Sunday, December 21, 2008

2008 Review

[Editor's note: The Update will return for 2009 on Sunday evening, January 4th for your reading pleasure on Monday morning the 5th.]

Back in January we had two posts that indicated our thoughts for the coming year. We include them here for review:

2008 Preview Part One:

In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.

Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.

The market seems to think this way today.

Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.

Deflation became a big topic late in the year and continues to be a hot topic in the media. What we said a year ago was that "the Fed will be powerless to prevent [deflation]". We didn't have our thinking caps on tight enough to think about the Government opening up its wallet. This turn of events caused us to move to an inflationary stance for now. Deflation still has a chance to reappear later in 2009.

Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.

Looking at this, we didn't really make any long range forecasts here.

Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occurring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.

Even back in January, recession seemed to be obvious. As we now know the economy was just declared in a recession, as of December 2007. The housing mess has taken up quite a bit of the media's attention. Home prices are too high and as they come down the mortgages seem to stay...

2008 Part Two

Stock market:

The stock market has shown us a high that should stay in place for a long time. In the October to early November period, all the major indexes pushed to new highs or relative new highs. Since then we have seen a pull back in all of them, well, except the HUI, our favorite gold mining index.

The highs we saw a year ago have indeed held for all of 2008. Now the question remains as to how long is "a long time"? We'll leave that question for later when we provide our forecast for 2009 and beyond.

There is one index that has another story, too.The Russell 2000 index, a leader in this market over the past several years, failed to make a new high in the October/November period. This index has dropped nearly 20% since its highs from last summer. The Russell 2000 is a small cap index, one that provides a good representation for the small investors. The stocks in this index have provided a lot of upward movement over the past several years and now they are tired out. This is a good indication that the market is headed down.

The Russell 2000, RUT, ended 2007 near 765 after being as high as 855 in June and July of 2007. This November, RUT traded down to 375 and today stands around 485. It has truly led the market (down) after failing to make new highs back in the fall of 2007 as the other indexes rallied to new highs.

Stocks have tried to ignore all of the credit problems. Part of the reason for this is that the oil stocks have proceeded much higher along with the price of oil. Here again, oil should be near its top and $100 should put a lid on it or somewhat higher prices will curb its upward move.

While we did sort of miss on the top for oil, it did top around $145 even as the media proclaimed that oil was going to $200. This week oil traded [Editor's change: This should have been "under $41".] That price represents a fairly good buying opportunity along with other commodities at the moment. These price swings are so violent that trading must be done carefully.

The news over the past few days has given some assurance to the bulls that the mortgage problems are behind us. The news from the Fed is that they are willing to lower rates in "substantive additional action". To us, this means one thing, that the Fed will lower rates at least 50 bps at their January meeting. They are not afraid of the consequences of lower rates, they are simply concerned that the market is signaling a downturn in the economy.

The Bank of America did rescue Counrtywide, or as some call it, Country Fried. The other rumor was that one more mortgage bank would be helped out. JP Morgan was rumored to be ready to step in to take over Washington Mutual.

All three of these items are part of the great effort to paper over the problem one more time. The stock market is a result of the attitudes of the many people who own stocks. The people need to be confident for the stock market to stay up, or not move down. This process has already turned down with the unemployment rate going up and the housing market not doing too well. The consumer confidence figures are low based on what is going on.

The remarks here are almost the same as they have been over the past few months. The papering over has been taken over by the government.

The market has no reason to go up in 2008. We think the top of the Dow in 2008 has already been seen. We were hoping to see a bit of a rally going into the first week of the year which is when we were hoping to make that statement. There are possible ways for the market to go up but we think the next moves by the banks or the Fed will not be very well received. The Fed will decide to lower rates several times this year but the market will not react the way they think it should.

The Fed has lowered rates several times and now Can't lower them any more. The market has failed to hold up even with this campaign of lowering rates. One thing we emphasized during the summer when everyone was clamoring that the Fed would need to Raise rates due to inflationary pressures, was that the Fed would Not raise rates.

There will be some opportunities for upside but they should be from much lower levels. We think the stock market will end the year 2008 with prices lower than where we started the year. You???

The year has not concluded just yet but it's likely that the market will end 2008 with much lower prices. And there were several rallies during the year that all led to further selling. We think a more substantial rally has started from the October/November lows that will surprise to the upside in January around the time of the inauguration.

That was then. What about 2009?

This post has taken too long so our forecast for 2009 will need to be finished in January. The important thing to remember is that the first couple of weeks in January should surprise to the upside.

Thursday, December 18, 2008

Last Post of 2008 Postponed Until This Weekend

Come back on Monday to get the final post of the year. We plan to recap the past year and take a look at what 2009 may bring. We are polishing our crystal ball.

Today's news was that SP downgraded GE's outlook to negative meaning that there is a good chance that SP will actually downgrade their bonds. The market sold off quickly right after that news hit the wire.

Friday is options' expiration and not just any expiration, the Quadruple Witching expiration. We always like the name Triple Witch, much easier to say. Quad stands for futures and options on futures as well as index options and stock options. But what it really means is there will be some unwinding of positions Witch can cause some volatility. We think some of that happened today.

Wednesday, December 17, 2008

Fed Rate Cut Equals Dollar Drop

Top Line: Wednesday's stock market tried to hold up but in the last hour the Dow dropped about 100 points. We're looking for some more upside...going into the inauguration. There may be some down days between now and then but when we are getting to the highs of the market these down days will not show up much. That will be a clue...people will be bullish going into the inauguration.

Wednesday's defining characteristics were centered on the weakness in the dollar. The dollar got hammered and has now fallen about 10% in the past week. (Check it out on with the symbol DXY.) At the same time, gold has gone up which makes sense since these two are opposing forces. What doesn't make much sense is the long Treasury bond continuing its rocket job, up another 3% today. (TLT is a good proxy.)

The latest moves are in the wake of the Fed's decision to lower interest rates to virtually 0. Now there is a question as to whether the Fed can pump money faster than the deflationary forces can drain it. We think this latest argument on deflation is too late. The Update has mentioned deflation as a possible outcome of the housing bust but this Fed is not about to let this happen.

The Fed Chairman, Bernanke, has said that money can be dropped from helicopters if need be. Now the Fed is going to be buying all kinds of debt, flooding the system with dollars, thereby weakening the dollar. We don't think the dollar will stop going down until we get to the top of the market sometime in 2009.

Yes, we think dollar weakness is stock market bullish. The reason for our thinking is that the dollars now being used to flood the system need to find a home and we think that home will be the stock market and commodities. What just doesn't make sense is that the Treasury bonds would hold up in a weakening dollar environment.

Right now, the world sees the US as the leader in generating global growth by lowering rates. We're not sure we buy the argument that lower interest rates cause lower currency values because the yen is probably the strongest currency on the planet and interest rates in Japan are lower than they are here in the US. But, the argument goes that the Europeans need to lower rates to match the expansionary policy of the Fed and that will cause the Euro to come back in down against the dollar. Again, we don't really have to buy the arguments, we just need to stay ahead of the moves, if possible.

The simple truth is that the Fed and the Treasury and the Government have now pulled out all the stops to try to generate growth. We have avoided saying that they are trying to hold up house prices because that is a tough job, ok an impossible job for now. What low interest rates do is encourage people to pursue riskier assets to generate more yield. This means all types of risky assets including mortgages and high yield bonds and all kinds of assets that are currently trading at lows not seen in decades.

What about house prices? The Fed is hoping to push mortgage rates down to levels that "force" people to consider buying houses. What rate would make you buy a house? There has to be some pent up demand for houses. The problem is that there is still too much inventory that needs to be sold and not enough mortgage underwriters willing to loan money unless there is a good risk coming to borrow.

Housekeeping: Thursday evening will be our last regular post of the year. We plan to lay out our current near term strategy and which direction the markets we follow are going. There may be further posts if unusual things happen over the next two weeks but we don't plan to go back to a regular schedule until Sunday, January 4th.

Tuesday, December 16, 2008

Federal Reserve Pushes Rates Down to Zero

Top Line: Do you need more proof that the market is headed higher? The Fed has just lowered interest rates to virtually zero and promised to do whatever it takes...

Here is a (new) paragraph from their statement:

"...The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity..."

As the Fed was deliberating on what to do about interest rates the last couple of days, the market was expecting at least 50bps as we mentioned in yesterday's post title. Of course, a cut of 75bps would even be better. The Fed decided that 75bps wasn't quite enough so they have stated that their target is between 0 and 25bps. The market was actually surprised by this news and pretty much rallied from the moment the news hit the wire. By the end of the day the Dow had cruised up 360 points.

Here we are with the Dow still sitting under 9000. Can it now punch through it so that it sticks this time? The round numbers for the Dow seem to provide some trouble and 9000 is no different. This is nonsense because it's just a number but the market has respected this level for a several weeks now. We think it's just a matter of time before we get over 10,000 so yes we think the 9000 will soon be behind us.

The Fed cut rates and the dollar dropped as it should have. Gold jumped $20 right after the news, again, as it should have, if not more. Then there was the Treasury bond market which again defied reality by jumping a bunch in the wake of the Fed's news. All we can say is that the price of these bonds is dizzying and should drop dramatically. The higher they go, the scarier they get. Justification to buying these can not be found.

Monday, December 15, 2008

50bps Coming?

Top Line: Stocks opened stronger on Monday morning but that was the high for the day...except for the gold mining stocks which held up for the better part of the day. The market seems to be having some trouble going down which means the downward momentum of the past year has at least subsided.

Gold jumped on Monday morning to a two month high and gold mining stocks opened strong, too. Over the past couple of weeks, the dollar has gone down and meanwhile gold has gone up. Did gold signal the dollar going down or confirm it? We usually say that the mining stocks lead the gold. The dollar and gold should generally move in different directions, that is the idea after all.

With today's rally, the GDX has finally come back to our first entry point just around 30. Fortunately, we continued buying it all the way down, with our lowest price just under 17. So far, our GDX position is our best performing asset since we started going long back in October. Our other assets are slightly under water but the GDX is providing some upside balance.

Tuesday's Fed rate decision plays a role in today's dollar decline. The Fed will likely lower rates again on Tuesday with 50bps being the most likely outcome. Frankly, we don't think another rate cut can do anything except show once again that the Fed is willing to do anything to thaw the credit freeze. The plan they have devised may reignite inflation. At least, that is what the market believed for a little while on Monday.

Back to the action, the stock market traded down most of the day. Then with about 45 minutes to go, a violent rally erupted leaving the market much closer to even but still negative on the day. The rally didn't hold up but the market did show some strength in the last hour. The Update gives the late day move a good mark for bullishness.

As we have said many times in the past couple of months, the economy has not recovered and may not recover for a long time. That is not the central theme in the stock market and does keep most risk takers out of the market for now. They will be back next year when the market manages to rally back to a much higher number. That's when the confidence will come back and the volatility indexes will have dropped back to 30 or lower. Meanwhile, we will be enjoying gains and may sell our shares to them.

Will the Fed's decision bring any volatility to the markets? The stock market is looking for a 50bps drop but would really like 75bps. If the Fed gives us 75, the stock market might have a little rally, otherwise, the news of 50bps should not make much difference. Anything less than 50bps will probably provide some movement, down first but then we could get a stronger rally. We don't think there will be much "news" in the Fed's news. We say 50bps.

A possible market mover is the Goldman Sachs' news which is believed to be that GS is going to report a loss for the quarter. These are the guys who told us how well they did in the mortgage market as it was falling. Yes, they are probably some smart traders but the market has gotten to GS, too.

The CPI will probably not move the market either...

One other subject is the Treasury bond market. Monday, the long bond traded higher and in our opinion to a riskier place. In the past couple of weeks, the long bond has held its price which looks like it is at a precipice and ready to dive. These bonds don't seem to realize what is happening...inflationary expansion.

Sunday, December 14, 2008

Bullish Conclusion to Friday

Top Line: The market dived into the abyss on Friday morning but recovered as the day wore on leaving a nice, bullish, Higher Low in place from the prior week. In late Sunday trading, the world markets are continuing the rally.

Friday's open, while down hard, was not down as much as we surmised on Thursday evening; and, from the opening drop, the market generally moved higher the rest of the day. The overnight futures had predicted a Dow that was going to be down about 450 points but the futures improved before the open and the Dow only opened down a little more than 200. The NASDAQ indexes we follow, the Comp and the 100, were down early but rallied strongly all day and were up over 2% by the close while the Dow was up less than 1%.

And, looking at the Treasury bonds, we had indicated on Thursday that the overnight trading showed strong gains in bonds but by the time the stock market opened these gains were largely gone. The trading during the day was down and then up to about unchanged on the day.

The volatility indexes were pretty much as expected, jump at the open and then selloff most of the day to mirror the stock market. Volatility is still extremely high indicated by the level of the VXO being over 50. We shouldn't expect that the stock market is going to go down much with these levels in the volatility. Even as the market opened on Friday, these indexes were no where near where they were the prior week. All in all, not the day that was signaled on Thursday evening.

As we look out over the next few years of in the market, we see some continued volatility causing most people to slowly leave the market. Many have left already but we suspect that the vast majority will come to the conclusion over the next several years that it's just too difficult to play the market anymore, that the old dollar cost averaging or buy and hold approach doesn't work anymore.

To that we say, fine, let them leave. We'll continue to try to pick good opportunities. The problem is that if you want to stay in the market, you will need to be more nimble with your trades. Buy and hold Is dead and dollar cost averaging only works if you know when to Take your money out, you know, at higher prices than you paid. This is not that easy for most.

Our position is that there will be a couple of required portfolio changes that need to take place over the course of 2009 with more to follow. The first is in late January when the recent bulls will declare victory, saying the market is now ready to go back up. The headlines will start to read bullish again, something different than we are seeing the last few weeks. Even as the market has rallied, most of the news we hear is tainted to be bearish, not bullish.

The market needs to rally quite a bit between now and then so it needs to get going. We expect that the first week or two of January will see a huge spike with the inauguration happening right after that. We expect the Dow to push over 10K in January just in time for us to sell into the new-found bullishness.

Right now, there seems to be some optimism that the government will indeed bailout the automakers. The Fed is meeting this week to discuss reducing interest rates Again, lowering them Below what Greenspan did following 9-11. We're not sure if optimism is the word to describe how people feel about another rate cut from the Fed. Probably the kindest word would be indifferent.

The fact is clear that the Fed is accommodating and the government is aiding and abetting them. We point to these items as being the most powerfully bullish arguments there are...then there is the stock market itself showing higher lows. We do need to now start seeing higher Highs as well and then everyone will be convinced the market is "headed" higher. Again that will be when we will be abandoning our long positions, at least temporarily.

Thursday, December 11, 2008

Enough Bad News To Go Around On Thursday

Top Line: Thursday has set the market late comers yet another opportunity to buy stocks cheap. We don't like this. We should have been selling into this morning's strength. Then we could think properly about this ugly day.

We are speaking of the late night fallout of the failed automaker bailout. Just before we started our post this evening, the Senate talks broke down and the market fell out of bed. The SP5oo futures dropped 30 points in about five minutes. So much for the idea that the market didn't want the government to bail out the automakers.

This news followed several other negative bombs during the day. The first one was the jobless claims were up and well over 500K. JP Morgan's CEO Jamie Dimon said that the integration of Bear Stearns had not gone too well because of the market turmoil in the past couple of months. He said a few other things that didn't please the market and then, after hours, Bank of America said it might lay off 35K employees. These items hit the market even before the Senate dropped the auto bailout. All of this has given the market a cold shiver that all the worries of the past couple of months may come back again.

Let's take a look at the volatility index and the Treasury bonds to see if something is amiss. First, the Treasury bonds didn't move up much even with the 200 point drop in the Dow. In fact, the TLT's have been sitting right around the world record price for about a week. As for the VXO (or the VIX), there was very little net change on the day. These two results do not support a drop in the stock market. With the selloff in stocks after hours, the Treasury bonds did jump to new highs so we'll have to see if these two indicators with confirm the down move or not.

As we go into Friday's trading, we are very disappointed in the way the market is trading. Yes, we know that the news is bad but we expect there is a rally in the making. If we have to go down and make new lows, so be it, but we really don't like that outcome. Putting in lows should have been done back in October and November. It felt like a rollover this morning so now the question is, "How far down do we go?" We'll see what happens Friday morning.

Wednesday, December 10, 2008

Happy To Be In GDX Today

Top Line: Today the market gave us fresh evidence that the commodities are coming back. This is evidence for the new inflation that is coming after all of these injections.

Yes, it's Wednesday. Tonight, we think the market is in the process of confusing many participants which is it's main job. So far the Dow has moved up from its November low around 7450 to just above 9000 a couple days ago. As we see it that's about 15% and the bears are claiming that the market will suffer another drop before we can consider going up again.

The mere fact that the bears are getting even a chance to express themselves is reason enough to suggest the 2008 bear market is Over. People are in enough fear without reading some of this bearspeak. Haven't you heard enough of that from the Update when you needed to know it, actually before you needed to know it so you didn't lose a lot of money being long. These bears have come out of the woods and now we're supposed to listen to them. Right...

The current situation is far less troublesome than what we were dealing with back in October and November. Back then stocks were cheap and people were scared. Now, people are not quite as scared but are cautious about what they are doing. This is still the point...there is a lot of liquidity rolling around and it is going to go into the stock market.

Our position going back over the past couple of months has not really changed: Stocks are cheap, Treasury bonds are in a bubble, gold mining stocks are still cheap as the dollar should get cheaper.

Thanks for the nice comment, Erick. Putting our thinking out there for the next several months is our opinion and you should look at it as one item in your thinking process, not the end all in your decisions.

Tuesday, December 09, 2008

What To Do In Your 401(k)

Top Line: The stock market pulled back today pretty much on track and now should move a little higher again.

A "regular" reader asked a question about moving some money from cash to stocks in their 401(k). This is the time to the Update to bring the practical into the post in order to answer this question.

Before we answer this question, we should say that we are fully invested in the stock market. We purchased all of these positions in October and November and any purchases we make in the near term would have to be done by selling something to raise enough cash to buy something else. We don't like this position because we like to take advantage of new ideas. These types of flaws will be fixed the next time we sell which should be sometime around the inauguration.

Ok, let's get back to what to do if you are still in cash.

Let's take a high level look at the landscape. Since 1982, the market has generally gone up in what we fondly call a bull market. During this time the market had some major drops in order to scare the bulls but all in all there was a move toward convincing people that the stock market always comes back...and goes higher.

After more than 25 years of bull market where the Dow went from 775 to 14,000, we are now ready for a serious bear market that will last for probably another ten years. Yes, you read that right, ten more years of a bear market. What should you do?

As happened in the 25 year bull market, when there were severe drops, this ten year bear market will feature its share of sharp rallies. This is what we think is going on now because of the huge fear factor that covered the public in the past couple of months.

The stock market is going to be volatile for the next ten years which will offer many opportunities to lose money. Or, if you're thinking about the buy and hold strategy, you will lose money on that, too. We would say that you can't have a long term hold strategy and you have to be careful about trading. Oh, yes, we would recommend coming back to the Update for clues on what to do. You are the captain of your ship but if you come back here you will get unbiased opinions on the market. So, here they are...

You can start your journey on this volatile ride. We think the Dow will top in January, near the inauguration on the 20th, near 10,500 followed by a severe drop. This drop may actually try to come back down to test the November lows which would give us another fantastic buying opportunity. For you 401(k) holders that can not "short", you still don't want to hold through that drop so we would recommend buying (on pullbacks like today) and then getting back into a cash position in January. Then, buy back in as the market drops back. This will not be easy for most of you but the results will be rewarding.

Monday, December 08, 2008

Dow Trades Just Over 9000

Top Line: As expected, the Asian rally continued around the globe pushing stocks up in its path. After jumping 300 points on Monday, the market kind of hit a wall called Dow 9000 and couldn't manage to stay above it. After a brief rest period, the Dow should make another run over 9000 and it will stick.

We're kind of relaxing with our positions at the moment. The market has been so violent for the past several months and now a day like today with only a 200 point range in the Dow is sort of boring. Ok, not so boring due to the nice gains we enjoyed. The market is on the way to a nice gain going into January.

The news over the weekend is that the President elect is wanting to spend some serious money on infrastructure to provide jobs. The liquidity being poured into the system is just incredible and we think that the market will be a primary recipient of those funds. With the extreme depths of the fear in the last couple of months, we expect that people will continue to feel that we are in a bear market. This means that they will be selling rallies until they decide that the market truly is moving up.

One of the items we have heard in the past month or so is that the market will experience some tax loss selling about now. We're really not sure what that means this year because there have been few gains that need to be offset by selling losses. Since the bears are roaming around, they are looking for any reason to tout their position and tax loss selling is as good a reason as any.

The stock market is in an up trend. We think volatility has decreased over the past two weeks and people are not talking about the market nearly as much as they were just two weeks ago. Complacency will return next year as the market moves up. These are our clues as to when the market will be ready to roll over. We will have a couple of opportunities next year as the market floats up. We think the first will be right around the inauguration on January 20th. There will be others, one will be a good one which we will talk about when the time arrives.

For now, we are looking for a small pullback based on the way the overnight US futures are trading. The news from Fed Ex (FDX) was that they would miss their numbers and got hit about 10% after that. Texas Instruments also made negative comments so the futures are under pressure this evening.

Once this current adjustment is over, there should be another push over 9000 sometime in the next week or so. We think that the Dow will be near 10,500 when we get to January 20th.

What's your thought?

Maybe Jackson has an idea, well, a smile for you anyway.

Sunday, December 07, 2008

Jobs Are Not the Stock Market

Top Line: The Asian markets are higher this evening and should help the rest of the global markets head higher as well. The jobs' report is now behind us and as bad as it was the stock market couldn't stay down long. We are looking at a pretty good up week...

Friday morning, several things happened, all negative. But, after the market went down about 250 points, the sellers decided to vanish from the premises. From there, the market headed up about 500 points from the lows to close up 250.

The other market we are interested in is the Treasury bond market. This market confirmed the reversal in the stock market by rising at the same time the stock market was falling and then reversing to the downside as the stock market was rallying. The 30 year Treasury bonds hit further highs in the early trading and then reversed.

Speaking of Treasury bonds, we think that the highs in these T-bonds have made are going to hold for a while. These long bonds had a yield just about down to 3% on Friday morning and the fundamentals really do not justify those prices at all. For those of you who have good credit are in a position to refi your mortgage have a great opportunity right now. The past two weeks have seen mortgage rates drop significantly. Otherwise, for those of you who own Treasury type bonds should be leaving that party.

Even as the Treasury bonds are making gigantic highs, the stock market is grinding out its lows of 2008 and is showing some strength, strength that is not being noticed by many. The volatility of the past couple of months has scared people into "waiting" for a good buying opportunity. We're quite sure they will be anxious to buy in January after the market has "proved" that it can go up. We've seen the Dow put in lows around 7500 and now we are up to 8600, but those 1100 points are still being questioned.

You may have surmised that we are bullish on stocks but in case you haven't gotten that message, then we are telling you that we are right now. Stocks are going up in a violent bear market rally that will shake the bears and put them back into hibernation sometime next year. Right now these bears are all the rage. Every time you look at the financial news, there are all kinds of bearish comments. These comments are made about the economy which are then translated by most people to mean the stock market will "follow" the economy. Who ever thought the stock market followed the economy?

We know that the stock market is in a counter trend move, which happens to be a rally in a bear market. When counter trends are happening, there are very few news items that match up with the stock move. When they finally do, that will signal to us that the market is about to stall and go the other way. January 20th is our target for now. Don't wait until then.

Thursday, December 04, 2008

What Will the Jobs' Report Do to the Stock Market?

Top Line: The jobs' report is due on Friday morning and it's supposed to be "bad" with about 300K to 350K job losses expected. The stock market sold off with the expectation about job losses. Guess what...the news is Old news. The stock market is getting ready for a rally...

On Thursday morning, the Europeans decided to lower rates. The rate cuts were widely expected but not the amount. The BOE, Bank of England, lowered rates by 1 full point to 2%, the lowest since 1951. Meanwhile the ECB, European Central Bank, lowered its rate by 75 bps to 2.5%. This follows other rate cuts around the world in the past week.

We have witnessed some incredible liquidity injections and central bank rate cuts. The world is sitting back and waiting for something to work, including the governments and central banks of the world. As they wait, the cash builds up in their basements. For banks, they do not want to lend because they are waiting for good credit risks to apply and very few are walking into their lobbies. So, instead of loaning out that money, they will be buying stocks. As soon as it gets going, a lot of others sitting on cash will act, too.

We continue to be amazed at the way some assets are being bought and others are being sold. We of course are talking about Treasury's and oil. The Treasury's were up to another high and have now gone up well over 20% in a month. These are bonds we are talking about!!! Oil, and gas, fell quite a bit on Thursday closing under $44.

This stretch between these two asset classes should give us an idea what to do. Let's see if the word contrarian actually means anything. It's time to get out of those T-bonds which means it's time to get into oil.

Friday brings us the jobs' report, which could be ugly, but it's OLD NEWS. We think the selling was done today but there could be more right after the report. Just remember the market will be higher by January 20th, what are you going to do?

Wednesday, December 03, 2008

Another Wild (and Up) Day for the Dow

Top Line: We think the stock market has been trying to rally since the October 10th lows and then we watched the Dow drop to a modest new low a couple of weeks ago. The market wants to go up so bad and we think the future point of reference is the inauguration on January 20th. Since that's a date we think will be a short term peak, the market doesn't have much time to get get going.

Stocks had another wild day with a range of about 400 points. The market opened with a thud as the Dow started with a loss of 150 points and then rallied 300 points followed by a 250 point loss before closing with another 300 point gain (all numbers approximate). Wild indeed.

The market has given people incredible volatility over the past couple of months. This volatility has kept most from entering the pool. Traders are having trouble in this market because it moves so far so fast. We have taken the position to buy at what we think are good prices and now are trying to be patient for the market to move higher.

We don't want to over analyze this market but we do want to understand why we are in the positions that we have or positions that could be good for the next few months. At the moment, the riskiest asset class is the Treasury bond, particularly the 30 year variety. We would steer clear of that class at least until rates go back up again.

The problem here is that the T-bonds are at incredible highs and so is the dollar. These two asset classes are closely tied and will fall together. Why? The government and the Fed have been pushing dollars through the printer and into the system to stave off deflation...we think it will work, at least for now, and inflation will return. Inflation is not a friend of T-bonds or the dollar. Who does have a friendship with inflation? Yes, commodities and in particular, gold.

Stocks don't really like inflation but they won't find out about it until they have gone up quite a bit. When they do find out about inflation, they will not be happy but until then we want to be invested.

Housing really doesn't like inflation either because of higher interest rates. Right now, though, interest rates have collapsed and mortgage applications have surged in the past week or so. This action is expected (not by us) to put a floor under housing. That confidence should put a floor under the stock market as well but that's not why we bring up housing. We are negative long term on housing because rates will go up and up into next year...but we do not see these same negatives in Asia.

In Asia, particularly Japan, where people didn't get crazy on housing. Prices of houses there never went up very much. Housing will Not have a drag on their economy like it has here in the US. The stock market will be able to go up in Japan with no burden of falling or fallen house prices.

Generally we are bullish on stocks for the near term and the reason is because of all the money being added to the system. We would have been bullish on stocks without that but this added liquidity just juices our thought process even more. Companies are awash in liquidity and banks don't want to lend it out so we think the best place for them to keep their money is in the stock market.

What should you do? If you are interested in refinancing your mortgage at lower rates, now is the time if you can qualify. In fact the latest news is that the government is trying to get new home buyers, probably not refi's, rates at around 4.5%. There is no clear plan but the WSJ broke the story Wednesday and you'll probably hear more about it on Thursday morning. Here is CNN Money's take on the subject.

The other thing you should do is buy stocks because at some time in 2009 we should see the Dow at a minimum of 10,500.

Don't forget, we've got the old jobs' report on Friday morning.

See you tomorrow.

Tuesday, December 02, 2008

When Did You Buy?

Top Line: The second day in December tries to balance the first with the Dow gaining back some of the losses. With the very negative day on Monday, Tuesday needed to "shock" the bears which it seems to have done. More upside on the way...

Monday's loss seemed to be an over reaction. Now, it is up to the market to tell us for certain that it wants to go up. The signals are pretty clear based on the lows recorded last month and in October. Even with Monday's extreme selloff, stocks held up pretty well. You may not think so but you need to look at the prices at the lows of the last few months.

For example, GDX dropped 4.07 on Monday to close at 22.50. Ouch, that leaves a mark...but, let's take a look at the recent history. Back on October 24th, GDX opened at its 52 week low of 15.83. If it had been in existence, it would have been about a five year low. From there it rallied to 24.72 on November 5th. Then on November 20th, it traded back down to 17.59, nearly 2 points higher than the October 24th low. On Friday GDX rallied to 26.71. Dropping down to 22.50 on Monday still shows higher lows and higher highs, very bullish in our opinion.

We are looking forward to what we expect to be a horrendous jobs' number on Friday. This is the kind of thing we expect over the next few months, more bad news...but at the same time the market should continue to rally. This is the trouble with reading the news and then trading stocks based on that news. It's a losing proposition.

When we were in the thick of the news in the last two months, it's difficult to step up and purchase stocks but that's exactly what needs to be done. If you look at the times when you should be buying and selling, you will see the fear or confidence in the news. That's why the news is not helpful at the turns.

It's difficult to do what needs to be done but the benefits are cheap prices. Yes, we paid higher prices than had we waited for a while, like a week or two, but you can't hit the lows. The "easiest" thing to do is buy into the decline and begin by losing money so you can buy more as stocks go down. You don't think it is easy, right? Well, if you "miss" the bottom, then you always want the prices to go back down...because you missed the bottom you have problems buying at all.

Monday, December 01, 2008

December Starts Down Big

Top Line: The stock market dropped back quite a bit on Monday, something that should get the bears talking again.

Today the NBER, National Bureau of Economic Research, announced that the US economy is in a recession. Oh, and by the way, it started in December of 2007. The NBER is the organization assigned the task of determining whether the economy is in a recession and when it comes out. Popular opinion says that a recession is when the GDP declines for two quarters in a row. That's a pretty good way to think about it but it's not the Official determination. Now that we know for sure that we're in a recession, do people think it's time to sell stocks???

There were several bad news items today. The biggest one is the one in the last paragraph on the recession. Then there was the ISM index that fell to a 26 year low. (Notice that we have changed from the 1991 lows and are now looking back at the 1982 lows.) The Chinese manufacturing dropped the most on record. The California governor, Arnie, declared a fiscal emergency and called the legislature into session to deal with a multi-billion dollar deficit. And, let's not forget that Bernanke and Paulson were making statements as they seem to do every day.

Do any of these things seem bullish to you? No, they don't. But, that's the whole idea. These things are not New, they have been known for months. Why should we be thinking about an investment strategy based on this Old news. The bears were smiling today because of the news but we don't think the news matches with what is really going on...which is, the market is going up. The lows have most likely been put in and a day like today just makes the bulls nervous. You may not have noticed that there were only 98 new 52 week lows on the NYSE.

What is happening in this fear driven market is that Treasury's are being sought, even by the Fed. The 30 year T-bond was up 5 points today...unbelievable. The yield on the 30 year is now at 3. 20%. Now, the Fed wants to start buying more Treasury securities to provide liquidity to the market. Can you say bubble in the Treasury market?

We think the Treasury's are now extremely overbought. The easiest decision to make these days is to buy Treasury's. How can that be?!? We mentioned that the short Treasury's are at basically 0 yield and the 30 year is barely over 3%. To the Update, these are some of the worst investment you can make at the moment. We would say that the rate on the 30 year Treasury bond has the chance to be 5% plus next year which would be a 15% loss from these price levels.

Sunday, November 30, 2008

And December Starts

Top Line: The stock market continues to drift higher. There will be setbacks, mostly to confuse the participants, but we think the market is headed higher.

Not much has happened since we last wrote except for moderately higher prices. Stocks were up strongly on Monday and continued to push higher the rest of the week. As stocks were moving up, skepticism remained that prices could continue higher. This is exactly the result we are looking for.

The news seems to be bad based on the way the media reports it. Check out this article from CNN Money. The news is that Black Friday's sales were higher than last year but the subtitle and the first paragraph are still showing negative thinking.

What should you do? There are going to be sharp pullbacks in the market so if you're still sitting on cash these selloffs will be opportunities to put it to work for you. If you are in already, as we are, these selloffs could be sharp and scary, but they should be buying opportunities not a reason to sell.

What are we looking for? The news should be tainted to the negative side especially in the early going of this rally. The Dow should move to 10,500 at a minimum sometime in the next six to nine months. Gold should attempt to cross back above the $1000 level. These are our two guiding lights.

Since we think the Dow should rise at a minimum of 20%, there will be several stocks that will move up strongly. The Gold moving up above $1000 means that we think the mining stocks will get back to the highs of last summer. They are way oversold and should make a major comeback as gold slides over the $1000 level.

The week before Thanksgiving gave you a great opportunity to buy some of those heavily sold technology stocks if that's the sector you like. Our own FSI put in a new low at 40.46 on Thursday November 20th. That day AAPL closed at 80.49 and AMZN closed at 35.03, there lows for the year. GOOG put in a new closing low on Monday the 24th at 257.44. These prices are compared to the closing highs of 199.83 for AAPL, 100.82 for AMZN, and 741.79 for GOOG.

The week before Thanksgiving contained a blowoff move in the Treasury bonds which managed to hold up into last Friday. We see this as a "terminal" move for the Treasury securities. There has been a tremendous flight to safety, that being the Treasury securities. If you look at the short T-bills, you will see rates that hardly make any sense at all. The one month bill is sitting at 0.036% and the three month bill is even lower at 0.030%. This means that players are more interested in getting their money back than getting any interest on it.

To us, that means the end of the flight to safety should be here. What does that mean? That means the stock market has some room to move and corporate bonds will make a comeback. The bonds with the most room to move up are those that are called junk bonds since they follow, or maybe lead, the stock market.

The lows in place from the week before Thanksgiving should hold. From there we just have to wait for the market to tell us when it wants us to get out. We are going back to our tells that have been keeping us in good stead, those being the Treasuries and the volatility indexes. We've already discussed the Treasuries so let's talk about the VXO. We think that the VXO has a long ways to drop. Yes, it's come down from 100 to 60 but we're probably headed for 30 or lower.

If we hadn't have been through the past two months and we told you the VXO was at 6o, you would say that it was a major buying opportunity. Well, that's what it is...a major buying opportunity, late for most securities, but still good.

Sunday, November 23, 2008

Being Thankful in 2008

Top Line: The stock market seems to have turned up (as we titled our last post, turn around Friday) and there are no more reasons to sit on the sidelines. There will be several major breathtaking pullbacks much like what we've seen over the past few months but these are to keep people thinking there is a bear market...these pullbacks should be bought.

[Editor's note: The Update will be taking the next week off. The last several weeks have been intense and interesting but we need a break. We will return for our regular post on Sunday evening next week, November 30th, for your reading pleasure on Monday morning December 1st. Have a great Thanksgiving week and remember to be thankful for something. We've all had a good year.]

Tonight as we write, the government has taken steps to bailout Citigroup. This move will back about $300 billion of toxic assets and provide another $20 billion in capital to the troubled bank. Here is a WSJ article that covers some of the highlights or you can find the article online somewhere like this article on CNN Money. It almost seems like just another bailout even though the numbers are staggering.

We are more than ready for a rally and we expect this one to last until sometime around the inauguration on January 20th. Maybe we should expect something similar to the election day rally that led to a 20% drop in the Dow but until then we expect a 30% plus rally to emerge.

In last Wednesday's post, we suggested that the President elect should show himself and that seems to be what he has done. Late in Friday's trading, news surfaced that the NY Fed Governor, Tim Geithner, was the choice for the post of Treasury Sec'y. To us, this is a good choice the little we know about him.

The market seemed to like the Treasury Sec'y news as it rallied about 500 points late Friday. We're not positive that was the reason but the timing was good. There was this matter of the Options' expiration that may have caused some of the up move.

The President elect also mentioned today that he was thinking about a $500 billion stimulus package scheduled for the next two years.

The trading on Friday highlighted the gold mining stocks with GDX jumping over 25% as gold jumped about $50. All of our positions had good gains and should continue to produce good gains until January sometime. The economy will continue to struggle but the market is looking past all of that right now. With all of the money being thrown at these problems, gold is probably telling us that inflation is coming back...Can you say, trillions of dollars of stimulus and bailouts or whatever you want to call them?

Thursday, November 20, 2008

Turn Around Friday???

Top Line: Another new low for the market on Thursday. For those of you sitting out there with cash, you aren't going to get much better prices than you can get right now.

Where we would like to start this evening is the Treasury bond market. There was an absolute melt up in the Treasury's today. The 30 year bond ended the day down 44 bps to 3.47%. This market is one of the largest and most heavily traded in the world and to see it move like this during a day is almost unprecedented. Just think about this for a minute...the 30 year Treasury bond moved almost a half a percent in one day. WOW.

What's wow about it is the government's insatiable desire for money would seem to Raise rates not cut them by nearly a half point in one day. All the deflationists out there must think this puts an exclamation mark on their argument. If 30 year Treasury bonds are only yielding 3.47%, then inflation is going to go down for 30 years!!! We would argue with them, at least for the next few months.

Ok, you all know that the stock market was down 444 points on Thursday so let's see if there is anything else we can discuss. After the market closed this evening, DELL announced their earnings that actually beat expectations although their revenues were lower than expected. This news surprised the market just as the news from HPQ did. The world doesn't really believe either of these two announcements...but here at the Update it's exactly that situation we have been waiting for. The public not believing any good news and selling everything. We think that this will be the inflection point in the market...Buy stocks Now.

The big downside leaders were financials, particularly Citigroup, which was hammered for another 25% today. This stock is under 5 bucks. This is just ridiculous. Why are people selling this stock for $5? Sellers just don't have any idea what they are doing. The Update is not recommending to buy it but what are these people thinking? Obviously, they are not thinking, this is totally irrational behavior.

The volatility indexes were up again today which makes sense based on the huge selloff but this is a good reason to buy as we have been saying for several days. Yes, we know you are tired of us saying it, but we are getting more and more bullish with every down tick in the market.

Today the volume in the market was pretty heavy which gives us more thoughts that the selling has very little left. Once the sellers are done selling, there will be some gap ups that will shatter the shorts in this market. All of the talk you hear about the hedge funds selling or de-leveraging as they call it is a nice story ,and may have been true a month or two or more ago, but the hedge funds are now trying to figure out how to make money. How do they do this? Could their strategy be shorting stocks since it's so Easy? That would make them have to Buy stocks in order to cover those shorts to push prices back up again. Think about it.

As we write, the Asian markets have begun to trade strongly up. The Hong Kong market, the Hang Seng index, started down about 3% and has now turned around and traded up 4.5%, and that is only the morning session, may be more in the afternoon session. The same thing is happening in Japan, with the Nikkei 225 starting down about 4% but is now trading up about 3%. (One thing is that the Nikkei had traded down under 7000 back in October and tonight it traded down to 7400.) The South Korean market opened down about 3% (but not quite to the October lows) and now is trading up nearly 7%. These are powerful reversals which could provide some 'round the globe upside on Friday. As it stands right now, the US futures market is up over 2%.

What else? Bottom line...we are about to see how fast the stock market can go up. There are so many depressing analysts out there that the public is going to stay away from the market for a long time...probably about a year from now when prices are back up to much higher levels. Our target for prices in the next few months is the 11K to 12K range. There are so many great values out there right now. Take a look at T, AA, DD, PFE, JPM as well as one of our favorite, the GDX. The market is tired of going down...

Wednesday, November 19, 2008

Dow Below 8000

Top Line: If you were looking for better prices, here you go. The Dow closed under 8000 for the first time since 2003 and close to the 2002 lows as well. The financials took a large hit today with Citigroup down over 20%, yes, today. All of this selling leaves the market extremely oversold...still waiting for a solid rally.

Wednesday the Big 3 were in Washington pleading for money from Congress. Apparently, they flew in on their private jets which seemed to anger the public. The public thinks all the employees at these auto companies make $75 a hour, which also distresses them. Barney Frank thinks that the employees at AIG make well over $75 an hour and no one was complaining about the government bailing them out, why should we bail out the Big 3.

We're not sure that the failure of these talks in Washington had a negative effect on Wall Street with the Dow dropping over 400 points. We're not exactly sure if Wall Street wants a bail out of the Big 3 or what. Maybe they want a government orchestrated Chapter XI bankruptcy. But, wait...

What we want is for someone to say, enough is enough. The world is waiting for something to Work, for all the money that is being thrown at the problems. And, we think our President elect has virtually disappeared from the stage. All of his voters are probably wondering what he's going to say. We have expected that the New President, whoever it would be, would inspire the nation and all of that inspiration would lift some fear out of the market. Looking back to the day of the election, the Dow closed over 9600 and today it closed right at 8000. What makes sense?

We don't expect that the President elect will be able to do much about the economy long term due to the massive tax liability that is coming due in the name of Social Security, but we still think the public thinks he can do something. That's the key but he needs to show himself in order for people to fell confident that he can still do something. The period between now and January 20th is supposed to be a very positive stock environment due to a New president. Where is he?

The market wants to go up but it needs something. The government has given so much money out that there doesn't seem to be any more pockets to put it in. There are not enough credit worthy entities, at least in the minds of the financial institutions, to give the excess money to but they are still too scared to actually invest it.

This is typically what happens when powerful stimulus packages are used...the banks buy bonds and stocks because they are less than willing to loan it until there are good credit risks. When stocks go up people generally feel better and more willing to spend money. While it doesn't seem like that could even be possible now, that is exactly what we think will happen. A year or so from now there should be some major denial about what is happening right now.

Think about what was happening a year ago. The mortgage problems were known then but there was significant denial that it would mean anything for stock prices. Guess what, they did.
When things seem irrational, they usually are, but the world looks around and says, well, this must be real because...the media says so or something just as flimsy.

There is always room for more analysis so let's continue. We have not fared well with our long positions since that high on November 4th. We have been long a couple of stock index ETFs and we are starting to think there are so many good stock values out there that will preform better than these index ETFs. We have considered switching from the ETFs to some of these cheap stocks due to the possible return available. We wouldn't expect that the ETFs would triple in value but some stocks will. There seems to be more risk with individual stocks but that's one of those statements that begs us to say, more risk more reward...yeah, it's a bad comeback in this market. It's still ugly out there but we do think there is a lot of opportunity for gains.

One more item...CPI. The CPI was down 1% last month and now the whole world is worried about deflation. The CPI is such a tortured number anyway but the food and energy component has been isolated as something that is volatile and should not be included in Real analysis. We haven't even mentioned this silly number because we think it is so meaningless. The problem is that with deflation being squeezed out of the news, that doesn't help our precious metals position. Yes, it's time to stop...see you tomorrow.

Tuesday, November 18, 2008

HPQ Surprises the Street

Top Line: Another day comes and goes but the volatility stays. The market seems to be scraping along the bottom and can't find a way to climb out of the cellar...that should change very soon. Thanksgiving is coming.

After we posted last night, the Asian markets managed to take the US futures down over night. But, in bullish bolt from the sky, Hewlett (HPQ) pre-announced that it expects to post better than expected earnings. That was enough to bring the futures back to positive just as the market was opening on Tuesday.

The Dow generally moved up for the first couple of hours and finally touched a 200 point rally. From there we saw the Dow drop over 350 points over the next couple of hours. Then with an hour to go, the Dow staged a major rally to take it back up to end up about 150. Volatility rules.

These are the kind of days that would normally be followed by a serious rally. The blue chips lead the market out of the doldrums and then the broader market gets in gear the next day. That theory had plenty of subscribers as the market closed Tuesday. The first fifteen minutes of the after hours trading saw a huge jump in the Q's but as we get our post up we notice that the rally has completely fizzled out.

The market is oversold and there are plenty of bargains out there. For those of you who sitting out there with cash, these prices are so great. You have obviously been smarter than the Update by waiting but at some point these prices have to start getting interesting even to you.

We think the gold mining stocks are still some of the best buys along with several other commodity related stocks. Yes, we've been recommending GDX since 30 and now it's down near 20. We still think GDX represents a great value with plenty of upside.

The fundamentals are that the government/Fed have been pumping money into the system. When this money finally gets used, inflation will be the result. While we have been proponents of deflation in the past year, the powers that be have thrown caution to the wind and have done what they can to reflate the world.

This Reflation is their answer to the biggest Credit Crisis the world has ever seen. No, it's not going to work ultimately but for the short run we see it creating some inflation in order to prevent home prices from dropping...that way people will Feel better even though their home value is still declining, the price isn't.

Monday, November 17, 2008

Notes for 2009 Due Now

Top Line: This is options' expiration week which has the potential to move this market up. Asian markets are down in sympathy to the down day in the US but the US futures are about flat on the evening.

As we look back over the past six weeks or so, specifically back to October 10th, we see the news continuing to be very bad but the market is not really moving down with the news. The QQQQ, or the NASDAQ 100, NDX, has fallen to a lower low than October 10th but only a modest one. The news, with it's acompanying selling, has not been able to push prices down very far. The news has been just terrible but the stock market has stopped going down.

The market is in a difficult period of time. It's trying to buck the news. The economy is showing bad news but the market is done going down. We realize that the market can go down more if it wants to but the October lows are pretty solid for the broader market. Some stocks are lower now than they were back in October but not all stocks trade the same.

These are the times that don't make a lot of sense when trading the stock market. The market has been very volatile which is being reflected in the volatility indexes but it's not actually putting in new lows. These are powerful messages being sent by the market that it doesn't really want to go down.

We can only look back on the past several weeks and say that we should have been trading more. The market has come down from around 14K about a year ago so now it's trying to turn itself around. This is not an easy task and because of this provides a lot of back and forth action. The problem here is that the back and forth can whipsaw you unless you have impeccable timing which is almost impossible. These times make it very easy to lose money.

For now, the market wants to squeeze as many part time bulls out of the market and entice them to turn to bears. For those of you who are wondering what to do, we recommend that you write down some of your thoughts about what you think you should do, along with how the market is trading. Make sure you can keep these notes for about six months so you can look back and see what you were thinking. Wouldn't it be nice to have something like that from a year ago?

How about a nice pic of Jackson and Grampa?

Sunday, November 16, 2008

Market Should Resolve to the Upside This Week

Top Line: The late day selloff on Friday set up a negative emotional weekend for most. We think any further selloff is limited at best. Generally, the stock market should go up between now and Thanksgiving.

Friday's stock market took a major turn to the downside late in the day. That selloff continued in after hours with more early Sunday evening in the futures market. The sellers can't seem to get enough during regular hours.

We're still being bombarded by bearish chatter in the media. Most articles we read have negative undertones but very little bullish statements. Any bullish statements are generally accompanied by other comments such as we're oversold for the moment.

On Friday, the VXO climbed back to the 70 level indicating another buying opportunity. Let's do a quick reality check on the VXO. We think the market has entered into a period of higher volatility than has been the case since the 2002 market low. That's true, we do, but let's take a quick look at that 2002 low. Both then and at the 9-11 low in 2001, the VXO couldn't get over 60 and barely made it over 50. We have been over 50 consistently through October and November. VXO closed under 50 two times in these two months. That is solidly bullish.

Oh, and by the way, Japan announced that it's officially in a recession. Did you hear that, Officially? The worst possible news...oh wait, that would be the Most Obvious news has now been released about Japan. The Nikkei is up about 3% as we write this. Yes, the Japanese stock market is up on that news. Big surprise.

So, there are eight trading days until Thanksgiving so we need to get this rally on the road. With the market starting in the hole from Friday's after hours trading, there's some extra distance for it to go. As the Asian markets are recovering, the US futures are also digging their way out of the cellar. This could be a wild week. We say it's resolved to the upside after last Thursday's performance...

Thursday, November 13, 2008

Stock Market Provides a Difficult Test for Participants

Top Line: The stock market gave us another wild ride on Thursday. Our position is that the market made a clear bottom.

In our last post, we asked if you were ready for today's test. The stock market gives a test every day but we thought maybe Thursday's trading would provide more like a big test than a little daily quiz. How did you do?

When taking this daily test, you are never given the subject or any idea what the questions will be, so you have to be Ready for anything. With INTC's news, along with several other bearish news items, going into the opening on Thursday, stocks had every right to collapse...but they didn't.

Trading was surprisingly calm. In fact, the Dow opened up about a 100 points. From there, the Dow fell 200 points but an hour into the session was back up 100 points. The rest of the day is almost unbelievable. Over the next 2 1/2 hours the Dow dropped 400 points at which time we went on a furious rally. In two hours the Dow went up 500 points before dropping 200 points. That left about an hour to go and during that hour the Dow moved up another 500 points.

What does this mean? By itself it may not mean too much as it might be just like all of the other crazy rallies we've seen. We think this day holds much different signals than all of the other crazy days we've seen over the past month or so.

On this day we saw a new low in the NASDAQ and the SP500 but not the Dow. Remember we have been saying that our premise is that the October lows in the Dow are The lows there. Now we think that the lows today are the lows for the broader market because of the action in other markets like the dollar, gold, oil, and Treasury bonds.

All of these markets had what we would call false breakout moves similar to the stock market. As the Dow was turning, the Treasury bonds turned down, the dollar turned down after hitting a new high for the move, gold had a reversal to the upside, and oil turned up after hitting a new low for the move. The volatility indexes were both lower on the day after spiking in the morning.

This is the exact action we would like to see for a turn. Volume was not spectacular but it was decent. One other indicator, the number of new 52 week lows, were only at 776. Yes, that's a big number but a far cry from the 2900 of October 10th, the technical low.

We have read many articles this evening and watched some talking heads on CNBC, too. All of them are skeptical of the move today which we think also confirms the significance of the rally. We think it's different this time. We will know fairly soon whether we are right but it's like we have already said, the market shouldn't reward people who missed the October lows.

So, how do you know how you scored on today's test? We think there are a few ways to tell.

You Pass if you said yes to these questions:
Did you purchase anything near 8000 in the Dow? (This deserves an A, we didn't have any cash available...this is bad)
Did you calmly think the market was ready for a turn as it was dropping in the morning? (This is where we were today, mostly calm and mostly glad to have it behind us.)

You Fail if you said yes to these questions:
Did you sell any of your positions near Dow 8000?
Were you scrambling to figure out what to sell during today's drop?
Or, did you think you would unload some of your 401k holdings today if the market wasn't going to come back?

What ever your score was today doesn't mean you are right tomorrow but today was a significant test. We hope our readers had a calm day today and enjoyed the rally as much as we did.

Wednesday, November 12, 2008

Thursday is the Big Test, Are You Ready?

Top Line: After the negative news from BBY, we had another big down day followed by a bad announcement from INTC after hours. Let's not forget the mid-day announcement from Treasury made by Paulson which gave the market some chills, too. With all of that news, the market is getting smacked after hours and the Asian markets are getting beat up tonight. Since it looks like the market will open down in the morning, it might not...or if it does, let's see if that is a good day for the start of a rally.

The deterioration of the market over the past few days has been a decidedly trying time. With these huge moves in both directions, the average investor would probably be best served by taking their money out of the stock market all together. But, even as we see the possibility that the market moves down on Thursday morning, how much more downside is there?

Since we've dropped about 15% over the past few weeks, we think the market is now Extremely oversold. Looking at the volatility index, we see it back up to around 70 at the close which confirms the oversold nature of the market.

We would suggest that any drop in the morning should be bought, but we don't have much cash left. The post this evening has been reduced due to house guests. Yes, there are many other items for this evening but you are on your own on Thursday...The Test begins.

Tuesday, November 11, 2008

Patience is Required

Top Line: The stock market put on its unique version of scare the bulls. The global markets followed Monday's drop in the US market and the US continued the drop on Tuesday morning...well, it continued most of the day, actually. Is it going to be over soon?

Looking back over the past six weeks or so, the market has pretty much done one thing, be volatile. Tuesday was no exception with its over 300 point drop followed by a 300 point rally and then a 200 point drop. The volatility we have seen the past several weeks is enough to scare even the most steadfast bulls.

We have our eye on the way the market trades to see exactly what it wants to do. With these volatility figures (as measured by the VXO) are truly stunning given how complacent the players were about a year ago, even early this summer VXO was well under 20 versus over 60 these days.

Whatever the market does over the next few days or hours or weeks, when the VXO is over 60 after being well over 80 in October, it is Not time to sell, it's time to buy.

The main idea is that the market "feels" like it is always going down. The facts are still that the market bottomed back in October, mostly. There are still a few stocks making new lows in these down days but Most of them are done going down. We operate on the premise that the Dow bottomed for this move back on October 10th down around 7850 or so.

Back on election day the Dow closed over 9600, it's true, and it traded around 8600 today. That's a thousand points down from those highs. Yes, you could have taken profits on that day last week and now could be buying back in but that is simply too difficult to do unless you are willing to spend some time watching and trading.

Our position is that this is a trading market and will be a trading market for some time to come, but we have commited to the long side of the market. That means we would be buying on dips like this expecting an up move over the next several months.

This day was difficult for our portfolio due to our heavy allocation of commodities producers which fell hard today...but looking back to the lows of two weeks ago, we're much higher.

Take a look at Oil. Back on October 10th, oil traded down into the 77 range and today it traded down into the 58 range. Given this huge drop in the past month, what do you think happened to Exxon (XOM)? Right, it bottomed on October 10th down around 56 and a half. So, if you had the courage to Buy it then you would have made a great trade even if you sold it today at 72, something like 30%.

So, it "Feels" like it's bad but it really isn't. Yeah, we know, just a wait a few days...Please.

This brings us to the main point of this post...Fear and Greed. We have found over the years that people have the worst time selling at high prices. That's the greed factor at work. The other part of this theory is what we should call the "It'll come back" factor. We have been trained by the market over the past 25 years that the market always comes back.

Back in 1982, the Dow was in the 700's and last fall it was over 14K. It's easy to get the idea the market always comes back in that environment. Last time we looked, though, the Dow was under 9000. People are starting to get the idea that the market is Never coming back. That's exactly what we've been waiting for in order to be extremely bullish. This is the Fear factor at work.

Right now, the media is trying to convince you that the market is never coming back. Does that make you believe it or not? Last year, no one was inclined to sell because, "stocks are going to the moon" (thanks PH). There was no fear when the Dow was at 14K and no one was looking to sell. Now, with prices down 40% plus, everyone is interested in selling on Weakness. As prices drop, people want to sell. When stocks rally, people have a bit of a relief...

This prices are incredible and should be purchased on dips, Not sold.

Yes, we know why you come here...Jackson. So, here you go, finally another picture or two...
Who's the Goofball???
Or, is it a halloween Duck???

Monday, November 10, 2008

Early High Fades Into the Close

Top Line: Another reversal from the early morning pop. How many times have we seen it happen! The early morning buyers or sellers open the market well off of the even line and the other team comes in and moves the market the other way, all day. As Asia opened tonight, stocks were following the US down but have since recovered and are heading back up...US to follow??? [Late addition: Asia has dropped back as we finish up our post.]

The news continues to run with two themes, companies in trouble and governments bailing them out. American Express asked for, and the Fed granted, the right to be a bank holding company. In the process they have the ability to get at some of the $700 billion that Congress approved.

AIG posted a monster loss of nearly $25 billion. Fannie said it may need more money from the government. Circuit City declared bankruptcy but will stay in business, at least for now. Nortel puts up a big loss. DHL has decided it wants to move out of the US. Starbucks (SBUX) had some bad things to say about their future. GM put in a trade that was equal to the price it traded at in 1946, but buy and hold...go. YICKS.

Tomorrow's another day...

Sunday, November 09, 2008

Stimulus Abounds

Top Line: The Friday unemployment report looked mighty bad but it was expected. Our last post had a title that said to buy the report. So far, that was good advice. More upside this week.

The stock market handed out a few ulcers the past couple of weeks with huge swings in prices. As we looked at the drop going into Thursday's close, we noticed that the market had not really challenged its lows of October. With the worst jobs' report expected on Friday, the market sold off hard on Thursday but failed to scare too many out of their positions. Strong hands holding stocks these days?

The big news this evening is the Asian moves. China announced an economic stimulus package and Taiwan cut interest rates for the fourth time in about a month. In case you didn't notice the governments and central banks of the world are doing all they can to stimulate the global economy.

These efforts will continue to push up the stock markets of the world. Tonight, the Chinese stock market has jumped 5% and, meanwhile, Japan is up nearly 6%. Of course, the US futures market couldn't be left out and is trading up about 3% to fair value this evening, too. Monday could prove to be a stunning global rally.

We just noticed that there is some big news this evening here in the US, that of the government changing the AIG aid package. The terms of the original $123 billion package were onerous for AIG and are being renegotiated. The New Deal (sorry) is going to be $150 billion (we think that means $27 billion more?) but comes with much better terms. Both deals allow the government to take over at least part of the company.

Along with this announcement is the efforts to provide funds to the auto industry. The country is worried that the industry collapse would cause major economic stress due to the number of people employed by the industry. They cite a number of 10% of all those employed work in the auto industry in some capacity.

We leave you this evening with an article from Gretchen Morgenson of the NY Times. This article is some more nuts and bolts of the financial collapse, focusing on the fall of Merrill Lynch.

Thursday, November 06, 2008

Buy the Jobs' Report

Top Line: Another huge down day on Thursday in anticipation of a difficult jobs' report due out on Friday morning. We think the worst is behind us with the lows having been set in October.

Here we are on Thursday evening and the market appears to be looking down into the abyss once again. CSCO's earnings gave the market a poor start but it just got worse over the course of the day. The central bankers in Europe decided to drop interest rates today but that sure didn't help the markets very much. The car makers were in Washington with their cups in hand for money, please. Then, after hours Disney (DIS) said less people came through their gates in the last few months.

Fear has been elevated again as the market has gone down the last two days. The volatility index jumped the last two days as the Dow dropped nearly a thousand points. This is setting up to be a bullish conclusion due to the heights of these indexes.

So many bears, especially in the public, can only mean one thing...higher prices. All of these newly declared bears will be proven wrong and will lose money in the process. The volatility index will come down and they will all turn back into bulls...then we'll turn bearish again.

Until then we will try to navigate through these Cheap stock prices. Jim Cramer inspired the Update to set up our own index, the FSI, the Fo(u)r Speculation Index. He proclaimed the Four Horseman to continue to push the market up...that was about a year ago. The four horsemen are AAPL, AMZN, GOOG, RIMM.

We said, he's wrong and they would lead the market down. We watched the FSI go from our initial point of 100 on October 22, 2007, down to 49.90 on October 27, 2008. (Yes, it went up to 111 on November 6, 2007, GOOG was 741, now it's 331) What's our point, you might ask???

Today, Mr. Cramer has declared that Coal is Over (at the same time he said it was ok to buy Peabody). Guess what the Update thinks. Right, we think he's wrong again, even though we do like the Peabody play so much that we bought some today. We like the symbol, BTU, great isn't it? We think coal is a good idea since it's not a popular play. We like to play this with KOL which dipped into the 15's today. Oh, yeah, BTU traded down about 15% today to 28ish. Yes, there are many great bargains in the market. (We're starting to sound like Cramer. Scary.)

The stock market is seriously oversold generally and particularly after a two day drubbing of nearly 1000 points in the Dow. We see the bad news being dangled out there and notice that the Dow is sitting right at 8700, nearly a 1000 points above the October 10th lows. Why is this? Why isn't it trading down in the 6000's? Because it's Done going down.

We entered a comment around noon on Thursday and discussed the 61.8% Fibonacci retracement level that would make sense if we were truly going up rather than starting a new down trend. The numbers we presented were 8730 in the Dow and 1235 in the NDX. The Dow did break down a little from 8730 but the NDX stopped going down at 1235 .85. Do we Know that these are the lows for the next few months? No, but it's a pretty good thought at the moment.

As we have been writing this evening, the world markets are coming back from the edge. When Japan opened, the Nikkei opened down over 600 points or about 7% but has climbed back and is only down about 100. Don't forget, even when it was down 600, the Nikkei was up nearly 20% from it's lows two weeks ago, yeah some bear market. Plus, the SP500 futures are now up about 15.

We think the anticipation of such bad news tomorrow morning (yes, the jobs' report) has blurred the reality of the market. Even if the number is bad, the market has Already sold off for that. If we get any selloff at all after the report, and even if we don't, Buy...

Wednesday, November 05, 2008

Jobs on Tap for Friday

Top Line: The market pulled back from the nice run it's had over the past several sessions. The dropped nearly 500 points and then CSCO announced poor results after hours to send the overnight futures down.

The Asian spurt the day before didn't make it around the globe to the US. In fact it fell apart in Europe before the US even opened. Then the ADP, you know, the payroll check company, said that 157K jobs were lost in the past month. This report can sometimes indicate how the Real jobs' report, released on Friday, can look. The estimates for the Real report are for job losses of between 180K and 200K.

As the day wore on, the selling continued until the Dow was down nearly 500 on the day. The possibility exists that the selloff is complete but with CSCO's news tonight and the jobs' report coming up on Friday, Thursday could challenge that theory. The situation is difficult to judge in the short run but we tend to think that the market is looking to Friday morning for information on trading.

At any rate, this selloff may be the punch down some have been looking for...we don't like a further drop because that would mean that there would be another chance for buying. The fear generated in October should have been enough and based on the volatility indexes from that period there really shouldn't be a test of those lows, let alone a penetration of them.

We keep thinking about the extreme in the number of new 52 week lows on the 10th of October, nearly 90% of all NYSE issues. That was the technical low but the closing price low happened a week ago Monday with several new lows, meaning there were stocks setting new bargain basement deals.

The fallout from Wall Street's selloff is the trading in Asia which is down 6% in some countries. This would indicate that the selloff will continue around the globe back to the US in the morning. Let's see what happens...

Tuesday, November 04, 2008

The Election is Behind Us, Finally

Top Line: The Dow jumped 300 points, following the other world markets up. Today is one of those days when people start questioning their belief that the stock market is going to zero.

We are concentrating on the election this evening but we received a couple of comments via email today which we thought we would address in tonight's post.

Question #1: Don't all the wild and violent moves normally indicate some sort of inflection point?

Yes, normally with such violent back and forth moves, the market is struggling with the current trend and trying to turn back the other way. We think that there will be more violence ahead but we do think the low has been put in back in October. All of the October violence was just ahead of today's election. We do think that the gas prices dropping in the last few weeks has changed some minds about the election and the economy. Here in MN gas is under $2 a gallon.

Question #2: Without getting to ahead of ourselves, what is the medium term outlook (1st & 2nd Qtr '09). Rally post election regardless of who gets elected and then what? In stocks? Out of stocks? Is Dow 8,000 as low as markets are expected to go in the next 3-5 years? Fleck mentioned a possibility of sliding down again.

Ok, there are a few questions in there. Let's start with our position for the next couple of years and maybe that will answer the question being asked. We had expected a low in the market in September or October this year and, for the moment, that seems to have played out pretty well. Now, the market is climbing out of a deep oversold condition caused by public fear. The rally has been fierce over the past week with the Dow up nearly 18% since last Monday's close.

So, you want us to drag out our crystal ball...Again??? Well, if we were to guess the future, we would say that the market will rise for several months, but with some significant pullbacks which will shake out some of the bulls. We want to stress that this up move is Counter Trend meaning it is going against the grain of the overall Bear market.

Once this up move ends, which we expect will last at least until April next year, the Big Bear market will step in and destroy values. To guess how high this up move will go, we have already suggested that would be somewhere between 10,500 and 12,500, possibly higher. After that, we expect a severe long term bear market that lasts maybe 18 months which will be a slow burn but take the Dow down well below 8,000. But, we are getting ahead of ourselves.

Let's stop with the answer to that last question since the question is more, What to do, rather than what the market's end points are. Here is the key point of the market. For several years we had significantly low volatility and now we are going to go into a period of time with significant volatility. This will not require you to trade but trading may be the best way to capitalize on the volatility.

We are putting our readers on notice this evening that we will be trading much more the next few months than we have done over the past year. We look back over the past year and realize that we were short for most of the year but with a short period of bullishness which gave us about 750 points. No, it doesn't sound like much but it did enhance our return for the year. We expect that you will not be interested in trading as much as we will want to so we'll have to work something out.

We just heard that the presidential election has been decided in favor of the Democrats. With that we will end the post and wish you luck.

[Editor's note: Check out the new additions in the left column.]

Monday, November 03, 2008

A New Month and A New President At Hand

Top Line: Here we are at the start of November and we have a calm day. There was very little action on Monday possibly due to the election anticipation but also possibly due to the end of the crazy month of October.

The start of a new month puts in some distance from the two important lows of October, the spike low on the 10th and the low close last Monday the 27th. The Update thinks these lows are very important and represent the lows of 2008. There are many who are looking for another spike down but that spike may only be minor pullback not something that takes out the October lows. We remain fully invested in long positions.

We continue to watch the important indicators that represent coming off the lows. The biggest one is the volatility index, VXO. It has come off its highs over the past week. After hitting a high of 103.41 back on October 10th (spike low) the index backed off. After the market went down again and put in the closing low on October 27th, the index could only manage to get back up to around 85 and now has dropped into the 50's. Our other indicators are less definitive but are supportive of the move off the lows.

The look and feel of the trading in the last few days presents an opportunity for a pullback going into the election. As mentioned earlier, this should not be a huge spike down, just a pullback. These are opportunities to buy in case you haven't completed your buying. The main idea is to set your price under the market and let the stock come back to you.

We received an email from CM who shared an article with us and asked about our timing versus this guy's. Sometimes, others read the Update to get good timing ideas but probably not this guy. He's only got a 1.9% return through September. Following the Update's timing there should be a much better return than that (at least in 2008). Of course, we are still trying to get even after taking those GDX shares into our portfolio. Even with that, we are doing pretty well on the whole year.

We are going to give way to the election and see what happens tomorrow. From all the media attention, you might think the market has priced in an Obama victory but the actual news, one way or the other, may allow the market to react. We see a pullback coming on Tuesday and possibly Wednesday depending on who wins the election but to us these would be buying opportunities.

Sunday, November 02, 2008

Can Dow Get Over 10K This Week?

Top Line: We are troubled by the market's lack of power the last few trading days. It needs to get on its horse and run a little.

Yes, we have moved up 15% from the lows so maybe we're just looking over our shoulder. The stock market needs to break out above its highs set a couple of weeks ago. You probably recall the near 1000 point rally on the 13th of October followed the next day by a huge opening which got sold later in the day. That was a powerful move and now we need to break above those prices in order to get above 10K which is where we need to go.

The Update thinks the 10K mountain can be attained in the next few days but we do need some power to get there. So far, we don't see that power. However, the Asian markets are strong this evening, even though Japan is not trading. Hong Kong is up 5% setting the US up for a good Monday morning trade. We'll see if we can get through the night without a down tick...

We are going to leave you with another Gretchen Morgenson article (NY Times). We don't think it's much news to our readers but here it is. Back tomorrow...

Thursday, October 30, 2008

Happy Halloween

Top Line: The stock market rallied nicely on Thursday even though it could have really rallied based on the moves in Asia. Tonight the world is taking a breather from the big rally that started on Tuesday.

With that, the Update is taking a breather tonight, too. There isn't much to say tonight and the world is resting, getting ready for the weekend.

Here is our current position:

Bullish on stocks, Dow heading back up to five digits soon

Bearish on volatility, VXO going back down to 25 or less

Change in our Gold position...Gold may have bottomed near $680
Now Bullish on Gold, buy pullbacks, do Not chase...we'll set a four digit high target later

Bullish on GDX, target 50 (or higher)
Bullish on BGEIX, target about 25
Don't forget to buy some silver...$10 now going much higher.
PAAS may be in play again too around 10.

Still Bearish on US Residential Real Estate, no real target

Bullish on US Dollar, target 90 (back to rallying, now over 80 again)
Dollar made it to 88 and we said it would back off since it rallied so hard, backed down to 83
Dollar probably has a lot more to go up but not at the moment...we'll go neutral for now

Bearish on Treasury bonds but will take No position

Happy Halloween