Obama’s Economic Team

Obama’s chief Economic Advisor is University of Chicago Economomist (home of Milton Friedman) Austan Goolsbee. The following is conservative columnist George Will evaluation of Goolsbee LINK

Those who surround Obama seem to be divided into two camps – The Warren Buffet and Paul Volker (former Fed Chair before Greenspan) camp. Both these guys back regulated markets. The other camp is led by two former treasury secretaries Larry Summers and Robert Reich (spelling?) This camp is the anti regulation. This is far too simple a description of their views. However, all of this diversified group of advisors have one thing in common. They are associated with a time when stocks and economics did far better than under Bush/McCain’s economic plan.

No one should be comfortable with the government moving in and taking preferred shares of companies or segments of our economy (banks insurance companies and more) but we should recognize the necessity. Tom Friedman on this LINK

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Index % Change Volume

Dow -3,59% flat
NASDQ -3.23% down
S&P500 -3.45% ?
Russell2000 -3.84% –

Headline – Asia Meltdown Intensifies

US Market & Foreign Markets -

Technicals – There was a sigh of relief as major US markets closed only @3.5% down yesterday. Volume was above average. Sorry difficult to read volume figures from charts. The NASDQ and the Russell 2000 (small caps) reached a new lows, and the DOW and S&P 500 reached new closing lows. Therefore 2 of the 4 major US indexes have broken support levels and are continuing the BEAR’s RULE technical trading pattern of lower lows and lower highs. The DOW and S&P are close to breaking their last lines of support too.

Asian markets plummeted and closed down another 6.4% earlier today. Japan is now at 26 year low. European markets are taking a 2% to 5% hit and American Futures trading is down 1 to 2%.

The silver lining is that we are more oversold than any time in the 21st century and the VIX is at an all time high

Fundamentals – The Fed meets this week and will probably lower interest rates significantly. Major earnings week for stocks. GDP #’s come out for the quarter.

PANIC – Three huge storms have combined into the biggest hurricane since the Great Depression.

1) The US housing bubble has burst.
2) A $50 to 70 trillion dollar unregulated Credit Default Swaps does not have the capital to back its assets
3) The problems in the US is causing a decoupling of of global markets and a worldwide recession.

About the only positive is that the Fed and other countries have made a clear commitment to keep banks open even if it means nationalization.

Nouriel Roubini again popped up in the media. This time in London Times LINK This time he is predicting thing will get so bad that stock indexes in countries will have to close for a week to prevent further panic selling. Dr Doom has been right in the past in calling the steps that would lead to the Credit Crisis.

Jim Cramer from CNBC describes what is happening as hedge funds selling. Since they can not borrow $ the only thing left to do is sell commodities and stocks to satisfy investors. All this forced selling is taking place because the government programs are not yet functioning.

The fed is starting its commercial credit intervention to American companies today. Combine this with a possible rate cut Tuesday and you have some decent fundamentals that could led to a rally.

Mea Culpa – Friday I stated that there were 400 hedge funds – Wrong – there are perhaps 10,000+. A guess by a talking head on CNBC stated that 400 of these giant funds are in trouble.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Three Month Treasury Bill & LIBOR

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

The 3 MTB moved lower -9.89% yesterday to an interest rate of -0.82%. After 4 straight days of moving higher it does technically look like we have started a reversal of the trend. This is the third day in a row that the 3MTB has fallen. Translation fear is returning to the markets and the major move higher after worldwide intervention and a bank rescue plan is in trouble

As the chart shows the LIBOR, while still very high but taken a dramatic drop since the revised rescue/bailout plan of buying equity in banks has been accepted) LIBOR in a week+ has dropped from 4.8% to below 3.5%. Again the rate of change has diminished. We still have a long way to go. LIBOR should be a lot closer to the 1.5 % Fed rate but the trend is very clear. LIBOR has basically inched ever so slightly down for the last three days.

Translation – The gap between the 3MTB and LIBOR has been flat for the last few days . LIBOR is down this AM and that’s good news.

3 MTB chart

LIBOR chart (3 month)

Bottom Line – Banks are not leading to other banks, but the commercial leading market is slowly opening up. This helps Main Street’s access to credit cards to adjustable mortgage rates.

OIL

Basically stocks go up so does oil. Stocks go down so does oil.

Chart of oil (WTIC)

The Dollar

Dollar and Yen are rising. (More on this later)

Chart of Dollar

The VIX

The VIX (measures amount of fear/volatility in S&P) . The VIX is at an all time high 79.13. Any major move higher , technically should lead to a sharp (temporary) rally in stocks.

Chart of VIX.

Short Term Outlook = Crash and Burn?

Already the Russell 2000 and the NASDQ have reached new lows and the DOW and S&P have reached closing lows. Not Good.

Obviously worldwide we are going to have a global recession. We are just entering the realization of this phase. How long and how deep is now the concern. Global coordinated moves by central banks help, but until US housing stops declining, the credit default swaps market assets become clear, and unemployment stops rising we are going to continue to fall.

There was hope technically that we could hold onto this years lows, but already two major indexes have reached this level and it looks like the global meltdown will continue.

This market is a short term traders dream and a long term investor’s nightmare.

Reading The Tea Leaves – We’ve already had a 35 to 40% stock losses. The rest of the world more. How low can it go? Certainly below the 7800 Dow interday low. Dow currently at 8378. Could we loose another 30% to 6000? Its possible. I don’t think we’ll loose another 30%, but I do think the next two years will see us at least test 7800 low and probably get below that.

NB -The VIX is at an all time high = the level of fear is higher than its ever been. This usually means you get at least a short term RALLY. The question that no one can answer is how many hedge funds will be forced to see into the rally (see Jim Cramer’s comments above)

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – Bear’s Rule

Technicals – Double bottom has formed, advance in strong , increased volume, and a new high on VIX -Technically all this = at least a short term rally and maybe a long term bottom.
Fundamentals – financial mortgage transparency problem is far far far far far far far far far bigger than anyone thought. New worldwide rescue plan offers hope, but this rally is going to be a bumpy ride because retail investors trust has been shaken. Global growth is obviously slowing

People feel like we are in a recession. The actual strict definition – 2 quarters of negative GDP growth has not occurred. How bad the worldwide recession will be is be is the major question. It’s beginning to look like the recession might last through 2009 – perhaps longer

Asset Allocation/Recommended Sectors (long term)

* 80% to 100% Cash – This depends on your risk tolerance

* 10+% US Index Funds
UWM (ETF that does 2x what Russell 2000 does) & QLD (ETF that does 2X what the NASDQ does) DDM (ETF that does 2X what the Dow does)
*5% Emerging Markets
EWZ (Brazil) should out perform other emerging markets in a rally and under perform in a fall – highest risk
*5% Alternative Energy
GEX(Alternative energy ETF) (If Obama wins you will see this sector flourish)

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 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. (less than 5%) Do not buy into rallies.

Shorting – Three ETF that short 2x what the the major indexes do -
TWM – ultra short Russell 2000
QID – ultra short NASDQ
SDS – ultra short S&P 500

Changes to Bottom Line Section Bolded

As Always Do Your Own Research Before Investing

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