Market Updates – The Fork in the Road

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News

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The Stories/News not Covered in Depth Today

• Long Term Structural Analysis (part 2) The How and Why the imbalance of wealth between the rich and poor in the USA caused the “Great Recession,” and why we need to address this problem.
• AIG – The mother of all Insurance companies is again near collapse. If the collapse of the much smaller Lehman Brothers sparked the financial crisis and sent 400+ billion dollars of over leveraged debt throughout the world, imagine the collapse of AIG.
• GE – The mother of all conglomerates is now trading below $10 because of its financial units over leveraged positions. Sure looks like a death spiral similar to auto industry.
• Banks – “How Stressed is Your Bank” from Time magazine. The real problem s not now, but what happens when the bad/toxic debt grows in 2010 and beyond
• The latest wisdom from Nobel Prize winning Princeton economist Paul Krugman  ”Banking on the Brink” or multi time Pulitzer Prize winner Tom Friedman “Start Up the Risk Takers.”
• Obama speaks to nation tonight

Today’s editorial is on the technical fork in the road.  Just at the mention of the word technical your eyes may glaze over, but - 

We are at one of those turning points in the history of the US Stock market and perhaps the world.  

See stock section below.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING!

Stocks

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The Fork in the Road

Who knows why looking at chart patterns usually works as a forecast of future events. Perhaps its because we are creatures of habit or perhaps its because so many analysts simply believe technical analysis works. One item of technical analysis that works better than others is the more time that occurs the more accurate the predictability and significance the pattern becomes.

The benchmark S&P 500 is at one of those critical forks in the road and so are world economies.

1970 to 2009 Chart of the S&P 500 below

(sorry for the overlap)

Here’s the Fork on the benchmark S&P 500 – Notice just like the price peaks in 2000 & 2008 at about 1500+, there are two vallies around 750 in 2002/2003 and today.20002/ 2003 was the result of the tech bubble bursting and the uncertainty behind 911. Today, two economic bubbles have recently burst – housing and credit. The critical support level for the S&P 500 is around 750. Since November the rapid fall of the S&P 500 (as well as the other major US indexes) has leveled off at @750 like in 2003.

The good news – The fact that we’ve held onto 750 since November shows strong support. (note – this chart is a bit distorted but it gives a rough approximation)

The bad news – The rate of decline falling to from 1500 is faster than 2000 to 2003, and yesterday the S&P 500 closed just below 750 at 743. If support at 750 fails we could really see some additional significant stock meltdown.

The Dow has already broken down though its 2002/2003 lows but the NASDQ and Russell 2000 are doing a bit better than our benchmark.

This is the mother of all technical trading pattern battles  

Long Term Outlook = BEARS RULE

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See STRATEGY, POSITIONS, OVERVIEW (new) & ARCHIVES sections of blog for more

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING!

The Sky Fell

Three very significant economic/business guru’s (George Soros, Nouriel Roubini and Paul Volker have basically all come to the conclusion that “the world’s financial system has effectively disintegrated.” and “there is [little or]no prospect for any near term solution.”

Investors411 has concluded each Market Updates with the same for months. “The problem in financial sector is far far far far far bigger than first imagined. Impact of mess is going to take years to resolve.” This conclusion is now under the Positions heading at top of blog.

Legendary Investor George Soros- “Sees no Bottom for World Financial Collapse” (Yes you are seeing double my mistake)

Former Fed Chair and head of Obama’s economic advisory council Paul Volker - “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.” Same Reuters’ source

The columbia economist who predicted this meltdown Nouriel Roubini “Laissez-Faire Capitalism Has Failed”

Long Term Outlook = BEARS RULE

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

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News

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Nationalization

It’s here. The concept of nationalization has come out of the closet and now even Bernanke and Greenspan are using the term.  Worries over nationalization have caused a meltdown in stocks, but it seems to be better choice than the systemic chaos of bankruptcies or the taxpayers continuing to to be the major shovel throwing money at the problem.

Now the big boys  Bernanke and Greenspan are  using the N word. At Investors411 (see archives) you watched this significant trend develop from a whisper to a market mover that will significantly change our governments response to the financial crisis.

Learning lessons from India

India has been terrorized by multiple terrorist attacks that have originated from inside Pakistan. Yet they have not gone to war with them unlike the Bush administration who went to war with a country that had nothing to do with WMD’s or 911. The significant Muslim population of India has rejected the Mumbai terrorists. For more see Tom Friedman’s editorial – No Way, No How, Not Here.

Helping Mortgage Holders

Finally a plan to keep the rate of foreclosures from growing. All he Paulson TARP plan did was shovel money at banks. Obama has announced a plan to help possibly 9 million threatened homeowners.  The ripple effect of not helping would bring down a lot more financial institutions and further devalue home across America. Many comments on this are like those on the stimulus plan – while significant it is not enough – NYT editorial

Israel Elections

The vast majority of elections analysts see the right wing gaining power in Israel. To most Israeli’s and Americans the war against Hamas had a far better outcome than the war against Hezbollah. Of course there are many worldwide angered by both wars. While the centrists  did barely win the most seats in Israel’s parliament the  divided right wing parties picked up a substantial majority. 

Bottom Line – The peace process has become a whole lot harder

Stanford, Another Madoff

Another this time smaller $8 billion dollar Ponzi scheme has come to light.  Seems investors thought nothing of  investing in 10% to 14% yielding CD’s controlled by the Stanford Group. Mr S is on the lamb.  

Bottom Line - Once again the understaffed, incompetent SEC is caught with its pants down. When all you had under Bush (really since Reagan) was cut cut cut government and don’t you dare dare dare regulate free markets – Stanford/Madoff and an over leveraged financial catastrophy is the result.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING!

Short Term Outlook

Major US markets took a breather yesterday. Foreign markets have rebounded somewhat overnight. CNBC, the most popular financial channel (they are right wing cheer leaders corporations) has a decent morning compilation of how markets are setting up for the day.

Momentum is still with the bears.

Long Term Outlook = Bears Rule

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See STRATEGY POSITIONS & ARCHIVES sections of blog for more

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING!

Market Updates – That Dirty Word

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Trends, Politics & Economics

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“Vengeance is Mine…”

“saith the Lord.” Another list of the top 25 people to blame for the financial crisis from Time magazine. Here’s the top 5:

1. Angelo Mozilo- CEO of Countrywide. America’s biggest mortgage leander popularized exotic mortgages.
2. Phil Gramm-  Head of Senate Banking wrote the infamous 1999 legislation and championed deregulation
3. Alan Greenspan- Fed chair who admitted his mistake “that financial firms could regulate themselves.”
4. Chris Cox- SEC chair whose  hands off attitude  and lax enforcement  failed to act against over leveraging and fraud.
5. The American Consumer-  Borrowing, borrowing, borrowing.

That Dirty Word – Nationalization

First it starts as a whisper then the voices grow.  Now more and more from every political and economic stripe are considering controlled reorganization under the government – Nationalization The unlikely trio of R – Phil Graham, D Maxine Waters & R Peter King have all used the N word. Obama has left the door open. Harvard’s ultra bear Niall Ferguson Economist Nouril Roubini makes the case for nationalization and so does Joe Nocera of the NYT business page. So has Simon Johnson from MIT’s Sloan Business School.

Who is going to pay for all this hell our deregulated, over leveraged financial/banking industry has brought down on us? Bank bond holders, shareholders, China,management, employees, pensioners, taxpayers(you). How big a haircut is each group going to take? How many of you want just your tax dollars to go to bailing out banks?

The Roubini and Nocera editorials bring up all the times we have successfully temporarily reorganized banks or put them into “receivership.”(why not include GM)

1. The USA in the 1980′s – called “bridge banks”
2. Sweden in 1992
3. The International Monetary Fund – This is exactly what the IMF tells emerging markets to do
4. Indy Mac – A 9 billion dollar bank was recently taken over by the FDIC and emerged far more solvent 6 months late

The downside here is Wall Street doesn’t like the idea because bond, shareholders, and management would take a hit.  So would the stock market. Many banks in Europe are already being temporarily nationalized.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Short Term Outlook

Danger Will Robinson Danger Danger - The growing threat of nationalization is going to start taking its toll on stocks – especially financials. (see above)  Even though volume was low (volume not confirming downside price move) technicals especially on the Dow are deteriorating. Sort of like a death of a thousand cuts (See Dow chart on right)

Its time to bring out the old Lost in Space robot with all its bells and whistles shouting Danger Will Robinson Danger Danger. – The threat of nationalization could cause another leg down in the markets.

Our Positions

These are listed under Recommendations or Stocks Picks on the Blog. Also the strategy of when to buy is listed under the strategy section on the blog.  Why fundamentally were these Exchange Traded Funds chosen?

GLD (Gold) – Investors usually buy gold when everything else is going bad. The second reason is all the stimulus plans around the world in the long run means inflation and that’s also good for gold.

FXI (China) Simply relative to the USA China is far better off.  They have a surplus of money while we are massively in debt. Their stimulus plan is is a greater percentage of GDP than ours. Our military costs are huge and w are deeply involved in wars/conflicts throughout the world. China is far less involved militarily. Vhina has a growing middle class and our is shrinking.

EWZ (Brazil) Brazil simply has an abundance of natural resources – Both oil and alternative energy.  About 5 years ago a left wing government took over and spread the wealth to more middle class working families. Even more so than China they are vulnerable to the worldwide recession because oil prices fall in recessions and they have lots of oil.

GEX – (Alternative Energy)  If we do not start developing alternative energy resources then our future as an industrial, economic power will decline even faster.  Obama was elected, in part, because of his belief in alternative energy.  The stimulus plan begins to deliver on this commitment to energy indpendence and America’s economic well being.

UWM (small caps) & QLD (mostly technology) over  SDS (S&P 500) and DXD (Dow).  The later two are short positions and the first two long positions.  Small caps and technology are less impacted by the financial crisis.  The are far less likely to be over leveraged. (See strategy section of blog)

Cash is king.

Long Term Outlook = Bears Rule

(see strategy section of blog for more)

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING!

Trends, Politics & Economics

Banks – Is the Sky Falling?

Answer – No, but its being held up by smoke and mirror

The simple truth is, if you were to value the assets vs. the liabilities of most major banks and many smaller banks you would find that they do NOT have the collateral to back their loans.  Plane and simple – If the government (your tax dollars) paid the market price for troubled assets now these financials would go bankrupt . No assets would be left. If this happened, the whole banking sector would probably meltdown in panic. What’s more – as the unemployment figures grow this problem is going to increase.

Tim Geithner , like Paulson before him is going to take a shot at blowing the smoke and moving the mirrors today at 11:00AM EST.  The question is can he keep the banking/financial sector afloat long enough for the economy to turn positive and some of over leveraged positions become more solvent.

The ultimate answer or last line of defense to this problem that nobody wants to even take about is NATIONALIZATION .

The Bottom Line –  there is a massive shift in wealth from those who created this problem (they made truckloads of $) plus those who own the banks/financials, and you the American taxpayer who is bailing out banks to prevent an economic collapse. MAD? – smoke should be coming out your ears. The co director for The Center for Economic Research, Dean Baker makes the case Nationalization or Welfare

Obama on Stimulus

Lost count last night of the times Elkhart Indiana (middle class America) was mentioned is Obama’s stimulus speech  You can read or watch videos of the Obama’s speech at CNN – Paraphrasing his money quote – "It s only government that can break this cycle of recession."

Early review- NYT – unfortunately concludes "Odds are…even an $800 billion stimulus package will fall short of what’s needed to combat today’s downturn, and that more will be needed later. When the Obama administration asks for more, it will need to be able to make a compelling case that the first round was the best it could possibly be. It’s certainly not there yet."

#1 Progessive Voice in American Media

He’s quoted by everyone from Pelozi to Limbaugh – Nobel prize winning, NYT columnist Paul Krugman . His latest editorial "The Destructive Center"

What’s Pork?

A Bridge to Nowhere, Compensation for Filipino WW 2 Vets as part of the stimulus plan are certainly pork. But as one of you suggested does a "water park" wanted by a governor as part of the stimulus program constitute pork? Thanks for this and all your emails .

First a water Park like Disney World or a baseball park creates jobs to build the facility. Both workers and suppliers benefit. Once built it continues to create jobs for workers and revenue for products it sells (food, souvenirs, etc) It also generates tax revenue for the state.  So is a Water Park pork?   I’d certainly prefer money going to education bridges etc., but a ready to go water park in the right location (not Alaska) could create jobs jobs jobs and increased tax revenue for states.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Technicals

US stock markets held onto last weeks gains. Technically, this is a positive sign .

Troubled GE shot up like a rocket reversing most of last weeks losses.  Another positive.

Both volume and how markets react to news (our primary indicators) still 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 on fire +48% over the last 4 days and another +10% on Monday. = Big Time Short term bullish signal.

Fundamentals

Today we learn what Tres. Secretary Timothy Geithner and what he plans to do with the second 1/2 of the TARP money. (see yesterday’s comments) Can’t over emphasize the impact the importance of this plan to both financial stocks and world markets.

Dr. Doom and the Black Swan – These two guys predicted the current financial crisis. Their comments "Even if we play our cards right…it will take at least 12 months to get out of this recession." That’s the good news. For the bad news read full article on Roubini and Taleb

Short Term Outlook/Strategy

Technically signs of a rally building are about as strong as they get. Fundamentally, the stimulus package has passed the Senate and that’s a whole lot of money about to juice US economy. However, what Geithner says about allocating the the TARP money is key to any short term rally.

Oppenheimer analyst Meredith Whitney, a financial bear,  is on a winning streak and therefore the analyst that has Wall Street’s ear. If she goes thumbs down on Geithner so will the markets according to CNBC’s Jim Cramer

Bottom Line – Still no long term light at the end of the tunnel, but technical signs for the rally to continue exist.

Long Term Outlook = BEARS RULE

• On a 1 to 5 scale Bears Rule is at the bottom.
• This section rarely change s
• 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. The closer markets get to 9000 the more you think about shorting. 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

These two words were supposed to put the intended victim in a hypnotic trance in an old 60 or 70 comedy movie. For Barak Obama the two key words don’t rhyme – Afghanistan Iraq .

In the last few days a US predator drone killed @20 al Qaeda or civilians at the Afghan/Pakistan boarder (depends on which news account you believe in) and there is a promised surge of another 30,000 troops in the face of diminishing foreign support.

It is heartening to see increased diplomatic efforts in Afghanistan and Pakistan. However even US military commanders say Afghanistan "cannot be won on the battlefield" AP report .

Afghan/Pakistan/India is the center of Sunni terrorism. However, If like Iraq the focus is on guns and bullets instead of hearts and minds we’ll get the same results. We may be able to eliminate some despicable people like Saddam but the end result is worse. The level of violence that we created by "unjustly" invading has diminished but -

* 3 to 5 million refugees (mostly Sunni’s) displaced or killed
* a corrupt religious Shia government replacing a corrupt secular government
* Militia’s that rule throughout Iraq an infiltrate the army.
* Radial leaders like Sadr who hold sway over the Shia majority (60+% of pop.)
* a new pro instead of anti Iranian government – making Iran more powerful to export terrorism
* loss of our positive image throughout the world Abu Ghraib and Gitmo.
* a war simmering between Turkey and the 20% Kurdish minority
* cost of $3 trillion dollars to American economy
* deaths and long term wounds of American soldiers.
* an economic disaster in Iraq.
* a inspiration or factory for producing terrorists
* a deeply divided America on Iraq

Yes there is a quazi elected government in Iraq, but the terrorists of Hamas were also elected.

Geithner Genuflects

Yesterday Wall Street favorite Tim Geithner was appointed Obama’s Treasury secretary. In his acceptance he payed homage or genuflected to Larry Summers, Obama’s chief economic advisor. Geithner is a Summers protegee. Larry Summers, as reported several times before, was instrumental in deregulating the banking industry in 1998 under Clinton. The guys who played a role in digging this economic hole should not be the major players in leading us out.

Far preferable to this dynamic duo would be Nobel prize winning economists like Stiglets and Krugman. Hero’s like Former Fed Paul Volker does have a more minor role in the Obama administration.

Lifting Global Gag

One of Obama’s first act was lifting the Global Gag on giving funds to any organization that in any way supported abortion. Bravo. Several of you emailed me on this. Thanks. Story at LINK

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Treading Water/Drifting Higher

Index % Change Volume

Dow -0.48% down
NASDQ +0.82% down
S&P500 +0.56% down
Russell2000 +1.28% –

Brown = same comments as yesterday.

US Market & Foreign Markets

Technicals – Major US indexes are treading water and foreign indexes are doing the same. Even though we are treading water major indexes are drifting in the right direction. The Dow closed at 8116 and is now 150+ points above its strong support level at 7950. We are a long ways from the 9088 Dow resistance level (see chart) established in early January.

Volume did NOT confirm the drift higher.

XLF is the financial sector ETF Chart here. Financials declined – 1.78 yesterday. A relatively minor move considering some of the wild swings. Financials are the major reason stocks are in trouble. This is the index to watch.

The area around DOW 7950 to 8000 is turning into a strong support level. The more times its tested and holds the stronger it becomes. Of course, this also means if it breaks down we should have a major fall.

Stocks are down 8% in January. Old Wall Street saying – "as January goes do goes the year."

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals-

7 Major Companies announced 56,000 more layoffs yesterday, Earnings news continues to disappoint, and we have a huge expected-5.2 to-5.5% GDP loss expected to be announced on Friday. Despite this chorus of bad news major indexes managed to tread water and drift ahead. What do investors see that they remain slightly bullish in the face of a pie of bad news?

A stock market is after all just a market of stocks. If major companies like Caterpillar (builds major construction equipment) (chart link ) falls over 8% after a dismal earning report yesterday and is perilously close to breaking through its low (support level) are in trouble be very cautious. CAT stands to to be one of the companies that gains from Obama’s stimulus plan.

If Financials are the index to watch, then CAT is the stock to watch. If CAT can keep treading water and drift ahead there is hope.

Forecasting Future Trends

LIBOR – LIBOR is the rate banks charge each other. It price has fallen from 3.4% three months ago to about 1.18% Its held steady in this area for about a week. (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 T bill flat at 0.07% yesterday and the longer term rates again rose a bit. The ten year rose 2.64% (low yields show fearfull investors flooding to Treasuries instead of stocks)

Treasury Bonds chart

Baltic Dry Index – Measures flow of goods between countries. Yesterday ir rose again almost 1.5% . Almost 85% drop since June. (We’ve had a solid steady gain since the early December lows of around 660 to 995, but we fell from pre recession figures of around 12,000 – That’s along way to go)

BDI chart

Short Term Outlook/Strategy

Reading the Tea Leaves – Strategy – Shorting rallies to protect gains is working. (see below) Until we see 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.

Technically, markets are consolidating despite some horrible economic news. That’s bullish news. Volume is not confirming or denying the bulls or bears right now. Secondary indicators (LIBOR Treasuries and BDI) are improving. The area around Dow 7950 has turned into one strong support level . It has bent but it has nor really been broken.

Therefore, Some sort of short term rally seems probable. Buying/nibbling close on dips at Dow 8,000 is much better than doing the same at 9,000. Protecting any purchased position as stocks rally (get closer to 9,000) seems to be working.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – BEARS RULE

This Section Rarely Changes
Changes to Bottom Line Section Bolded and in Plum or crossed out

Technicals – Series of Lower Lows and Lower Highs = Bears Rule.. Technical Range for 2009 – 7449 (low) and 9654.- This is a wild guess. Any sustained move above Dow 9650 is bullish.

Fundamentals – Financial transparency/accountability problem is far far far far far far far far far bigger than anyone thought. Cleaning up this mess is going to take years and growth will suffer.

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 8000 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.

SDS – ultra short S&P 500
DXD – ultra short Dow – (Both small caps and tech stocks are outperforming the DOW and S&P)
SKF – ultra short Financials (this is the sector that’s most broken)

As Always Do Your Own Research Before Investing