Market Updates – FUNDAMENTALS RULE

Trends, Politics & Economics

Sorry Late night porker game has limited today’s blog

Major Changes to Blog

As the Investors 411 blog is developed some major changes are occurring.  The entire Long Term Outlook part that gets sent out each AM going to be put on the blog as a heading as well as several other categories. It will no longer be published in the email that comes out before markets open. Hopefully all these changes will  get developed and filled by early next week.

Master’s of the Universe

How tough is the Obama administrations going to be with the Masters of the Universe (a Tom Wolfe phrase)?  Will the Obama administration (Geithner and Summers are themselves part of this infamous MOU crowd) allow the banking oligarchs to continue to run the  show? Were in between a rock and a hard place – If you make the powerful oligarchs happy, financial stocks will rally. If not, they’ll fall.  If financials are not showered with tax payer dollars then financials will suffer and perhaps collapse.  Here’s one view on this 

The Bottom Line to all this is we need a function banking system. 

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Technicals

The budding rally crumbled and Major markets took a major body blow as US equities fell between 4 and 5 % in increased volume.  Volume therefore confirmed the move higher. Markets fell to the Dow support level that’s been holding up the markets for two months The Doe ended the day at 7889 and its interday low/support level  - last weeks low is 7845. The Dow is leading ther other major indexes is the plunge. They are not as close to breaking down through support.  If we break down through support the next and final support level is last years low at Dow 7449

Secondary Indicators

Both Treasury Bonds and LIBOR have moved in a bullish direction over the last few months. The Baltic Dry Sea Index that measures the flow of goods between countries, is still on fire +59% over the last 5 days and another +9% on Tuesday. = Big Time Short term bullish signal.

Fundamentals

FUNDAMENTALS RULE -Yesterday we learn what Tres. Secretary Timothy Geithner and what he plans to do with the second 1/2 of the TARP money. From yesterday’s Investors411 ” Can’t over emphasize the impact the importance of this plan to both financial stocks and world markets

Technicals do play a major role in forecasting movement. However in volatile markets FUNDAMENTALS RULE. Geithener’s speech was not a detailed rescue plan where more of you tax dollars was shoveled at banks or some slight of hand accounting system was proclaimed. Obviously markets were disappointed, especially financial stocks. This sector took a major hit – down 10.21% hit

Bakers in front of Congress today.

Short Term Outlook

As said in previous Updates the chances are will will test last years lows. The budding rally got crushed by Fundamentals.  Lesson here is Fundamentals, especially in volatile bear markets can easily trump technicals.

Long Term Outlook = Bears Rule

See yesterday’s Investors411 blog – The Outlook remains the same. This will be posted in a future heading category at top of blog.

Trends, Politics & Economics

Banks – Is the Sky Falling?

Answer – No, but its being held up by smoke and mirror

The simple truth is, if you were to value the assets vs. the liabilities of most major banks and many smaller banks you would find that they do NOT have the collateral to back their loans.  Plane and simple – If the government (your tax dollars) paid the market price for troubled assets now these financials would go bankrupt . No assets would be left. If this happened, the whole banking sector would probably meltdown in panic. What’s more – as the unemployment figures grow this problem is going to increase.

Tim Geithner , like Paulson before him is going to take a shot at blowing the smoke and moving the mirrors today at 11:00AM EST.  The question is can he keep the banking/financial sector afloat long enough for the economy to turn positive and some of over leveraged positions become more solvent.

The ultimate answer or last line of defense to this problem that nobody wants to even take about is NATIONALIZATION .

The Bottom Line –  there is a massive shift in wealth from those who created this problem (they made truckloads of $) plus those who own the banks/financials, and you the American taxpayer who is bailing out banks to prevent an economic collapse. MAD? – smoke should be coming out your ears. The co director for The Center for Economic Research, Dean Baker makes the case Nationalization or Welfare

Obama on Stimulus

Lost count last night of the times Elkhart Indiana (middle class America) was mentioned is Obama’s stimulus speech  You can read or watch videos of the Obama’s speech at CNN – Paraphrasing his money quote – "It s only government that can break this cycle of recession."

Early review- NYT – unfortunately concludes "Odds are…even an $800 billion stimulus package will fall short of what’s needed to combat today’s downturn, and that more will be needed later. When the Obama administration asks for more, it will need to be able to make a compelling case that the first round was the best it could possibly be. It’s certainly not there yet."

#1 Progessive Voice in American Media

He’s quoted by everyone from Pelozi to Limbaugh – Nobel prize winning, NYT columnist Paul Krugman . His latest editorial "The Destructive Center"

What’s Pork?

A Bridge to Nowhere, Compensation for Filipino WW 2 Vets as part of the stimulus plan are certainly pork. But as one of you suggested does a "water park" wanted by a governor as part of the stimulus program constitute pork? Thanks for this and all your emails .

First a water Park like Disney World or a baseball park creates jobs to build the facility. Both workers and suppliers benefit. Once built it continues to create jobs for workers and revenue for products it sells (food, souvenirs, etc) It also generates tax revenue for the state.  So is a Water Park pork?   I’d certainly prefer money going to education bridges etc., but a ready to go water park in the right location (not Alaska) could create jobs jobs jobs and increased tax revenue for states.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Technicals

US stock markets held onto last weeks gains. Technically, this is a positive sign .

Troubled GE shot up like a rocket reversing most of last weeks losses.  Another positive.

Both volume and how markets react to news (our primary indicators) still show a rally building .

Secondary Indicators

Both Treasury Bonds and LIBOR have moved in a bullish direction over the last few months. The Baltic Dry Sea Index that measures the flow of goods between countries, is on fire +48% over the last 4 days and another +10% on Monday. = Big Time Short term bullish signal.

Fundamentals

Today we learn what Tres. Secretary Timothy Geithner and what he plans to do with the second 1/2 of the TARP money. (see yesterday’s comments) Can’t over emphasize the impact the importance of this plan to both financial stocks and world markets.

Dr. Doom and the Black Swan – These two guys predicted the current financial crisis. Their comments "Even if we play our cards right…it will take at least 12 months to get out of this recession." That’s the good news. For the bad news read full article on Roubini and Taleb

Short Term Outlook/Strategy

Technically signs of a rally building are about as strong as they get. Fundamentally, the stimulus package has passed the Senate and that’s a whole lot of money about to juice US economy. However, what Geithner says about allocating the the TARP money is key to any short term rally.

Oppenheimer analyst Meredith Whitney, a financial bear,  is on a winning streak and therefore the analyst that has Wall Street’s ear. If she goes thumbs down on Geithner so will the markets according to CNBC’s Jim Cramer

Bottom Line – Still no long term light at the end of the tunnel, but technical signs for the rally to continue exist.

Long Term Outlook = BEARS RULE

• On a 1 to 5 scale Bears Rule is at the bottom.
• This section rarely change s
• Changed are bolded and in plum or crossed out

Technicals - Best read of the tea leaves – 2009 Markets range bound between Dow 7449 (last year’s low) and 9654 (November 08 high )

Fundamentals – Problem in financial sector is far far far far far bigger than fist imagined. Impact of mess is going to take years to resolve.

Asset Allocation

15% to 30%+ Stocks (Depends on your level of risk) Buy/nibble the dips below 8,000 – the bigger the better.  -

Recommended Sectors

• 5%+ US Index ETF’s - UWM (Exchange Traded Fund does @ 2x what Russell 2000 does ) & QLD (does 2X what NASDQ does)
• 5%+ Emerging Markets - FXI (China ETF) & EWZ (Brazil ETF)
• 5%+ Alternative energy - GEX (alternative energy fund)
• 5%+ Gold - GLD (ETF for gold)

Chief Strategy -

Buy the dips. Use the Dow as a barometer for all of the above sectors except GLD. This is NOT your fathers buy and hold market. Under 8 years of Bush the Dow went from 11,000 to 8,000 and left a whole dung heap of economic problems.

Protect your gains – After rallies you can protect your long positions by using ETF’s that short the market. Two ETF’s that short major indexes (@ 2x the loss). These indexes go down you make money. The closer markets get to 9000 the more you think about shorting. Until the long term outlook changes this hedging strategy will remain.  Note – long positions/ETF’s  NASDQ & Russell, short positions/ETF’s S&P & Dow

• SDS – Ultra short S&P 500
• DXD – Ultra short Dow

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

-

A New Economic Era Emerges

When FDR took office in 1933, he was confronted with 25% unemployment and the Great Depression. By 1937 he had reduced unemployment to about 10%, but unfortunately tried to balance too soon with negative results. The ultimate stimulus package came along – World War 2 and this helped lift the world out of the Great Depression. Government dominated in providing solutions to economic problems and the leading economist behind this move was J.M. Keynes This era lasted until 1980.

Ronald Reagan took over in 1981 with runaway inflation and an oversized government. Together with his Fed Chair, Paul Volker they began to bring some of the  excesses under control. Inflation fell from 11% to 4%. Volker got fired. Government became the problem and not the solution. Alan Greenspan became the new Fed chair and he believed in the concept that “free markets” worked better when they were stripped of almost all regulations.  The leading economist of this era was Milton Friedman

The pendulum of economic history is now swinging back as Barack Obama assumed the Presidency in 2009. We learned when business runs government the checks and balances vanish and what we’re left with are over leveraged, insolvent, corrupt businesses (free market system) that can trigger a “Great Recession” or even worse.

Obviously the absolutists for big government and big business were wrong. There needs to be a structural balance between the two. Because of the worldwide economic meltdown created by runaway capitalism we need to restore balance in the favor of government acting as a check and balance to free markets.

Stimulus Package

No matter how you feel about the @$800 billion moving through the Senate this week. You have to be impressed by the way Obama is using the internet to explain this plan He even has VA Gov. Kaine answering some of the most asked questions

While other traditional media outlets are loosing huge hunks of their users, the internet is flourishing.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Technicals

US stock markets staged a major rally in slightly reduced but well above average volume.  Thursday and Friday were a major right left combination for the bulls. Volume confirmed the move .  Foreign Indexes went along for the ride. Leadership is coming from the world’s #2 economy – China.  FXI (China ETF ) turned before US indexes and had a +4.75% move Friday.

Even though we had a 7.6% unemployment number and for the 3rd month in a row close to 600,000 jobs were lost, stock indexes moved higher. Stocks moving higher on bad news= strong short term bullish signal

Sure, this may end up being just another Bear Market rally. However, our strategy has been to buy the dip (Dow dips below 8000) and sell or short into the rally (Dow approaches 9000) Dow currently at 8281.

GE , the mother of all conglomerates, finally found a ledge of support to halt its free fall Friday. It’s quite possible that like AIG, GE because its financial division is so over leveraged could need a bailout.

Both volume and how markets react to news (our primary indicators) show a rally building .

Secondary Indicators

Both Treasury Bonds and LIBOR have moved in a bullish direction over the last few months. The Baltic Dry Sea Index that measures the flow of goods between countries, is up +38% over the last 3 days and almost +10% on Friday. = Short term bullish signal.

Fundamentals

The major news of the week may be the stimulus package.  However all eyes on Wall Street are on Tres. Secretary Timothy Geithner and what he plans to do with the second 1/2 of the TARP money. If he cuts the banks some slack (a politically unpopular move) expect the Wall Street rally to continue. Defending banks/Wall Street right now is like defending child pornographers. However, if some slack is NOT granted banks then you will see the rally crumble.

Short Term Outlook/Strategy

Until we see some light at the end of the economic tunnel, VOLATILITY continues to be the most predictable major stock market trend. When equities reach the lower end of their range (see Long Term Outlook below) nibble/buy.  When they reach the higher end of their range add protection. Dow at 8281 is closer to bottom of its range than top. Shorter term range between Dow 8000 & 9000 Buy the Dip.

Technicals are indicating a budding rally, but TARP resolution is key to any short term rally

Long Term Outlook = BEARS RULE

• On a 1 to 5 scale Bears Rule is at the bottom.
• This section rarely changes
• Changed are bolded and in plum or crossed out

Technicals - Best read of the tea leaves – 2009 Markets range bound between Dow 7449 (last year’s low) and 9654 (November 08 high)

Fundamentals - Problem in financial sector is far far far far far bigger than fist imagined. Impact of mess is going to take years to resolve.

Asset Allocation

15% to 30%+ Stocks (Depends on your level of risk) Buy/nibble the dips below 8,000 – the bigger the better.  -

Recommended Sectors

• 5%+ US Index ETF’s - UWM (Exchange Traded Fund does @ 2x what Russell 2000 does ) & QLD (does 2X what NASDQ does)
• 5%+ Emerging Markets - FXI (China ETF) & EWZ (Brazil ETF)
• 5%+ Alternative energy - GEX (alternative energy fund)
• 5%+ Gold - GLD (ETF for gold)

Chief Strategy -

Buy the dips. Use the Dow as a barometer for all of the above sectors except GLD. This is NOT your fathers buy and hold market. Under 8 years of Bush the Dow went from 11,000 to 8,000 and left a whole dung heap of economic problems.

Protect your gains – After rallies you can protect your long positions by using ETF’s that short the market. Two ETF’s that short major indexes (@ 2x the loss). These indexes go down you make money. Until the long term outlook changes this hedging strategy will remain.  Note – long positions/ETF’s  NASDQ & Russell, short positions/ETF’s S&P & Dow

• SDS - Ultra short S&P 500
• DXD – Ultra short Dow

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING