Thinking With Your Stomach

It was a long day after the 3 day holiday weekend. Just two days to go until the NFL season kicks off, so that is some relief.

Thinking With Your Stomach
While many readers may find it very hard to believe, I was looking around the markets over the weekend for an investment idea that was not related to precious metals! No, I am not kidding.

On principle I will not trade anything related to real estate or the financials. This of course leaves many things off the table. I figured I would go to real basics, and this is what I am looking at right now.

I am seeing a very weak "recovery" (if it even qualifies as such) led mainly by US government spending and not structural strength in the real economy. The report on consumer credit for July (biggest contraction in history) should have put a scare in the bullish crowd, but it did not. A stingy consumer is one part of my thesis, the other is the coming cold weather season. Sprinkle is a little flu season and I arrived at a couple of ideas for a new position.

The first candidate is Hormel Foods (HRL). The maker of SPAM and Dinty Moore brand beef stew is a low budget heart meal maker. I admit I wanted to get in this stock a while back, but I never got around to it. HRL has surprised to the upside over the past few months, and not by cost cutting alone. There is real growth here. The one year chart:

HRL shows good support at $35 and extremely solid support at $30. The stock closed at about $37 and change today.

The second candidate is Campbell Soup Co. (CPB). Chicken noodle soup is sure to lead the way as the weather turns colder, and if a nervous public is Swine Flu scared, I can imagine plenty of warm soup meals spooned up over the Fall and Winter months. Campbells has over the years expanded their soup menu tremendously, so they have plenty to choose from. The one year chart:

CPB has good support at $28 and a great floor at $25. CPB closed today at about $32.30.

What I am looking at here is two criteria:
-Lower cost alternative food items
-Seasonal factors adding demand

Just as candy makers go up before Halloween, I think warm comfort food may have a place this year more so than others due to the lower cost component.

This of course is NOT INVESTMENT advice. I am sharing an idea that I rolled around in my head over the weekend and I am looking to enter smallish positions this week. The best way to lose money is to listen to me, so you have been warned!
Full Disclosure: No position in HRL or CPB as of writing, but looking to enter a position.

Repudiation of US Financial Engineering Follow Up
On August 26, 2009 I wrote the section Repudiation of US Financial Engineering and I wanted to add a few more notes.

I discussed how foreign debt holders were abandoning agency (read mortgage debt) paper in large numbers. Today the Washington Post (hat tip to The Mess that Greenspan Made) ran a story with the following headline:
Mortgage Market Bound by Major US Role
The story tells the tale of how the US government is now the only player in the mortgage game, with about 90% of all new loans being funded or guaranteed by the US taxpayer. It seems the world has had enough of our mortgage games.

Add to this the almost daily news deluge detailing ways around the dollar as reserve currency and it seems the US is in the dog house the world over. From today:
UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’
Dollar Threat: China Selling Yuan Bonds For The First Time

I am still unclear about how the actions of foreign debt holders fit together. Right now it seems they are serious about returning the more exotic creations of the credit bubble back to the US doorstep, yet at the same time they seem perfectly willing to buy treasury bonds which allows the US to cover those very debts. It is a puzzling picture to be sure.

Have a good night.

10 Year Yields Moving Up; Why the Bears Cannot be Right

A little short on time this evening. I am in the process of picking a contractor to build a stairway/deck in the back of the house and I am collecting estimates and had to meet with a builder this evening. Why everything has to be so expensive I will never know!

Processed Meat Debate
Economic Disconnect has been having a back and forth with the fun blog Illusion of Prosperity as of late concerning a certain processed meat known as SPAM. I eat salads 3 times a week (Mon-Wed-Fri) and include SPAM as my lunch meat of choice. It seems that there is a basic lack of understanding of the wealth of products offered by the Hormel company in this space, so I thought I would wade in.

First off, there are many SPAM's. There is turkey SPAM, Lite SPAM, Low Sodium SPAM, and SPAM made with Bacon, which really is a masterpiece. You may also be interested to know that SPAM now is available in single serve packs so you do not have to open an entire can! Its true, see them here. SPAM is the perfect guilty addition to my salads as I hate salad dressings but find I need a little substance to the lunch.

The company Hormel Foods (HRL) and I can offer my full endorsement of SPAM. The stock as things stand I like as well and am thinking about taking a small position to protect my SPAM source. Of course, if I like a stock then Tim Knight hates it, and so HRL is a leading short candidate for Mr. Knight. I say buy what you like!
Full Disclosure: Love SPAM and this may influence my judgement on the stock; looking to start a position soon.

Mr. Practical from Minyanville
I really miss the writings of Mr. Practical on the Minyanville site. While he still offers posts from time to time, his writing has dropped off in frequency. Today his insights were spot on as usual:

Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.
Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it. In 2002 consumer debt as a percentage of disposable income was an all-time high of 90%
Apparently that was still low enough to spur consumers into borrowing money against their houses and spend it. This drove the ratio up to 135%! By the first quarter of 2009 the ratio dropped to about 130%. Just look at what damage that did as consumers tried to get out of some debt. The ratio is still at least 125% (we will know for sure in at the end of June as the numbers are quarterly). There's no way to know for sure, but logic says to reflate from that high level of debt is going to be virtually impossible.

Mr. Practical hits the nail on the head.

Trying to reflate assets prices may have worked if those asset prices were at some lower to medium level. As things stand, homes and many stocks were at all time highs and thus cannot participate in a reflation campaign. At least not with an intact dollar. Simple analysis often is the best, see Occam's Razor.

10 Year Yields Moving Up; Why the Bears Cannot be Right
The big story of the past two days has been the monster move up in yield (lower price) for the 10 year treasury (^TNX). A 20% move up is very substantial, though it is from extreme lows.

The coverage of this move has been very broad, with both bloggers and mainstream media joining in. From the blogroll, Jesse's Cafe had these comments and this chart:


And Mr. Denninger at Market Ticker had this to say and had this chart:

To start let me say that I agree in total with what Jesse and Karl are saying. I think that the move up is a repudiation of US debt and signifies a bond market revolt against money printing. Let me be clear, that is what I think.

And thus, I am most likely totally wrong.

For this kind of reasoning to be the catalyst behind the drop in 10 year prices would amount to something making sense in the markets.

We know by experience that this is unlikely. Perhaps impossible.

The FED's plan is to keep loan rates (especially mortgages) depressed at all time lows to allow further debt expansion and roll over. They have been explicit on this point. We can debate the merits of such a plan ( I hate it) but it is what it is.

So how does this fit in with the current market action? Is this the bond market dislocation many (myself included) have been looking for?

I say it is not.

In last Friday's post I linked to work done over at Housing Doom that showed foreign buyers for debt were on a record tear as of late. We know that for foreign debt holders to grow a brain in regards to the dollar and their overweight treasury holdings would signal a real change in thinking. I cannot imagine anything of the sort is going on. So what is?

My first hint comes from a blip in this Yahoo Finance story from today:

Some traders fear demand for Treasuries could weaken as the government issues massive amounts of debt to fund its financial and economic rescue programs. The Federal Reserve has said it would buy up to $300 billion in Treasury debt this year as part of its efforts to keep borrowing costs low. But investors are now concerned that the central bank isn't buying as much as some had hoped.

Catch that?

Traders are concerned that Ben Bernanke is going Quantitative Easing lite, and not QE on steroids with protein shakes on hand!

Now there is a "market" reason I can understand!

The 10 year is going up in yield (and down in price) because the market wants Bernanke to really get the money printing going. The market wants lower rates. The markets needs lower rates. The market wants an open ended commitment to lower rates. That this process is self destructive and may outright collapse has no meaning to the market, those are rational thoughts.

Any two day span in any instrument is too short a time to make a firm judgement. At this point I would attribute the jump in 10 year yields to market forces putting pressure on the FED to make good on their promise to go "all in" with QE. With green shoots flying up all over the place, the recovery must not be disturbed, less anyone really start to look at the stock markets valuation against expected earnings. I mean, no serious disconnect there, yes?

So what I think is happening is the FED is being gamed into buying as many treasuries as the market deems necessary to ensure low rates. The recent examples of profligate spending by the US seems to have made many think we can indeed spend (borrow) whatever we want and there will be no one to do anything about it. Maybe they are right.

Today, the bears are wrong. Next week they may be right. When they are right, things are going to get all post Lehman-esque in a hurry.

Have a good night.

Steps Closer to the Real "Grand Experiment"

I think just about everyone went out and had a fun weekend. Across all the sources I read almost nobody had new posts over the weekend and even the government seemed content to keep quiet for once. Calm before the storm or the new Zen of "green shoots"? We shall see.

Hot Commodities
LOL FED has a great post up today that explores some major commodity winners since the financial crisis started. I have to agree that SPAM is the big winner, I have a pantry with plenty of it in case of banking failure, swine flu, or other random catastrophe:

We’ve been saying for like six months that SPAM is the go-to commodity in times of fail, and sure enough, Hormel just posted a 6% increase in first-quarter sales. If you’re wondering what else is flying off the shelves (yes, a few things actually are), AP is out with a report this weekend, which we’ll dissect.

AP says we’re packing our carts with:

- SPAM, as discussed above.

- Macaroni and cheese, because SPAM can’t go it alone.

- Laxatives and stomach remedies, to help cope with all that SPAM and macaroni-and-cheese indigestion and constipation.

- Running shoes and fishing gear. Sporting goods are the kind of things where the initial outlay of $ can keep you amused for months, provided the item doesn’t end up collecting dust in your closet somewhere.

- Gold coins, a nice shiny hedge against inflation.

- Gardening seeds. Peek over your fence, and you’ll probably find the yuppies next door scratching in the dirt, talking about TEOTWAWKI or at least about “radical self-reliance,” attempting to turn their plot of suburbia into arable land. Well, okay, probably not. They’ve probably just gone out and gotten themselves an Aerogarden.

- Guns. Must protect the gold coins and Aerogarden.

- Booze. It’s cheaper to drink it at home than at the bar, and we still need SOMETHING to cry in.

- Condoms and match.com memberships. Hey, I just explained that no one is going to the bar.

- Self-tanner. Angelo Mozilo idolatry at work? Nah, probably just trying to get your date to like you, and there’s no way you can afford to get to the beach. Hey, your date might like the chocolate that made the list, too.

This is your life, America.
Now, if you’ll pardon me, I’ve gotta go pour some cheap beer out on my doorstep for Dow 14,000.

I would add banking stocks to the list as they seem to be the hottest "must have" item right now.

Job Losses After the "Jobless" Recovery
It seems to be genrally accepted that unemployment numbers do not really matter anymore because they are a lagging indiactor and a V shaped recovery will solve the jobs problem anyway. While we can certainly debate the merits of such thinking, I wanted to spend a minute looking at job creation over the past few years.

It is generally accepted that about 300k jobs need to be created a month to provide a stable job force that can accomidate new workers and economic growth. After the Nasdaq tech bust and then September 11th, unemployment rose quickly, but then eased off. The credit boom and its' and associated vehicles (real estate and mortgage related jobs) were high growth areas, but most other sectors stayed weak for some time.

The site iCharts has almost any chart you can imagine and I would point you towards this chart of monthly non-farm payrolls.

It is clear from the chart that from 2004 to 2008 job creation was anemic. The 300k level was only reached a few times over that span. Now the jobs picture is ugly with job losses piling up wiping out much of the 4 years of gains in about a year.

I think about the fact that there was a "jobless recovery" that has been followed up by monster job losses. Proponents of the secondhalf recovery theme should probably stop and ask where the needed jobs for a real recovery are going to come from. Federal spending, loaded bank earnings, and low end earnings estimate beats are good enough for a 30% run up in the stock market, but they are hardly the bedrock of a recovery in the "real economy".

Steps Closer to the Real "Grand Experiment"
There were several related items circulating today that rovelve around a central point. First, the stories:
Brazil and China eye plan to axe dollar
Brazil and China want to settle accounts in their own currrencies, not the dollar.

Asia will author its own destruction if it triggers a crisis over US bonds
Japan and China can never dump the dollar (via treasury holdings) because they will collapse if they do.

Moody's Japan downgrade puts triple-As in spotlightHigh government spending and no real plan for change cause Japan to get downgraded, but the USA is all good.

In aggregate these stories bring up a thought that I have written about at length;
Can the US spend whatever it wants?
By "spend" I of course mean "borrow". With tax revenue falling off a cliff and increased federal spending as far as the eye can see (wait until the state bailouts begin, oh brother!) the US seems immune from bearing any of the usual bond consequences for this kind of behavior.

The actions of the Treasury and the FED amount to a new kind of "Grand Experiment". In this lab test tube we are going to see just how dissociated from any economic reality one actor can behave without causing a collpase.

The officials in charge think they know just how far they can push the envelope. Just like they think they know where interest rates should be and just how "contained" mortgage loses will become. I hope there is a backup plan.

Have a good night.