How the US Will React to China’s Trade Surplus

November 10th, 2010

What do I see front and center this morning on the currency screens? A nasty sell-off in the currencies and metals that began yesterday afternoon, carried over to the Asian markets…

Gold had lost the $1,400 figure in the profit taking yesterday, but has rallied back $9 this morning to push past $1,400 again. Silver, which yesterday morning looked like it was going to be on a straight line to the moon, also sold off in the late afternoon trading, but like gold, has rebounded in the morning trading.

“This is just monetary policy”… Those aren’t my words… Those are Big Ben Bernanke’s words at the Jekyll Island Jamboree last weekend, when he was being dissed for implementing another round of quantitative easing (QE). Gee, it’s nice to know that he takes this stuff seriously, eh? Memo to Big Ben… QE is printing of money… And money supply is in its base form, inflation… It’s that simple!

The Fed Heads have said over and over again that inflation in the US is too low… I beg to differ with them… (See yesterday’s Pfennig “Gold and Silver Surge Higher” for a discussion on inflation…) But on the thought that the Fed Heads believe inflation is too low, I heard a great line from James Grant (editor of Grant’s Interest Rate Observer) who quipped, “That’s like the New York Police Department complaining about the lack of crimes.”

The news this morning includes a report from China that is sure to get the boys on “the Hill” all lathered up… China posted a larger than forecast trade surplus in October of $27.1 billion, which is a 22.9% gain from a year earlier… Yes, the “boys” are not going to be happy to hear this news, and I think we’ll hear more saber rattling for faster currency appreciation from China, and… Trade sanctions… UGH!

Here’s what I see… China really began putting the pedal to the metal with currency appreciation in October, but even if they keep their foot on the accelerator it’s going to take a very long time to change or rebalance China’s economy, folks… I would caution the “boy” on the “hill” to have patience, and not do something that would hurt trade… Chinese renminbi (CNY) has gained over 2% in the past 3 months, which I believe to be a “fast enough pace” for currency appreciation… If at the end of next September we see that the renminbi is up over 8% in that time period, then I think that’s a good thing… A nice “steady as she goes” pace, without inflicting major harm on the Chinese economy!

China also raised their reserve requirement for banks by 0.5%… this move has scared the bejeebers out of the risk takers, and the selling that began yesterday afternoon, has really picked up overnight. Why would this reserve requirement rate hike in China scare the risk takers? Ahhh grasshopper, come…sit… China is the proxy for global growth, and if they apply the brakes by taking liquidity out of the economy, then that’s going to hurt global growth, which is what the risk takers are all about!

We’re going to have to be patient and let this reserve requirement rate hike work its way through the markets. I just don’t see anything but short-term rallies in the cards for the dollar, as I keep coming back to the thought that the dollar just doesn’t offer investors any yield… And won’t for some time!

The guys over at Market Rates Insight, Inc. sent me this note yesterday…

The national average for all deposit products, the average rate for CDs, including Specials, now dipped below one percent for the first time since rate data has been recorded. The average rate for CDs ranging from 3 months to 5 years, including all Specials, reached 0.99%…

So… US investors/savers have that going for them… NOT! Leads me to talk about something that I’ve been talking about in both my paid subscriber newsletter, and my presentations… And that is… Looking for income… Because you’re not getting it from US dollar bank accounts! (Of course, excluding my bank, EverBank, where yields can still be gotten!)

The thing to think about, folks, is this… You can pick up yield in foreign investments, because of different rate/economic cycles. And when you “lock in” a yield for a time period, you are sure to get it! Of course, the interest will be paid in the foreign currency that the principal is denominated in, and the value of the interest is dependent on how the currency performs… But again, think about this… Most US savers receive their interest, and then roll it into the principal for another time period… You can do the same thing with a currency CD… Any way you look at, you get a pickup in yield, and you have diversified at the same time!

Alrighty then! Well… The New Zealand dollar/kiwi (NZD), is still getting sold because of the news coming from the kiwi-fruit fields that at least 18 orchards are suspected as being infected and possibly diseased. Take that news and mix it with some dovish remarks by Reserve Bank of New Zealand (RBNZ) Gov. Bollard, and kiwi-currency weakness is the result…

The top Fed Head in Dallas, Richard Fisher, was talking yesterday, and said something that just didn’t rhyme for me… Fisher said, “All of us are believers in a strong dollar policy. We want to make sure that the dollar has its purchasing power, and we want to make sure it is of great international standing.” Hmmm…. That all sounds good, but it just doesn’t rhyme with the actions of the Fed Heads… Two rounds of quantitative easing, cutting and leaving interest rates at near zero for far too long, ballooning the balance sheet, secret deals on Treasury auctions… These just don’t add up to what Fisher is saying his fellow Fed Heads believe… But you can make that call yourself… I’m sure you’ll agree with me that they don’t add up…

On a side bar… I have to wonder now with the latest round of QE if the Fed/Cartel’s independence is going to be taken away… A reader sent me the following story that plays well with that thought of mine regarding the Cartel’s independence…

Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee. And Congressman Paul has some big plans.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” Paul said in an interview with NetNet Thursday.

Paul said his first priority will be to open up the books of the Federal Reserve to the American people.

“We need to create transparency there. To see what it is they are buy buying and lending, and who it is they are dealing with,” Paul said.

I’ve always liked Ron Paul’s economic thoughts… He’s one of the few followers of Austrian economics in Washington…

My friend, and writer extraordinaire, David Galland, had some great thoughts on the US debt situation in his letter yesterday. Here’s a snippet of David talking about the dire situation regarding US debt and money printing…

Unfortunately, the scale of the problems now facing the US have reached the point where…

  • The nation’s debt and mandatory spending obligations are intractable. Simply, there is no conceivable way that the debt can be paid and the obligations met, at least not through any “normal” government operations.
  • Evidence that this is true can be seen in [what] it is now accepted as a fait accompli by Democrats and Republicans alike that annual US budget deficits approaching $1.5 trillion will be the norm for years into the future.
  • A lot of people are paying attention. In fact, pretty much everyone is watching the desperate follies of the US government. The watchers may hope for the best, but if the prices of gold and silver are any indication, they are beginning to suspect the worst.
  • Desperate to avoid the debt death spiral that will be triggered by rising interest rates, the Fed has announced that even if no one else shows up at the almost daily auctions of Treasury debt, the Fed will. By doing so, Bernanke & Friends hope to lull the watchers back to a less vigilant posture. So far, it is “sort of” working… The watchers are buying the argument that as long as the Fed keeps buying Treasuries, rates should remain dampened.

It is, however, our contention that this charade cannot last. A sentiment shared, it is clear, by the number of big money players recently piling into sound money.

There are a number of big questions yet to be answered, but the core issue surrounding the ability of the US government to meet its obligations using normal operations is not one of them. It can’t. Therefore, by definition, it must either default or attempt to debase the dollar to the point where fixed-amount obligations erode back into a range where they can be paid.

Thank you, David… You always say it 10 times better than I would!

And one more thing before I head to the Big Finish… US Treasury yields are moving higher once again… The 10-year jumped 20 Basis Points yesterday to 2.72%! WOW! OK… Before I go out and make statements that the Treasury Bubble is popping, let me remind you that the Fed is going to be buying $600 billion in the coming months… But this Treasury yield bump higher could provide the dollar some strength…

Then there was this… Remember about a year ago, I told you about the Chinese organization that downgraded the US’s credit rating? Well, they’re at it again… “The Federal Reserve’s plan to buy $600 billion in government debt prompted Dagong Global Credit Rating to lower its credit rating for the US. The Chinese credit rating agency cited the country’s deteriorating intent and ability to repay debt as it downgraded the US from AA to A+. ‘The serious defects in the US economy will lead to long-term recession and fundamentally lower the national solvency,’ according to a report from Dagong.”

To recap… The dollar rallied yesterday afternoon and in the overnight markets pushing the currencies and precious metals down. Gold and silver rebounded some this morning, but not the currencies. China’s raising of their reserve requirement, really took the wind out of the sails of the risk takers, and it’s definitely a “risk off” day in the markets. New Zealand’s kiwi-fruit industry is under deep pressure after at least 18 orchards were found with diseased vines, and then RBNZ Governor Bollard had some dovish things to say. Both of these items have kiwi-currency beaten and battered.

Chuck Butler
for The Daily Reckoning

How the US Will React to China’s Trade Surplus originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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Measuring the Pullback

November 10th, 2010

One hour into today’s session finds the S&P 500 index hovering just a few points above the 1200 level as weakness which began on Monday and accelerated yesterday has continued into the early stages of today.

Yesterday, in Looking for SPX Support Levels, I offered up a chartists’ perspective on how far the current pullback might extend. Today I am updating a table which has captured what I consider to be all the significant pullbacks since stocks bottomed in March 2009.

At only 1.9% peak to trough, the current pullback is not yet as significant as any of the previous dozen pullbacks. Using the table as a measuring stick, if the current selloff is able to muster enough bearish momentum to match the group mean, this would take the SPX all the way back to 1151.

Related posts:

Disclosure(s): none

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Measuring the Pullback


Measuring the Pullback

November 10th, 2010

One hour into today’s session finds the S&P 500 index hovering just a few points above the 1200 level as weakness which began on Monday and accelerated yesterday has continued into the early stages of today.

Yesterday, in Looking for SPX Support Levels, I offered up a chartists’ perspective on how far the current pullback might extend. Today I am updating a table which has captured what I consider to be all the significant pullbacks since stocks bottomed in March 2009.

At only 1.9% peak to trough, the current pullback is not yet as significant as any of the previous dozen pullbacks. Using the table as a measuring stick, if the current selloff is able to muster enough bearish momentum to match the group mean, this would take the SPX all the way back to 1151.

Related posts:

Disclosure(s): none

Read more here:
Measuring the Pullback


This Auto Maker Looks Like a No-Brainer Trade

November 10th, 2010

This Auto Maker Looks Like a No-Brainer Trade

There are many things to like about the world's fourth largest automaker.

For starters, it was the only major U.S. automaker able to skirt bankruptcy during the financial crisis. And due to aggressive cost cutting, it is on target to have one of its strongest years ever.

In the wake of Toyota's (NYSE: TM) ongoing vehicle recalls, customers are understandably attracted to this car company, which has an award-winning safety record.

As a result, October 2010 sales increased +15.4% compared with a year ago.

Of course, if you haven't already guessed, I'm talking about Ford Motor Co. (NYSE: F).

In addition to strong fundamentals and a compelling valuation, the technicals for Ford shares look very enticing.

Take a look at the chart below to see what I'm talking about…

Currently trading just under $16, Ford appears to be on a major growth trajectory. The shares are on a major uptrend since hitting a low of $1.50 in February 2009, climbing more than +980% to date!

This past November 1st trading week, Ford bullishly broke a multi-month ascending triangle, formed by the major uptrend line and important resistance near $14.57.

The stock busted through resistance and pierced the upper Bollinger band, which currently intersects at $15.20.

According to the measuring principle for a triangle, calculated by adding the height of the triangle to the breakout level, Ford should reach an initial price target of $19.25 ($14.57-$9.89=$4.68; $4.68+$14.57=$19.25).

In late September, the 10, 20, 30 and 40-week moving averages all began to converge around each other. Now, the 10-week moving average has risen above the 20, 30 and 40-week moving averages — a bullish sign.

The lower Bollinger band, which intersects near $10, marks a shelf of historical support dating from January 2010.

The indicators are bullish. Since June, relative strength index (RSI) has been in an uptrend. It is currently well above its uptrend line and rising. At 73, it has just become overbought; however, strong stocks can become and stay overbought for long periods.

MACD is on a buy signal. The MACD histogram is rising in positive territory.

Stochastics, although overbought, has not yet given a sell signal.

In late October, the Michigan-based automaker reported profits for the sixth straight quarter.

Third-quarter 2010 revenue was $29 billion. Including the sale of the Volvo brand, revenue would have been $30.7 billion. In the year-ago quarter, revenue was $30.3 billion.

Due to strong pick-up truck sales, analysts expect Ford's full year 2010 revenue will inch up +0.8% to $119.3 billion, compared to $118.3 billion last year, despite weak sales in Europe. By 2011, analysts project revenue will increase a further +4.2% to $124.3 billion.

The earnings outlook is also bright.

In the most recently reported third-quarter, earnings increased +48.3% to $0.43 per share, compared with $0.29 in the year-earlier period. Growth was driven by higher profit margins on both cars and trucks.

Due to aggressive cost cutting, Ford is on target to have one of its strongest years ever. Analysts project full year 2010 earnings to increase to $2.03 from a flat $0.00 last year. By 2011, analysts expect earnings will rise by a penny, to $2.04.

In addition to growth potential, Ford is also attractively valued.

Ford's trailing price-to-earnings (P/E) ratio is 9.7. By comparison, competitor Honda Motor Co (NYSE: HMC) has a slightly higher trailing P/E of 9.8, while Toyota Motors has a trailing P/E of 19.2.

Ford also leads its peers from a price-to-sales (P/S) standpoint. Ford has a P/S of 0.4, while HMC and TM have slightly higher P/S ratios of 0.6 and 0.5, respectively.

Ford is also rigorously working to reduce debt. Current debt is around $22.8 billion, down from $33.6 billion a year-ago. By the end of 2010, the company expects to have equal amounts of cash and debt, which bodes well for its future operations.

Action to Take–> Given Ford's solid growth outlook, attractive valuation and strong technicals, I would go long on the automaker by purchasing the stock and setting an initial target price of $19.25, as calculated by the measuring principle, mentioned above. I recommend using a stop-loss of $13.22, just below the current intersection of the 10-week moving average.

Based on Friday's closing price of $16.21, the risk reward ratio is 1.02:1, and traders stand to make +18.8% from this trade.

– Dr. Melvin Pasternak

Dr. Melvin Pasternak is one of the most experienced market technicians in the nation and Chief Trading Expert behind Double-Digit Trading.


Look out Below: These Stocks are Headed Down

November 10th, 2010

Look out Below: These Stocks are Headed Down

In search of undervalued companies, investors seek out stocks that tend to have an earnings growth rate that is higher than the price-to-earnings (P/E) ratio. These stocks are known as low PEG stocks, or stocks with a PEG ratio below 1. (For example, a P/E of 10, and an earnings growth rate of 20% yields a PEG ratio of 0.5, or 10 divided by 20).

Well, the converse is also true. Companies with a high PEG ratio can be overvalued. If you hold a stock with high PEG ratio, you may want to contemplate selling the shares. Better yet, high PEG stocks sometimes also make compelling short selling candidates.

So I went looking for companies that have a P/E ratio that is at least twice as high as the earnings growth rate. In other words, they have a PEG ratio above 2.0. On the table below, I've compiled a list of high P/E stocks that show either small or negative profit growth forecasts for 2011. For most on this list, profit growth is expected to turn negative next year, but the basic concept of a too-high PEG ratio still applies.

Akamai Technologies(Nasdaq: AKAM) appears to be a poster child for high PEG stocks. The provider of content delivery services is a good — not great — growth story. Over the years, an increasing number of companies have relied on Akamai to store content in local servers so websites can be pulled up quickly anywhere in the world. After years of erratic growth, the company is on track to boost sales and profits about +15% in 2011. Yet this has become a largely mature industry, price pressures are starting to bite, and the major telecom players are trying to steal market share, which is why analysts don't expect profit growth to exceed +10% to +15% in 2012 and beyond.

So why do shares trade for 33 times projected 2011 profits? Or said another way, does this stock deserve a PEG ratio above 2.0? Probably not. Instead, this is a classic example of a stock that becomes so hot that it becomes disconnected from the fundamentals. Investors have been bidding up shares in the expectation that a suitor for the company might emerge. Yet the higher shares rise, the harder it would become for a suitor to acquire the company without taking a big hit to its earnings per share (EPS), as any deal would likely be quite dilutive. So if a deal fails to materialize, or investors start to see Akamai as a slowing-growth kind of company, then the high P/E ratio would set shares up for a big fall.

It's worth adding that Limelight Networks (Nasdaq: LLNW) and InterNAP (Nasdaq: INAP), a pair of Akamai rivals, also make this list. Each stock carries a super-high P/E ratio, which would be understandable if each company was just getting going. But this is a mature industry, and these companies are likely to only grow in single digits in 2012 and beyond. So it's hard to see how earnings will grow fast enough to ever justify such a lofty P/E ratio.

The earnings look back
At first glance, it makes sense that boat builder Marine Products (NYSE: MPX) sports a very high P/E ratio. Boat sales are depressed and profits will be more robust when the economy improves. Back in 2005, the company earned a record $0.65 a share, and the stock trades for about 10 times that figure. But that was a peak year. In the past 10 years, annual EPS has averaged $0.30. And shares don't deserve to trade at 20 times average annual earnings, since this is a highly cyclical business. This stock has nearly doubled since the summer of 2009, but it looks as if investors are over-estimating the prospects of robust profits in the future.

A high-growth P/E for a low-growth company
Perhaps no company on this list better typifies the perils of a high PEG ratio than retailer Sears Holdings (Nasdaq: SHLD). Profits are going nowhere, but you can't just blame the weak economy. Management has spent the past five years squeezing cash out of this business, leaving Sears and Kmart stores badly in need of sprucing up. As analysts at research firm ISI noted in a recent report, Sears Holdings generated no free cash flow in the first half of 2010, but still bought back $273 million in stock. Their conclusion: “We continue to believe that underinvestment will not support the asset base and find much better opportunities (elsewhere) in retail.” They see shares falling from a recent $73 down to $52 as they predict that current consensus profit forecasts are too high.

Analysts at UBS see shares falling down to $56 and rate the stock a “sell.” They have a point — shares trade for more than 30 times UBS's 2011 profit forecast.

Action to Take –> The only time you can justify a high P/E ratio is when a company has not begun to reap the benefits of projected strong growth. But the companies on this list are largely mature, and unlikely to see a big spurt in profits down the road. Sears Holdings in particular carries the value of a hot tech stock but is really a lumbering giant whose best days have passed. If you hold any of these stocks, consider selling. And for those investors looking for a short candidate, the list above is a good place to start.

– David Sterman

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
Look out Below: These Stocks are Headed Down

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Look out Below: These Stocks are Headed Down


The One Stock Ben Bernanke Told Me to Buy

November 10th, 2010

The One Stock Ben Bernanke Told Me to Buy

Want to know how much power the Federal Reserve holds?

Late Tuesday, the Fed announced it would spend $600 billion on a program of buying Treasury bonds. That's in addition to what it will also spend by reinvesting the proceeds of other bonds it had purchased already.

On Wednesday, the S&P soared nearly +2%, creating about $220 billion in market cap in a single day.

I can't say it was unexpected.

You see, every year for my StreetAuthority Market Advisor readers, I put together two lists. First comes a list of my predictions for the coming year. Next is a list of my top 10 stocks for the year.

About a week before the Fed's announcement, I sent my predictions for 2011 to my subscribers. Prediction No. 9 called for this next round of quantitative easing, or as it's more elegantly called, QE2. But that was only part of the prediction. Now that the first half came true, I also predicted exactly where I want to invest based on the news… and it's looking good, too.

Bernanke is between a rock and a hard place. He's trying to get the Fed to steer a course between inflation and deflation.

When deflation rules, you want to be holding utilities, bonds, and other assets that generate fixed income. But if inflation takes control, you'll want to run from them.

A few months back, I hammered out my argument for why inflation looks to be the ultimate victor. If there were ever a recipe to cook up uncontrolled price hikes, we've been stirring together the right ingredients.

The government has kept interest rates locked at zero since December 2008 and ran the deficit to alarming levels — it's up another $3 trillion in the past two years.

Now Bernanke and the Federal Reserve intend to take even stronger action.

We're nearly out of monetary ammunition. But the Fed can always print more money and then use it to purchase long-term Treasuries. The goal is to inject cash into the system, lower borrowing costs and stimulate bank loans and other economic activity.

Sure, the additional liquidity might provide some temporary economic support. But running the printing presses will also devalue the dollar. And I'm afraid the resulting inflation will push bond yields and borrowing costs higher — countering the policy's very objective.

Modest inflation is surely preferable to deflation. But the pendulum could easily swing too far in the other direction.

I can already see this in the spreads between 30-year Treasury bonds and comparable Treasury Inflation-Protected Securities (Treasuries that adjust for inflation rates), which have widened this month.

So if the Fed has signed off on creating inflation, then Ben Bernanke has essentially told me where to invest.

Action to Take–> This was already an ideal environment for commodities. Soybean and wheat futures have surged. Aluminum and nickel are at multi-month highs. Copper is within striking distance of an all-time high. And precious metals have streaked higher and higher.

I'm confident this intervention will make the commodities markets fertile ground again in 2011. That's why I own shares of Silver Wheaton (NYSE: SLW) in my Market Advisor portfolio (to be fair, I have owned them since late 2009).

The precious/semi-precious metals are prime inflation hedges. In fact, shares of Silver Wheaton were up +14.6% this past week alone.

Thanks Mr. Bernanke.

– Nathan Slaughter

Nathan Slaughter's previous experience includes

Commodities, Uncategorized

Bill Gates Can’t Get Enough of This Stock

November 10th, 2010

Bill Gates Can't Get Enough of This Stock

The super-rich aren't like you and me. They can't invest a little here and a little there and hope to make serious returns. They have to bet big on particular investments to really get a payoff. And with such big bets to make, you can be sure they do lots of homework and then vet their ideas with the investment world's leading thinkers.

So when Bill Gates — one of the country's wealthiest citizens — makes repeated investments in an automotive retailer, my ears perk up. He's bought three large blocks of stock in the past 10 days, even as shares power higher to new 52-week highs. Is he crazy, or does he know something the rest of us don't?

The limits on insiders
Bill Gates already owns more than 10% of automotive retailer AutoNation (NYSE: AN), well above the 5% threshold that qualifies him as an insider (in this case he's deemed a “beneficial owner”). And like all insiders, he can only buy and sell stock during certain trading windows, such as after an earnings release. His latest moves came after the company, which operates 250 car dealerships in 15 states, reported third quarter results. In three separate filings, Gates acquired an additional 159,000 shares at an average price of $24, pushing his total ownership to 12 million shares — worth $288 million.

AutoNation's quarterly results were a mixed bag, highlighted by an impressive +4% jump in same store-sales, but offset by higher operating expenses that led the auto retailer to slightly miss profit forecasts. Gates likely figured that the sales trends were the most important metric to watch, and not quarter-to-quarter expense trends. That's what sets big picture investors like him apart from the analyst crowd. (Sure enough, AutoNation's October new car sales figures, which were released last Thursday, were up a healthy +15% from a year ago, slightly exceeding broader industry trends).

Analysts simply look at current trends and derive a target price. For example, UBS rates the shares a “sell” with a $20 price target (down from the current $26 share price), believing the stock is only worth about 13 times their projected 2011 EPS forecast of $1.55. Analysts at Buckingham Research predict shares will fall all the way to $18, citing tepid profit margins. If you looked at AutoNation's recent growth rates and profit margins, that price target makes sense.

But that's not a wise way to look at this stock. Instead, longer-term focused investors note that the U.S. auto and truck market has shrunk from 17 million vehicles in 2006 and 2007 to around 11 or 12 million these days. In the next few years, though, industry volume is likely to rebound back to the 13 or 14 million mark. And if that happens, Auto Nation's per share profits are likely to surpass $2 or even $2.50 a share. If the industry sells 15 or 16 million vehicles by 2014 or 2015, then the EPS math changes to $3 or $3.50. And that's likely how Bill Gates views this story. With potential earnings power like that, this $26 stock could easily approach $35 or $40, representing nearly +50% upside.

Action to Take –> This increasingly large bet from Bill Gates highlights the difference you should notice between the near-term analysts and long-term investors. While analysts incrementally raise and lower their estimates and target prices, big picture investors like Bill Gates can afford to look much farther out. And in this instance, he sees a pretty sunny view for AutoNation, and you might do well to follow his lead.

– David Sterman

P.S. –


3 Tech Stocks That Will Profit From the "Commodity Shock"

November 10th, 2010

3 Tech Stocks That Will Profit From the

In the past few months, commodities prices have surged. The Reuters-Jefferies CRB Index, which tracks 19 heavily-traded commodities, posted an +8.5% gain in September and then a +4.8% increase in October.

There are many drivers for this trend which are likely to continue. The falling dollar provides a boost, since global commodities are denominated in the currency and increase in price as the dollar falls. At the same time, countries like China and India have insatiable demand for commodities to fuel their growth . Add to those long-term factors the fact that there have been a variety of supply disruptions, such as bad weather and lower yields on mining operations across the world, and it's no wonder prices are surging.

No doubt, the commodities boom has been great for investors. [Read my article on ways to play October's best-performing commodities.] But the surging prices have been a big problem for companies that rely on commodities inputs. These include manufacturers, apparel makers, food producers and so on. Ultimately, they will experience a squeeze on margins, which could put pressure on stock prices. In fact, there's a name for this trend: “the commodity shock.”

To deal with this, it's likely companies will try to use technologies to improve their cost structures and streamline operations. This could be with supply-chain management, better sourcing and enhanced pricing strategies. And companies that can provide these services will profit handsomely.

So what are some of these types of companies that may benefit?

Let's take a look at three:

1. PROS Holdings (NYSE: PRO) — This company develops enterprise software that allows large companies to optimize their pricing. This involves processing huge amounts of data in real-time and then applying complex formulas. The upshot is that the PROS technology can help companies not only with setting the best prices but also when to give discounts, increase shipping charges or provide promotions.

Even a small increase in prices — if done correctly — can have a major impact on a company's profits. This is especially important in the current economic environment, where it can be difficult to pass-on price increases to consumers.

While 2009 was a difficult year for PROS, the fundamentals have been much better this year. The company has taken strides to make its software easier to implement, which is a key for getting new customers.

Despite all this, PROS still is showing declining revenue (according to its latest quarterly report) and is unprofitable. Because of large expense of its software, it will likely take some time to get more traction.

2. Ariba (Nasdaq: ARBA) — This company develops software for spend management. This includes help with sourcing (the network is over 180,000 suppliers), spend analysis, electronic invoicing, supplier monitoring and contract management. Ariba has more than 1,000 customers, which include half the Fortune 500.

But Ariba is not only about software. The company also has a team of domain experts who consult with customers to devise cost-effective strategies.

As for the financials, Ariba is growing at a nice rate. The company posted revenue of $95.1 million in the most recent quarter, up from $84.3 million in the same period a year ago. Cash flow from operations was $12.8 million.

3. Echo Global Logistics (Nasdaq: ECHO) — The company has a software platform that helps companies supply-chain costs, with a focus on freight. Echo's system has a network of over 24,000 transportation providers and uses complex data analysis to find the most efficient option for its customers. The software also features automation of carrier management, routing compliance, freight bill audit and performance reporting. The result is that customers can realize cost savings of anywhere from 5% to 15%. Some companies have even eliminated their internal logistics departments, thanks to the software.

All in all, Echo has been growing at a sizzling rate. The company has been aggressive with recruiting sales people and has continued to innovate its technology offering. In the latest quarter, revenue rose to $113.5 million, up +61.8% from a year ago.

Action to Take –> All three companies stand to benefit from the commodity shock, however, Ariba and PROS shares have already had nice gains in the past few months.

But as for Echo, the stock price dropped -18% when its latest quarterly report was released. The problem was that the company was seeing some softening of customer demand, yet the fact remains that growth should still be fairly strong. And with the stock trading at less than 0.8 times revenue, the current valuation looks attractive. The stock could see a +20% to +25% return within the next six months.

– Tom Taulli

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Tom has been a stock commentator for 15 years. He has written a best-selling book, “Investing in IPOs,” and become a frequent guest on shows like CNBC and CNN. Tom has also appeared in the New York Times, BusinessWeek Online and Read more…

Disclosure: Neither Tom Taulli nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Tom Taulli
3 Tech Stocks That Will Profit From the “Commodity Shock”

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3 Tech Stocks That Will Profit From the "Commodity Shock"

Commodities, Uncategorized

My Shocking Prediction for 2011 — and 2 Ways to Profit

November 10th, 2010

My Shocking Prediction for 2011 -- and 2 Ways to Profit

I don't want to bury the lead, so let me start with my prediction: the economy will add over 2 million jobs in the next 12 months.

But before we get to that, let's add some context.

To say that the job market is weak would be like saying the Saw horror movie franchise is a little gory. In fact, I'm not sure which has seen more bloodletting. Last month, The Los Angeles Times reported that 2.3 million California workers have been axed — and that's just in the Golden State.

Nationwide, the unemployment rate has remained at elevated levels above 9.5% for 15 consecutive months, the longest such drought on record.

The last time we saw a “jobless recovery” of this magnitude was in the aftermath of September 11, 2001. According to Challenger, Gray & Christmas, more than 2.5 million jobs were lost in the 18 months following the terror attacks. At that point, it seemed as if the labor market would never get in gear.

But by January 2004, payrolls around the country were already expanding at a rate of 150,000 per month. And before long, the severe labor slump was over. We've seen this same scenario play out many times over the decades.

In May 1975, in the wake of a painful recession, unemployment climbed above 9%. But then looser monetary policy (the Fed Funds rate was slashed from 12.9% to 5.2%) brought 10 million jobs in the next three years. The same thing happened in December 1982, when unemployment peaked at 10.8% before President Reagan's tax cuts kicked in and the ensuing expansion created 10 million jobs by the end of 1985.

Interestingly, the same two catalysts that triggered those previous turnarounds will both soon be in place. In this case, money is nearly free and could get even cheaper thanks to the Fed's second round of Quantitative Easing, known as QE2. [For more, see our primer on QE2 at our sister site,] And I strongly suspect we'll see an extension of the Bush tax cuts in the next 60 days.

Boom and bust. Bust and boom. Even my kindergarten son could tell you what's coming next in the cycle.

Given the deteriorating balance sheets of state and local governments, I think the public sector will continue to shed jobs. [For more on that, read David Sterman's excellent analysis here.] But the private sector is a different story.

When I first began writing this article a few days ago, I was emboldened to see the ADP report showing 43,000 jobs created last month (double what economists were expecting). Now, Friday's official tally from the Labor Department revealed that the private sector actually added 159,000 positions in October — while the figures from the prior two months were revised upward by 103,000.

Simply put, I think we've reached an inflection point. Intel's (Nasdaq: INTC) recently announced plan to spend $8 billion on new manufacturing facilities in Arizona and Oregon (which will employ up to 8,000 construction workers) could be a sign of things to come.

We still have a long road ahead to recoup the eight million jobs lost in the past two years, but it's a step in the right direction. And as we all know, the market is a forward-looking mechanism. So if you want to profit from a reversal, you need to act before concrete signs of improvement are blindingly obvious to everyone else.

If I'm right, and we do see sustained job growth of 200,000-plus each month by next summer, then there will be many beneficiaries, such as payroll processor Paychex (Nasdaq: PAYX) and Quest Diagnostics (NYSE: DGX), which handles drug screens for employment candidates.

But the two stocks below might have the most to gain.

1. Monster Worldwide (NYSE: MWW) — Anyone who grew up in the digital age is probably familiar with the Monster brand. The firm's well-known website is a popular gathering place that connects job seekers with potential employers.

Just as eBay (Nasdaq: EBAY) brings buyers and sellers together, Monster appeals to job hunters because of the abundance of postings, and to recruiters because the network reaches a pool of 84 million potential candidates. The company's recent acquisition of Yahoo! HotJobs will only widen the firm's footprint.

Last quarter, Monster's bookings jumped +26% to $235 million. And management is expecting that rate to be maintained throughout 2011. That uptick in orders not only means stronger revenue on the horizon, but it's a clear signal that employers are ramping up hiring.

The stock has had a nice run lately, but would have to climb another +200% from here to reach its former highs near $60.

2. Robert Half International (NYSE: RHI) — Robert Half is one of the world's largest staffing agencies and consulting firms. The firm helps fill vacancies in the accounting, finance and legal fields, billing clients for hours worked and then disbursing a portion of the proceeds to its workers — pocketing the difference.

Last year, the company found jobs for 157,000 temp workers — and that was in the teeth of a recession.

Whenever large companies sense an upturn (but don't want to pay the full salaries and benefits of new full-time positions), they often start by bringing in temporary help. And temp agencies have been growing briskly for months, adding 35,000 new workers in October.

This bullish leading indicator points to an improvement in the overall labor market, and Robert Half International will be one of the first to feel the winds change direction. Sales and profits plunged -34% and -85%, respectively, last year, but I suspect we'll see sharp improvements in the next few quarters.

Keep in mind, the last time we were on the cusp of a labor recovery, this stock surged +76% between April 2003 and January 2004.

Action to Take –> I see both stocks outpacing the S&P 500 next year. But don't wait too long — as I stated earlier, I already see upbeat signs underneath the dreary headlines.

Moving into a beleaguered sector where many other investors are fleeing takes nerves of steel — but bold predictions like this tend to reward investors the most.

[I've made 10 other predictions for 2011, which I just shared with my Market Advisor subscribers in the latest issue. To get access to all of my predictions, including how to profit, go here.]

– Nathan Slaughter

Nathan Slaughter's previous experience includes


How Poker Can Lead to +40% Winners

November 10th, 2010

How Poker Can Lead to +40% Winners

For those that don't know, in addition to being the Chief Strategist behind StreetAuthority's Stock of the Month newsletter, I'm also an avid poker player.

I first picked up poker about a decade ago, well before it was all over television. But I wasn't after the big jackpot like most of the people who've taken up the game. I simply thought poker could make me a better investor. Poker has a lot in common with investing — and no, I'm not talking about luck.

In poker, you get only one move at a time. You don't get the luxury of making your moves in a vacuum or without consideration for the dynamics other players bring to the game. It also takes patience and foresight to win consistently. And sometimes, it's not about winning, but simply knowing when to cut your losses.

When put in those terms, it's easy to see how playing poker can make you a better investor.

Truth is, I count on my experience and skill at the table for my strategy in Stock of the Month. I only select one pick each month to invest in — it's crucial I make the right call. With a $100,000 real-money portfolio (yes, I buy my recommendations with actual cash), I'm not playing a theoretical game either — this is real money and my picks have real implications.

Fortunately, losing money has been something I haven't had to worry about; my background and simple, focused strategy is paying off.

A perfect example is a call I made earlier in 2010 as I anticipated a weaker dollar, growing commodities demand and a rebound in strong, well-managed emerging market countries.

With that combination, one of the countries that quickly came to mind was Chile. Industrial commodities were being consumed at an enormous rate by China and India. As the West came back online, they would soon start to feed their hunger for raw materials again. Plus, the Chilean economy was in very good shape and stood to benefit from all the trends I was anticipating during the year. So I did my due diligence and found a great fund to access the country.

Each time I put in my buy order, I get a little shot of adrenaline — not unlike making a call at the poker table. But my research and patience has paid off handsomely. Since making the purchase back in February, my holding in the iShares MSCI Chile Investment Market Index Fund (NYSE: ECH) is up almost +40%.

Certainly at this point the fund has seen quite a run for my readers fortunate enough to have taken the ride. While I believe there may still be some profits left, I'm honestly more excited about some of my more recent additions to the portfolio.

Action to Take –> In poker, there is an expression for playing a starting hand with the highest probability of winning. It's called “getting your money in good.” My goal is to “get my money in good” with stock picks like ECH every month. So far, the odds have been in my favor. On each of my 11 closed positions, I've averaged a total return of +31.1%.

But I've learned the best poker players — and investors — don't spend their time thinking about the hands they've already won. They are always keeping their eyes open for the next hand to play.

Commodities, Uncategorized

A Unique Strategy to Play Offense and Defense in This Market

November 10th, 2010

A Unique Strategy to Play Offense and Defense in This Market

Heading into last week's election and the Federal Reserve's latest stimulus efforts, the stock market looked set to pause. After all, the major indices had been in rally mode since late August and bargain prices were harder to find. Yet the market rallied even further late last week, returning stocks to pre-Lehman crisis levels. But this is no time to be complacent: even as the market looks healthy, it could just as easily falter at this point as earnings season winds down and market-moving catalysts don't appear on the near-term radar.

Rather than try to bet on the market's direction, you're better off focusing on specific investment plays. And even as you stand by your bullish picks, it makes sense to offset them with equally bearish picks. This “market neutral” approach, known as paired trading, should do well regardless of which way the broader stock market goes.

In a paired trade (called by some a “pair trade”), you go long with a stock in a certain industry and make a corresponding short investment on an industry peer that looks less attractive. For example, you may like the prospects for steel maker Nucor (NYSE: NUE) but are concerned about the broader economy and its impact on steel stocks. So you could short rival U.S. Steel (NYSE: X) if you thought that it would not benefit as much in a scenario of a recovering economy.

With that in mind, here are three current pair trades that I like:

1. AMR (long) vs. UAL (short)
The challenge of paired trades is not simply to find a company that is operating at peak levels and correspondingly bet against companies that are performing weakly. Instead, you want to gauge where those companies may be in the next 12 to 24 months, and how their shares are currently valued. In that context, AMR (NYSE: AMR), which is currently an airline industry laggard, and United Continental (NUSE: UAL), which is reaping the benefits of a solid merger, are a play on reversing fortunes.

United Continental is posting great numbers right now — revenue at each of the two airlines jumped sharply in October — and analysts have been talking up shares based on the myriad synergies that the merger will yield. As a result, shares have tripled in the last year — reflecting all of the income statement gains yet to come.

Meanwhile, AMR has been struggling with high labor and pension costs, and stubborn operating losses, and has only recently joined the airline sector rally. But looking ahead, it may be AMR's turn to shine.

For starters, AMR has a high degree of exposure to the North America-South America travel market, which is expected to be characterized by restrained supply growth but rising demand in 2011. Carriers like AMR tend to operate international flights much more profitably than domestic flights, and booming economies in Brazil, Colombia and Chile should allow this region to be highly profitable for AMR.

Second, AMR has spent much of 2010 focusing on shoring up its underfunded pensions and upgrading its aging fleet. Those expenses are expected to be sharply lower in 2011, which should help free cash flow (FCF) to soar. Barclays estimates that AMR could generate $750 million in FCF next year, yet the company's stock is valued at less than $3 billion, equating to a FCF yield of around 25%. According to Barclay's that's the highest in the sector.

Much of this call resides on external conditions such as demand for air travel and oil prices. Those factors may help or hurt in 2011. By focusing on a pair trade, you can remove these possible factors and stock market risk.

2. NuVasive (long) vs. Intuitive Surgical (short)
In the past two decades, surgeons have seen a revolution in terms of spinal surgery. Thanks to companies like Intuitive Surgical (Nasdaq: ISRG), patients now have a much better chance of exiting the operating room with a hoped-for end to chronic back pain and disability. In recent years, industry upstart NuVasive (Nasdaq; NUVA) has also appeared on the scene with a set of surgical tools that set a new benchmark for minimally invasive spinal surgeries that yield faster recoveries. The company's sales surged from $50 million in 2004 to nearly $500 million this year. Management has laid out plans to fuel further growth by training more doctors in the United States on its platform of tools and expanding internationally.

At least here in the U.S., those growth plans may have to slow a bit in the near-term as the company recently warned that the changing healthcare landscape is leading many patients to defer elective surgery. To be sure, NuVasive's approach represents real cost-savings for health care insurers thanks to improved patient outcomes and shorter hospital stays. Shares of NuVasive have fallen -45% from their 52-week high on concerns that sales growth will slow to +10% to +15% next year. Yet if that's the case, then forecasts that rival Intuitive Surgical will boost sales nearly +20% next year looks too optimistic.

So by my math, shares of NuVasive will rebound nicely if near-term growth concerns prove overblown. Or shares of Intuitive Surgical have ample room to fall if NuVasive's cautious view comes to pass. This pair trade removes the element of risk associated with forecasting sales trends in the spinal surgery market.

3. Christopher & Banks (long) vs. Liz Claiborne (short)
Spending on women's apparel remains in a funk thanks to the weak economy. And weak spending has been especially painful for Christopher & Banks (NYSE: CBK), which recently had to change leadership after seeing shares fall from $30 in late 2006 to a recent $6. But this retailer still has strong resonance with its customer base, and should see nice gains once the economy improves. Sales growth is likely to be just +2% to +3% next year, to around $475 million. But I look for sales to rebound +5% to +10% in 2012, which should fuel EPS growth at a much faster pace. A return to a $10 or $15 share price is not out of the question in such a rebound scenario.

Conversely, if the economy remains weak, then shares of Liz Claiborne (NYSE: LIZ) look increasingly vulnerable. Its shares have risen +50% since late August. Those gains have partially come from a recent rebound in gross margins, yet cotton prices have risen sharply in recent days and analysts' forecasts of Liz Claiborne's profit levels may need to come down.

If the economy rebounds, Christopher & Banks looks to have major profit leverage. Yet if the economy doesn't rebound and rising cotton prices start to bite, the recent strong rebound for Liz makes that stock risky.

Action to Take –> Since we lack a crystal ball, immunizing your portfolio against bull or bear markets can be a prudent approach. AMR, NuVasive and Christopher & Banks look cheaper than their peers on a variety of metrics. They have more upside in a bull market, and likely less downside in a falling market. By pairing these stocks with their bearish counterparts, you can significantly reduce downside risk, while still enjoying the upside.

– David Sterman

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
A Unique Strategy to Play Offense and Defense in This Market

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A Unique Strategy to Play Offense and Defense in This Market


Bernanke’s Monetary Policy Is Doomed!

November 10th, 2010

Claus Vogt

Last week Ben Bernanke wrote an article for The Washington Post to justify the Fed’s decision of another round of quantitative easing. Here’s his core argument:

“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.

“And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

It looks to me like the world’s most powerful central banker hasn’t learned anything from recent financial history. He seems to resist the overwhelming evidence that the Fed’s bubble-blowing policy since the second half of the 1990s has failed miserably.

And he seems convinced that the current economic malaise can be remedied by more easy-money.

I was critical of Greenspan’s stock market bubble policy of the late 1990s. And in 2004 I wrote the book, The Greenspan Dossier, where I described the state of the housing market and predicted the severe consequences of its unavoidable bursting:

“When the U.S. real estate bubble bursts it will not only trigger a recession and a stock market crash, but it will endanger the entire financial system, especially Fannie Mae and Freddie Mac.”

These predictions were clearly spot on. Now, here we are two burst bubbles later, and the Fed chairman maintains his bubble-creating policies! And in his Washington Post article he clearly tells us he wants to create another stock market bubble to boost consumer spending and the economy.

With unemployment high and inflation very low, Bernanke defended the Fed's $600 billion bond-buying program.
With unemployment high and inflation very low, Bernanke defended the Fed’s $600 billion bond-buying program.

I think Bernanke’s policy is doomed, mainly because …

The Markets Can Be Stronger
than the Manipulators!

Many stock market participants remember the past decade’s roller-coaster ride when the market lost half its value … twice! And they just might not be willing to be led into the same trap a third time.

So market forces could turn out to be stronger than the central bank’s market manipulation efforts.

And it’s not the first time that has happened …

Years ago many central bankers learned this lesson in the currency markets when their interventions totally failed to change currency trends. And with the Bank of Japan we have a prime example of failed central bank manipulations of the stock market.

As you can see in the chart below, the Nikkei shot up 22 percent following the BOJ’s quantitative easing announcement in March 2001. But the party was a short one …

chart Bernankes Monetary Policy Is Doomed!

From May 1, 2001 through September 17, 2001, the Japanese market lost all of those gains — and more — tumbling 34.1 percent.

It’s really ironic …

When the twin bubbles in Japan burst — a stock market bubble followed by a housing bubble — the Japanese authorities answered in exactly the same way their U.S. counterparts are doing now.

They implemented the same fiscal and monetary policies grounded in the same faulty arguments — and failed miserably. Even more ironic is the fact that the U.S. was Japan’s sternest critic.

Here we go: Same problems, same short-term fixes — yet Bernanke is hoping for different outcomes. But given all that ails the economy, I think Helicopter Ben is in for a very unpleasant surprise.

Best wishes,


Related posts:

  1. Is the housing market doomed without tax credits?
  2. Fed President: Bernanke Making “A PACT WITH THE DEVIL”
  3. Four Shocking Bombshells Bernanke Did NOT Tell Congress About Last Week

Read more here:
Bernanke’s Monetary Policy Is Doomed!

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

Van Eck Granted Exemptive Relief, JP Morgan Removes Derivatives

November 10th, 2010

Van Eck, the company behind the Market Vectors line of ETFs, has been granted exemptive relief by the SEC for the actively-managed ETFs which the company first filed for in November, 2008. The application to request exemptive relief from the SEC is one of the first steps to launching an Active ETFs in the US. Van Eck had made several amendments to its application since the first filing.

Van Eck’s application was for two actively-managed ETFs, the first being the Market Vectors – Active Africa ETF and the second being the Market Vectors – Active Short Municipal ETF. According to the latest amendment of the application, the Active Africa ETF will be investing in equity securities of companies domiciled in Africa, listed on an African exchange or those that derive at least 50% of their revenues from Africa. The security selection would be based on both quantitative and qualitative measures. If launched, this would be the first actively-managed ETF to focus on the African market. The Active Short Municipal ETF will try to exceed the total return of the Barclays Capital AMT-Free Short Continuous Municipal Index, by investing in investment-grade municipal bonds that provide interest exempt from federal income tax. At the same time, the fund is allowed to invest up to 20% of its assets in junk bonds or noninvestment-grade securities.

In other news, JP Morgan has filed an amendment to its application to launch actively-managed ETFs, stating explicitly that the funds will not utilize options, futures or swaps. JP Morgan had first filed for exmeptive relief from the SEC back in March, when a lot of major financial firms in the US were lining up to file applications to launch Active ETFs. The number of new firms entering the space has since slowed, many likely being deterred by the stance that the SEC has taken with regards to ETFs. In March, the SEC officially announced that it is investigating the usage of derivatives in ETFs and until it is satisfied, all applications for new ETFs that utilize derivatives will be put on hold. The SEC has since not provided any clear indication of its final opinion and the regulatory uncertainty has come to discourage many issuers planning to enter the Active ETF space.

JP Morgan’s initial actively-managed ETF would invest in large cap US equities, holding up to 300 stocks across various sectors, selected based on valuation and fundamental qualitative measures.


Looking for SPX Support Levels

November 10th, 2010

After topping out at a new two-year high of just over 1227 on Friday, the S&P 500 index has begun to show some signs of vulnerability this week, falling 1.5% from that top to the 1208 level today.

I generally think of pullbacks as being meaningful only when they span at least 3% from peak to trough, so assuming the bulls will not continue to drive stocks higher day after day, it is certainly worth considering what sort of support the SPX may have.

The first candidate for support now stands at today’s low of SPX 1208. After that, the psychologically significant 1200 level looms large, particularly since it also acted as the last base before the index soared to a new high. Below 1200, finding support is not as easy.

The chart below highlights two areas of congestion marked in red ovals. The higher one is defined by the 1175-1185 level, where stocks consolidated for about three weeks before moving higher. The lower area of congestion sits in the 1140-1150 range, just above a key Fibonacci support level and reflects the range-bound trading during the second half of September. Below this area on the chart, we encounter residual support levels at 1130 and below from the May to September trading range.

A pullback of 3% would bring the SPX back to about 1190, so I would expect the 1175-1185 to be a critical support level and perhaps the line of demarcation between a minor pullback and a bearish counter trend. Of course the bears have not been able to muster any semblance of bearish momentum since August. but given that the SPX tacked on 187 points (18%) almost without interruption in the interim, the possibility that the next move down could be a sharp one cannot be discounted.

Those concerned about the possibility of a double top should also consider that the On Balance Volume indicator is also pointing to the possibility of a double top. Finally, with the VIX in the low 19s, VIX calls can provide relatively inexpensive portfolio insurance at this juncture, just in case the bulls start to have some second thoughts.

Related posts:


The Dollar or Toilet Paper… Which is Shrinking Faster?

November 10th, 2010

In the middle of last month, before Bernanke’s dream of QE2 became a reality, he described that “inflation is running at rates that are too low.” By “too low,” he meant of course that inflation is too low to keep artificially propping up asset prices, like the major market indices which in his opinion ought to give the US economy a shiny veneer of growth despite little underlying improvement in production.

Given this intended outcome, quantitative easing is at best a gimmicky strategy. What makes it far more pernicious though, is the weak premise that inflation is actually too low. When you consider the methods he’s relying upon for measuring it, you get the impression he wouldn’t note so much as a mild inflation uptick for a hot air balloon lifting off of the ground… but, we’ll explain more about measuring inflation below.

First, assuming Bernanke will in fact be successful in sparking inflation, how will a rising-prices environment impact the average wage-earner? Gonzalo Lira takes a closer look:

“Even in the best of economic times, wages and salaries do not rise in lockstep with an expanding economy. And we are currently not in an expanding economy. It is reasonable to assume that, during a period of steadily rising prices coupled with stagnant economic growth, wages and salaries will not rise for at least six months, if not longer…

“Wages are key. If inflation hit consumer prices as well as wages in equal measure, the net effect would be zero—which is more or less what you see in ordinary expansion-driven inflation, the kind prevalent in healthy economies: There are price pressures on commodities, which eventually translate into higher prices at the supermarket—but there are also price pressures on wages, as the economy in toto is expanding, and therefore bidding up scarce labor as it grows. In an expanding economy, prices might be rising—but wages are rising too, so no complaints.

“However, in a stagnating or contracting environment—such as what we are experiencing now in the American economy—there are obviously no pressures on wages: If anything, there are downward pressures on wages and salaries. So if commodity prices rise, people—especially the poor, the working poor, and the middle-class, but maybe even the upper-middle class—are really going to take a hit, as more of their after-tax income goes to paying for basic necessities.

“Some people might think that the debasing of the dollar via QE2 will mean that the real cost of housing will fall, as rents and fixed mortgages will be undermined by inflation. They might think this is a good thing. But this only makes sense if your earnings are absolute: If you’re boss is paying you in gold coins, or silver ingots. But if you live on a dollar income, especially a fixed income—as so many seniors do, let alone the average wage earner—even if your housing costs remain nominally static, rising food, transportation and clothing prices will still take bigger and bigger bites out of that dollar-based income.”

So what’s problematic about measuring inflation? A vivid modern-day example can be seen in this infographic, which shows how even lowly toilet paper is shrinking in size right under our noses, so to speak. According to Gonzalo Lira, this subtle type of inflation, which occurs in stripped-down utility but not reduced prices, is not tracked by the CPI. As long as the same product is sold for the same price — despite markedly reduced customer value — prices are computed as holding level.

Domestically, Bernanke and the Fed are likely anticipating that shoppers won’t notice when they’re paying the same price for less merchandise every time the cashier rings them up. Internationally, the Fed’s employing a similar tactic, diminishing the dollar so US exports look less expensive abroad and so the US’ massive debt appears a little bit less so. The US isn’t the only nation adopting this “currency war” approach to global trade, but — given that the dollar is in many ways leading the major currencies in the devaluation race — let’s hope Bernanke doesn’t end up taking a few too many cues from toilet paper.

You can read more details in Gonzalo Lira’s post on how QE2 will have a boiling frog effect on the bottom 80 percent of the US population.


Rocky Vega,
The Daily Reckoning

The Dollar or Toilet Paper… Which is Shrinking Faster? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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The Dollar or Toilet Paper… Which is Shrinking Faster?

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

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