World Of Wallstreet

How I Read The Recent Market Action... Inflation Vs Deflation

Here's what the recent action means to me:

 

Inflation vs Deflation - looks like the USA is looking at stagflation with commodities (e.g. copper) refusing to fall even though inventories are ramping higher. This is partly because the rest of the world seems to be decoupling from the USA (or from the USA, Europe and Japan). The deflationists look wrong to me (and will as long as copper and crude ride way above last year's lows). Commodities like copper falling back under their 50-day moving averages will make me relook my outlook, but for the USA it looks like stagflation, not deflation. USA consumer price inflation goes positive in the next few months, I expect, as commodities year-over-year start going quite positive.

 

USA Stock Market - Its not clear how much longer the inflation part of the stagflation can keep the USA stock market up. From a P/E basis the general markets look way overvalued. The USA economic outlook is pretty bad (see below). I'm going to hold my S&P 500 Mar 1000 puts (underwater) until I'm convinced that easy-money can continue to support or ramp up current overvalued stock prices. Its a hedge, but I bet it will be a money-making hedge from here on out.  

 

Gold Market - its clear that there is big support in the physical market from China, India and others who are buying physical gold. The price can remain indefinitely near its current levels (and will probably rise from here). If we get a close below $980 I'll have to relook this. For now, my Jr gold producers (GORO.OB, TRY.TO, DMM.TO, AGP.TO/AGT, MAI.TO, LMA.TO) which can make big money at much lower gold / silver prices seem like a really good place to be. I'm even holding some COMEX gold futures which went positive today.

 

USA Economy - will get some kind of positive GDP print for Q3, but as far as real-people are concerned, the economy stays soft with rising unemployment for the next few months. A double-dip downturn into negative GDP seems likely to me after probably just one quarter of positive GDP. There is just too much bad debt hanging over the USA economy.  

 

Where am I wrong? What am I not seeing (or should be looking for)? I'm watching and trying to understand what's truly going on.

 

MontyHigh

Unadjusted Year Over Year: Census Department Durable Goods Manufacturers New Orders Down 19%

Here's the summary for today's Census Department monthly Durable Goods Orders and Shipments report:

• Associated Press Headline And Lead: "Orders for durable goods drop unexpectedly in Aug... Orders for goods expected to last at least three years fell unexpectedly in August due mainly to a drop in demand for commercial aircraft. The worst reading since January for durable goods is evidence that any recovery in manufacturing will be slow and gradual."
• Labor Department News Release: click here. 
• Key Numbers: Census Dept Durable Goods Manufacturers New Orders Not Seasonally Adjusted: $165,888,000,000 Year Ago: $204,937,000,000, Year Over Year -19.05%. Census Dept Durable Goods Manufacturers Shipments Not Seasonally Adjusted: $175,081,000,000, Year Ago: $210,847,000,000, Year Over Year -16.96%.
• Last Months Numbers: Orders=-24.97%, Shipments=-19.76%
• My Spreadsheet (click Download 20090925yoy)

Here's my uneducated interpretation - Unadjusted shipments and orders remain down hard year-over-year. The orders to shipment ratio remains under 100% meaning orders are not coming in fast enough to allow shipments to grow. This is bearish report for the economy, although durable goods are a lagging indicator.

Looking at the graph below, you see that the shipments (year over year) and orders (year over year) are still down hard but improving and are better than the net shipments ratio. I expect that this "improvement" will continue for sometime converging on the net shipments ratio. This will indicate a steady contraction of the economy.

AP Spin - no matter how bad the numbers are, AP persists in their spin that some kind of recovery is underway. They refuse to admit the possibility that the economy is still (and could for some time) continue to contract.

MontyHigh, www.worldofwallstreet.us

Best Of The Boards: Kilowatt8 On Auditing The Federal Reserve

http://www.investorvillage.com/smbd.asp?mb=144&mn=30855&pt=msg&mid=7960901

"Yup.  I think that was probably the most despicable and blatant hold up in history. But under the shield of presumed legitimacy, they are lionized for it.  It went something like this didn't it:

 

You must give us trillions immediately, no questions asked, or we'll all be reduced to hunter gatherers by tomorrow morning!!  We have no time to explain!

 

OMG, that sounds horrible, here take this blank check for other peoples money.  Gee, I've never been more frightened.

 

Later -

 

Umm, what did you guys actually do with that money?  

 

Umm, it wouldn't be wise for us to tell you that.  It might compromise the integrity of the system."

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 6.7%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "New jobless claims drop unexpectedly to 530K... The number of newly laid-off workers seeking unemployment benefits in the U.S. fell for the third straight week, evidence that layoffs are continuing to ease in the earliest stages of an economic recovery."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 434,358 in the week ending Sept. 19, an increase of 21,966 from the previous week. There were 398,070 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20090917yoy).

Here's my uneducated interpretation - The year-over-year initial jobless claims are definitely becoming less bad, but are still really bad in absolute terms. They are actually becoming less bad pretty quickly. But... they are still roughly 200K per week higher than the "good times" (say 2005, 2006) and are still 100K higher than most of the previous "bad times" (2001 and 2002). I think we are good for one or two quarters of positive GDP with unemployment increasing the whole time, but after that I don't know. Given that the stock market looks about 6 months ahead there is no clear read on where the stock market is going from this data, either.

This leaves me currently in Jim Dines' "High State Of Confusion".

MontyHigh, www.worldofwallstreet.us

Year-Over-Year: India Consumer Price Index At 11.9%

The above graphs which come from bloomberg via www.ritholtz.com seem to shed light on the gold market in India. As you can see, the economy is growing at 6% year over year so there is more wealth being generated. This wealth is being generated in a situation where the investment of choice for the majority of the population is physical gold. That seems bullish for gold.

The India consumer price inflation (CPI) is 11.9%. This seems a like a good explanation for why gold is the investment of choice for the majority of the population (rural farmers). Gold is a way for rural farmers to protect themselves from very real inflation. As best I can tell by googling about there is no sales tax or only minimal sales tax on gold (perhaps 1%) when a farmer buys or sells gold. Even if there is a 1% sales tax, I wonder how often it is accurately collected in rural India.

Gold must look like the only good investment if one is rural farmer in India wanting to protect one's savings against 11.9% inflation. Probably the only really practical alternative is a bank savings account and yet the banks offer less than 6% interest. The stock market must not seem very practical given how volatile it is and given that a rural farmer doesn't have the tools (Internet access, etc.) necessary to do a good job with stock investing.

It seems to be a sure thing that as long as these conditions persist there will be significant gold buying in India. The chart shows India's deficit as second overall at 5.6% of GDP. This seems like a good indicator that inflation in India will persist.

Overall, this chart gives me a renewed appreciation for why Indian's invest in gold and why this can be expected to remain bullish for the global price of gold. I would be obliged if you would leave me a comment if you can add anything to or correct my understanding of the factors that affect the attractiveness of gold as an investment for Indian citizens.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Caveat

Yesteday I reported that year-over-year initial jobless claims were much better than the previous week (click here).

I now see that this is a one-time statistical fluke. Here's why:

• This year, this week included Labor. You can't file for unemployment on Labor day. The loss of labor day is 20% of the week.
• Last year's comparable week did not include labor day.
• Either by switching to last year's labor day week (subtracting 50K from the last year comparable) or adding 20% (adding 80K to the this year number) more to this week to accommodate labor day you see the data line up with earlier weeks.

So, I expect that next week initial jobless claims will go back to looking quite dismal with something like a 30% year-over-year increase.

I apologize for not catching this yesterday,

MontyHigh, www.worldofwallstreet.us

Best Of The Blogs: NakedCapitalism - Why The USA Will See A Positive Q3 GDP

Here's the best explanation I've seen for the USA is about to record a positive quarter (or two) of GDP growth and why it doesn't necessarily mean the recession is over.

http://www.nakedcapitalism.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html

MontyHigh, www.worldofwallstreet.us

Year-Over-Year: 3 Of 4 Ports Container Activity Down Hard Year-Over-Year

 

Here it is, verbatim from www.urbansurvival.com:

 

"The latest batch of TEU data from the Port of Long Beach just out shows their container traffic is down a whopping 21.7% from last year.  What's worse?  While imports are down 21.9%, the outbound loaded figure is down a full 26% which means the balance of trade picture is suffering continued asymmetry.

 

True, the Port of Seattle August container traffic showed a rise of 5.4%  in August this year,  but the odds of Seattle hitting its all time high of 14-million + metric tons of cargo (set in 2005) this year are somewhere between slim and none. 

 

Nor is Seattle's blip  a coast-wide phenomena:  The Port of Portland's container volume was down 14.5% from 2008 (the previous month it was down 18.5%) but compared with 2007, Portland is down almost 22%.

 

The Port of Los Angeles showed a 19.32% drop in loaded inbound, while loaded outbound was down only 14.22%.   But just so you don't get the wrong idea for your balance of trade musings, keep in mind that even with the lesser decline in exports, Los Angeles still runs only 31.7% export trade; the rest is inbound."

 

MontyHigh, www.worldofwallstreet.us

Chinese Gold Mania

http://www.sovereignman.com/finance/gold-mania-in-china/

Nice story. Money quote: "Second- the government has stepped up its promotional campaign, and Chinese consumers have responded on cue. Gold demand has grown dramatically just this year, particularly as savvy local investors are starting to view Chinese stocks suspiciously."

Here's a longer bit: "You can buy gold in China at any bank– even tiny banks in tier-3 cities sell gold.  More importantly, however, the government is setting up official Chinese Mint stores all over the country.

On the inside, they look like jewelry shops– armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars.

The government mints bars in sizes ranging from 5 grams (which are so tiny they’re actually cute) to 1 kilogram. The prices are updated instantly– they have a Bloomberg screen which tracks the spot price, generally indexed to the Renminbi price in Shanghai rather than New York or London (another sign of Chinese financial independence).

The bars are all serialized and 9999 purity, the same as you would get from Switzerland.  They are also certified by the gold exchange, which validates the quality. There is no tax, and the premium runs 10 renminbi per gram, or roughly $30 (US) per ounce.

We went into several stores and saw Chinese people buying like crazy… all with cash. The most popular denominations were 10 grams and 50 grams– and I’m surprised the mint shops didn’t sell out at the rate those bars were flying off the shelf."

Now, this is a major game-changer for the price of gold if it is true that the Chinese people are "buying like crazy" or even just buying more than before in increasing amounts. There's no telling where the price of gold will go with central bankers turning from sellers to buyers and with a giant population ramping up its investment buying. 

Are there any ways to verify how much of this report is accurate?

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Commerce Department Building Permits Down 31% And Housing Starts Down 28%

Here's the summary for the Commerce Department's New Residential Construction release:

• Associated Press Headline And Lead: "US home construction falls 1 percent, misses views... Construction of new U.S. homes dipped slightly last month, missing expectations, in a sign that the building industry's recovery from the housing bust is likely to be bumpy and gradual." 
• Department Of Commerce News Release: click here.
• Key Numbers: New Privately-Owned Housing Units Authorized in Permit-Issuing Places Not Seasonally Adjusted, Aug 2009=52,300, Aug 2008=76,300. New Privately-Owned Housing Units Started Not Seasonally Adjusted: Aug 2009=55,100, Aug 2008=76,400.
• Last Month's Unadjusted Year-Over-Year Numbers: Permits Down 37% And Housing Starts Down 36%

Here's my uneducated (also not not spun by guys trying to make you a sucker) interpretation: House construction is still falling hard year-over-year, but the trend is towards less bad (year-over-year) each month.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 6.7%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "New jobless claims drop unexpectedly to 545K... The number of newly laid-off workers seeking unemployment benefits fell last week to the lowest level since early July, evidence that job cuts are slowing."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 407,869 in the week ending Sept. 12, a decrease of 58,429 from the previous week. There were 382,249 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20090917yoy).

Here's my uneducated interpretation - The year-over-year initial jobless claims made a really big shift this week (for the better), at least twice as big as any prior shift I've witnessed since following this closely. We'll have to see if this sticks. In the previous recession, unadjusted year over year initial jobless claims first went negative in January of 2002 while the market bottom was nine months later in September 2002. At +6%, this economy does not have that far to go before year-over-year goes negative. I'm changing my position and I expect that with the recent other bullish news (industrial production, retail sales) that Q3 GDP will print a positive number when it comes out about a month from now. I don't know how long positive GDP can be sustained and I don't know when unemployment will top, but for now positive GDP of some sort seems to be in place.

The chart show just how big a shift this week's number was. As you can see, the year-over-year shift was based both on a big increase week-over-week a year ago and on a big reduction week-over-week this year. 

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: US Industrial Production Down 10.4%

Here's the summary of today's Federal Reserve's US Industrial Production release:

• Last Month's YOY Number: Down 13.2%
• Associated Press Headline And Lead: "Industrial production better than expected in Aug.... Industrial companies boosted production more than expected in August, making more cars, clothing and other goods in the early stages of a broad economic recovery." 
• Federal Reserve News Release: click here. Un-seasonally adjusted numbers found in supplemental, both this year and previous year release supplemental data must be consulted.
• Key Numbers: This month 2009 99.6, same month 2008 111.2 from a baseline for 2002 of 100.
• My Spreadsheet (click hereDownload 20090916yoy)

Here's my uneducated (also not not spun by guys trying to make you a sucker) interpretation - Still down hard year-over-year, but definitely better than the last few months. Will it be sustained? We'll see.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Devaluing A Currency Into Prosperity

Nice punchy quote from Michael Pento (never heard of him before) regarding the USA economy: "You can't pay anything off by monetizing your debt. There hasn't been one country in the history of planet earth that has devalued their currency into prosperity."

The video interview (click here) is probably worth listening to although I'd say it doesn't really cover any new ground. Its the same thing you'd expect to hear from Peter Schiff or Jim Rogers. Interview gets interesting around 3:30 in.

Is that right? Is there absolutely not one country that has devalued its currency into prosperity? Is there so much debt that there is no turning back at this point?

By the way, Pento says the party keeps going until the Fed does a seriously raises interest rates (and then look out below).

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Consumer Price Index Down -1.5%

Today we cover the Labor Department's Consumer Price Index release from a year-over-year perspective:

• Associated Press Headline And Lead: "US consumer prices rise on higher gas prices... U.S. consumer prices rose slightly in August due to higher gas prices, another sign the weak economy is keeping inflation in check." 
• Labor Department News Release: click here. 
• Key Numbers: The unadjusted index is at 215.834. Same month 2008 was 219.086 from its initial news release.
• Last Month: -1.4%
• My Spreadsheet (click Download 20090916yoy)

Here's my uneducated (also not not spun by guys trying to make you a sucker) interpretation - there is still price deflation happening, but crude oil is still down 31% year-over-year. We are getting close to the interesting point which happens in Q4 09 when the year over year commodity prices stop falling (assuming no fall crash)? 

 

MontyHigh, www.worldofwallstreet.us

Off Topic: Good Work If You Can Get It...

http://blogs.wsj.com/economics/2009/09/11/interest-on-reserves-seen-as-key-fed-tool/

An article about the Federal Reserve paying interest on bank reserves.

Money Quote: “It’s incredibly important that they have this tool,” said Michael Feroli, an economist with J.P. Morgan Chase. It gives policy makers the breathing room to sell off their considerable store of assets at more leisurely pace, he explained."

 

Translation:  “It’s incredibly important that they have this tool,... It allows JP Morgan Chase and other bankers to get unlimited money from the Federal Reserve which they own and control at no risk to the bankers and without interference from or the consent of the government or taxpayers.”

 

Completely outrageous,

 

MontyHigh

Unadjusted Year Over Year: Producer Price Index Down 4.3%

Here's the summary for the Labor Department's producer price report for July 2009:

• Associated Press Headline And Lead: "US wholesale prices soar 1.7 percent in August... U.S. inflation at the wholesale level shot up at double the expected rate in August as gasoline prices soared by the largest amount in a decade." 
• Labor Department News Release: click here. 
• Key Numbers: Monthly Change In Finished Good From 12 Months Ago (unadj.) = -4.3%, Unadjusted Index = 174.3.
• My Spreadsheet (click Download 20090915yoy)

Here's my uneducated interpretation - Still down hard year over year, but is that a whiff of inflation returning?

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: USA Retail Sales Down 7.9%

Here's the year over year summary of today's Commerce Department's retail sales figures:

• Associated Press Spin: "Retail sales rise more than expected in August... Retail sales jumped in August by the largest amount in more than three years, spurred by widespread gains beyond the expected increases of auto sales from the government's Cash for Clunkers program." 
• Commerce Department News Release: click here. 
• Key Numbers: Commerce Department Retail And Food Services Sales Unadjusted August 2009: $362,278,000,000 vs July 2008: $384,798,000,000. Last month unadjusted year over year was down 7.95%
• My Spreadsheet (click Download 20090915yoy)

Here's my uneducated interpretation - Still down hard year-over-year but definitely decelerating. Is the economy bottoming or is consumer inflation (not adjusted for) starting to kick back in? I don't know.

MontyHigh, www.worldofwallstreet.us

Off Topic: Nobel Prize Economist Stiglitz Says Banking Problems Are Bigger Now...

than before the crisis started.

Here's a piece about nobel prize winning economists view that banking problems are worse now than before the crisis.

This quote provokes a few thoughts:
"Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult".

It begs the question, what is politically difficult about challenging the banks? You would think the banks would be a fat populist target with little voter support. In a democracy where "majority rules" you would think they'd be in a lot of trouble. What makes them difficult to challenge? Is it:
(a) They have a huge number of voters standing behind them like the unions? No,
(b) They control TV and newspapers which shape public debate? No, not directly.
It most be something hidden and sinister. The fact that they got that 700 billion dollar TARP money when voters phoned in against it 100 to 1 shows that the hidden, sinister political power of the banks is very real as Stiglitz alludes. It begs the question, where does this power come from and what hold do the bankers have over our politicians?

MontyHigh, www.worldofwallstreet.us

Best Of The Podcasts: Prechter Vs Schiff (Deflation vs Inflation), The Puplava Interviews

http://www.financialsense.com/fsn/main.html

Jim Puplava has posted two different interviews over the last two weeks giving the leading deflationist and leading inflationist a chance to clearly present their views and supporting evidence. I've just listened to both of these interviews pretty carefully.

Here's a summary as I heard it:

Prechter's key point is that there is an ocean of unpayable debt which must result in a deflationary collapse and depression (huge unemployment, big hit on the standard of living, etc.).

Schiff agrees that there is an ocean of unpayable debt, but disagrees on what the outcome will be. He expects a dollar collapse and an inflationary depression (huge unemployment, big hit on the standard of living, etc.).

So, there is a lot more agreement between the “deflationists” and the “inflationists” than you would think.

Prechter claims that the creditors will not allow the Federal Reserve to “print its way out of the debt” and that the key evidence for this is that the Fed has tried really hard to keep from doing anything to really, really tick of its creditors.

Schiff claims that the Federal Reserve will keep “printing debt” until the creditors refuse to buy any more and that is when the printing goes into high-gear and there is a currency collapse (dollar plummets) and the inflationary depression really kicks in.

Schiff claims that the government and Federal Reserve have been printing money and causing inflation non-stop for decades and there's nothing to stop them from continuing and that there are very powerful reasons for the government to continue including:

• Allowing the government to spend money without having to raise taxes.

• Inflation allows the government to tax assets (when sold) which have not gone up in value (for example when you sell a house).

• Inflation automatically drives tax payers into higher brackets increasing their tax burden.

I find Schiff's argument here is pretty compelling.

Prechter claims a major shift has taken place in the last year with credit contracting and a major change attitude to avoid debt. Prechter claims the amount of monetization so far is puny compared to shrinkage in the amount of credit outstanding and that even if all of the bad debt was replaced with 100 dollar bills it would not create inflation because it would just replace what was formally in place.

I find Prechter's argument pretty weak here because the replacement dollars would be chasing fewer goods (as a result of economic distortions) resulting in price inflation.

Here's my observations:

Prechter is an man enthralled by his grand idea of a cyclic approach to history based on waves of mass mob attitude. He paints everything as black and white (e.g. these guys at the Federal Reserve are completely powerless and just follow the trends of cyclic history). At the core of his thinking is his cyclic thinking, not any kind of argument based on specific data. He can't imagine any way he would be wrong and requires 5 years for his ideas to be tested. This puts me off. I can buy an idea that cycles are significant, but not that they are overwhelmingly the most important thing that dominates all other considerations.

Schiff's outlook seems to be more based on data and natural reasoning about cause and effect and is more in continuity the last few decades experience. Prechter has been more accurate on what has happened the last 18 months or so with Schiff having been wrong short-term about the dollar and inflation.

Neither seems to understand why USA creditors (China, Japan, etc.) keep buying USA debt and neither has a grip on what will trigger their stepping back and yet this is the key to the current situation and when/if it will change suddenly.

So to my mind, there is no clear winner of this controversy right now, although I favor Schiff's outlook.

What's next?

We are going to be at a really, really interesting point around the end of this year and I see two really big factors that should put their ideas to the test:

1. Federal Reserve funds for monetizing debt runs out in October, I believe. They will then either have to:

1. Stop buying treasuries and Fannie Mae / Freddie Mac debt which may very well cause interest rates to launch and trigger another major contraction which results in the dollar rising in a flight to safety. If this happens Prechter is proved right.
2. Announce another round of monetization and have the creditors belly ache but keep on buying treasuries. If this happens the jury is still out.
3. Announce another round of moneitization and have the creditors refuse to keep buying treasuries resulting in a dollar collapse. If this happens Schiff is proved right short term.
4. Secretly continue monetization (with perhaps a delayed reaction).

2. Year over year commodity prices start rising in Q4 (unless there is another crash) and the CPI should stop falling and start rising. The U.S. Dollar should probably keep falling, but any significant resumption of CPI rise proves Schiff right short term. Prechter's outlook doesn't really allow for this, although he gives himself test of requiring all prices to rise to new highs.

Of course, both may be wrong and the ocean of debt may not be unsupportable and there may be a chance that we just muddle through indefinitely, with GDP growth and super low interest rates allowing the USA to work its way out of debt (or at least sustain the debt). I'm kind of dubious of this result, although the key to the whole situation is the reaction of USA creditors to the continued piling up of USA debt and there's no telling how long they will just grin and bear it.

I'm in Schiff camp of thinking that the USA will continue to pile up and monetize debt and think that eventually there will be a major dollar collapse when times get really, really bad. I'm expecting either scenario 1.2 or 1.3 this fall with either minor CPI inflation (with 1.2) or major CPI inflation with another big economic step down (with 1.3).

Hope this makes some sense. I certainly don't have a crystal ball and am perfectly willing to admit I'm wrong if the data shifts leading me out of the inflationist camp into either the muddle-through or deflationist camp.

Leave me a comment with what you think.

MontyHigh, www.worldofwallstreet.us

Off-Topic: Mad As Hell At DC Tea Party

I attended the DC Tea party today. I wish I had brought my camera as pictures of the signs being carried would really help you capture what the protesters are thinking.

Living outside of DC, I've been to many protests and gatherings on the Mall (Nixon's Reinauguration Protest, Marches for Life, Promise Keepers, 4^th Of July Fireworks, etc.).

SIDENOTE: As a result of the President Bush / Republicans obvious corruption surrounding the financial crisis (and stupid wars and the Republican's porking out when they finally got in power rather than reforming anything), I am cured of being a “social conservative”. I'm more in the Bill Bonner all politicians are lying and self-serving camp right now. So I'm mostly trying to report to you what I saw and heard rather spin some particular political agenda.

UPDATE: I'm removing all crowd size estimates from this post because the photos I saw on TV after coming home were clearly larger than what I could see on the ground on location when I left around 12:30PM. I expect that the crowd continued to grow after I left and I probably didn't see the entire size of the crowd that was present when I left. My earlier estimates were wrong.

Unlike other things I've gone to, with a well-planned out program and name-brand speakers and everything ho-hum we all agree, this was way more grass-roots. Every sign was home-made expressing the individual's view point and with their own slogan.

The best part about being there was conversations with folks who were coming. Here's some examples of representative opinion:

Q: What is this about? Being taxed too much or about the corruption of government by both parties. A: Mostly about corruption.

Q: Who are the main spokesman for what this is about? A: Nobody really gets it. Glenn Beck comes the closest. No mentions of Rush Limbaugh. A couple of Hannity mentions.

My sense is that most of the people there used to be “social conservatives”, but got so burnt out by Bush 2 and the trough-feeding by the post-Contract-With-America Republicans in power that now they are basically in the I'm mad as hell, “throw the bums” non-partisans.

Some of the key ideas/slogans were:

“You Work For Me” - these folks have concluded that the politicians exist just to feather their own beds and their big buck-insider pals.

“No Obama Health Care” - my conclusion is that this is a case where folks realize that the reason why the Obama health-care plan is so nebulous is because the politicians are clearly lying and that it would never pass (be acceptable to the public) if it was clearly stated because it is intended to benefit the Washington insiders (and their elite pals) and screw the “hard-working”.

"You Lie" - applies especially to Obama, but also to all of the politicians in congress. 

There was no clear fingering of the banksters or any other corporations (other than a resentment of the mainstream media). No much anti-Federal Reserve talk. The hostility was focused against unlistening politicians, power-hungy politicians and politicians taking/spending other people's money especially not for those people's own good.

The fact that the attendees were not listened to during the whole “TARP” bailout thing (and ignored / attacked by the press) is quite a sore point.

I could not hear any of the speakers at the front. I did hear one sound-bite speaking out against corruption by both Rupublicans and Democrats (to the cheering of the crowd).

My overall impression is that this is politically significant. Its 15 months to go to the next election congressional only election. Ordinarily around DC there would be nothing (especially from the “right”) at this time in the political cycle (they always manage to trot out some kind of “repent America” rally for the social conservatives during presidential election seasons). I expect that, given a lack of improvement in the economy for the average Joe, that this will be quite a bit bigger next year (say ½ million), better organized with a “throw the bums out” attitude.

This is clearly not an instrument of the Republican establishment. Its probably more of a threat to them than anyone else as the first step for really making things happen is to clean out the old Republican leadership as anybody who's trying to get in front of this crowd knows.

I think it immediately sucks significant political support out of Obama care, more bailouts, the carbon tax stuff as anyone who is up for reelection and isn't in a politically slam dunk district/state is going to try to avoid getting a “GO HOME” vote from these folks. This goes especially for anyone down south who got in on an anti-bush/pro-change we can believe in stance. This is particularly important in a congressional only election where voter turnout is the key to everything. My guess is that no significant legislation will pass before the next election. 

I'm looking for some Republican to come out of nowhere with a populist, but conservative “stop the corruption” and we Republican's have been part of the problem message.

There were no clear messages I could see for how to stop the corruption, other than returning to the constitution and having honesty and integrity from government officials. This is an area where some work has to happen if this movement is going to go anywhere. There has to be better placement of blame on populist targets (beyond just the existing government and Obama) and a clear, simple message about what to do about it.

I hope you find this report helpful,

MontyHigh, www.worldofwallstreet.us

Best Of The Boards: China Like GM?

Here's a comment with an unexpected thought in it (from quite a high-quality post board, click here):

"China builds stuff and we consume it. At least, that has been the case up until now. We can't really afford the stuff they sell to us so they must lend us the money to buy it. (I think there is a parallel in the GM story where car buyers couldn't afford GM's product unless they offered financing incentives. Where did that lead? Who went bankrupt and who just changed car brands?)"

What do you think?

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 37%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "New jobless claims fall more than expected to 550K... First-time claims for jobless benefits fell more than expected last week, evidence that companies are laying off fewer workers as the economy improves."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 460,516 in the week ending Sept. 5, an increase of 3,834 from the previous week. There were 336,733 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20090910yoy).

Here's my uneducated interpretation - Initial jobless claims got worse this week (despite the headline) both unadjusted week over week and especially year over year. In the previous recession, unadjusted year over year initial jobless claims first went negative in January of 2002 while the market bottom was nine months later in September 2002. At +37%, this economy has a long way to go before year-over-year goes negative. Initial jobless claims is a leading indicator and I think it indicates continued economic contraction. 

Of course, the AP does whatever it can to put a positive spin on this sensitive statistic and leads with a conclusion that is the exact opposite of mine.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Denninger On Credit Contraction

http://market-ticker.denninger.net/

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Is The Stock Market Cheap?

Here's a reasonably short piece worth reading (and maybe bookmarking for repeat visits): http://dshort.com/articles/2009/SP-Composite-pe-ratios.html.

I find the chart useful, but, like most such things, taken with a grain of salt. Here's a couple of sceptical comments about the usefulness of this chart, assuming you've already taken the time to read the piece:

• Scepticism about the use of P/E10 - the use of P/E10 has an implicit reversion to the mean outlook (an assumption that things will return to normal). I'm not at all convinced of this, especially for the USA. Given my pessimism about this, I see stocks as even more overpriced than P/E10 seems to indicate. The three key things I see preventing a return to normal are:

1. Peak Oil - this affects the whole world, not just the USA.
2. USA Debt - the USA's huge and growing debt seems like it will be a major drag on the USA and prevent it going back to normal. This may also be a factor for the rest of the developed world.
3. Demographic Aging - seems like a major, major problem preventing the rest of the developed world from going back to normal. It seems a like a pretty big issue for the USA as well given the baby boomers passing their peak spending / saving /earning and moving into retirement. 

• Scepticism about "every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600." I'm sceptical about "every time... blah, blah, blah" technical arguments when every time has only a handful of data points (four in this case). In many cases, the criteria is nothing more than "curve fitting" with no predictive power at all.

What do you make of P/E10, the current trailing twelve month P/E of over 130 to 1 and the outlook for the stock market? Honor me with a reply.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 26%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "New jobless claims dip less than expected to 570K... New jobless claims fell slightly last week while the number of people receiving unemployment benefits rose, a sign the job market's recovery will be long and bumpy."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 452,271 in the week ending Aug. 29, a decrease of 5,002 from the previous week. There were 358,730 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20090903yoy).

Here's my uneducated interpretation - Things remain bad with initial jobless claims still way over the roughly 330K value which historically has represented a bottoming of the economy and stock market. Year-over-year percentages are falling as the economy was hard in recession this time last year.

I think the long-term chart clearly shows how high initial jobless claims are compared to the good times. Infact, seasonally adjusted initial jobless claims are still above the peak of the dot-com recession. This data indicates that the economy is still contracting.

MontyHigh, www.worldofwallstreet.us

Markets At A Major Turning Point?

I've noticed that the markets make major turns and they often take place at predictable places in the calendar.

Just going from memory, here's some that I recall:
o July 1, 2007 - End of Q2 and the jig is up for commodities after a fantastic run. That is, when Q2 07 ended, the trade shifted from the "stronger for longer" BRIC countries taking over the world to a "recession is coming" pull in your horns world.
o Sep 1, 2008 - End of summer and the start of the stock market crash of 2008.
o Mar 6, 2009 - The beginning of the green shoots rally. Not especially aligned with the calendar.

I think the Sep 1, 2009 end of summar calendar event is probably another major turning point. A good indication of this kind of turning point is when the reaction to a news story changes. Since Mar 2009, any "better than expected" news item triggered a major uptick. This changed yesterday where "better than expected" news on industrial production and pending home sales resulted in a hard market-downturn.

Now, what's really interesting for me is the fact that gold and the U.S. dollar went up when everything else (US stocks, Asian stocks, European stocks, crude oil, copper) went down. I think the market turn is from a "green shoots rally" to a flight to safety theme. This time gold is a safe haven and not a commodity to be dumped.

I believe it may be different for Jr producing gold stocks this year. Last year they were dumped with everything else as leveraged hedge funds dumped their commodity holdings to raise cash to meet fund redemptions and margin calls. I don't think the hedge funds have been in this neighborhood this year and individual investors hold these stocks without margin. So they could easily launch if gold does step up.

As I write this, 9:30AM, gold is up hard at $966, breaking thru major resistance at $960 while the S&P 500 has fallen through the psychologically significant 1000 support. If this holds there could be quite a flight to gold.

MontyHigh, www.worldofwallstreet.us