Stimulus Package

Cutting taxes for Business – You cut taxes for business and what do they do? CEO and Board members get raises, dividends get increased, corporate jets get bought, stocks get bought back, esoteric derivatives get bought, or a lavish weekend party at a spa/resort/penthouse are held. OK some of the money may go for research and development or worker’s salaries, but obviously there is not much bang for the buck or accountability in cutting taxes for businesses.

The Obama stimulus plan plans to give tax cuts to those businesses that hire new workers. However, would not this money be better spent by creating demand for a product. By creating demand business would grow and new workers would be hired. This benefits both consumer and business.

Cutting Your Taxes – Sounds good and the impact is almost immediate. Bush did give us a tax cut and it did keep GDP positive for one quarter – but had no longer lasting impact and GDP for the 4th quarter is going to be something around -4.00%.

What happens to the (especially working middle class) tax cut. Some of it is used to pay down debt and some of it is saved. Commendable behavior, but that does not stimulate the economy and therefore it does not have a big bang for the buck. It’s better than cutting business taxes because it helps middle class consumers who spend on business products. The middle class spends and the economy grows.

Creating Jobs/infrastructure – Government creating private jobs through infrastructure projects. This has the biggest bang for the buck. Take building a bridge or a school. You create a job that turns an individual into a tax payer instead of a welfare recipient. What you build increases demand for businesses products – they grow. Example all the different contractor and materials that are needed to build a bridge/school are also helped. Once you have the bridge/school it benefits the individuals who use them. Example helps the flow of goods – bridge or provides a better educational environment – schools.

The problem with this is that infrastructure projects take time to get started. Red tape bureaucracy & politics get in the way. What Obama is proposing will not really have an impact till 2010.

Green Jobs – Right now hundreds of billions of dollars each year goes to petro dictators who we have become dependent on. This is an added benefit to infrastructure jobs – the money will be staying here. Of course pollution problems and global warming problems will decrease. This puts infrastructure green jobs at the top of the list.

Economist Peter Morici (see yesterday’s updates) and others have done work on how stimulus impacts markets. For more on Morici LINK

Nobel prize winning economist Paul Krugman offered his formula for stimulus yesterday LINK

Another $350 Billion

Bush has asked for another $350 billion – The Obama administration will spend this $. More on this below in "Fundamentals" section.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – $350 Billion

Index % Change Volume

Dow -1.46% up
NASDQ -2.09% down
S&P500 -2.26% up
Russell2000 -2.60% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals – Major US markets fell and volume especially in the financial sector rose.

XLF is the financial sector ETF Chart here . As the chart shows financials fell -5.26% yesterday in increased volume and clearly broke through support levels (11.33 see chart) XLF closed at 10.95. Financials used to be the largest sector of the market and may no longer hold that distinction. But they are certainly capable of leading all major indexes lower.

The major indexes are at their major support levels (just above or below). Volume is starting to pick up. This is never a good sign as we start to move lower. Foreign markets are following the US lead.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals – What’s happened is the Bush administration has asked congress for the second 1/2 of the poorly administered bank/financials (and auto) bailout/loans. The Obama administration will oversee the use of these funds. This has spooked stocks – especially financials. CitiGroup, the mother of all banks, broke support levels and fell 17% in huge volume. City has already twice received bailout funds. Citi is in the too big to fail category and its failure would mean a run on suspect banks worldwide.

The bottom line – Just the knowledge that the government thinks the bank/financial needs more financial help is enough to make worried investors panic and sell. This time the Panic is a bit more orderly, but with no transparency and no accountability its pretty hard to invest in a financial stock. You know they’re in trouble, especially Citigroup, but who knows which ones will go belly up and what criteria the government is using to hand out loans.

Some of these financial and other institutions have to be allowed to fail. They have to fix the accountability, transparency problems that the first bailout/loan package contained. Lot’s more on this later.

Institutions that are too big to fail need more government oversight – Ben Bernanke just said something like this AM at London School of Economics. Also expects more job losses in at least 1st 1/4 of 09 and turning this around will take time.

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 this week.

Forecasting Future Trends

The following is a group of indexes that are all interrelated and strongly influence how stocks moves. At different times one index may be more influential than the other.

LIBOR – LIBOR is the rate banks charge each other. It price has fallen from 3.4% three months ago to about 1.16% (good news for stocks)

LIBOR chart (3 month)

Treasuries – T Bills yields show how fearful investors are. The lower the rate the more the fear. Short term yields – 3 month flat at 0.02% and longer term treasuries all fell. 10 year fell to 2.30% (low yields show fearfull investors flooding to Treasuries instead of stocks – Bad news for stocks)

Treasury Bonds chart

Baltic Dry Index – Measures flow of goods between countries. Yesterday it rose 2+% yesterday. Almost 85% drop since June. (short term good news a 2, 4, 6, & 2% gains in last 4 days)

BDI chart

We’ve seen a short term pop in international trade to go along with a solid bullish move in inter bank lending rates. Both are bullish signs. However, Panic still rules the credit markets. Prices of major banks are have again started to go south. Looks like at some time another chunk of bailout $ is going to be needed to fix banks in the future. Bush yesterday announced he’s going for the second chunk of bailout/loan money.

Short Term Outlook/Strategy

Reading the Tea Leaves-

PANIC STILL RULES the credit markets
Without credit (treasury bills/bonds) and goods (BDI) flowing, a long term stock rally is unlikely.

Strategy – Shorting rallies to protect gains is working. (see below) Until we some light at the end of the recession tunnel VOLATILITY continues to be the most predictable major stock market trend. Obama rally (stimulus package) is holding up equities right now.

We’ve seen a short term pop in international trade (BDI) to go along with a solid bullish move in inter bank lending rates (LIBOR) Both are bullish signs

Panic still rules the credit markets. Prices of major banks are have again started to go south. Looks like at some time another chunk of bailout $ is going to be needed to fix banks in the future . BINGO – Bush/Obama asked for the second half of the $750 billion bailout package.

Add a falling financial sector to the mix and the Dow 8500 support level will probably NOT 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 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+% 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

  • Share/Save/Bookmark