Dow +2.70 up
NASDQ +2.94 up
S&P 500 +2.75 up
Russell 2000 +3.43 up

-

A New Economic Era Emerges

When FDR took office in 1933, he was confronted with 25% unemployment and the Great Depression. By 1937 he had reduced unemployment to about 10%, but unfortunately tried to balance too soon with negative results. The ultimate stimulus package came along – World War 2 and this helped lift the world out of the Great Depression. Government dominated in providing solutions to economic problems and the leading economist behind this move was J.M. Keynes This era lasted until 1980.

Ronald Reagan took over in 1981 with runaway inflation and an oversized government. Together with his Fed Chair, Paul Volker they began to bring some of the  excesses under control. Inflation fell from 11% to 4%. Volker got fired. Government became the problem and not the solution. Alan Greenspan became the new Fed chair and he believed in the concept that “free markets” worked better when they were stripped of almost all regulations.  The leading economist of this era was Milton Friedman

The pendulum of economic history is now swinging back as Barack Obama assumed the Presidency in 2009. We learned when business runs government the checks and balances vanish and what we’re left with are over leveraged, insolvent, corrupt businesses (free market system) that can trigger a “Great Recession” or even worse.

Obviously the absolutists for big government and big business were wrong. There needs to be a structural balance between the two. Because of the worldwide economic meltdown created by runaway capitalism we need to restore balance in the favor of government acting as a check and balance to free markets.

Stimulus Package

No matter how you feel about the @$800 billion moving through the Senate this week. You have to be impressed by the way Obama is using the internet to explain this plan He even has VA Gov. Kaine answering some of the most asked questions

While other traditional media outlets are loosing huge hunks of their users, the internet is flourishing.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Technicals

US stock markets staged a major rally in slightly reduced but well above average volume.  Thursday and Friday were a major right left combination for the bulls. Volume confirmed the move .  Foreign Indexes went along for the ride. Leadership is coming from the world’s #2 economy – China.  FXI (China ETF ) turned before US indexes and had a +4.75% move Friday.

Even though we had a 7.6% unemployment number and for the 3rd month in a row close to 600,000 jobs were lost, stock indexes moved higher. Stocks moving higher on bad news= strong short term bullish signal

Sure, this may end up being just another Bear Market rally. However, our strategy has been to buy the dip (Dow dips below 8000) and sell or short into the rally (Dow approaches 9000) Dow currently at 8281.

GE , the mother of all conglomerates, finally found a ledge of support to halt its free fall Friday. It’s quite possible that like AIG, GE because its financial division is so over leveraged could need a bailout.

Both volume and how markets react to news (our primary indicators) show a rally building .

Secondary Indicators

Both Treasury Bonds and LIBOR have moved in a bullish direction over the last few months. The Baltic Dry Sea Index that measures the flow of goods between countries, is up +38% over the last 3 days and almost +10% on Friday. = Short term bullish signal.

Fundamentals

The major news of the week may be the stimulus package.  However all eyes on Wall Street are on Tres. Secretary Timothy Geithner and what he plans to do with the second 1/2 of the TARP money. If he cuts the banks some slack (a politically unpopular move) expect the Wall Street rally to continue. Defending banks/Wall Street right now is like defending child pornographers. However, if some slack is NOT granted banks then you will see the rally crumble.

Short Term Outlook/Strategy

Until we see some light at the end of the economic tunnel, VOLATILITY continues to be the most predictable major stock market trend. When equities reach the lower end of their range (see Long Term Outlook below) nibble/buy.  When they reach the higher end of their range add protection. Dow at 8281 is closer to bottom of its range than top. Shorter term range between Dow 8000 & 9000 Buy the Dip.

Technicals are indicating a budding rally, but TARP resolution is key to any short term rally

Long Term Outlook = BEARS RULE

  • On a 1 to 5 scale Bears Rule is at the bottom.
  • This section rarely changes
  • Changed are bolded and in plum or crossed out

Technicals - Best read of the tea leaves – 2009 Markets range bound between Dow 7449 (last year’s low) and 9654 (November 08 high)

Fundamentals - Problem in financial sector is far far far far far bigger than fist imagined. Impact of mess is going to take years to resolve.

Asset Allocation

15% to 30%+ Stocks (Depends on your level of risk) Buy/nibble the dips below 8,000 – the bigger the better.  -

Recommended Sectors

  • 5%+ US Index ETF’s UWM (Exchange Traded Fund does @ 2x what Russell 2000 does ) & QLD (does 2X what NASDQ does)
  • 5%+ Emerging Markets FXI (China ETF) & EWZ (Brazil ETF)
  • 5%+ Alternative energy GEX (alternative energy fund)
  • 5%+ Gold GLD (ETF for gold)

Chief Strategy -

Buy the dips. Use the Dow as a barometer for all of the above sectors except GLD. This is NOT your fathers buy and hold market. Under 8 years of Bush the Dow went from 11,000 to 8,000 and left a whole dung heap of economic problems.

Protect your gains – After rallies you can protect your long positions by using ETF’s that short the market. Two ETF’s that short major indexes (@ 2x the loss). These indexes go down you make money. Until the long term outlook changes this hedging strategy will remain.  Note – long positions/ETF’s  NASDQ & Russell, short positions/ETF’s S&P & Dow

  • SDS - Ultra short S&P 500
  • DXD – Ultra short Dow

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

  • Share/Save/Bookmark