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

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

The overwhelming crowd in Washington was certainly uplifting. However, at our hotel far more Jamaican’s than white American’s on holiday joined together to watch Obama take the oath of office. Tears flowed freely in the room. Obama’s inauguration has had a major impact on Jamaican’s and others throughout the world. At least now there is hope, but hope alone in not enough.

Another interesting point is that the resorts and plane flights were packed with people = what recession.

Banks

Updates has warned over the impending meltdown in financial/bank stocks. (see below) Bank prices collapsed yesterday and the FLX (see below) reached new lows. Now Bank of America and Citi group, two huge financials loaded with credit default swaps, are again melting down. Will the Obama administration, like the Bush administration just throw money at these and other institutions without any accountability or transparency?

One major concern – It was Obama’s new chief economist Larry Summers (as Clinton’s Tres. Sec. Clinton) who enthusiastically supported the deregulation that opened the door for most of the problems are swamping financial companies.

Few banks made any loans with the cash they were given in part 1 of the TARP. England and other countries have nationalized trouble banks that were "too big to fail" and are forcing these institutions to make loans instead of buying other banks, paying dividends, & handing out bonuses. Obama’s administration this AM halted the regulatory process pending review.

Bottom Line – Over the last few decades we have cut government so that it became too weak to regulate big business. Mega companies from CitiGroup to General to GM proved that left to themselves they were incapable of self regulation.

The absolutism of "free trade" and "free markets" have let greed run wild. Combine this with no real central planing and an eviscerated government. The result is a stock market, country and world facing the largest economic crisis since the Great Depression.

Remember – You should be very critical of TARP part 1, but it did prevent a worldwide run on the banks. While major banks are in trouble there is currently no run on the banks.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Financial Meltdown

Index % Change Volume

Dow -4.01% down
NASDQ -5.78% down
S&P500 -5.28% down
Russell2000 -7.03% –

Brown = same comments as yesterday.

US Market & Foreign Markets

Technicals – Major meltdown led by financials. The Dow broke through its major support at 8,000 and ended the day at 7949.

XLF is the financial sector ETF Chart here. As the chart shows financials fell another -16.53% yesterday to new lows. 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. Other banking indexes are approaching or have broken through November lows. Mega banks Bank of America and Citigroup are leading this deterioration. The problem is all their over leveraged debt. (credit default swaps)

Bank Sector is collapsing. Volume did NOT increase (probably because of the inauguration). However this sector could easily drag the rest of the American and foreign markets with it.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals – All the talk of passing the second 1/2 of the TARP ($350 billion) is focusing investor attention on the problems of the markets.

IBM – Had a very positive earnings report.

Both Citi and BAC are leading financials and the rest of stocks DOWN. State Street Bank and others are also getting clocked.

Forecasting Future Trends

LIBOR – LIBOR is the rate banks charge each other . It price has fallen from 3.4% three months ago to about 1.12% (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 was falt at 0.07% and longer term treasuries were basically fell 10 year rose to to 2.38% (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 remailed flat . Almost 85% drop since June. (short term good news are the gains over the last two weeks)

BDI chart

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.

Support levels have broken for all major indexes. Dow at 8200 and has a minor support level at 8148 (see chart) and the psychological 8000 number. Both these levels have broken and the Dow is at 7949. The 8000 level is the line in the sand. If the Dow can regain 8000 today there is a chance we could rally.

The short term Obama inauguration rally has been OVERWHELMED by the financial meltdown.
We could stabilize today, but confidence in banks seem shattered. Economist Nourille Roubini yesterday announced that banks are basically insolvent. Any extended rally is impossible without a solvent banking sector.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – BEARS RULE

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 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

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.

TWM – ultra short Russell 2000
QID – ultra short NASDQ
SDS – ultra short S&P 500

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

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

Hope/Obama

Second Market Updates with editorial cartoons on hope sent in by one of you will follow today.

Auto Loans/Bailouts/TARP

You can get caught robbing a bank and thrown in jail. But if you’re a bank you can take hundreds of billions of dollars from the taxpayers and not be held accountable. Now the General Accounting Office says the $750 billion taxpayer loans/bailout is not transparent and accountable .

Auto makers in front of congress today. Now concessions from Unions .

The financial institutions that created the recession by over leveraging debt created this meltdown just get money shoveled at them. No matte how you feel about the auto loan/bailout – at least there is some accountability being forced on the auto industry.

India/Pakistan

This situation is deteriorating as more evidence of Pakistan’s indirect involvement (elements within Pakistan’s military) with the terrorist group (Lashkar-e-Taiba or LET) responsible for the Mumbai and other terrorist attacks becomes evident. The Asian Times is the largest english online foreign news source for the region. Their reports show a growing knowledge of Pakistani involvement and weak leadership in India.

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Headline – Volatility

Index % Change Volume

Dow +2.05% down
NASDQ +2.94% up
S&P500 +2.58% up
Russell2000 +2.70% –

italics = same comments as yesterday.

US Market & Foreign Markets

Technicals

Major US markets went through a roller coaster ride and closed higher. We have made up @2/3 of Monday’s huge meltdown combining Tuesday’s and Wednesday’s gains. This technically gives the short term momentum to the bulls. Volume has been below or at average since the week began. Both up days had slightly more volume across the board than Monday’s low volume meltdown.

Analysis – The bulls are regaining short term control of the markets. Very few people are coming in off the sidelines to invest.

There was also a lot of bad economic news Wednesday. Before each report markets dropped, but when the bad news was announced markets stabilized and rallied. How markets react to news is the #2 confirmation factor behind volume. Both factors are bullish right now, even though many are on sidelines.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals

Auto makers are back in front of congress today.

Monthly jobs report due out Friday. Preliminary indication that it is really bad already seems to be discounted by stock market.

England just did a major interest rate cut of 1.00% to 2.00%.
Think ECB (Europe) also did 0.75% cut – more than expected.

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 .2% 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%. 6 Month, 2,3,5, 10 & 30 year all fell slightly.

If investors are putting their money in Treasury bonds for 3 months to 30 years, they are NOT investing in stocks. The silver lining in this panic to find a safe place for money is people all over the world are choosing the USA. This is part of the $ we use for bailouts or loans.

There is simply NO confidence in the credit markets – Americans and foreigners are investing in US treasuries and paying ridiculously low interest rates.. Yields falling at all levels = a massive flight to US Treasury bonds at all levels. 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 has dropped to 672 – @6% loss this 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 Baltic Dry Index chart another major concern.

Dow 8831 and 8923 are the two resistance levels that need to get taken out. (see chart of Dow) The Dow is now at 8591. We seemed to have established enough momentum to at least challenge these levels this week or early next week. Short term technical momentum is back with the bulls.

Mea Culpa – Thought yesterday would be a down day, but as mentioned daily predictions are minor. Watch the major (and minor) resistance levels, volume figures, and how markets react to news.

Daily forecasts/guesses are very minor and what’s important is to short the big rallies and buy the big dips. The closer you get to the low of 7449 – go long. The closer you get to 9654 – go short. The long term trend down – Bears Rule Therefore, getting close to or breaking 7449 is the place to nibble a little long. Anything close to 9000 is a place to short.

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
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+% 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 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