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.