Wednesday, November 4, 2009

WOW – How quickly things are going to change

WOW – How quickly things are going to change

Now that the recession is over let the recovery begin?? I don’t what our politicians are looking at but this recovery will be one big mirage. All the stimulus and tax credits for homes and clunkers have hit the economy with little response. Maybe it’s the higher real estate or state taxes? Maybe it’s the 10% unemployment? In the last 10 years our economy has created 2 million jobs of which 1.8 are government jobs. What going to happen with all the legacy costs? Maybe its seniors getting a zero social security increase for 2010? Maybe it’s the zero interest rates hurting the savers and causing them to search for higher and riskier investments? We know how all this is going to end.

Ford had its first profit in two years. Then they come out with a big debt and equity offering. How is Ford going to compete with GM (Government motors)? Ford lost an UAW concession vote and now will be at the mercy of the government in a few years.

Today the FED left the negative rates intact. Goldman Sachs will continue to rake in the cash for a while longer. Last quarter GS made at least 100 million that’s million per day for 36 of the 65 trading days. They ONLY HAD 1 losing day! How did they do it? From the trading pits it’s called free money. GS is selling debt to our government at big mark-ups. Our government is buying debt instruments in various programs that total in the trillions. Our government is almost the only buyer of mortgages. They were big buyers of treasuries until this past week when the program expired. This activity is super dangerous and marks an important factor of “ no one can fail” philosophy which is going to bite us where it hurts during the next 2-3 years.

The FED states there is no inflation. Sure we don’t have oil at $140 but prices have been creeping up even though the demand worldwide has dropped this past year. Our government doesn’t consider surcharges when computing inflation. Companies that deal in steel, airlines and shipping to name a few are raising prices by adding surcharges. This is a joke.

Gold has broken out and is likely to move parabolic just like oil did a few years back. Oil went from $100-$140 in 4 months before crashing. Gold can reach $1500-$2000 in the next 3-5 months before it crashes. Those that are long gold put a stop around $1020. There might be a bit of a pull back but use it to buy. Move your stop up every week and scale both in and out but it should act like oil did in 2008.

One of the carry trades that have been popular since the beginning of the year is shorting of the dollar and take the proceeds and invest in riskier assets like equities, bonds, mortgage securities both here but mainly overseas. Gold and commodities have also benefitted but this is about to change.

The dollar trade is of great concern when it gets unwound. Just like in 1998 when all the computer geeks and professors (L-T Capital) thought they figured out how world markets correlate. They bet big and lost hundreds of millions leaving our government to bail them out. The dollar will rally in the short term because there are too many shorts. Stocks will suffer but gold will rally. Commodities will also fall. This action will begin any day. There will be a lot of confusion in all the computer models.

The yield curve has steepened meaning mortgage rates will go up. The Fed has been buying treasury auctions but that ended last week. Next week’s auctions will be a major concern for the markets next week. The unraveling will begin soon. The dollar will rally because of interest rates are going up leaving the carry trade at risk of a nasty unraveling.

The job market basically is ugly and will take years to return to 7 or 8% unless we believe the so called “jobs saved” scenario. The problem with this is 90% (debatable) of the working population is much greater than the 10% unemployed so jobs “saved” can really jump. Maybe in 6 months if unemployment tops 11-12% our government will come out and state that it could be worse and we “saved” millions of jobs.

As for stocks, all this free money should send the market to 12,000 but too many remember the outcome of 1% rates in 2002 and what happen years later. How about zero rates? That should turbo charge the market but memories of the recent bear can’t trap everyone just like those alive in the 1929 era.

Our government thinks a weaker dollar will help exports. How about producing a quality product? China’s currency is fixed to the dollar so it doesn’t change much when the dollar drops. We are net importers of stuff from Europe, Korea and South America so goods will cost more not to mention the impact of oil which is priced in dollars. Sooner rather than later our credit starved country will suffer from our current policies of using the charge card.

The same mistakes that have hindered growth in Japan for the last 20 years has made its way across the ocean. The FED o.k.’s the use of a banks model to price assets rather than market prices. Take Ambac(ABK) which just reported a profit of over $7 this past quarter. One would think the stock would be trading $50-70 a share. How about $1.50!!(On its way to zero). The company is a mortgage insurer and marked up their assets.

Not until we see bankruptcies and companies losing money will the market make a cyclical bear market low not a fake-out rally which either has ended or is in the process of ending. DOW 10,100 is short term resistance followed by 10,300. Support is 9615 then 9400 then 9100 and 8850. Once the 8850 level is broken the bear will reappear in earnest. DOW 6600 will be retested and probably break the first time.

Too much public debt and government debt leaves our country with a continuation of the re pricing of assets and letting the air out of the bubbles. That will lay a foundation for a solid recovery and new cyclical bull market to emerge in the next 2-3 years. The next few years however will be of great concern. Capitalism as the way we knew it the past 30 years has run its course since 9/11 but more like 2005. More on that at another time.

Just a few ideas-

Remember to keep your stops on both the buy and sells-

Short DIA 98 stop 102 target 9200

Short or buy puts in –

FCX $75-79 stop 85 target 60
FWLT $30-32 stop 35.25 target 22-23
MCD $60-61 stop 64 target 56-57
WHR $75-80 stop 83 target 60-62
TUP $45-46 stop 49 target 34-36
AXP $36-37 stop 39 target 30-31
COF $38-40 stop 42 target 32-34
MS $32-33 stop 35 ½ target 26-27
SHLD $70-72 stop 79 target 48-50
WFC $28 ½-29 ½ stop 31 ½ target 20-22
IP $23-25 stop 27 ½ target 16-18
TIN $16-18 stop 20 target 10-11
LNC $25-26 stop 29 target 16-18
XOM $72-74 stop 76 target 62-64

BUY GLD $102-104 stop 97 target 130-150

Stay away from the double or triple short ETF’s unless you buy puts in the long ETF or puts in the short ETF. Over time with volatility these products melt away. For example, natural gas has rallied from .25 to .45 in a few months but the UNG hasn’t moved. The commodity is up 45% while the ETF’s are up 5-10% when they say they will mirror the commodity movement. This activity will cause a big class action lawsuit next year and the government will start another hoopla investigation.

Wednesday, October 14, 2009

Is the Stock Market Safe to Invest Again?

Is the Stock Market Safe to Invest Again?

What has happened since the March lows in the DOW besides a 3400 point rally? Back in March, pessimism was rampant. Eric Schmidt CEO of Google was very negative on the economy with his stock trading in the $320 level. Just last week he became optimistic about the future with his stock already up 65% off the lows to $530. The current market psychology has gone in a complete 360 reversal. An important top in the market is at hand. We are in the latter stages of a cyclical bear market that started in March of 2000. A real cyclical bull market will re-emerge in 2-3 years. The current rally is just a big head fake. Below are a few reasons why-

Dollar falling
Shippers near their lows
Higher commodity prices
Zero business investment as % of GDP
Government spending out of control
Recent IPO’s open lower than their IPO price
Nearing the 50% retracement in the DOW which is 10,300 level
Commercial real-estate loans due in next 2-5 years
Lack of any housing appreciation even with tax credit.
Unemployment at least 10%.
Government intervention in health care
In recessions companies usually lose money.
Repeat of 2002 with free money

There has been no country in modern history that ever was prosperous when their currency falls apart. It was one of the reasons why we crashed in 1987. People don’t want to hold a currency that loses its value overnight. Remember Germany and the wheel-barrel? Give me the wheel barrel and forget the $$. Sure it might help the trade deficit a bit but it also raises foreign import prices. We are net IMPORTERS of goods.

If economies of the world have a positive GDP and are out of recession then why are shippers near their lows? Most shippers haven’t participated in any part of this rally. The dry shipper’s index has barely budged from its low of $8,000 to its current level of $21,000. Still it’s off its all time high of $230,000 made May 2008 and more importantly its June high of $70,000.

The Fed’s current easy money policy was supposed to inflate house prices instead its inflating commodity and financial assets. Heating oil prices have rallied even though there is plenty of heating oil in storage. This is the same with oil and natural gas. The latter has no more storage places left. It bottomed at about 25 cents and now trades in the 45 cent level. Funny thing with oil is it’s trading around $74 a barrel but pump prices are only $2.65. When oil was $140 we were paying $4.40 a gallon. Talk about manipulation.

How can the FED lend out money at .25% while the DOW yields over 4 ¾% and not expect a flood of money into the markets. The current yield is about 2.90% which is very low to historical yields. Money has also flowed into the bond market also keeping yields low. It doesn’t help that our government is also a buyer of bonds. Didn’t we make the same mistake in 2002? Haven’t we learned our lesson?

Our government is spending like they just won the lottery. Don’t they understand that somebody namely the people of the US will end up paying for the current misgivings? The value of the dollar is reaching a critical point where it will harm our markets and the future of America in a very negative way. It’s sad only a chosen few can cause problems for the masses.

There is resistance in the DOW around 10,000 followed by 10,300 then 10,500. If the market doesn’t break 10,000 by the end of the month then odds favor another bear move down. The panic to get out of the market won’t happen until we close below 8850. A return next year to 6600 is a high possibility.

Don’t be fooled into thinking everything is fine. We are walking a tightrope of fiscal irresponsibility and monetary shamefulness. History will soon repeat itself. Where are the bankruptcies? Companies that don’t make money in a recession are making money now because of cost cutting i.e. job cuts. That can’t last for long.

One sign of market weakness is the current IPO’s that are trading below their initial offering. Companies are issuing stock to raise capital which in a way is good but they don’t use the money to expand rather just payoff debt via equity.

Gold is looking frothy but could easily go into orbit like oil did in 2008. Adjusted for inflation gold should be about $2300 an ounce. Gold could easily hit $1500 over the next 6 months, but like in 1980 the down move can be ugly. This makes one wonder if it’s really a hedge of inflation or just a mirage. Commodities are rising on fears of inflation not demand. Commodities are a better hedge against inflation than gold. Stagflation will be the theme 2010-2013.

The government wants to inflate its way out of the large deficits. It’s the 1970’s all over again. Won’t be surprised to see the bell bottoms come back. Does a war, falling dollar, rising commodity prices and weak stock market sound like a remix of the 1970’s that left this country in stagflation? Paul Volcker is standing in the background shaking his head.

There was cash for clunkers which helped Honda and Toyota move their inventory. There was a tax credit for first time home buyers which stabilized the housing market.
There was an $870 billion dollar stimulus package. There was a US winner of the Nobel peace prize who is running the country. In the end the inevatable will happen. Companies will go bankrupt and the weak will disappear laying the groundwork for a stronger economy. Our nation will go back to real growth and be a stronger country. The politicians who put us into this mess will be defeated. America will wake-up. Unfortunately it won’t happen for a while especially if the policies that are in place stay with us for a while.

Where’s the wake up call? Maybe the defeat of Chicago not making it past Japan for the Olympics is the beginning. Chicago came in 4th in a 3 country race. Maybe the Olympic committee figured out that Chicago politicians are crooks. Some went out and bought land where the future Olympic site was planned. Maybe now they will use it for a casino. Many of these crooks are now in Washington.

On a final note of how sad our country has gotten. The nightly news was showing the awful killing of school kids over the past years. Intercity kids don’t attend and the unattended usually end up in gangs. It was getting so bad that the Obama administration decided to send the head of education to address the problem. The funny thing about that is the guy used to be in charge of the Chicago schools before he left for Washington. Talk about a waste.

Sunday, August 23, 2009

The Dog days of summer

The Dog Days of Summer

With school days just around the corner the market actions have seen a steady rising upward bias market off the March lows. Corrections have been short and shallow. There are a bunch of stocks that have rallied from $1-4 to $20-30 in a short period of time. Currently there are too many people that are bearish. The September-October period historically has been weak. That might occur this year again but the chance of a sharp decline of over 20% will be put off till next year. The recent weakness in our markets is due to China falling over 20% in a few weeks after rising over 90% in the past 6 months. Also China has tightened credit.

The free wheeling spending has just started to hit the streets. Examples like taking out future demand for cars by extending the cash for clunkers deal. GM even has to start ramping up production with overtime hours as they lack workers which they just bought out. Those overtime hours have to be more expensive then hiring a few more people. In the longer run this policy will leave the consumer waiting for the next deal. Next Spring car sales will be slow. Maybe the government might start tearing down houses next.

Our country is spending $1.85 for every dollar that comes in from taxpayers. Housing isn’t coming back anytime soon. Commercial real-estate is seeing lower rents and higher vacancy rates along with a tighter credit market. Residential housing has stabilized in the junk end but continues to decline in the prime end. Real interest rates are near zero. There are so many problems to fix with most being helped over time. Problem is many solutions our government is currently trying to use will only put off the pending world financial spiral that will begin next year and last for 2-4 more years. Once the washout runs its course a new stronger cycle will emerge.

The current bear market began in March 2000. The past 9 years the market has been in a cyclical bear market with sharp rallies along the way. The current rally is no different. There is resistance in the DOW 9650 then 9750 then 10,250. We probably will see the 10K area but not on this go around. If it doesn’t happen in the next 3 weeks then odds favor the downside. We are days away from a medium term top. The S&P could see 1070-1080 before a 10-15% correction that will last a month or 2 before a recovery that may not past the current highs. Next year will see a vast number of financial problems that will start the next and last major leg down to DOW sub-6,000 and maybe 4200.

Bring your stops up to within 5% of the current highs. Scale out of positions while those with experience buy put options or short stocks. The market is at a swing point that probably sees a sharp quick spike up before the drop. 8850 is key support followed by 8400 then 8150. A break below that is dangerous. On the S&P 975 then 950 support followed by 890 support. The big break in the market will occur next year. There are a number of factors that will lead this decline that are technical, fundamental and governmental.

Stay away from ETF’s that are either double long or short. Stay away from ETF’s that are in the commodity arena. Our government wants to regulate them so they can only hold a small amount of any commodity. The UNG (Natural gas fund) has so much cash and can’t buy enough futures contracts because the rules are being changed as to contract limits and who can buy them. The Fund has entered into a swap deal but the NAV will be hard to figure on a mark to mark basis. In the end the Fund will not mirror the price move of natural gas. Natural gas is the cheapest it’s been in 7 years. It might go a bit lower as traders need to unwind long UNG and short oil. Our government is pro-oil and negative natural gas with the latter being so much cleaner. Our country is abundant in natural gas but the oil lobbyists are too strong. All the trucks and buses should be run on natural gas. If our government changes our stance then natural gas is a screaming buy at current levels for long term appreciation.

The double short or long ETF’s do not work over the long run. They will run out of money and be worthless. Commissions and a volatile market will put these guys out of business in the next 6-12 months. It will be a big lawsuit next year. Since they use leverage they must cover their losses over time and then will run out of money. Since they try to mirror the market movement 2 or 3 fold they end up shorting the bottom and covering at the top. Stay away from these vehicles before they crash. It won’t matter if they are double long or short. The only ones that work are the SPY, DIA and GLD. If you think the market is going down just short the ETF don’t buy the inverse ETF(i.e. DOG, SDS)

As for recommendations at this time caution is the word for those long. I will start to begin shorting stocks this week looking for the ones that have gone up from $1 or 2 bucks to $15 or $20 since March. These are short term trades as I stated earlier the big bear will feast next year.

Always use trailing stops and scale in and out of the positions.


DTG $23-25 stop 28.75 target $15-17
ACH $31-33 stop $36 target $22-25
DOW $22-24 stop 26.75 target $15-17
IBM $125-128 stop $132 target $110-112
AXP $33-35 stop 38.50 target $25-27
GLD $93-95 stop 96.50 target 87-89
IP $ 21-23 stop 26 target 15-17
MAS $14-16 stop 18 target 10-12
FCX $66-68 stop 71.25 target 50-53
WFMI $29.75-30.75 stop 33.25 target 22-25
TIN $18-20 stop 22 target 13-15
HPQ $44.50-45.50 stop 48 target 38-40
STT $54.50-56 stop 59.75 target 45-47
ISRG $245-250 stop 285 target 180-190
WDC $33-35 stop 38 target 25-27
BAC $18-19 stop 22 target 10-12
KLAC $33.50-35 stop 38 target 24-26
COF $40-42 stop 46 target 25-27
AIG $38-40 stop 46 target 18-20
TEN $18.50-20 stop 23 target 10-12
WYNN $68-70 stop 76 target 45-47
LNC $29-31 stop 36 target 16-18
WFC $29.50-31 stop 34.75 target 20-22
MMM $73-75 stop 79.25 target 60-62
R $40-42 stop 45.50 target 29-31

Only like Natural gas futures long term out 6-9 months.

Tuesday, June 2, 2009

What's next for June Expiration??

What’s next for June Expiration?? May is over and the market has gone straight up since March 6th. The DOW has closed above 8500 and now there is little resistance between 8500 and 9,000 to 9150. It could take only a few weeks to reach these levels however there are some very worrisome clouds on the horizon. Gas prices have jumped and will see $3 per gallon by July 4th and maybe $4 by Labor Day if the current flow of money continues to push prices higher. The funny thing is oil inventory is high and demand remains low. China just released that it has plenty of oil although it did raise state prices a bit. Doesn’t this sound like a broken record from last summer? This time however the commodity price increases are less than last summer but will cause more harm than last summers surge. Why? Expect a cap and trade or some sort of tax on fuel to occur by the end of the summer.

Yesterday the market shot up over 200 points while the vix was up. This divergence usually signals some sort of short term top. So many stocks have gone up 200-300% in just 3 months. The financials have issued huge secondaries. Stocks like Dow Chemical couldn’t raise money at $5 in March but did so 2 months later at $15.

The SPX is up 11 out of the last 13 weeks while the COMP is up 12 of 13 weeks. Some sort of sharp selloff is due. June expiration is 5 weeks in length. Most 5 week expirations have a key reversal during the final week or so especially when there was a strong trend the previous 4 weeks. This is due to option traders selling out of the money options thinking the market can’t reverse. In the current case a continuation of the rally into late next week or expiration week followed by a sharp 3-5 day reversal putting the out of the money options into the money. Kind of a vacuum reversal where traders sell out the money puts thinking the market never can go down and then getting caught the final week.

On the fundamental side seems the government has created a false sense of security in the financial markets. Does anyone think that GM will pay back all of the 50 billion? In GM’s best years they made only a few billion. That was with funny accounting. What happens if foreign countries slow their purchases of our bonds? Who is going to bail out California? Or other states that are in trouble? What about legacy payments?

This bear market rally could last a bit longer but the easy money has already been made. It’s amazing how everyone had been putting the blame on short sellers for the market’s decline. Now that we are 2100 points higher where is all the noise? Short selling has dropped sharply the past few months to 2 year lows. The lack of increased shorts the past 2 months is a big negative.

Below are some ideas-


Tin short 14-16 stop 18.75 target 7-9

LNC short 20-22 stop 26 target 8-10

IP Short 15-17 stop 19 target 7-9

BWA Short 36-38 stop 41 target 22-24

STT Short 46-51 stop 56 target 25-27

AAPL short 143-145 stop 151 target 120-122

GS Short 149-151 stop 157 target 110-115

DOW short 18-20 stop 22 target 11-13

MAS short 11-13 stop 16 target 8-9

TM Short 83-85 stop 93 target 70-72

DAI short 45-47 stop 51 target 30-32


UNG buy 13-15 stop 11 target 23-27

LUV buy 6.50- 7 stop 5.5 target 10-12

LCC buy 2.50 – 3 stop 1.95 target 4.5-5

Bottom line is keep raising your stops. Seems that all the recommendations in March have hit their sell zones and quickly.

Wednesday, May 6, 2009

What’s next? DOW 10,000 or 5,000? Or Both

What’s next? DOW 10,000 or 5,000? Or Both

Back on February 23rd I wrote that a bottom was near and a sharp 30-50% rally taking 3-5 months would happen. Well it only took 8 weeks for a 35% rally so far. Many stocks went from $2-3 to $10-15. A truly amazing achievement but the sharpness of the decline was also unprecedented resulting in a stampede. What’s next? If one has looked out their window the Obama giveaway is starting to land. Although the consumer is starting to save for the first time in years, our wonderful government has taken over that problem. The DOW could see 9500-10,000 before giving way to the end of the bear market rally and DOW 5,000 within the next 2-3 years.

If the DOW closes above 8500 the next resistance is 9,100. There is very little resistance from 9150 to 10,000-10,200 except around the 9600 level. For the most part the strength of the bear market rally will depend how aggressive the shorts are on the way up. Always put a trailing stop. On the downside a break of DOW 7750 gives way to 7400. A close below 7350 would mean a high probability of retesting 6600.

The big problem of buying and holding and working in the upcoming years is highly remote. Our government printing press is in overdrive and the percentage of our debt to GDP is closing in like a freight train. This week the government has huge auctions. The 10 year bond has gone from 2% to 3.20% in the past few months. The 10 year is how mortgage rates prices are determined. If they keep going up, mortgage rates will follow. Our government can’t control the long term movement of the 10 yr. It’s just too big. Our government is printing money and using that money to purchase 10 yr. bonds all the way to 1 month bills to artificially keep the mortgage rates low. They are forcing people into riskier assets by giving no return on short term money. Something is close to giving. It might be the fall of the dollar or jump in rates or both. It’s a very risky game especially with our tax dollars.

Don’t be fooled by the increase in housing sales. About ½ of the sales are foreclosure sales. Expect these foreclosure sales to re-enter the market in 3-6 months. Most of these foreclosures need work before being put back on the market. Housing is years away from being a good investment inflation adjusted.

Besides Chrysler which is private there have been very few bankruptcies. So far all the money being created and borrowed has delayed the ensuing slew of failures. It is only a matter of time before the house of cards collapses. Higher taxes and stagflation is on the horizon. The rapid increase in money supply leaves the FED on a tightrope of trying to inflate housing prices while leaving other consumer and producer prices stable. It’s an impossible task as we learned last summer with energy costs soaring. The FED is trying to inflate housing prices so people are above water on their equity value which will result, in the banks will be out of trouble. Higher taxes, rapid money supply growth, job loss, too much inventory, credit availability being curtailed all spell trouble on the horizon. Not to mention the government trying to control our financial institutions.

There needs to be failure so stronger companies can grow. With GM and Chrysler being backed by the government this is penalizing the successful car companies like Ford, Toyota and Honda. Capitalism is at risk with the no failure policy. The cost in the long run will be a move toward socialism. Stocks markets don’t flourish in this type of environment.

Tax polices and increase government control spell trouble for the next 2-3 years. Our budget deficit is going to push interest rates higher and slow down our growth. The current 2 month rally can last longer but keep your stops tight. Most of the easy gains have already occurred.

Our government is backstopping everything – credit, auto parts, cds’,cdo’s pensions etc... Once people realize the backstop is the taxpayer not some factious entity don’t be the last one out the door. Smart money is selling into this rally.

Monday, February 23, 2009

Time for a Reversal!!!!!

It’s is interesting to notice the Chinese market is up 25% for the year while our markets are nearly down that much as both countries have huge stimulus packages. The pessimism in our country is at levels not seen since the 1973-4 recession. Can our markets get past the first 100 days of the Obama Administration without losing another 50%? The market will bottom this week. Dow 7145, Comp 1398 and SPX 741 will hold on a closing basis or may slightly be violated (3-5%). Next support is DOW 6,000 level, COMP 1295 and SPX 682. The ensuing rally could be up between 30-50% depending on the shorting and negativism at the higher levels. Longer term the market and our economic system are heading toward a disaster.

Our government wants to raise the value of housing in order to save the major asset of the people. Unfortunately in the long run housing could bring down the whole system if the government tries to manipulate it. Lower housing prices in free markets bring in new buyers that couldn’t afford the high prices. Higher housing prices forced by the government subsidies will keep housing prices stagnate for decades. It will cause the younger generation’s entry into a house harder to obtain. Even with lower house prices the affordability index is still 20-30% above its norm. As with most markets they tend to overshoot and undershoot when they crash. Housing will be no different.

There will be many stocks that go from $3 or $4 to $10-12 in the coming 3-5 months. It’s not saying much as they have come from the $30-$50 level. What makes me so bullish is not what’s happened but what’s going to happen in the coming months. The cost of money is zero to negative adjusted for inflation. Trillions of dollars around the world will hit the streets in the next few months. I wouldn’t be surprised to see the government buy S&P futures although they will never state they did buy or sell. The drop in oil prices will help stimulate the economy. The stock market looks forward not backward. Once the money grab peaks later in the year the realization of whom and how are we going to pay for it will mark the next leg of the secular bear market. The government will talk about fiscal responsibility on one side of their mouth while signing the check with the other. For now enjoy the rally. The old rule of never fight the FED still exists until proven otherwise. Look out your window not for Santa Claus, but Helicopter Ben Bernanke sending your tax dollars and future tax dollars floating in the air. The piƱata has been broken in Washington. Just be careful with the person holding the bat.

This rally will be broad based. Stick with ETF’s or a basket of 9-12 stocks. Keep your stops 15% below the market. Insurers will bounce back sharply as their balance sheet is full of financial assets. Retailers, healthcare, materials and infrastructure stocks should outperform.

Tuesday, February 17, 2009

Will The Retest of the Market Hold???

The market action since the November lows has been as boring as the government stimulus plan. Both lack substance. Seems that the government will take over the public‘s lack of using their credit cards by using the US treasury’s credit card. With the public now interested in something they haven’t done in years that is save(nothing wrong with that), our government has decided to do the opposite and will borrow a vast amount of money. Unfortunately, the government is the public so indirectly not only is the public borrowing more with Uncle Sam as the chief card holder, in the end we the public will end up paying for it. Who has a more efficient way of spending money, the individual or the government?

Not since the 1981-2 recession has the economy been so depressed. Downturns in the economy are healthy for the long run however the actions of our government have delayed the inevitable. WE need companies to file for chapter 11. The government has thrown billions of dollars to bail out companies that will fail. Citicorp and Bank of America are both insolvent if they had to market their portfolios to current market conditions. General Motors is another zero as their pension liability and cost structure point to an inevitable bankruptcy. If these companies would file as companies have done in other downturns the stock market would takeoff like a rocket. Right now none of these companies can find private capital as they worry about the chance of bankruptcy or the government diluting their equity. Once they file, private capital will enter the market. Private capital will be able to measure their risk of the new capital formation.

Signs of a temporary market bottom aren’t totally in place. Fundamentally the government needs to finalize the rules. Right now they keep changing the rules or have no plan. In the next few weeks details of the plan should emerge as well as the budget due on February 26th. It doesn’t matter if the plan doesn’t work in the long run. It’s amazing how the Obama administration is setting up the public by stating the economy will be much worse in the upcoming months and years. How about the current administration lowering expectations and killing economic sentiment while feeding the wave of negativism to the public as a dire consequence of the Bush administration’s policies of the past 8 years? Even in the depression our government didn’t talk this negative to the people. The action of a plan is what is missing. Once a plan of what the Obama administration entails on housing, autos and banking, companies can then plan their next move whether it’s pro or anti-growth. One thing for sure is Uncle Sam’s credit card will be very close to being maxed out in the next few years.

This economic downturn is not an ordinary one as will be this bear market. The market will have a strong bear market rally off this upcoming low that will last 3-5 months. Longer term there are too many negatives- aging work population, pension liability, budget deficit, government red tape and public debt that will keep this bear alive for years to come.

Technically, the Dow is knocking on the door at the lows set this past November. The S&P is farther away than the DOW, but the Nasdaq Composite is the farthest. The November lows intraday are DOW 7449, SPX 741 and Nasdaq 1295. Next support is 7150 from 1997 then around 6,000 and finally 5072 which I think will be the bear market low sometime in the next 12-18 months. The SPX has support once 741 is broken at 682 then 602 and finally the 500 area. The COMP is 1108 then 830 and finally 700 level.

A close above 8200 would be a bullish signal but the current decline might start from 7200 then run to 8200 before backing off. Most trades this year will be short term plays. Scale buy and scale sell keeping a rising stop.

Buy AKS $6-7.25 stop $4.75 target 10-12
ACH buy 10 ½ - 11 ¾ stop 9 ¾ target 16-18
DRYS buy $3.-4.50 stop $2.45 target $7-9
X buy 24-27 stop 21 target 35-38
AA buy $6.50-7.50 stop $4.75 target 9 ½-11
RVBD buy 8-9 ½ stop 7.30 target 12.75-14
FDX buy 48-51 stop 44 target 62-65
FWLT buy 19-21 stop 16.75 target 24-26
MA- buy 140-145 stop 125 target 165-175
V buy 48-51 stop 42 target 60-62
GOOG buy 320-332 stop 290 target 400
AAPL buy 80-82 stop 78 target 101
GS buy 72-76 stop 68 target 95-100
MS buy 17-19 stop 14.70 target 28-30
AXP buy 13-15 stop 11.75 target 18-20
TGT buy 28-30 stop 24 target 40-42
YRCW buy 2.80-3.50 stop 1.90 target 4.75-6
AMR buy 4.50-5 stop 3.75 target 7-9
GE buy 9-10 stop 8 target 12-13

The markets will bounce in the short term 3-5 months once clarity arrives in the banking, housing and auto sector. This could take a few weeks. If we get a bunch of bankruptcies along with a corporate tax cut the market will moon shot and the big bad bear market will end. Chances of this are slim as Obama is just redistributing the wealth from one hand to the other without adding much long term growth and investment. Review my last article about not letting anyone fail. The next big shoe to drop will be the dollar but not this quarter. Uncle Sam’s credit card will come due later in the year and next. The government can do any combination of 3 ways to pay off the credit cards - print more money, borrow the money or raise taxes. None of them are pro-growth or pro-bull market.