Thanks to one of you who sent this very funny video of Robin William’s on American Politics (Obama to President Jack Nickelson) and more. PoliticalIrony.com is a great humor site.

"Scam of the Century"

Yesterday Tom Friedman called the Madoff scandal the "cherry" on top of the whole financial mess.

Today Nobel Prize winner Paul Krugman echo’s Friedman – "How really different is Mr Madoff’s tale from the story of the investment industry as a whole."

Bottom Line – Many of you have talked about investments in the financial sector. Your reasoning – After all financials are so beaten up and the government is not going to allow this sector to fail – Citigroup the prime example. You’re right but -

The other side to this coin is that – we do NOT have transparency in this sector, We have not enforced a new restructuring, we do not know how much "toxic" debt each company has.

In the end financial companies are all going to have to de-leverage. They made their profits from huge risks (leverage like credit derivatives) and you the taxpayers are now subsidizing that risk. Financials, therefore, will not be as profitable as in the past unless we continue to allow them to run unregulated Ponzi schemes. So, as a long term investment the financial sector’s outlook does not seem as bright as other sectors.

Since financials used to be the largest sector of the market it is hard to see stocks(especially financials) recover significantly in the upcoming years because their earnings are going to shrink.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING


Headline – Consolidation

Index % Change Volume

Dow -2.49% down

NASDQ -1.71% down

S&P500 -2.12% down

Russell2000 -1.52% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

Major US stock indexes took it on the chin in weaker volume Thursday. Volume did NOT confirm the move lower, but the last two days have seen the four major indexes erase almost all of Tuesday’s big gains. That’s not good news for bulls.

All the major indexes have failed to breakout through their 50 day moving averages (see charts – the blue line) and the highs established two weeks ago. This makes the area around 9000 on the Dow a stronger and significant technical resistance area. Two failures to break it and the fact that the 50 day moving average is close to this level all combine to make it a line in the sand resistance level for stocks.

The shorter term mojo is still with the bulls until stocks close below their opening price on Tuesday. This area just above 8500 held for three days in a row (last Friday, Mon. and Tues.) and is a short term support level.

Dow now at 8605 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 still with the bulls . Downside support level just above 8500 is in danger of falling. Today’s test of this level is relevant to the Santa Clause/Obama rally continuing.

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’ economic team & his proposed stimulus package.

Mea Culpa – Several of you caught a mistake the company mentioned was another Financial giant Morgan Stanley and not BS. (Thanks for the emails) Bear Sterns had a bad earnings report yesterday, but this had little impact on overall markets. After volume, how markets react to news is the #2 confirmation factor. The lack of a major fall in stocks despite the Bear Sterns and continuing Madoff see yesterday’s Update) fallout is bullish.

GE – The mother of all conglomerates was the reason for yesterday’s fall. GE finance is loaded with "toxic debt" and as mentioned in the past negatively impacting this stock.

GM and Chrysler – Yesterday Bush said he had not made up his mind on loan/bailout and auto stock got toasted – Today Reuters says agreement near. Toyota has first loss in 70 years of operation. Bush speaks on this at 9:00 AM.

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 has fallen from 4.8% two months ago to about 1.52% LIBOR rates are on their second leg down and have again 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

All the yields fell. 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. Investors are willing to pay an unbelievably low 2.08% for a ten year treasury bond.

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 almost less than -1% yesterday to 828. We have had a significant rally off the lows of @660 in the last week. The BDI had seen an 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 (more later)

Yesterday the dollar rose and oil prices declined significantly. Weak oil prices are also a sign of worldwide recession is going to get worse before it gets better.

The dollar is falling about as fast as it ever has for the last week. Chart of the dollar .

The dollar is falling because of the low US interest rates and it looks like the Fed will bee printing a whole lot of $ to keep the financial system liquid.

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. Long term stock rallies simply do not have the money supply to exist as long as the credit panic continues.

Fundamentally the market reacted negatively to the GE news (see above) US stocks had been ignoring bad news. How markets react to news is an early indicator of a reversal, so the technical support around Dow 8500 is in trouble.

Best guess is that 8500 will hold.

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 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%+% 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 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

  • Share/Save/Bookmark