Trends, Politics & Economics

Index	Percentage %	Volume
Dow	-0.12%	down
NASDQ	-0.01%	down
S&P500	+0.15%	up
Russell2000	-0.59%	down

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

Just a quick note before leaving. Ironically flying US Airlines to Charlotte, then Jamaica.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Obama Rally(part 3)

Index % Change Volume

Dow +0.15% up
NASDQ +1.49% up
S&P500 +0.13% up
Russell2000 +2.09% –

US Indexes fell to the Dow 8000 support level (@-200 pts) and then rallied in big time volume. The Obama inauguration, passage or TARP part 2, an oversold market condition, and probable passage of stimulus plan should rally stocks today and Tuesday.

Congratulations to those long term investors (as suggested at end of last Updates) who bought the dip yesterday. At least right now it looks like the right move.

Back Wednesday

Barr

FDR and Stimulus

President Herbert Hover eighty years ago offered no stimulus or loans to a crumbling economy. As a consequence bank after bank failed Unemployment rose above 25 % and by the time Roosevelt (FDR) took over in 1932 we were already in the Great Depression . But, FDR made progress and consequently Americans overwhelmingly re elected him to office in 36. By 1937 he had through a massive government stimulus program reversed the growing unemployment figure and reduced it to under 15 %.

Unfortunately FDR, tried to balance the budget too early in 1937 and the recovery slowed. Again Americans showed overwhelming confidence in FDR and reelected him in 1940. American’s vote again confirmed confidence in his stimulus program. WW2 was in itself one big government stimulus program as was the post WW 2 GI bills and other economic measures. We emerged from all this government stimulus far stronger.

Basic economics teaches you to stimulate faltering economies and when times are good you don’t stimulate, but lower deficits. Many ultra right wing zealots are now trying to re write FDR’s historic economic actions and leadership. These are the same voices that believed "free markets" need no regulations, and lead us into the current crisis.

Undoubtedly, the government has done a poor job in transparency and accountability in the current stimulus and loans packages. However, we have not had the cascading loss of banks and insurance companies (AIG) that would have led to other industries collapsing throughout the world. This is NOT a plea for blanket bailouts. Poorly managed companies have to be allowed to fail. But it does clearly show government stimulating and regulating a faltering economy works.

Bill Cosby and Education

Bill Cosby last Sunday on Face the Nation came up with some interesting statistics on why we should be offering more funding for inner city schools. It costs us $41,000 a year to incarcerate a prisoner and only $8,000 educate a child. You pay now or pay later. Add to this that incarcerated prisoners and welfare moms pay no taxes vs someone who enters the work force and pays taxes.

Funding education should be a priority. (more later)

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Citigroup, AA & Retail #’s -Bad news.

Index % Change Volume

Dow -0.30% up
NASDQ +0.50% up
S&P500 +0.18% up
Russell2000 +1.06% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals – Major US markets "churned" yesterday. That’s the term Wall Street uses for high volume days where the market went nowhere.

XLF is the financial sector ETF Chart here. As the chart shows financials rose +1.37% yesterday after loosing over -5% the day before. While any gain is positive, a +1.37 gain is not enough to put the bulls back in charge. 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.

AA is the symbol for Alcoa Aluminum, the first Dow company to report. It went down again another 5% in massive volume yesterday. Early indications are negative earnings and outlook are not built into markets and investors are beginning to realize there is going to be no second half recovery. (Bad news for stocks)

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. Citi did recover +5% in reduced volume yesterday. Problem – Citigroup is up to its neck in credit default swaps.

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.

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. However, Citigroup remains the stock to watch.

Retail sales numbers out this AM are far worse than expected.

Treasury Secretary Geitner, who Wall Street likes, nomination is in trouble.

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 1.08% (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 rose to +0.07% and longer term treasuries were basically flat. 10 year fell to 2.29% (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 another 2+% yesterday. Almost 85% drop since June. (short term good news a 2, 4, 6, 2, & 2% gains in last 5 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

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.

There are some positives out there but -

Add a falling financial sector, AA news, & now the miserable retail #’s = the Dow 8500 support and other major index support level will 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

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

Afghanistan

The CIA has found a new way to win over Afghan warlords. Money may not work well since the lucrative opium trade flourishes in Afghanistan. These old warlords have found something that puts smiles on their faces and on the faces of their many wives – Viagra. Yes, blue lightning is is being used by the CIA as a bribe.

Mexico

This is another country with a massive drug problem and ironically just like Afghanistan we are the major end users of the drugs causing the problem. The drug war in Mexico is perhaps the most under reported war on the planet. Here is an old photo essay from Time mag. It’s getting worse not better.

Obama is meeting with the Mexican President to go over the alarming escalation.

Israel/Hamas

One of the most under reported aspects of the Israel/Hamas conflict is that Israeli elections are being held in February. This has to impact what actions Israel takes. Three major parties are all positioning themselves accordingly and these elections have to influence Israel’s actions. Strong support inside Israel (80%+) for war and even stronger support in US Senate and House who overwhelmingly back Israel in a vote (above 95%). There is growing support for Hamas on the Arab street, but most moderate Arab governments right now are also angry with Hamas.

This is turning into a wider – Egypt, Saudi Arabia and other more moderate Sunni dominant Islamic countries vs. Iran (Shia dominated and Hamas’s #1 backer) Ironically, Hamas itself is made up of Sunni fundamentalists.

Iran has warned Hamas NOT to accept any ceasefire and threatened the withdrawal of support according to Jerusalem Post. LINK

Neither Israel or Hamas has accepted any cease fire.

Stimulus Package

Focus of this weeks Updates is going to be Obama’s stimulus package. One of the most used sources is going to be a guy that lives in my hometown (or he used to). He writes for BusinessWeek and the occasionally for Boston Globe. Bob Kuttner is also the a founding editor of the American Prospect. LINK to his most recent editorials.

What’s most important about any stimulus pan is the bang you get for the buck you spend. Kuttner and others often quote the work of U of Md. Economist Peter Morici Here’s Kuttner quoting Morici

The lion’s share of stimulus should be public outlay. Economist Peter Morici calculates that a tax cut of $100 billion produces a net economic stimulus of $125 billion, when multiplier benefits are factored in, while $100 billion of infrastructure investment has the far more potent eventual effects of $350 billion. In a deepening recession, public spending delivers both more economic punch and more political benefit. Citizens once again experience the positive uses of government, not just the negative gains of government cutting taxes.

More tomorrow

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Job’s Report

Index % Change Volume

Dow -1.64% down
NASDQ -2.81% down
S&P500 -2.13% down
Russell2000 -4.13% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals – Major US markets were fell yesterday as volume fell. Markets did well despite really horrible jobs news. The Dow is at 8599 – within 100 points of its 8500 support level. (see chart)

Volume did NOT confirm the move lower. Volume fell and was below average.

Bottom Line – Technically we are not approaching the Dow 8500 and similar support levels for the other indexes with a head of steam/volume. Right now looks like support levels will hold.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals – The rapidness of the decline in jobs has caught everyone with their pants down. The -524,000 was expected, but the significant downward revision of previous months that cause the jump to 7.2% was not expected. 7.2% is the headline that every American read in their news report. Considering that the markets held up pretty well despite the news.

Earnings season begins this week. It going to be really bad. Lots of this bad news is already built into stocks. We’ll have to wait and see how the first few major earnings reports and forecasts impact those particular stocks to get an idea of what will happen in the longer term.

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 in a 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 1.27% (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 fell to 0.02% and longer term treasuries were mixed. 10 year fell to 2.39% (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 6+% yesterday. Almost 85% drop since June. (short term good news a 4 and 6% gains in last two 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. 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.

Dow now less than 100 points away from its 8500 support level. This support level is where we (shorter term traders) have been successful buying equities or lightening up on short positions.

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.

Dow now less than 100 points away from its 8500 support level. This support level is where we (shorter term traders) have been successful buying equities or lightening up on short positions in the past.

Earning usually over shadow everything else. However weekly jobs numbers (Thursday) are gaining in importance.

Caution – Oil price futures are down significantly this AM (about -6% to $38.50 a barrel) Oil prices are another proxy for the general economic outlook. Sharp declines in oil show a worsening economy and a 6% haircut before the US stock markets open is NOT good news. Expect a challenge of the 8500 support level today.

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

Going to London and Paris over holidays. May be able to send abbreviated Updates from Europe.

"Recession Plagued Nation Demands New Bubble to Invest In."

The above headline is from "The Onion" Sometimes humor tell the truth better than analysts. After an internet and housing bubble American’s are looking for the next Ponzi scheme.

Nobel prize winner Paul Krugman expects "were in for months, perhaps a year of economic hell ."

Paulson and Bernanke as Heroes

In the past few month Updates has spent a lot of time punching holes in the TARP bailout and other financial moves. The government loans/bailouts have been termed "Not accountable," "did not fix the lack of regulation problem," "not transparent," "arrogant" and "what looks like Paulson giving $ to cronies (banking buddies like Rubin)" While there is a clear negative side the actions taken it does not necessarily add
up to failure.

Herbert Hover failed to act. He let bank after bank go under and the end result was the Great Depression . When Lehman Brothers failed this year the almost $400 billion of bad over leveraged debt shook countries and banking systems worldwide.

Twice the entire world economic/financial stood on the brink of the abyss.

1. The AIG bailout. The world’s largest insurance collapse would have taken down the entire insurance industry. AIG was/is overloaded with credit defaults swap obligations. – just like Lehman.
2. The TARP financial/bank bailout and the second bailout to the world’s largest bank Citigroup. Again Citi and banks are over leveraged with obligations like credit default swaps.

Paulson and Bernanke have not fixed the problem - but they have kept the entire world’s financial system ticking . The ships been hit by an iceberg, but it is still afloat. Bernanke and Paulson do deserve some credit.

Solutions

There are many. Some of the more obvious ones

1. We need laws to regulate financial companies, – free markets and especially Financials (credit default swaps etc.) need some structure or else they go wild.
2. The over leveraged situation needs to get reduced.
3. Temporarily stop building houses or find some other way to stabilize housing/foreclosure market.
4. Stimulus – This worked for FDR until he tried to balance the budget too soon in 1937. Then he needed the a huge stimulus package (WW 2) to ultimately fix things.

"What Me Worry" Alfred E Neuman

Huge financial entities (domestic and foreign) knees are trembling with worry.

1. Banks are not loaning money – they are probably over leveraged and need the cash just to stay in business.
2. Big money is all hiding in Treasury Bonds. – the Yields are ridiculously low
3. Corporate bond yields are ridiculously high – this means a whole mess of defaults should happen in the future.
4. Check out the drop in the Baltic Dry Index (see below)
5. We’ve entered this mess with an already huge deficit.

Hope Krugman is right and "we are in for months, perhaps a year of economic hell" and not something worse.

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Still Consolidation
Index % Change Volume

Dow -0.69% down
NASDQ -2.04% down
S&P500 -1.83% down
Russell2000 -2.30% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

This week and next have historically had light trading. Also the next three weeks have historically been positive.

The shorter term mojo is still with the bulls until stock’s close below their opening price on last 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 – 8500

The Dow fell below 8500, but rallied to close above it at 8517 So technical support while threatened, held yesterday.

Today again will be a test of this level.

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.

Lots of down grades of companies by brokers was most cited reason stocks fell yesterday.

Here’s about a disastrous an outlook as I can find from a self described Dr Doom and Gloom .

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 [MISTAKE 4.8 is the European LIBOR rate high 3.4% is the US high] two months ago to about 1.46% 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

The 3 month has basically flatlined at 0.01% Longer term rose yeilds rose slightly

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 2.17% for a ten year treasury bond.

Yields keep falling = Continued deterioration of credit market. Low Yields = 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 fall more than -2% yesterday to 801. We have had a significant rally off the lows of @660 two weeks ago week, but again have started to fall. Big long term picture The BDI had seen an almost 90% loss since June. It seems, a least for a week international trade has picked up but has again begun to slowly fall. These shipping figures confirm world wide recession.

Dollar Falling

Dollar was flat yesterday.

Wild ride over the last three weeks – especially last week. Basically, the dollar has gone from a high of $88 to low of $78 and at the end of the last
two days setteled at $81. These are historically big moves for the dollar. Chart.

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.

Dow 8500 is the technical support level that’s closest and 9000 is the upside resistance level.

Historically the markets turn before the economy, however fundamentally its hard to see signs of any long term economic turn.

Hedges

As I’ve discussed with many of you, personally I am long (bought lots of) FXI (the China ETF) and I’m hedging it with a short position in US equities – SDS or others listed below. The higher FXI gets the more I hedge. The lower it goes the less I hedge.

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

Art show at end of week – No Updates Thursday through Monday

Auto Loan/Bailout – Green Technology

The new technology of the future is going to be based around alternative energy. Countries like Spain (30% renewable energy by 2010), Israel (plans to use use almost all electric cars in 10 years) etc. have already made major commitments to this new technology. It’s unpardonable to see so many solar, wind, and other forms of alternative energy companies based or move overseas.

We are more dependent on cars than most every other nation. We send 100′s of billions to petro dictators every year because of our dependency. The future is hybrid, electric even solar cars. Yet this massive and new technology will probably continue to be produced in other countries. Just like oil we will have to import this technology will have to be imported Japan, China, Europe and other countries. We led the internet revolution and the next recognizable major technology shift is going to be led by countries outside the USA.

Perhaps we are just too fat, arrogant, politically polarized, to make a difference any more. However right now Green technology is leaving the USA. We need American companies, including car companies that can innovate and compete with foreign manufacturers.

Three Reagan Ideas That Need to Die

Francis Fukuyama is a well known former neocon who has become a realist. Like Alan Greenspan who admitted he was wrong about unregulated free markets, Fukuyama admitted his errors and is offering alternative solutions. He list the 3 ideas that need to be "reformulated or discarded."

1) The belief that the enormous "shadow" financial market could regulate itself. (Greenspan’s false premise)
2) Tax cuts would always be self financing – these cuts led to growing deficits
3) Overwhelming US military dominance would lead to the collapse of all American enemies.

Too many on the far right are caught up in emotionalism, fear mongering and American "exceptionalism." (see yesterday’s update) to change. But there are folks like Greenspan and Fukuyama that are willing to admit mistakes and look for solutions.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Obama/Santa Clause Rally

Index % Change Volume

Dow +3.46% up
NASDQ +4.14% up
S&P500 +3.85% up
Russell2000 +4.40% --

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

Some resistance levels fell and stocks again staged a major rally in volume that was slightly higher than the day before. We’re not getting the major spike higher you’d like to see when markets move higher, but any increase is better than none. Technicals are showing that this rally could continue. Dow at 8937. The 50 day moving average resistance level is at 8941 and falling. 9000 is another minor resistance level.

The line in the sand number is 9654 – the November high. (see charts – these numbers are presented in rectangles)

Major rally even though unemployment numbers were extremely bad. Rallies on bad economic news = Bull Rule the short term momentum . Again, volume was only slightly higher and therefore did not really confirm the rally.
Chart of the benchmark S&P 500
Chart of the Russell 2000
Chart of the NASDQ
Chart of the Dow

Fundamentals-

This market is trading on momentum. It seems to have factored in the horrible earnings results and all the warnings that are coming out of companies. We could see a -4% GDP growth for the last quarter. The positive that traders are focused on is that all the stimulus will work. Markets tend to look six month in advance. Six months from now folks are expecting thing to improve.

If the $15 billion dollar auto deal in congress does NOT pass you are probably going to see stocks fall dramatically.

CAUTION – There is very little volume behind the rally. Few are jumping in off the sidelines. The closer stocks get to 9654 resistance level, the more protection (shorts) of long positions is recommended. But for now it looks like a rally is in the works.

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% six weeks ago to @2 .17% LIBOR rates have flattened over the last three weeks. LIBOR is the rate banks charge each other, not businesses. LIBOR is the rate banks charge each other. LIBOR has flatlined.

LIBOR chart (3 month)
Treasury Bonds

Again 3 Month Treasury Bond rose to to 0.03%. Most of the 2,3,5, 10 & 30 year Treasury Bonds also rose.
By no means are we out of the woods, but the trend has turned for the last two days – Fundamentally BEAR’s RULE

If 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 actually rose over +1% yesterday to 671. The BDI has seen an over 90+% loss since June. This is a clear indication that worldwide recession is growing. Best hope is that this index is finally reached a bottom.

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. The Balitic Dry Index chart another major concern. Low oil prices are another indication of growing recession Fundamentals continue to show worldwide recession growing.

Prices in the BDI & the 3MTB, as well as oil have moved higher in the last two days. A small move in the right direction.

Technically, a short term rally is likely. Stocks moving higher on extremely bad news (unemployment report) is a very bullish sign. This right now this s a momentum trade based on stimulus being pumped into the system.

Personally – Will be adding some ETF’s that short US indexes now and more into any rally. Right now still hold more long positions than short positions.

CAUTION : If a monkey wrench is thrown into the stimulus being offered – like NO auto bailout/loan happens could fall dramatically impact markets.

Favorite Investment

China – They have a budget surplus, A huge stimulus package (relative to GDP) and if the USA is going to improve so will China. Over the course of the next year they seem to be in a more favorable position. Also technically ETF for china FXI is far closer to breakout from its November high of 28.00. FXI now at 27.83. See chart .

China FXI did break out of its trading pattern and rose +8.8% yesterday.

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 o be taking hold.
Look for range between 7449 and 9654 for rest of year.

Fundamentals – Financial mortgage transparency problem (credit default swaps $50 to $70 trillion?) 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

Art show at end of week – No Updates Thursday through Monday

Obama and Foreign Policy

Will there be some of the substantive changes so many were hoping for or will Obama turn into Bush lite? Over the last month this has been the subject of most of your emails. The jury is out, but in 6 months to a year we should know the answer.

Will Obama change the Bush approach to foreign policy? So many of us hoped his early opposition to the Iraq war was a signal that he better understood that the invasion of Iraq just fomented more terrorism and lost us allies though out the world. Major question to be answered.

Will their be a timely withdrawal from Iraq?
Will Obama junk the Bush doctrine?
Will we still be God’s chosen people, above international laws or will we rejoin the other nations of the world?
Will Guantanamo get closed?
Will Obama try to stupidly nation build Afghanistan into an American mini me – a nation that historically has always been ruled by tribalism?
Will the War on terrorism continue to be the organizing principle of foreign policy?

Andrew Bacevich called the problem "American Exceptionalism " – We are the superiors of everyone else and as the "chosen people" our nation is above the rules that govern everyone else. This "exceptionalism" has led to runaway free markets that required no regulations and the neocon’s who ran Cheney/Bush foreign policy that labeled any American’s who disagreed as against democracy or against the troops.

Americans, because of this exceptionalism/arrogance have lost almost all of their self awareness. How do you solve any problems when only YOU know the answer.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Obama/Santa Clause Rally

Index % Change Volume

Dow +3.09% -
NASDQ +4.41% up
S&P500 +3.65% -
Russell2000 +4.91% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals-

Dow closed at 8635 . Up side resistance level is 8831 and downside support at Monday’s low @8175 . Technically, bulls still have the short term momentum. More significant resistance is around the 50 day moving average at 8985 (and falling), and the round number 9,000. The line in the sand number is 9654 – the November high. (see charts – these numbers are presented in rectangles)

Major rally even though unemployment numbers were extremely bad. Rallies on bad economic news + Bull Rule the short term momentum. Volume was only slightly higher and therefore did not really confirm the rally.

Chartof the benchmark S&P 500
Chartof the Russell 2000
Chartof the NASDQ
Chartof the Dow

Fundamentals-

Obama this weekend talked about huge infrastructure spending (stimulus package) – This should put some more juice behind Friday’s rally. "Biggest stimulus since 1950′s" Obama’s economic team, his stimulus plan and confidence (hope) in Obama are obviously impacting stocks favorably. Combine this with all the Fed action and while this stimulus does not have an immediate impact, it will have a long term impact.

Is the worst over? Some investors believe this. These folks believe might get another month or two of bad unemployment news, but Obama’s economic stimulus and team are coming to the rescue. It looks like these folks believe the absolutely horrible numbers (a -4.0%+ GDP) are already factored into the markets.

CAUTION – There is very little volume behind the rally. The closer stocks get to 9654 resistance level, the more protection (shorts) of long positions is recommended. But for now it looks like a rally is in the works.

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% six weeks ago to @2 .17% LIBOR rates have flattened over the last three weeks. LIBOR is the rate banks charge each other, not businesses. LIBOR is the rate banks charge each other. LIBOR has flatlined

LIBOR chart (3 month)
Treasury Bonds

Again 3 Month Treasury Bond held steady at 0.01%. 2,3,5, 10 & 30 year all rose reversing the trend.
Example – a 30 year Treasury Bond fell from 3.53% last week to 3.15% t0 3.04% Thursday and rallied to 3.12% Friday – Fundamentally BEAR’s RULE

If 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.

Set range indicator to one month and you will see this chart has dropped to 663 – @7% loss lat week on top or a 13+% loss last week – An over 90+% loss since June. This is a clear indication that worldwide recession is growing.

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. The Balitic Dry Index chart another major concern. Oil prices fell to $40.81 a barrel – another indication of economic deterioration. Fundamentals continue to show worldwide recession growing.

Fundamentally its hard to see any extended stock rally if fundamentals keep getting worse.

Technically, a short term rally is likely. Stocks moving higher on extremely bad news (unemployment report) is a very bullish sign.

Some of you invested/traded more on the dip Friday as stocks dropped after the job news – Thanks for the emails. Yes this is exactly what investing on dips is all about.

Favorite Investment

China – They have a budget surplus, A huge stimulus package (relative to GDP) and if the USA is going to improve so will China. Over the course of the next year they seem to be in a more favorable position. Also technically ETF for china FXI is far closer to breakout from its November high of 28.00. FXI now at 27.83. See chart .

Lots of investors believe that if a stock builds a base and after breaking out it is still within 5% of its breakout level it is still a good investment. Usually breakout levels (in the case of FXI 28.00) are retested.

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 o be taking hold.
Look for range between 7449 and 9654 for rest of year.

Fundamentals – Financial mortgage transparency problem (credit default swaps $50 to $70 trillion?) 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