How we got into such a huge financial mess.

Nobel Prize winner Joe Stiglitz has a comprehensive piece on just how this economic meltdown began. He traces its roots all the way back to Alan Greenspan becoming Fed Chair. Some of the incidents he mentions have already been covered in Updates. History can repeat itself unless we do something to change it. His basic premise is what Alan Greenspan already admitted to – that free markets are not self regulating entities.

You can read about the 5 major causes that made us "Capitalist Fools ."  More on this later.

Flying Shoes

Thanks to one of you who sent in the following video. Got to admit Bush is fast and for the first time he moved to the left.

Green – An Electric Car Bailout?

We all know Detroit is in trouble, but the falling oil prices and world wide recession has meant major set backs for emerging electric car companies . Even Prius is cutting back. LINK

Peak oil is a reality. Our dependence on foreign sources for oil is another reality. So is global warming and the pollution that burning fossil fuels create. Now that prices drop in a worldwide recession so does the desire for green energy.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Fed Cuts = Big Rally

Index % Change Volume

Dow +4.20% up
NASDQ +5.41% up
S&P500 +5.14% up
Russell2000 +6.69% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

Therefore, both the primary (volume) and #2 factor (how markets react to news) seem to be bullish right now.

As predicted we had a rally yesterday. It was one of those big time bear market rallies (were still not out of the woods) in increased average volume. Volume up is a good sign and there was a significant increase in volume, but in total the volume for the major indexes was average. All in all a very good day , but, it sure looks like there are a whole class of investors unwilling or unable (not enough $) to invest large amounts of capital in stocks.

Dow now at 8924 with the first resistance level at 9026 and major resistance at 9654 . The Technical aspect of US equities has been very solid since the late November lows. Short term the momentum is clearly with the bulls.

Chart of the benchmark S&P 50

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’ economic team & his proposed stimulus package.

The auto bailout/loan is in limbo. Will Paulson and Treasury act?

Major action taken by US Fed lowering interest rates more than expected. They lowered rates 0.75% to 0.25%. That’s the lowest they’ve ever been. Great one day news for the markets, but there is little the Fed can do to lower rates any further.

Some credit cards and mortgages are tied to US Fed interest rates.

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 WAS being made. LIBOR has fallen from 4.8% two months ago to about 1.8% LIBOR rates are on their second leg down started to fall . 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.

LIBOR chart (3 month)

Treasury Bonds

All the yields kept falling – relative to last year. month, week and day. The 3 month has basically flatlined at 0.01%
Fearful investors are putting their money in Treasury bonds for 3 months to 30 years, they are NOT investing in stocks.

Yields keep falling = Continued deterioration of credit market. 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.

Bloomberg data and chart (If the link does not work Google – bloomberg baltic dry index) Set range indicator to one month and you will see this chart.

BDI rose over +3% yesterday to 823. We have had a significant rally off the lows of @660 in the last week. The BDI had seen an over 90% loss since June. It seems, a least for a week international trade has picked up. This is very good news for bulls.

Dollar Falling and Therefore Oil Prices Rising (more later)

Short Term Outlook

Reading the Tea Leaves-

PANIC RULES the credit markets and its hard to see money flowing into stocks while so many potential investors are putting $ in treasuries at ridiculously low rates.

A Santa Clause/Obama rally seems in the works. However, announcement of an auto bankruptcy would have an immediate negative impact.

Same outlook holds Santa Clause /Obama rally is chugging along. Shorter term traders should buy the dips. Rally looks like it has enough technical juice to make it close to 9654.

All the recommended sectors are doing quite well.

FXI (China) is clearly out preforming the USA. Chart of FXI .

EWZ (Brazil) chart is not as good as China, but again outperforming USA. Chart of EWZ . Caution – Brazil s tied to rising oil prices and will under perform on the way down.

GEX (Alternative energy) chart is basically forming a base. Chart of GEX. Will rally with US equities. Broke out to new short term high yesterday This is a play that the Obama stimulus package contains a lot of green energy proposals.

GLD (Gold) weekly chart is not quite as good as major US indexes – then again gold did not fall as much as the US indexes. Gold is a play that inflation emerges at the other end of the recession. Chart of GLD .

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 part 2 seems to be taking hold.
Look for range between 7449 and 9654 for rest of year.

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 20 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%+% 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 fathers market – over the 8 Bush years the Dow has gone from 11,000 to 8,500 and 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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