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Don’t touch these stocks with a ten-foot pole!

June 13th, 2011

Martin D. Weiss, Ph.D.Major stock sectors are now in a race for the bottom.

These are stocks on a rendezvous with their lowest lows reached in the debt crisis of 2008-2009 … sinking back into the danger zone that came with red ink, bankruptcy, and financial ruin for millions of investors.

Hard to believe that could already be happening so soon after the market peaked?

Then consider the 25 stocks I’m going to list for you in a moment, starting with PMI Group, one of the nation’s leading mortgage insurers.

Two and a half years ago, at the height of the financial crisis, this leading mortgage insurer plummeted to a low of a meager 32 cents per share.

But in the weeks and months that followed, Washington worked overtime to inject trillions of dollars into the housing market and convince the world that the Great American Nightmare — the worst real estate crash of all time — was over.

Many Americans, blinded by their faith in “almighty government,” actually fell for it: The housing market stabilized temporarily. The economy recovered a bit. Stocks rallied sharply. And PMI surged, reaching a peak of $7.10 per share last year.

But that was just the prelude to disaster …

Chart

In the ensuing months, all of the government’s housing support programs and all the government’s mortgage subsidy initiatives failed.

Nothing the government did could stop wave after wave of mortgage defaults and foreclosures.

And even the government’s massive injections of money into the mortgage market were unable to prevent PMI from crashing again, closing at a mere $1.12 per share in late trading hours this past Friday.

That’s down a sickening 84% from last year’s high!

If you had invested $10,000 in this dog at that time, you’d now have only $1,577 in your account right now.

An Unimportant Company? No!

PMI has historically been a huge player with a pivotal function in the housing finance industry — insuring mortgages against default. But now …

If big mortgage insurers like PMI go out of business or refuse to write new policies, most lenders will refuse to extend mortgage loans to anyone except those who are rich enough to buy a home for cash and don’t need a mortgage to begin with.

Moreover, PMI is on the frontline of the losing battle against a flood of bad mortgages in virtually every region of the United States.

So if this company is drowning and its stock is sinking to zero, you can be quite certain that many other companies downstream — lenders and banks, builders and realtors, REITs and other financials — are likely to face a similar fate.

As I illustrated here last week, nearly all bank and financial stocks are now in a race for the bottom — the only difference being, PMI is “winning” that race.

Just a Technical Correction?

If the housing and mortgage markets were holding up nicely, perhaps you could make that argument stick. But the fact is, all three key facets of this giant sector are coming unglued at the seams —

  1. The finances of homeowners who borrowed the money
  2. The finances of bankers who loaned them the money
  3. And the value of the home itself, the underlying collateral that’s supposed to be tapped when folks run out of money.

This is no small technicality. It’s a fundamental deterioration in the underpinnings of the entire sector.

“Why Can’t the Government Come
To The Rescue Again?” You Ask

For the simple reason that the government itself is ALSO running out of money.

But for argument’s sake, let’s say the government does somehow come up with more funds to pump into housing and mortgages.

OK. So what? What difference is that going to make?

Based on the recent history, the answer should be obvious: Not much!

Chart

Remember: No amount of government intervention has been able to prevent home prices from plunging to new lows — even lower than the bottom of March 2009, when homes were selling at deeply distressed prices. (See chart to left.)

Similarly, no amount of government intervention can prevent nearly every sector that touches housing and mortgages from suffering a similar fate.

“Martin’s Too Pessimistic.
Don’t Listen to Him!” Say My Critics

Harry Truman once said. “I never give them hell. I just tell the truth and they think it’s hell.”

That’s what my team and I do.

If anything, we’re optimists. We find the few companies that do have the wherewithal to survive and even benefit. And we see silver linings in this crisis that I’ll be glad to tell you more about in future issues.

Moreover, this is isn’t the first time we have given advance warnings about companies like PMI.

In our Safe Money Report of April 2005, well before the housing bubble peaked, we told our subscribers not to touch PMI Group and 24 other stocks with a ten-foot pole. Here they are:

Aames Investment, Accredited Home Lenders, Beazer Homes, Countrywide Financial, DR Horton, Fannie Mae, Freddie Mac, Fidelity National Financial, Fremont General, General Motors, Golden West Financial, H&R Block, KB Homes, MDC Holdings, MGIC Investment, New Century Financial, Novastar Financial, PHH Group, PMI Group, Pulte Homes, Radian Group, Toll Brothers, Washington Mutual, and Wells Fargo & Company.

(Want proof? Click here for the SMR issue of April 2005 and scroll down to page 10.)

Subsequently, 11 of these 25 companies filed for bankruptcy, were bailed out or bought out.

ALL 25 stocks plummeted, with an AVERAGE loss of 81.3%.

And even after more than two years of stock market rally, investors who bought and held these stocks are deep in the red.

(But whether they rallied or not, our advice to anyone who owns the surviving companies today is the same: Don’t touch them with a ten-foot pole!)

Later, in the financial crisis of 2008, we were the only ones who issued negative ratings and warned well ahead of time of nearly every major firm that subsequently collapsed. We warned about …

* Bear Stearns 102 days before it failed (click here for the proof)

* Lehman Brothers 182 days before (proof)

* Citigroup 110 days before (proof)

* Washington Mutual 51 days before (proof), and

* Fannie Mae 4 years before (proof).

That’s history. What counts most now is that …

It’s “Game Over” for the U.S. “Recovery”

Look. From the outset, we knew the U.S. economic recovery was rigged — bought and paid for by the greatest monetary and fiscal extravaganzas of all time.

We knew that no government, no matter how rich, can create corporate immortality: In the real world, companies are born and companies must die. I’m sure you understood that as well.

We knew that no government, no matter how autocratic, can repeal the law of gravity: When sellers are anxious to sell and buyers are reluctant to buy, prices fall. A no-brainer!

We also knew that no government, no matter how powerful, can stop the march of time: With every second that ticks by, more debts come due, more mortgages go into default, more homes are foreclosed.

And I think you knew, too. But still you ask:

“How Could This Recovery End So
Abruptly and Crumble So Dramatically?”

Answer: As we’ve been telling you all along, it was never a true recovery to begin with:

Updating the Intraday Arc Pattern Forming in Gold

June 12th, 2011

At the start of last week, I showed the “Arc Pattern” trendline boundaries that were forming at the peak of the intraday arc in gold prices, and this week, the arc continues right on schedule.

Let’s take a look at the updated/current “Arc” pattern and then see where that structure takes us on the daily support chart.

As I noted last week, the upper boundary was roughly $1,550 while the lower boundary was $1,525.

Price continued to respect these boundaries appropriately, giving intraday traders quick opportunities to play ’scalp’ moves off these developing trendline boundaries.

Not much has changed, as the boundaries now have defined themselves clearer this week to $1,545 and $1,525/$1,530 as seen above.

The analysis is the same – as long as price continues to respect (bounce between) these levels, then you have your “roadmap” or game-plan for intraday/short-term trading opportunities.

Should price break firmly through either of these boundaries, then it would suggest pattern completion and a breakout/impulse phase would emerge, allowing for Breakout trading strategies.

I had a fun post last Wednesday – “Wednesday with Wyckoff” – regarding basic breakout trading tactics.

So that’s the intraday structure – the “Arc” – but let’s take a look of where that leaves us currently on the Daily Chart:

Before discussing current levels, I wanted to show the example of the prior “Arc” pattern from February into early March 2011.

Though the ‘rally’ phase was longer than present, daily (and intraday) gold prices formed a similar arc with negative divergences inside the pattern (as we have now).

The downside action continued, culminating in a strong sell-off bar that slammed the rising 50 day EMA at the confluence of the $1,400 “Round Number” support zone.

The test of the confluence support ended the retracement phase, and price quickly broke the upper ‘arc’ trendline, triggering a breakout buy signal that preceded the April rally.

And now to the present – we have a well-defined arc that is now coming into the support at the rising 20d EMA at $1,530.

It’s possible buyers enter here to support prices at the 20 EMA, but if they fail to do so, expect a similar retest (deeper retracement) of the rising 50d EMA as what took place in March.

It would then be up to buyers again to try for a retracement buy at the confluence of the 50d EMA and the $1,500 “Round Number” support (strange how structure aligns like that again).

In other words, watch the current price at $1,520 and if there’s no rally here, then expect the ’rounding arc’ to continue, leading to another retest of the rising 50d EMA.  Watch what happens at the 50d EMA at $1,500 for clues as to what to expect from there.

Continue watching gold on the hourly/intraday timeframe with regard to this arc formation and trade appropriately (don’t get ahead of the arc!).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
Updating the Intraday Arc Pattern Forming in Gold

Uncategorized

Updating the Intraday Arc Pattern Forming in Gold

June 12th, 2011

At the start of last week, I showed the “Arc Pattern” trendline boundaries that were forming at the peak of the intraday arc in gold prices, and this week, the arc continues right on schedule.

Let’s take a look at the updated/current “Arc” pattern and then see where that structure takes us on the daily support chart.

As I noted last week, the upper boundary was roughly $1,550 while the lower boundary was $1,525.

Price continued to respect these boundaries appropriately, giving intraday traders quick opportunities to play ’scalp’ moves off these developing trendline boundaries.

Not much has changed, as the boundaries now have defined themselves clearer this week to $1,545 and $1,525/$1,530 as seen above.

The analysis is the same – as long as price continues to respect (bounce between) these levels, then you have your “roadmap” or game-plan for intraday/short-term trading opportunities.

Should price break firmly through either of these boundaries, then it would suggest pattern completion and a breakout/impulse phase would emerge, allowing for Breakout trading strategies.

I had a fun post last Wednesday – “Wednesday with Wyckoff” – regarding basic breakout trading tactics.

So that’s the intraday structure – the “Arc” – but let’s take a look of where that leaves us currently on the Daily Chart:

Before discussing current levels, I wanted to show the example of the prior “Arc” pattern from February into early March 2011.

Though the ‘rally’ phase was longer than present, daily (and intraday) gold prices formed a similar arc with negative divergences inside the pattern (as we have now).

The downside action continued, culminating in a strong sell-off bar that slammed the rising 50 day EMA at the confluence of the $1,400 “Round Number” support zone.

The test of the confluence support ended the retracement phase, and price quickly broke the upper ‘arc’ trendline, triggering a breakout buy signal that preceded the April rally.

And now to the present – we have a well-defined arc that is now coming into the support at the rising 20d EMA at $1,530.

It’s possible buyers enter here to support prices at the 20 EMA, but if they fail to do so, expect a similar retest (deeper retracement) of the rising 50d EMA as what took place in March.

It would then be up to buyers again to try for a retracement buy at the confluence of the 50d EMA and the $1,500 “Round Number” support (strange how structure aligns like that again).

In other words, watch the current price at $1,520 and if there’s no rally here, then expect the ’rounding arc’ to continue, leading to another retest of the rising 50d EMA.  Watch what happens at the 50d EMA at $1,500 for clues as to what to expect from there.

Continue watching gold on the hourly/intraday timeframe with regard to this arc formation and trade appropriately (don’t get ahead of the arc!).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
Updating the Intraday Arc Pattern Forming in Gold

Uncategorized

Why Income Investors Should Pursue Alternative Income Strategies

June 9th, 2011

Whatever is left of the baby boom generation’s retirement is about to get wiped out. It’s the third and final step in the systematic destruction of a whole generation’s wealth.

OK, bold statement… we agree. But hear us out.

The first step came with the dot-com crash. Retirement accounts stuffed with tech stocks pumped by CNBC – or funds that bought tech stocks pumped by CNBC – were vaporized.

Boomers picked themselves up, dusted themselves off and a few years later they figured they were riding high again. Yes, their retirement accounts were a shadow of their former selves… but their homes were rising in value 10% a year, every year. So who complained?

Phase 2. Federal Reserve Chairman Alan Greenspan encouraged folks to load up on ARMs. His successor Ben Bernanke assured them there’d never been a sustained nationwide drop in home prices.

Bummer. We know how this one ended, too.

In their effort to “chase yield,” bankers on Wall Street created the Frankenstein known as mortgage-backed securities (MBS) and went on to insure them with the abominable credit default swap (CDS). That derivative stew poisoned the entire global financial system…

Now comes Phase 3. Baby boomers are approaching retirement age. What are you supposed to do with whatever wealth you have remaining? Why, unless you’re a speculator in stocks and commodities and willing to bet on monetary policy outcomes… you’re supposed to play it safe with fixed income, of course – first and foremost with US Treasuries.

A 10-year US Treasury note yields a paltry 2.95% this morning. Consumer prices, even using the government’s heavily gamed figures, grew 3.1% over the last 12 months.

In other words, if you lend your money to Uncle Sam in “safe” Treasuries, you lose all of your yield, and a bit of your principal, to inflation. It’s even worse if you opt for a savings vehicle like a bank CD. The best rate we find for a 5-year CD on the Internet this morning is 2.41%.

This is no accident. It’s policy. Even if, in the end, we discover it’s accidental policy. “Negative real interest rates” are how the federal government will try to pay down some of its staggering debt.

This puts income investors in a real pickle. Sure, they could turn to a corporate bond fund… but how wise is that when the economy is slowing and profits are bound to come in below Wall Street’s lofty expectations?

Of course, there are municipal bonds, and the tax advantages they bring. But at a time when municipal budgets are strained and whole cities in California are filing for bankruptcy… how “safe” is that?

Income investors need to throw out the traditional playbook… and pursue alternative income strategies.

For instance, did you know you could take a humble corporate bond yielding 7%… collect a yield of 10%… and cash out a 73% gain? And all without adding risk or leverage?

“Let’s say Company X is expanding its business,” says our income specialist Jim Nelson. “It plans to open 10 new retail stores for its widgets in the coming few years. To do so, it issues 5-year bonds, also called notes, with a 7% coupon rate.

“After the second year, the widget industry enters into a downturn. Sales growth slows, but the company is still cashing in steady cash flows. Since investors are worried about the company’s top line, they sell their bonds. Prices fall from their $1,000 par value to $700. This is where we step in.

“We run the math and discover that even with a business slowdown, the company will still be able to pay off its bondholders. With the recent sell-off, we are able to lock in an even-lower bond price.

“At $700, that 7% coupon rate actually pays 10% ($70 annual interest/$700 investment). Plus, in just three years, we’ll receive the full redemption price of $1,000.

“Paying semiannually, we’ll receive six $35 interest payments… totaling $210 for the three-year period. That brings our total return to $510. We put down only $700. So in three years, we cash in a 73% gain… or 24% annually.”

Your broker won’t tell you about this strategy… because there’s little in the way of fees to collect.

Addison Wiggin
for The Daily Reckoning

Why Income Investors Should Pursue Alternative Income Strategies originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
Why Income Investors Should Pursue Alternative Income Strategies




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

What if Past is Prologue?

June 8th, 2011

My investment letter, Outstanding Investments, looks for opportunities in resource plays. Hence, our portfolio is chock-full of oil and gas companies, uranium diggers, gold and silver miners and technology companies that enable basic resource production.

This resource focus has been working very well for the past decade – and it’s not just me saying it. The authoritative Hulbert Financial Digest recently ranked Outstanding Investments as No. 1 in overall return from 2000-2010 among 98 investment newsletters.

According to Peter Brimelow, of the Dow Jones publication MarketWatch, “The decade’s top performer is a hard-assets bull… Over the past 10 years, Outstanding Investments was up an absolutely stunning 21.66% annualized by Hulbert Financial Digest count, versus 2.33% annualized for the dividend-reinvested Wilshire 5000 Total Stock Market Index.”

To place this in perspective, Mr. Brimelow explained that Outstanding Investments is “easily [Hulbert’s] top performer over the decade – the second best, The Dines Letter, was up 14.7% annualized.”

It’s an honor to be the editor of a newsletter that’s ranked so highly by an independent third-party reviewing service. And it’s humbling to be out in front of such a strong field of competitors. It makes me want to work even harder to find more great investment ideas for Outstanding Investments readers.

So where do we go from here?

I believe that the fundamental Outstanding Investments investment idea – looking for resource plays – will carry over into this new decade. In other words, many of the same factors that shaped the investment climate during 2000-2010 will still be at work in the next 10 years.

More specifically, I don’t see any looming large increases in supply for most energy and mineral products. If it happens, then increased supply will tend to drive down prices and undercut the long-term benefits of resource investing. But I don’t see it happening.

Also, still, I’m deeply concerned about future shortages of many forms of energy and minerals. The world’s population is growing, and many millions – billions, actually – of people are moving up in their ability to demand and afford things that require energy and minerals.

So I see rising future demand, accompanied by shortages of many things in many areas. These forecast shortages support the long-term trends in pricing strength and, by association, the Outstanding Investments resource-investing thesis.

Let’s drill down a bit more. Why do I see problems – and investment opportunities – ahead for energy and resources? I keep an eye on major resource development stories from across the world. Whether it’s oil development offshore Brazil or Australia or mining projects in Africa or Central Asia, I see many common themes.

First, there are very few new high-grade energy and mineral deposits being found anymore. For as big as it is, the world is well mapped and explored, if not picked over. If there’s a “new” high-grade ore or energy resource – and there are some – it’s likely difficult and expensive to access.

For example, one of the highest-grade new copper developments in the world is in Afghanistan. It’s a huge deposit, with high grades, but it’s subject to the vagaries of the ongoing warfare in the South Asia region. It’s important to note that the Chinese are developing this deposit, and the eventual output will likely ship out to China.

Or consider the difficulty of developing the oil deposits recently discovered off Brazil. Yes, there are immense new oil resources in the Brazilian pre-salt plays. But any developer – such as Petrobras (NYSE:PBR), Statoil (NYSE:STO) or Hess Oil (NYSE:HES) – will have to stage expensive ships up to 200 miles offshore and drill four-mile deep wells after lowering risers and drill pipe into as much as 10,000 feet of water. Overall, the Brazil oil play will require a monumental effort, which I’ve addressed in many Outstanding Investments articles over the past couple of years.

This gets into the second major issue for future resource supplies. The costs of development are large and rising, to the point where the sticker shock is stunning.

A deep-water drilling rig – such as one of the massive vessels owned by Transocean (NYSE:RIG) – costs over $1 million per day to lease and operate. When you add in the costs for designing, building and installing subsea production equipment – such as the equipment manufactured by FMC Technologies (NYSE:FTI) – a deep-water oil well can cost in the range of $150 million and more. A major deep-water, multiwell oil development, such as the Perdido project of Shell Oil (NYSE:RDS-B) in the Gulf of Mexico can cost in the ballpark of $10 billion.

It seems like many resource developments come in multiples of half a billion dollars or so. For example, not long ago, I visited a major new project to develop potash fertilizer, and the “basic” construction number was over $600 million for the mine setup. Or consider a new facility to process rare earths currently being built in Malaysia at a cost of over $500 million. I’ve reviewed plans for upgrades to several major US pipelines, and the price tags are in the range of a billion dollars for every hundred miles or so.

It all adds up, and it adds up to very big numbers. For many future resource developments, capital costs alone may turn into showstoppers. It’s important to keep an eye on this critical metric.

A third major issue for resource development is time. Everything in this arena takes time, on the scale of years, if not decades.

A relatively straightforward oil sands development in Alberta can take five years from the feasibility study to delivering the first oil. And that’s if all of the permitting and financing goes well, with no major interruptions.

Another issue that affects project development is personnel. For a variety of reasons that date back over many years, there just aren’t enough trained people to run all of the world’s major resource development projects.

There’s one more issue that affects resource development and future availability, and that’s political interference. One clear example of national-level mismanagement, affecting current and future resource availability, is in Venezuela. There, Generalissimo Hugo Chavez has utterly politicized the state oil company, PdVSA.

Over the past 10 years, Gen. Chavez fired many former oil workers and packed PdVSA with loyalists. Also, he forced PdVSA to divert capital from oil development into social spending. The result is clear, with PdVSA oil output falling from 3.3 million barrels per day (b/d) in 1998 to the current level of about 2.25 million b/d – despite the utterly immense hydrocarbon resources of Venezuela.

Gen. Chavez also nationalized some foreign-owned oil and related energy operations in Venezuela. This has led to a precipitous decline in foreign direct investment in Venezuela’s oil sector. Many talented firms and people simply fled or avoided Venezuela to work in other countries and regions.

Falling oil output, and a mercurial investment climate, has hurt overall revenues flowing into Venezuela, as well as contributed to tighter world markets for oil. In an indirect way, Gen. Chavez’s actions support high world oil prices and create new energy and resource investment opportunities elsewhere.

Thus, with things the way they are right now – low grades, high costs, long timelines, limited personnel and national-scale mismanagement – I foresee something that may seem a bit odd to say: There are many more years of profitable resource-investing ahead of us.

Regards,

Byron King,
for The Daily Reckoning

What if Past is Prologue? originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
What if Past is Prologue?




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

Wall Street Is Already Reacting Negatively To Debt Ceiling Fight

June 7th, 2011

SmartStops reminds everyone that you can benefit by sidestepping periods of risk. The low trading costs in today’s environment warrant the ROI for taking action.

Authored by Stan Collender of CapitalGains & Games blog. Posted at: http://capitalgainsandgames.com/blog/stan-collender/2264/wall-street-already-reacting-negatively-debt-ceiling-fight

Contrary to what the GOP has been saying, financial markets not only will react negatively to the debt ceiling fight happening on Capital Hill, but as I explain in my column from today’s Roll Call, that negative reaction has already begun and it’s not at all ambiguous or tepid.
 
 Negative Market Reaction to Debt Ceiling Fight

Three things are wrong with the continuing insistence by the Republican Congressional leadership and a number of potential GOP presidential candidates that the financial markets will not react negatively if the existing federal debt ceiling is not increased by Aug. 2, the date that the U.S. Treasury says the government’s cash situation will become critical.

First, it’s not at all clear that GOP Congressional leaders really believe what they are saying. One of the back stories to last week’s scam of a debate in the House on a “clean” debt ceiling bill was that the leadership apparently went out of its way to let the financial world know in advance that the vote was nothing more than political theater and shouldn’t be taken seriously. That’s the Washington version of the hedging that’s typical on Wall Street. It’s also ample evidence that the leadership was worried enough about a negative reaction from investors that it needed to reassure them in advance about what was happening and what it meant. That’s not a vote of confidence in the hold-the-debt-ceiling-hostage strategy that we keep being told will not have a negative impact on interest rates, market psychology, stock prices or economic growth.

Second, the leadership and the candidates don’t seem to realize or be able to admit that the White House is in control of many of the levers that will affect the markets. Administration officials, not the Congressional leadership, will determine how to deal with a cash shortage, and Wall Street is much more likely to react to the Treasury’s decisions than to political hyperbole, demagoguery and attempted spin. Try to imagine the virtually immediate impact on the stock price of government contractors if the administration announces on Aug. 2 that money owed to those companies will be paid after 120 days instead of 30, and you start to get a sense of how much the White House rather than Congressional Republicans are in control of the situation.

Third, in spite of all the GOP protestations to the contrary, there are actually a number of important signs that capital markets have already begun to react disapprovingly to the debt ceiling impasse and that the economy is starting to feel the negative effects.

It started in mid-April when Standard & Poor’s, one of the top three credit rating agencies, revised its outlook on the rating for U.S. debt to “negative.” Much of the reporting about S&P’s changed outlook was about the size of the deficit, but a closer look shows that S&P expressed little doubt about the United States’ ability to pay its debts. Its main concern was over the government’s “willingness to pay,” or its ability to reach the political consensus needed to make timely payments. The fight over increasing the debt ceiling, which raises questions about the government’s willingness to pay existing obligations, had to weigh heavily on S&P’s analysis, especially because the United States is having no problem borrowing and could easily meet its obligations by doing so.

The negative market reaction continued last week when Moody’s, another of the three top rating agencies, warned it was considering a downgrade of the federal government’s credit rating. Moody’s explicitly blamed the debt ceiling fight: The rating agency said the nation’s rating could be lowered if the debt ceiling is not raised “in coming weeks,” and it cited “the heightened polarization over the debt limit” as one of the primary reasons for its thinking.

In other words, and completely contrary to what GOP leaders are saying, two major financial market participants are warning that there will be a Wall Street-related price to pay if the debt ceiling is not raised as needed.

The best indication of all that the market has already started reacting negatively is the current trading of credit default swaps on U.S. debt. As of late May, the number of CDS contracts — essentially insurance policies on the possibility of a default — had risen by 82 percent. Equally as important, the cost of a CDS — the best indication of how much riskier U.S. debt has become — rose by more than 35 percent from April to May. Last week I spoke to a number of people who calculate such things for a living, and they said this change means that the interest rate the U.S. government has to pay has already increased by as much as 40 basis points compared with what it otherwise would be. This means higher federal borrowing costs and deficits, and overall higher interest rates on everything from car loans to mortgages to credit cards.

Except when something unexpected occurs, the initial changes in market psychology and behavior start with just a few investors who act either because they are more or less risk averse, have better information, or are smarter. That means there are usually small signs of change before a market tsunami hits. In this case, there is now clear evidence that the uncertainty over the federal debt ceiling is already having the negative impact on financial markets that the Republican leadership has said will not occur. Just because it may not yet be obvious to everyone doesn’t mean it’s not happening.

Read more here:
Wall Street Is Already Reacting Negatively To Debt Ceiling Fight




HERE IS YOUR FOOTER

Uncategorized

Zombie Spending on Things Already Consumed

June 7th, 2011

Yesterday, stocks continued to slide. The 10-year note yield fell to exactly 3%. Oil traded at $99. And gold rose another $4.

Has the post-crisis bounce finally exhausted itself? It’s beginning to look like it. But you wouldn’t be surprised if this turned out be just another feint to the downside, would you? We’ve seen several. We expected the end of the bounce last summer. Instead, the rally has held up for a full year longer than we expected.

Is it ready to roll over now? Let’ wait and see…

We’re attending a conference of financial analysts, investment advisors and writers.

What have we learned so far?

How about this? Porter Stansberry told us that together, public and private sectors in the US now spend $3.5 trillion just on interest. Since almost all the borrowed money was spent on consumption rather than capital investment, this expense is just one big drag on the economy. It produces no growth, no real jobs, and no real wealth.

And here’s another big drag: taxes. Porter says the total tax take is about $2.5 trillion. Again, this is money almost 100% consumed…eaten up…used up, with nothing to show for it but people eager to consume even more next year.

These two expenses combined tote to about 40% of GDP.

No wonder the economy is not growing! Four out of every ten dollars is zombie spending. It supports hamburgers consumed in 1998…gasoline burned in 2002…bankers’ bonuses handed out in 2008…and food stamps distributed in 2011.

Debt, in other words. But what can be done about it?

Households are already defaulting on mortgage debt. As the Great Correction intensifies, there will probably be more defaults. And not just on mortgage debt, but on credit card debt and student loans too.

Over in the public sector, they’re counting on inflation to wipe out much of their debt. Already, inflation is said to have reduced seniors’ purchasing power by 32% over the last decade. And that is with an official CPI of only 1% or 2%. Wait until inflation really gets going!

Meanwhile, word is getting out. The mainstream financial media – which supported the feds’ nitwit interventions – is beginning to realize that they didn’t work. Here’s The Economist rubbing its eyes, waking from a long sleep:

RECOVERIES from financial crises are usually subdued, but America’s is starting to look comatose…

Last December an agreement between Barack Obama and the Republicans to extend George Bush’s tax cuts and enact new ones led to forecasts of 3% to 4% growth this year. But the new consensus rate of 2.6%, for a recovery now two years old, is barely above America’s long-term potential and scarcely enough to bring unemployment down. To be sure, the post-crisis imperative for banks and households to reduce their debt meant a V-shaped rebound was never on the cards. Even so, this is a terrible performance.

Economists have found themselves repeatedly making excuses. First it was the snowstorms. Then it was Japan’s earthquake, tsunami and nuclear disaster which crimped the supply of parts to car assembly plants in America. Then, as the snow melted, floods ravaged Arkansas, Mississippi, Missouri and Tennessee, and tornadoes battered Alabama and Missouri. America has suffered five incidents of extreme weather this year, each inflicting at least $1 billion in damage.

The most important special factor has been petrol. Prices jumped from $3 per gallon at the end of December to $3.90 in early May. That has siphoned off much of the purchasing power that consumers should have extracted from December’s tax agreement and subsequent gains in employment. Total consumer spending rose at just a 6.7% annual rate in the three months to the end of April, but most of that increase was eaten up by inflation. Real spending grew by a paltry 2.2%.

To make matters worse, house prices in March fell to a new post-crisis low. Betsy Graseck of Morgan Stanley reckons they’ll fall another 10% to 12% over the next year. That is only one of many reasons she says banks are cautious about lending: they are also facing tougher scrutiny of their underwriting by regulators and buyers of their mortgages.

Having learned nothing, The Economist gives more bad advice:

…[Republicans’] main plank is that the federal government slash spending. “Families are tightening their belts and sticking to a budget – and Washington should too,” said Eric Cantor, the Republican majority leader in the House. Maybe so, but spending less when households are in no shape to pick up the slack seems a sure-fire way to keep an anaemic recovery off-colour.

Yeah. Spend, spend, spend…borrow, borrow, borrow. That’s worked great so far. Yeah.

The trouble with The Economist, The Financial Times, the US government and most mainstream economists is not that they don’t know what is going on but that they don’t want to know.

Nobody gets a Nobel Prize for letting the chips fall where they may. Nobody attracts readers by telling them that there is nothing that can be done. And nobody gets elected by promising to do nothing.

So they continue giving bad advice…and following dead-end, counter-productive, zombie-feeding policies.

Usually, the economy is robust enough to recover despite their efforts. Not, apparently, this time.

So, we give you a new definition:

A Great Correction: when an economy is so weak it can’t overcome the feds’ efforts to fix it.

Regards,

Bill Bonner,
for The Daily Reckoning

Zombie Spending on Things Already Consumed originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
Zombie Spending on Things Already Consumed




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.

Uncategorized

Charting the Recent Weakness in Financials XLF

June 7th, 2011

Financial stocks have seen relative weakness with companies in other sectors, as evidenced by the lackluster performance and recent support breakdowns in the leading Financial ETF – XLF.

Let’s take a Daily then Weekly view to learn lessons from the structure, and see current reference levels to watch.

First, the Daily Chart (notice the “Arc”):

Let’s start first with a trading lesson in terms of the divergences at the high in February ahead of the reversal.

This is a good reference example of how negative volume and momentum (3/10 Oscillator) divergences served as broad non-confirmations of the new recovery high at $17.00 per share.

Notice the string of five doji (reversal) candles that formed into the upper Bollinger Band at this time.

If you see this pattern in real time in the future – reversal candles into the upper Bollinger Band when price is undercut by lengthy negative divergences – take profits quickly.

Aggressive traders could consider setting up a reversal play into this structure or – preferably – on confirmed price breakdowns of rising trendlines or moving averages.  If you miss the perfect entry – we all do – there’s almost always two or three good entries into a swing move like this.

I’m showing two of them in terms of the first breakdown of the rising 20 day EMA  with an impulse candle on February 22.  The other safe opportunity was on the breakdown under the rising 50 day EMA on March 14/15.

Price “flagged” (bear flag) its way down to the target level of the 200d SMA and November 2010 price high, which I showed in the post:  “Triangulating FAS Challenges Critical Support” (while FAS is different than XLF, the structure on the chart was similar at the target test level).

After a four-day rally into EMA target resistance off the critical support level, sellers pushed the financial ETF back under the rising 200d SMA and swing low, creating a “failure to rally” signal (or successful breakdown – depending on your perspective).

It wasn’t just the 200d SMA that was important at the $15.45 level – it was a long-standing rising weekly trendline on which price initially supported… that broke last week:

Starting with the June 2009 swing low, we can draw a trendline up that connects three additional swing lows in the context of the recent recovery/rally.

Price broke down under that rising trendline last week – at the same time it sliced through the rising 200d SMA.

Cutting right to the chase, the XLF ETF takes a bearish confirmation turn as long as it’s under this trendline and the 200d SMA – both currently converging at $15.60/$15.80.

The classic chart expectation would be to look for further price deterioration, and the alternate scenario would be to expect a bullish surprise or short-squeeze should the ETF rally back above $16.00 (to be safe and to have an easy-to-remember reference level).

Lower targets include the $14.30 area (November 2010 low) and beyond that is the 2010 “triple-tested” lows at $13.20.

In other words, unless buyers pull off a big surge to the upside soon and bust this recent bearish development, the “path of least resistance” (reference my Wyckoff Imagery Lesson last week) is now to these downside levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
Charting the Recent Weakness in Financials XLF

ETF, Uncategorized

The Global Economy is a Very Sick Patient

June 2nd, 2011

The following interview was first published in The Edge Singapore on May 30, 2011 by Assif Shameen.

Richard Duncan, author of the seminal The Dollar Crisis: Causes, Consequences, Cures, an international bestseller that predicted the recent global economic crisis with extraordinary accuracy, commands a lot of respect among Asian policymakers. Armed with a Master’s degree in international finance, the affable American economist is a veteran of the region.

He first arrived in Hong Kong in 1986 to take a job as an equity analyst and later worked as a financial sector specialist for the World Bank in Washington, DC and as a consultant for the International Monetary Fund in Thailand during the 1997 Asian financial crisis.

Bangkok-based Duncan is currently chief economist at Blackhorse Asset Management. His latest book, The Corruption of Capitalism: A Strategy to Rebalance the Global Economy and Restore Sustainable Growth, was published early last year.

He recently spoke to The Edge Singapore on the sidelines of an investors’ forum. The following are excerpts from the interview:

The Edge: The US Federal Reserve is about to end the latest round of quantitative easing, or QE2, next month. The markets are fairly nervous about what might happen next. What’s your take?

RD: When QE2 stops, the US economy will weaken again, the global economy will weaken, stock and bond prices will drop. So, interest rates will go up, commodity prices will drop. The US economy will start moving back towards a recession and, around the end of the year, we’ll have QE3 or another round of quantitative easing, and then everything will spike up again — equities, bonds, commodities, all sorts of assets.

The Edge: So, you are predicting another speculative bubble in commodities and other assets? Can the US afford it?

RD: Sure it can. It doesn’t cost anything to print money. Yes, I believe inflation will move higher. But, before we get there, when QE2 stops next month, we will probably see a significant correction in commodity prices that will be disinflationary. That will help alleviate inflationary pressures long before QE3 starts.

There are really three different kinds of inflation. The first, what the Fed looks at, is consumer price index, excluding food and energy. That’s been trending downwards for years because of globalization. The marginal cost of labor has dropped 90% or 95%.

In the past, if you hired someone to produce car parts in Michigan, you might pay US$200 a day. You can hire someone in Chennai for about 5% of that. In China or Thailand, you’d pay a little bit more, but still far cheaper than Michigan. This represents an unprecedented collapse in the cost of labor.

Nothing like this has ever occurred in history. If it wasn’t for this — all the paper money that is being created by central bank easing — it would have created hyperinflation.

There is also asset price inflation like stocks or real estate. The whole purpose of QE2 was to create asset price inflation. The Fed wanted stock markets to go up, bond prices to be higher, so interest rates were lower and that worked out very well. Since QE2 started, stocks have surged 25% from where they were just before it was announced. That created a wealth effect supporting US consumption, driving the US economy and, with it, the global economy.

The real problem is the third kind of inflation or commodity price inflation, including food, which is now a serious global issue. You have two billion people who live on less than US$3 a day. As food prices rise, they become hungrier.

That’s what North African revolutions have been all about. Egyptians and Tunisians didn’t wake up one morning and decide they wanted more democracy. They woke up hungry because of food price inflation, which was a consequence of QE2.

The Edge: So, you see a global economy in turmoil?

RD: I believe that the global economy is a very sick patient that is being kept alive by life support primarily in the form of budget deficits. The US deficit has reached 10% of GDP, or US$1.4 trillion ($1.7 trillion). It looks like the US economy might still grow more than 2% this year, but if it weren’t for the 10% budget deficit, the growth rate might actually be minus 8% or far slower.

The budget deficit has kept the economy from collapsing and is being financed in large parts by quantitative easing of US$600 billion over seven months, or roughly US$3 billion a day. That’s new money that the Fed is creating from nothing and using it to buy Treasury bonds.

The Fed has been buying every new bond that the government has sold over the last few months, and that has kept bond prices higher and interest rates lower, which in turn has helped support the economy and forced the people who would normally buy those bonds to buy equities, which is why you have stock prices moving 25% higher and helping create a wealth effect that drives consumption.

The Edge: What about China — the new global engine of growth, which is buying raw materials from Australia, and components and materials from Asia?

RD: Where does China get the money to buy those goods? Who does China sell most of its goods to? Mainly, the US. Nearly 80% of the people in China still earn less than US$10 a day and that means they don’t have enough money to buy things like the iPhones they make in their factories.

The remaining 20% or so who have money to spend are earning money from companies that export to the US or because they have access to bank loans.

The US’ slipping into a crisis doesn’t make those 20% Chinese any richer. Indeed, it makes them poorer because those businesses that export won’t be as profitable as before. Did you know that Chinese bank loans expanded 60% over the last two years? When the US slipped into recession and started buying less from China, it almost burst China’s bubble. The Chinese government responded by prodding the banks to lend more.

Can you imagine what would happen to any economy if bank loans grew 60% over two years? It’s like China has been drinking a gallon of Red Bull. It’s so stimulating that it’s shaken China and given it severe heart palpations. It’s only going to lead to a greater property bubble, more and more unnecessary capacity to produce goods that no one wants to buy, and then a crash.

The Edge: Couldn’t China just put off that moment of truth with more stimulus and hope that, in time, the US economy will recover and everyone is busy emptying the shelves at Walmart?

RD: It would be nice if that happened, but the US’ problem is mainly structural. The US economy is no longer viable the way it is structured. The reason it is not viable is that it is fast de-industrializing and losing all of the manufacturing jobs. The reason it is losing manufacturing jobs is that wages in China, India or Vietnam are 90% lower.

Wages in China could double but they’d still be 80% lower than in the US. The Chinese currency might appreciate 20%, but that still wouldn’t change anything. The service economy mostly financial services, real estate, etc — isn’t creating enough jobs. Actually, it just blew up and had to be bailed out by the government. And, some of the other service sectors were only profitable so long as Americans were borrowing in a big way. The US has innovative companies like Google and Facebook but, unfortunately, they don’t seem to employ many people.

The Edge: So, what should President Obama or the Congress do now? Is there a way out or just a steady deterioration from here on?

RD: The US has two choices. The government can spend less and the US will collapse into a depression, from where it will be all downhill, or just spend more wisely. The US needs to spend in a way that actually restructures the economy and restore its economic viability. It looks like the US government will have a US$10 trillion budget deficit over the next 10 years.

If we spend US$1 trillion on solar energy, US$1 trillion on genetic engineering and biotechnology and US$1 trillion on nanotechnology, it will give the US an unassailable lead in these future technologies. We will then be producing things that people couldn’t buy from anywhere else. Like the cure for cancer. We would be able sell our cure for cancer in exchange for Chinese tennis shoes and the trade will then balance.

A trillion dollars into solar technology will mean an America with free, limitless energy. That will immediately cut our trade deficit by 40%. On top of that, we would cut our budget deficit by US$200 billion because we wouldn’t have to defend the Middle East oil that we need. On top of that, the government could tax domestically generated electricity and bring down the deficit even further.

As soon as we start selling that cancer vaccine, it won’t be long before we pay our national debt. We need a strategy to go forward boldly with investment projects designed to solve our problems rather than sit back resigned to fact that there is no hope except cutting spending, which I believe is a road to disaster.

President Obama, in his State of the Union address, said: “This our Sputnik Moment” — meaning that we have to invest in new industry or be overtaken by our rivals, just as Russia forced us to rethink our space strategy with its launch of the Sputnik in the 1950s.

The Edge: And what should China do?

RD: China should agree to a global agreement on increasing industrial wages by US$1 a year every year. We need a global minimum wage so that wages go from US$5 a day this year to US$6 a day next year, tripling to US$15 a day in 10 years. That, in turn, will greatly expand the purchasing power of a billion people at the bottom of the Chinese pyramid, who would be able to afford the sneakers or the iPods they make.

It took 150 years after the industrial revolution before industrial workers in the West could afford to buy the things they were making. When Henry Ford increased wages to US$5 a day in 1915, everyone thought he was insane. Only because wages went up did you have in the US the base of a consumer-based industrial society. If wages had remained low, the West would not have developed to the stage where it is now and Americans wouldn’t be able to afford Chinese-made goods in Walmarts.

The Edge: What’s your take on the sovereign debt crisis in Europe? Will the eurozone break up, with weaker economies such as Greece, Ireland and Portugal dropping out?

RD: I don’t think the eurozone will break up, though it is not impossible that a country like Greece might drop out. Over the long run, we will see some of the weaker economies gradually bailed out by European taxpayers and the European Central Bank.

The Edge: What should Southeast Asian policymakers worry about?

RD: All asset-price bubbles end up in busts, and that destroys banking systems. Southeast Asian banks came out unscathed in the global financial crisis but, if property prices in Singapore, Hong Kong and China keep going up, mark my words, there will be a banking crisis. Just because Asian banks withstood the last crisis doesn’t mean they will withstand the next one.

The Edge: Anything else policymakers in Singapore should worry about?

RD: Derivatives. There is no reason Singapore should try to be a global hub for derivatives. Warren Buffett was right when he said derivatives are financial weapons of mass destruction. Singapore and other emerging financial centers should be wary of derivatives and the damage unfettered use of derivatives could do.

Regards,

Richard Duncan
for The Daily Reckoning

The Global Economy is a Very Sick Patient originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
The Global Economy is a Very Sick Patient




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, Real Estate, Uncategorized

The True Products of Quantitative Easing

May 31st, 2011

While we were traveling around the globe, the data continued to come in. It offered no surprises. Instead, it was more of the same. Housing is in a bitter slump, with prices down more than 30% nationwide and now falling at about 1% per month.

Unemployment remains a problem area. Officially, the unemployment rate is around 9%. But the real rate of joblessness, according to Yale professor Robert Shiller, is closer to 16%. New jobs are being created. But there are not enough of them to keep up with population growth and allow the unemployed to get back to work.

Another problem is that the jobs being created tend to be in government, government-sponsored businesses, or other low-productivity, low-wage activities.

You can earn money parking cars, for example. But not very much. Nor does parking a car contribute much to standards of living. So real wages go down. Wages increased by 1.9% over the last year; that was exactly equal to the official estimate of price increases. But prices are rising faster than the official CPI, as we’ll explain in a moment.

Meanwhile, the feds have completely failed. The figures we reported last week showed that the ‘recovery’ efforts had totally washed up. Each job ‘created’ by quantitative easing, for example, cost more than $800,000. Assuming the average wage is about $40,000, this means the program destroyed the equivalent of 20 jobs for every one it created.

Instead of creating jobs, the Fed’s QE program created inflation – especially in the price of energy. Family budgets suffer. Here’s an AP report:

NEW YORK (AP) – There’s less money this summer for hotel rooms, surfboards and bathing suits. It’s all going into the gas tank.

High prices at the pump are putting a squeeze on the family budget as the traditional summer driving season begins. For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal.

Households spent an average of $369 on gas last month. In April 2009, they spent just $201. Families now spend more filling up than they spend on cars, clothes or recreation. Last year, they spent less on gasoline than each of those things.

The ramifications are far-reaching for an economy still struggling to gain momentum two years into a recovery. Economists say the gas squeeze makes people feel poorer than they actually are.

They’re showing it by limiting spending far beyond the gas station. Wal-Mart recently blamed high gas prices for an eighth straight quarter of lower sales in the US. Target said gas prices were hurting sales of clothes.

Every 50-cent jump in the cost of gasoline takes $70 billion out of the US economy over the course of a year, Hamilton says. That’s about one half of one percent of gross domestic product.

The latest GDP numbers show ‘growth’ happening at the rate of 1.8% per year. But, like everything else the feds report, the figures are probably little more than wishful thinking and bald-faced lies. In order to come up with a GDP growth number, the feds take the raw figures and then subtract inflation to come up with ‘real’ GDP growth.

The number they use to ‘deflate’ GDP is their annual CPI-U figure 1.9%. But the first quarter of this year showed prices rising much faster, with a CPI-U figure annualized to 5.7%. We won’t even mention the higher figure provided by the Billion Prices Project. In other words, if they applied their own inflation number for the first quarter, to their own GDP number for the first quarter, US GDP would not be going up at all. It would be going down at a 1.8% rate.

Bill Bonner
for The Daily Reckoning

The True Products of Quantitative Easing originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
The True Products of Quantitative Easing




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.

Uncategorized

Elevating Risk Management

May 28th, 2011

We couldn’t agree with some of the commentary from this article in  Financial Advisor Magazine.  Its why we created SmartStops.   

The broader message is that indexing is moving past the standard beta carve-ups, such as small- vs. large-cap equities and value vs. growth stocks. A new era of factor-based indexing is dawning… Among the catalysts for the new indices is the growing use of factor models, says Rolf Agather, director of index research at Russell. “As investors become more sophisticated, they’re using risk factor models to have a better understanding of their risk exposures.”   Elevating risk management to a high priority, in other words, is the new new thing.   “Many investors are realizing that using a traditional framework built around countries, sectors or styles doesn’t always provide the insights for appropriately managing risk,” he explained in an e-mail. “Investors are looking for new ways to manage their risks more directly.”

Beyond One Beta

A key motivation for targeting multiple risk factors in portfolio design is recognizing the limits of using just one.

The broad market beta does the heavy lifting for explaining the link between risk and return, according to the capital asset pricing model (CAPM). (CAPM is Robert Merton’s invention) .   But if CAPM worked as promised, one beta would suffice for explaining risk and return. More exposure to market beta would bring higher return; less exposure would mean lower return.

CAPM’s embedded message: Don’t waste your time with factors other than market beta. It’s an elegant story, and it simplifies portfolio design and management—if it works.  But it doesn’t, at least not completely

Even if you have the stomach for sitting tight over ten or 20 years, the risk and return story isn’t as simple as CAPM suggests. Decades of empirical research show that there are other risk factors beyond market beta driving performance. In fact, the risk-return story is teeming with factor narratives. The concept of one dominant beta isn’t dead, but it’s no longer alone.

Read more here:
Elevating Risk Management




HERE IS YOUR FOOTER

Uncategorized

Stepping Inside the Recent Intraday Bullish Volume Flow into Stocks

May 26th, 2011

If you’re an intraday trader of stock market index futures or ETFs, you probably noticed visible surges of buy/bullish volume into these funds today and Wednesday.

Let’s zoom-in on this bullish volume action and put it in context of the critical higher timeframe support level at 1,300 in the S&P 500.

First, the SPY ETF Intraday:

The chart above is the 4-min (to show more bars than the typical 5-min) view of the intraday SPY (S&P 500 ETF) from Wednesday the 25th to Thursday May 26th.

I’ve highlighted periods of unusual surges in bullish/buy volume which has corresponded in all cases with sharp impulse rallies in the fund price.

This picture is similar in the other index ETFs – DIA (Dow Jones), QQQ (NASDAQ) and IWM (Russell 2000) – but is more evident in the SPY chart.

What the bullish volume action suggests is that large-scale funds are either scaling into positions or are removing hedges, or bears are taking profits/scaling out as the market pushes into the critical support level near 1,300 (in the S&P 500).

As long as this bullish activity continues, it suggests stock prices will rally higher off this inflection pivot.

Why might 1,300 be a very important “Make or Break” level for the market?

Let’s take a look at the basic Weekly Chart of the S&P 500:

The rising 20 week EMA rests currently at 1,309.65 – two insignificant points under the recent weekly low at 1,311.

When you combine the bullish surge in volume this week with the major inflection point of the 20w EMA – combined with the psychological “Round Number” at 1,300 – we have odds shifting back to the bullish camp in the evolving market structure.

Of course, a firm breakdown under 1,300 will send many of these buyers scrambling for the “sell/exit” button, but that hasn’t happened yet.

Instead, we’re seeing buyers put risk back on the table, as evidenced by the buy-volume inflows intraday as price tests this dual-confluence, critical inflection point in the index.

Based on these two simple facts, the market is back in the domain of the bulls unless proven otherwise with a breakdown under 1,300.

In other words, it’s once again the bulls’ game to lose.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
Stepping Inside the Recent Intraday Bullish Volume Flow into Stocks

ETF, Uncategorized

Preparing Your Investments for an Inflationary Future

May 26th, 2011

Let the boxing match begin!…In the near corner, we find deflation, with its furious fists of debt liquidation and credit contraction… And in the far corner, we’ve got Ben Bernanke’s printing press, with its menacing inflationary uppercut.

Inflation will win this contest eventually, but the match might go the full 12 rounds.

Deflation is no slouch. He packs a mean punch. Borrowers of all types – from single-family mortgage-holders to national governments – are defaulting on their loans…or moving rapidly in that direction. As the weakest of these borrowers fails, asset prices fall and confidence wanes, both of which produce additional defaults. Once this vicious cycle gains fury, all but the strongest – or least leveraged – borrowers endure.

If Greece defaults, for example, Ireland might follow…and so might Portugal and Spain, etc. If Greece defaults, a contagion becomes quite likely, as the folks who are kicking in their tax dollars to the European Central Bank and the IMF begin to realize that their bailouts are futile. Eventually, the taxpayers from relatively solvent nations resist pouring their capital down Greek, Irish or Portuguese rat holes. Eventually, the bailouts end and the defaults – politely known as “restructurings” – begin.

Aware of this grim prospect and fearful of deflationary forces in general, the Central Banks of America and Europe have been counterpunching with various combinations of money-printing, subsidized lending and debt-financed bailouts. In other words, all the classic inflationary responses, plus a few innovations like quantitative easing.

The match between deflation and inflation looks like a draw so far. The global economy is not slipping into a deflationary abyss. On the other hand, inflationary effects are popping up in numerous inconvenient places.

Based on official US data, the Consumer Price Index (CPI) is up 3.2% over the last 12 months, while the Producer Price Index (PPI) is up 6.8%. Both numbers are higher than in recent history, but neither one seems particularly terrifying…on the surface.

When you dig down into the numbers, however, you discover that these inflation rates are accelerating rapidly. During the first four months of this year, the CPI has jumped 9.7% annualized, while the PPI has soared at a 12.8% annualized pace.

Import prices are also rocketing higher – up 2.2% in April, after a 2.6% jump the previous month. Year-over-year, import prices are up a hefty 11.1%. But once again, the trend is accelerating. For the first four months of this year, import prices have increased at a 26.7% annualized rate!

Let’s put these facts and figures into a real-world context. Based on the lowest of these various inflation data, the CPI, the average US wage earner has made no progress whatsoever during the last four years…

US average per capita weekly earnings have increased about 12% since the beginning of 2006. But since the CPI has increased the same amount, that means inflation has wiped out all the growth of weekly earnings.

If, as we suspect, the forces of inflation continue to prevail in this contest, hard asset investments should perform well, at least relative to most other options. But this analysis is not new news to faithful Daily Reckoning readers. It’s probably not even new news to unfaithful Daily Reckoning readers. (You know who you are!)

We’ve been singing the praises of hard assets like gold and silver for many, many years. In fact, we’ve been talking up had assets for so long that our analysis would be growing tiresome by now…if not for the fact that it has been profitable.

Even so, your editor does not wish to grow tiresome to anyone – not to his kids, not to his girlfriend and certainly not to his Daily Reckoning readers. So he will add a nuance to his monotonous “buy hard assets” mantra.

Here goes: If inflation takes hold as we expect, the allocations in your portfolio that are not hard asset investments should, nevertheless, possess hard asset attributes. When allocating to specific stocks, for example, insist that those stocks possess two key attributes:

1) Significant exposure to non-dollar revenues.
2) Significant pricing power, even in an inflationary cycle.

A strong balance sheet and solid cash flow also help.

Eric Fry
for The Daily Reckoning

Preparing Your Investments for an Inflationary Future originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
Preparing Your Investments for an Inflationary Future




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.

OPTIONS, Uncategorized

Preparing Your Investments for an Inflationary Future

May 26th, 2011

Let the boxing match begin!…In the near corner, we find deflation, with its furious fists of debt liquidation and credit contraction… And in the far corner, we’ve got Ben Bernanke’s printing press, with its menacing inflationary uppercut.

Inflation will win this contest eventually, but the match might go the full 12 rounds.

Deflation is no slouch. He packs a mean punch. Borrowers of all types – from single-family mortgage-holders to national governments – are defaulting on their loans…or moving rapidly in that direction. As the weakest of these borrowers fails, asset prices fall and confidence wanes, both of which produce additional defaults. Once this vicious cycle gains fury, all but the strongest – or least leveraged – borrowers endure.

If Greece defaults, for example, Ireland might follow…and so might Portugal and Spain, etc. If Greece defaults, a contagion becomes quite likely, as the folks who are kicking in their tax dollars to the European Central Bank and the IMF begin to realize that their bailouts are futile. Eventually, the taxpayers from relatively solvent nations resist pouring their capital down Greek, Irish or Portuguese rat holes. Eventually, the bailouts end and the defaults – politely known as “restructurings” – begin.

Aware of this grim prospect and fearful of deflationary forces in general, the Central Banks of America and Europe have been counterpunching with various combinations of money-printing, subsidized lending and debt-financed bailouts. In other words, all the classic inflationary responses, plus a few innovations like quantitative easing.

The match between deflation and inflation looks like a draw so far. The global economy is not slipping into a deflationary abyss. On the other hand, inflationary effects are popping up in numerous inconvenient places.

Based on official US data, the Consumer Price Index (CPI) is up 3.2% over the last 12 months, while the Producer Price Index (PPI) is up 6.8%. Both numbers are higher than in recent history, but neither one seems particularly terrifying…on the surface.

When you dig down into the numbers, however, you discover that these inflation rates are accelerating rapidly. During the first four months of this year, the CPI has jumped 9.7% annualized, while the PPI has soared at a 12.8% annualized pace.

Import prices are also rocketing higher – up 2.2% in April, after a 2.6% jump the previous month. Year-over-year, import prices are up a hefty 11.1%. But once again, the trend is accelerating. For the first four months of this year, import prices have increased at a 26.7% annualized rate!

Let’s put these facts and figures into a real-world context. Based on the lowest of these various inflation data, the CPI, the average US wage earner has made no progress whatsoever during the last four years…

US average per capita weekly earnings have increased about 12% since the beginning of 2006. But since the CPI has increased the same amount, that means inflation has wiped out all the growth of weekly earnings.

If, as we suspect, the forces of inflation continue to prevail in this contest, hard asset investments should perform well, at least relative to most other options. But this analysis is not new news to faithful Daily Reckoning readers. It’s probably not even new news to unfaithful Daily Reckoning readers. (You know who you are!)

We’ve been singing the praises of hard assets like gold and silver for many, many years. In fact, we’ve been talking up had assets for so long that our analysis would be growing tiresome by now…if not for the fact that it has been profitable.

Even so, your editor does not wish to grow tiresome to anyone – not to his kids, not to his girlfriend and certainly not to his Daily Reckoning readers. So he will add a nuance to his monotonous “buy hard assets” mantra.

Here goes: If inflation takes hold as we expect, the allocations in your portfolio that are not hard asset investments should, nevertheless, possess hard asset attributes. When allocating to specific stocks, for example, insist that those stocks possess two key attributes:

1) Significant exposure to non-dollar revenues.
2) Significant pricing power, even in an inflationary cycle.

A strong balance sheet and solid cash flow also help.

Eric Fry
for The Daily Reckoning

Preparing Your Investments for an Inflationary Future originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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Preparing Your Investments for an Inflationary Future




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.

OPTIONS, Uncategorized

Now here’s a powerful foreign dividend payer!

May 24th, 2011

Nilus MattiveLast week, I talked about a long-time dividend recommendation of mine … one that embodied many of the characteristics I think make conservative income stocks such strong wealth builders.

Today, I want to talk about another textbook dividend play — only this one summarizes nearly everything I love about FOREIGN income shares.

It’s a company that I first discussed here in Money and Markets last August as one of the very first investments I was recommending for my own dad’s income portfolio.

At the time I didn’t name it because that wouldn’t have been fair to my dad or my other paying subscribers. But I don’t mind revealing it now since it has already produced a very solid return in the last 10 months …

In Fact, This Foreign Utility Has Beaten the Market
By 37 Percent Since I First Recommended It Last July!

The company’s name is National Grid Utility, and when I blindly mentioned this U.K.-based power provider last year it had already handed my own dad a 6.3 percent return in his first six days of ownership.

As I went on to explain, dad’s return from just this one position was already enough to quadruple the income he would receive from his entire $100,000 nest egg sitting in a money market fund for an entire year.

Of course, as of this past Friday he is now sitting on a total return of 31.7 percent from the same position — 30 TIMES what his entire $100,000 would have earned him sitting in cash through this coming August.

“Okay,” you’re probably thinking, “but what about the rest of his positions?” I’ll have more on that in a moment.

First, let’s stick with this single investment in National Grid.

Most of dad’s gain — 29.1 percent to be exact — has come from pure capital appreciation … which is pretty amazing because the S&P 500 has only gained 21.2 percent over the same period!

In other words, this position has outperformed the market by 7.9 percentage points or 37 percent …

National Grid PLC

Even more amazing is the fact that this particular company is a very conservative utility … and as I first reported a couple weeks ago, utilities have been one of the worst performing sectors so far this year!

If that doesn’t prove that careful stock selection — even in the most “boring” sectors — can produce superior results, I don’t know what would.

But Again, Much of National Grid’s Strong Performance
Can Be Attributed to the Fact that It’s a FOREIGN Dividend Payer …

While dad has only collected one dividend from this company so far, I expect future payments to boost his overall return quite substantially.

Reason: This company only pays twice a year, and its next indicated payment should be very healthy.

Moreover, as I’ve mentioned before, the beauty of buying foreign dividend stocks is that you can benefit from any negative moves in the U.S. dollar — both via inherent moves in the share price plus dividend payments that represent more dollars once translated from the company’s home currency.

Remember, even though you are going through a U.S. exchange, when you buy a stock like National Grid you are essentially purchasing a foreign company. As such, everything related to your holding is originally priced in some foreign currency … the British pound, in this case.

Therefore, if the pound strengthens against the dollar, you get what I like to call a “currency kicker.” Obviously, the opposite can also be true if the dollar rises against the pound. So far, however, the currency relationship here has worked in our favor. Plus, I think it’s important to diversify your portfolio into other economies anyway … since the overall effect will be a greater level of overall safety.

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Now, am I saying National Grid is the best foreign stock to buy today? Hardly. In fact, while I continue to like it as a long-term holding and think there is plenty of upside still ahead, I have not been telling my subscribers to make new purchases at this point.

But as I said about Altria last week, this company demonstrates what to look for in foreign income stocks:

  1. It’s a conservative, high-quality company with a solid business that does well in good times and bad.
  2. It has a great dividend history.
  3. Its current yield is well above average.
  4. It was being undervalued by the market when I recommended it.
  5. And its home currency looked likely to strengthen against the U.S. dollar.

So if you have yet to add any high-quality foreign dividend shares to your income portfolio, I suggest you get out there and start looking for a couple now!

Speaking of which, here’s a quick look at how the individual positions in my Dad’s Income Portfolio have been performing:

Stock Table

As you can see, we’re doing pretty darn well while staying very conservative. We’ve been slowly building up our individual stock positions … keeping a very healthy dose of cash … and waiting for other opportunities to present themselves.

Meanwhile, in addition to the positions above, we’ve already closed out two other trades with booked total returns (including commissions) of 32.5 percent and 38.4 percent, respectively!

So again, it really is possible to get far better income right now than you’d be receiving from the traditional sources … it just takes a little knowledge and some careful planning.

Best wishes,

Nilus

P.S. For more information on these individual investments, I encourage you to take a risk-free trial to my Income Superstars newsletter today. Heck, it’s only $69 for a full year!

Read more here:
Now here’s a powerful foreign dividend payer!

Commodities, ETF, Mutual Fund, Uncategorized

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