Reading The Tea Leaves -

The Forecasting indexes have changed to mostly Neutral & its the confirmation day after  big rally. China news is going to hurt.

From yesterday in brown – Three paths in descending order of preference.

• Yes the bottom -TJX (Target) had a great earnings report and outlook. Oversold markets & 50DMA support levels hold. GM IPO energizes markets
• We’re in for an acceptable 5 to 10% consolidation after a nine week bull run with a S&P support level of 1130. (SPX now at 1179)
• A double dip recession is out there and Investors will soon realize the horror as foreclosures rise, Europe falls apart

The problem here is – if you combine choices the more bearish choices #s 2 & 3, are larger than #1.

The GM deal with a potential strong Christmas season and QE2′s print & dump could swing an oversold market. – It did. Today is a confirmation day for yesterday’s big rally but the China news is going to hurt.

• Stocks remain flat or go higher = confirmation & good
• Stocks loose up to 1/2 their previous days gains = fair
• Stocks loose more than 1/2 the gain = bad
• Stocks loose all gains or more = duck and cover

Positions

• EEM – (Emerging Markets ETF)

Short term Traders. – See no clear advantage to a trade today, although momentum is with the bulls.

Investors. [From yesterday in brown] The MO goes below -60 buying becomes a much better option. Twice in the last 3 years the MO has reached -130. So you could loose out especially if there is a double dip recession. So I started small and nibbled on a little EEM (emerging market ETF) A  position at 45.28 Willing to accept a 7 or 8% loss on this. If we keep going lower I’m going to add some more EEM and country specific ETF’s on dips. (See POSITIONS Section of blog.)

Investors411 main strategy is to “buy the dip” in a positively trending market. When panic is in the street we buy.

I think the chances of a double dip recession are remote, but a flatline US economy coupled with (right now over heated) growing emerging markets is more possible.

Long Term Outlook has been changed back to CAUTIOUSLY BULLISH from NEUTRAL. It will remain there unless the major US indexes fall back below their 50 day moving averages of pice (see charts on top right of blog) CAUTION – We are on the cusp of change so Long Term Outlook might flip flop for a while.

Look for Paul R’s always enlightening remarks on stocks and sectors in the comments section of the blog. See POSITION section of blog for lists of potential stocks & ETF’s including “YOUR Stock List.” -

“The Comeback Country.”

America’s Back - Is the front cover headline from April 19th’ Newsweek.

The stock market chart below sure shows the US stock market is back. This issue of Investors411 is going to go over why stocks NOT the economy (a different story although since Obama took office we have gone from -700,000 jobs to +100,000 jobs a month) have recovered and one major point on technical analysis

LINK to bigger representation of above chart by dshort.com

CAUTION – While this two year chart (we are the blue line) does look good if you take a 10 year perspective the chart shows that stocks are in the 3rd worse bear market. The US stock crash of 1929 and the 1989 Japan stock crash the other two worse bear markets.

Why Stocks Recovered

1. The Paulson/Bernanke Bailout - You can also give credit to Bush, Obama, McCain, Geithner and every member of congress that voted for this flawed plan. We stood at the precipice of well over a dozen of the world’s largest banks, its largest insurance company all failing. This would have easily have cascaded us in panic into another Great Depression. Many many big foreign banks were also bailed out.
2. Worldwide Stimulus – Obama’s stimulus plan cut taxes @ 10%, kept state governments solvent, provided new jobs, new focus on alternative fuels, and gave tax breaks to small companies. You can argue the merits of the Obama plan vs. the other world wide stimulus plans, but combined they made a difference.
3. Low Interest Rates – Our Fed and other central banks cut interest rates dramatically and gave insolvent or near insolvent banks the money at close to 0%
4. Changed Accounting procedures - We virtually eliminated “mark to market” accounting. This allowed banks to less transparency in accounting and not to value assets at what they are worth at the present time.
5. Speed - Unlike the 1929 Great Depression and the 1989 Japanese stock crash, action was taken within a year to fix a worldwide economic problem.
6. Emerging Markets – China, India, Brazil and others never entered recession. Partly because their banks did NOT get over leveraged. Their economies kept right on growing.

This is all truly great news for Wall Street. Of course for every on Main Street this Simply Sucks

1. We’ve privatized the Gains and Socialized the Risk - Untold trillions have gone into fixing our over leveraged, unregulated markets (shadow financials that caused the crisis). The government money printing presses (later this means you pay with inflation) and tax dollars (bigger deficits) have added new burdens on Main Street.
2. We’ve done NOTHING to fix the problem. Alan Greenspan had his OMG moment in front of congress when he exclaimed he was wrong – “Free” (unregulated) market can not fix themselves.  There is something called GREED that emerges on Wall Street if you have little or no transparency and rules.  In fact, we’ve made things less transparent by removing mark to market accounting.

Technical Analysis

I love it that so many of you who have my personal email send in stocks for consideration on YOUR Stock List. Again Thanks – I will give you a short technical analysis of each stock. Two new stocks sent in over the weekend CKEC (3D theater stock,but over extended) & MSPD (chart looks great!) are worthy of consideration. One stock on YOUR list ICON “raised guidance”

One request - Almost all of you send me some stocks that  are too small to consider. These small companies are too easily manipulated by Wall Street Sharks. Please send in stocks that do over $5,000,000 a day in trades. More than that is even better. Multiply Volume X Price

Over two decades I’ve watched /owned way too many of these “thinly traded” stocks that exploded.

Here’s how they fall in an analysis of ERES – Chart shows @200,000 shares a day traded and price at $7.27 = @ $1.5 million a day.  Thats chump change to hedge funds, big investors, brokers, institutions.  Its too easy for them to “pump and dump”

Example-someone acquired 1,000,000 shares around 6 to 6.5. over time. They pumped up the stock by buying more shares as it comes close to its technical breakout point. Knowing other investors would then jump in as the stock broke out, they pump it up by buying more. ESRS goes higher and then they dump the million (plus say 50,000 to 100,00 extra shares it took to pump up the stock) ERES prices go down big time but they make a killing.

This obviously does not mean ERES is getting pumped then will be dumped. But the lower the volume & price the greater the potential for manipuation

Don’t worry if the above explanation makes your eyes glaze over. Just stay away from thinly traded companies.

AS ALWAYS DO YOUR OWN ANALYSIS BEFORE INVESTING

How we got into such a huge financial mess.

Nobel Prize winner Joe Stiglitz has a comprehensive piece on just how this economic meltdown began. He traces its roots all the way back to Alan Greenspan becoming Fed Chair. Some of the incidents he mentions have already been covered in Updates. History can repeat itself unless we do something to change it. His basic premise is what Alan Greenspan already admitted to – that free markets are not self regulating entities.

You can read about the 5 major causes that made us "Capitalist Fools ."  More on this later.

Flying Shoes

Thanks to one of you who sent in the following video. Got to admit Bush is fast and for the first time he moved to the left.

Green – An Electric Car Bailout?

We all know Detroit is in trouble, but the falling oil prices and world wide recession has meant major set backs for emerging electric car companies . Even Prius is cutting back. LINK

Peak oil is a reality. Our dependence on foreign sources for oil is another reality. So is global warming and the pollution that burning fossil fuels create. Now that prices drop in a worldwide recession so does the desire for green energy.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Fed Cuts = Big Rally

Index % Change Volume

Dow +4.20% up
NASDQ +5.41% up
S&P500 +5.14% up
Russell2000 +6.69% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

Therefore, both the primary (volume) and #2 factor (how markets react to news) seem to be bullish right now.

As predicted we had a rally yesterday. It was one of those big time bear market rallies (were still not out of the woods) in increased average volume. Volume up is a good sign and there was a significant increase in volume, but in total the volume for the major indexes was average. All in all a very good day , but, it sure looks like there are a whole class of investors unwilling or unable (not enough $) to invest large amounts of capital in stocks.

Dow now at 8924 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 clearly with the bulls.

Chart of the benchmark S&P 50

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.

The auto bailout/loan is in limbo. Will Paulson and Treasury act?

Major action taken by US Fed lowering interest rates more than expected. They lowered rates 0.75% to 0.25%. That’s the lowest they’ve ever been. Great one day news for the markets, but there is little the Fed can do to lower rates any further.

Some credit cards and mortgages are tied to US Fed interest rates.

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 WAS being made. LIBOR has fallen from 4.8% two months ago to about 1.8% LIBOR rates are on their second leg down started to fall . 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.

LIBOR chart (3 month)

Treasury Bonds

All the yields kept falling – relative to last year. month, week and day. 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.

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 over +3% yesterday to 823. We have had a significant rally off the lows of @660 in the last week. The BDI had seen an over 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 and Therefore Oil Prices Rising (more later)

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.

A Santa Clause/Obama rally seems in the works. However, announcement of an auto bankruptcy would have an immediate negative impact.

Same outlook holds Santa Clause /Obama rally is chugging along. Shorter term traders should buy the dips. Rally looks like it has enough technical juice to make it close to 9654.

All the recommended sectors are doing quite well.

FXI (China) is clearly out preforming the USA. Chart of FXI .

EWZ (Brazil) chart is not as good as China, but again outperforming USA. Chart of EWZ . Caution – Brazil s tied to rising oil prices and will under perform on the way down.

GEX (Alternative energy) chart is basically forming a base. Chart of GEX. Will rally with US equities. Broke out to new short term high yesterday This is a play that the Obama stimulus package contains a lot of green energy proposals.

GLD (Gold) weekly chart is not quite as good as major US indexes – then again gold did not fall as much as the US indexes. Gold is a play that inflation emerges at the other end of the recession. Chart of GLD .

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 20 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 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

China, Buffett and the Electric Car – Green Technology

China has just launched its first home grown electric/hybrid vehicle – the F3DM. BDY co. which Buffett own 9.9% of just announced the new car. If or when American auto companies collapse, we will once again be sending boatloads of money abroad to buy cars like the F3DM that will be manufactured in China. Story LINK

Fox in Charge of the Old Hen House.

The feature story since Friday in financial news has been the $50 billion lost by those investors who trusted Bernerd Madoff and his Investment Company. The SEC is supposed to govern folks like Madoff, hedge funds, financials and anyone who trades stocks. Since Greenspan took over as Fed Chair in 87 we have lived by the philosophy of free market zealots (like Ayn Rand) who believes any almost regulations on capitalism was unnecessary. One again we are getting hit over the head with another example of lax or non existent enforcement and regulations.

It was all a big Ponzi scheme and there is no silver lining – the money is gone. It makes you wonder about all those big unregulated hedge fund. How many more Madoff’s are there?

Bank Robbers Get Jail Time.

But what happens when the banks or financial institutions rob you? You bail them out with your tax dollars and watch as confidence in the American financial system crumbles. Of course other industries Insurance, Auto’s and others get sucked down with the implosion of over leveraged banks. Transparency, regulations have not been put in place to prevent this from happening again. We don’t even know which financial/banks are in trouble.

Flying Shoes

Throughout the rest of the world (from China to Mecca) the headline has been the story of the Iraqi news reporter who threw his shoes at President Bush. al Zaidi who called Bush "a killer of children" as he threw the shoes has become a hero throughout most of the world. Foreign news sources quote his family as saying he had become depressed after watching/covering the destruction of Iraq neighborhoods and the loss of "innocent" lives.

You can google almost any foreign news source and you’ll find al Zaidi almost universally depicted as a hero. For a starting point on sources outside US mainstream media on this -  al Zaidi .

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Obama Rally

Index % Change Volume

Dow -0.75% down
NASDQ -2.10% down
S&P500 -1.27% down
Russell2000 -3.39% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

Over the last few trading days stocks have moved lower in decreased below average volume. Monday’s volume was the lightest since the 1/2 day’s trading after Thanksgiving. Falling markets increased volume is just what bulls like to see.

The news has been pretty negative and its surprising to see stocks holdup as well as they have. Seems most of the bad news is already factored into the markets.

Therefore,Both the primary (volume) and #2 factor (how markets react to news) seem to be bullish right now.
Chartof the benchmark S&P 500
Chartof the Russell 2000
Chartof the NASDQ
Chartof 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.

The auto bailout/loan is in limbo. Will Paulson and Treasury act?

Some major financials are announcing earnings results today. Goldman Sachs just announced bette than expected earnings.

Fed meets rates today. Lower (0.50%) interest rates expected. They could lower rates to zero.

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 WAS being made. LIBOR has fallen from 4.8% two months ago to 1.85% LIBOR rates have again started to fall . 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.

LIBOR chart (3 month)
Treasury Bonds

All the yields kept falling – relative to last year. month, week and day. 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.

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 over +5% yesterday to 803. We have had a significant rally off the lows of @660 in the last week. The BDI had seen an over 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 and Therefore Oil Prices Rising (more later)

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.

Other indicators covered above are all showing short term signs of life. A Santa Clause/Obama rally seems in the works. However, announcement of an auto bankruptcy would have an immediate negative impact.

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 15-20+% 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 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