2009 Call

This is not your father’s "Buy and Hold" market . 2008 huge losses and the unpredictability of the future shows no safe trends except volatility. Therefore, we can use volatility as an investment tool until some clear longer term patterns become established. This does mean you have to pay more attention. After stocks rally (Dow +5 to 10%) buy an ETF that shorts to protect your gains.

The range prediction in the Bottom Line section is between the 2008 low 7449 and the November high of 9654 . This is just a wild guess based on technical factors. Volatility could easily move stock prices above and below these levels.

Tomorrow we will go over specific sector (ETF’s) to invest in and why.

2009 Economic Problems

Investors basically look 6 months into the future and if they see signs or have confidence that the situation will improve then they will start investing again. This is not going to happen quickly because many have had close to 40% of their portfolio’s wiped out and there are some dark clouds on the horizon. Here’s a list of some of those clouds.

#1 – Financials/Banks are still over leveraged. There is easily over $10 trillion of over leveraged debt (credit default swaps) that has not been written off.
#2 – Transparency – There is none. TARP has thrown money at banks, but there has been no accountability.
#2 – Mortgages – The number of people defaulting on mortgages is going to grow and overall housing prices continue to decline.
#4 – Unemployment rises – It looks like the unemployment figures will reach 8+% this year.
#5 – This mess took decades to create, it will not be solved overnight.
#6 – Clearly recession is a worldwide problem. This could lead to more problems like protectionism and sink us further into a hole.
#7 – We entered this disaster with both a huge trade and federal deficit.

The good news is that stocks have fallen a long way and many of these factors are in some ways built into equity prices. Technically it does look like stocks have made a bottom around Dow 7500.

Like Tinkerbell believed in Pete Pan you have to believe in Obama’s economic approach and your fellow Americans for an economic recovery. The "free market"/Ayn Rand zealots that lead us into this disaster could easily again take control. Critical to all of this is a housing recovery. China relative stability and continued growth could help lead us out of this mess.

Back to Politics Tomorrow

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Obama Rally Part 2

Index % Change Volume

Dow -0.91% up
NASDQ -0.26% up
S&P500 -0.47% up
Russell2000 -0.16% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals – After a rally, when markets basically go nowhere and volume increases, the end result is usually a reversal of trend. Technically what’s happening is the bulls and the bears are having a big fight at the Dow 9000 resistance level and one side is going to run out of troops (the increased volume) More often than not the trend reverses because the (in this case) the bulls used up so many troops (buyers) to get to the resistance level.

Bottom Line – today is significant because it will probably set the pattern for the next few days. We have in the last month established a range between @ Dow 8500 and 9000. Both the 8500 support and 9000 resistance have held.

If we can hold onto gains this week, another leg higher is very possible. Next major resistance level is around Dow 9650. See charts.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals-

Obama Rally = HOPE A whole bunch of stimulus that has already been thrown at stocks, plus the composition of Obama’s economic team & his proposed stimulus package.
Earnings season begins in a weak or two and usually the next week or two warnings impact stocks.

Three Month Treasury Bill & LIBOR

Credit markets are the dog and the Stock Markets are the tail. Without credit the tail won’t wag.

Real progress is being made. LIBOR continues to fall 3.4% two months ago to about 1.42% LIBOR rates have fallen significantly. LIBOR is the rate banks charge each other, not businesses. Some credit cards, loans and mortgages are tied to LIBOR so this is good news. Some credit cards & mortgage rates are tied to Fed prime rate.

LIBOR chart (3 month)

Treasury Bonds

The 3 month T Bill fell to 0.04% Shorter term yields fell. Longer term rose yields rose. The 30 year T bond rate is back above 3%. Slow but moving in right direction.
Fearful investors are putting their money in Treasury bonds for 3 months to 30 years, they are NOT investing in stocks. Investors are willing to pay an unbelievably low 2.48% for a ten year treasury bond.

Yields keep falling = Continued deterioration of credit market. Low Yields = There is simply NO confidence in the credit markets PANIC RULES

Baltic Dry Index

The Baltic Dry Index is a forward looking indicator that measures pre production materials that are shipped around the world. For better definition see LINK
Bloomberg data and chart LINK (If the link does not work Google – bloomberg baltic dry index) Set range indicator to one month and you will see this chart.

BDI flatted yesterday (-1) to 772 We have had a significant rally off the lows of @660 three weeks ago week.

Long term picture The BDI had seen an almost 90% loss since June. It seems, a least for a week international trade has picked up but has again begun to slowly fall. These shipping figures confirm world wide recession.

Short Term Outlook

Reading the Tea Leaves-

PANIC STILL RULES the credit markets.

Without credit and goods (BDI) flowing a long term stock rally is unlikely. However, Dow 9654 is a possibility. That is the number the Dow reached on around election day. The Obama stimulus plan (hope) dominates the investment news. "Buy the rumor and sell the news" is an old Wall Street axiom. Despite a technical breather the tea leaves indicate that we rally till the stimulus pakage becomes apparent.

Strategy – Volatility rules and a 6+% move higher in the Dow is a big move in a week. Personally will start adding some SHORT positions to protect the gains of last week. The higher we go the more short positions.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – BEARS RULE

Changes to Bottom Line Section Bolded

Technicals – Series of Lower Lows and Lower Highs = Bears Rule. Obama/stimulus rally phase 2 is underway. Technical Range for 2009 – 7449 (low) and 9654.- This is a wild guess . Any sustained move above Dow 9650 is bullish.

Fundamentals – Financial transparency problem is far far far far far far far far far bigger than anyone thought. It’s looks like the recession will last through 2009 – perhaps longer Hopes of a more competent Obama administration have rallied stocks.

Asset Allocation/Recommended Sectors (long term)

50% to 90% Cash – Long Term Investors (up to 15 to 25+% stocks – only buy big dips) Wait for the next big dip to add 5 to 10%
Be Cautious and PROTECT YOUR MONEY (use ETF’s that short major indexes) when stocks have a big rally

*5-10% +% US Index Funds
UWM (ETF that does 2x what Russell 2000 does) & QLD (ETF that does 2X the NASDQ ) DDM (ETF that does 2X the Dow ) SSO (ETF does 2X the S&P 500)

*5%+ Emerging Markets
EWZ (Brazil) should out perform other emerging markets in a rally and under perform in a fall – highest risk and dependent on oil prices
FXI (China ETF) should outperform USA

*5%+ Alternative Energy
GEX(Alternative energy ETF) Obama administration will focus on this area

*5+% Gold
GLD is the ETF for gold-

Chief Strategy – Buy the DIPS of trending sector – This is not your father’s buy and hold market – over the 8 Bush years the Dow has gone from 11,000 to 9000 and huge uncertainty clouds the future.

The major trend now is volatility.

Traders who have a strong tolerance for risk jump in on dips and invest more. Sell and/or go short into major rallies. Long term Investors who can tolerate risk and are 100% in cash nibble just a little on big dips. (5% on each big dip) Do not buy into rallies.

Shorting – Three ETF that short 2x what the major indexes do.

TWM – ultra short Russell 2000
QID – ultra short NASDQ
SDS – ultra short S&P 500

As Always Do Your Own Research Before Investing

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