Since the stock market rally began two months ago, I’ve argued that this is not a new bull market. In fact, I’ve said it’s nothing more than a bear market rally. Bear markets are actually well known for sharp rallies, but bull markets never start by bouncing 40% off the lows in just two months.

Sell Your Stocks Now For Short Term Gains

If you have short-term gains, I suggest you take your profits and sell your stocks now. If you subscribe to the Xcelerated Profits Report or any of our VIP trading services, you’ll know that we’re watching the market all day, every day, so we can let you know exactly what positions to keep, which ones to sell… and when to sell them.

But for investors who aren’t following a specific program, put some profits in the bank and wait to get back in at a lower price.

Sure, we’ve enjoyed some much-needed respite from the economic tidal wave that crashed on our shores last year. But that was mostly a stock market reprieve. For the average American, things are still tough.

• Unemployment is now at 8.9% and heading higher. And when you take into account the number of people who are under-employed, or have stopped looking for work, the number nearly doubles.
• Last week, initial jobless claims rose by 5% to 637,000.
• A record 6.56 million people are collecting unemployment benefits. It was the 15^th straight week, that figure set a new record.

The bottom line is that no matter what the stock market is doing, we won’t have a sustainable bull market until the market anticipates real economic recovery. And record unemployment figures are not a sign of recovery.

Insiders Don’t Trust This Market… And Neither Should You

Company insiders see the writing on the wall, too. In fact, they sold over eight times more shares than they purchased last month, according to Barrons.

While you should never look at one insider’s sale as a signal of a company’s fortunes, when execs and directors are rushing for the exits at the same time, that’s a very strong hint that upside may be limited.

Insiders understand their companies’ prospects better than anyone. And if they’re cashing out, so should you.

Bear Market Rallies Don’t Become Bull Markets

The common denominator about bear market rallies is that they don’t suddenly do a 180-degree turn and become bull markets. Instead, they typically carve out bases that allow stock to stay rangebound for a while.

This shakes out the weak holders and gives the market a chance to build a head of steam for a meaningful and sustainable move higher.

To illustrate the point, take a look at the two charts below, comparing the last bear market with the current market.

The first one is from the summer of 2001 until the spring of 2005 and shows a typical pattern in which the bear market carves out a base and eventually turns into a bull market.

Now take a look at the chart below, which shows the current market situation. Could we be at the upper end of what will eventually be the base? It’s certainly possible.

But it is highly improbable that after falling so sharply, the market will suddenly bounce right back and recoup those losses.

Pundits Declare The Bear Market Is Over…

During the current bounce, many pundits have boldly declared that the bear market is over.

Perhaps. But there’s a big difference between a bear market ending and a bull market beginning. If stocks are going to stagnate or trade in a range for a while, you’re probably better off having your money in other assets that will earn income or may appreciate.

On March 5, I recommended not selling stocks into the panic and said, “Be prepared to see a strong surge upward. Bear market rallies are notorious for featuring fast and sharp moves higher.”

The very next day, the S&P 500 hit a low of 666 – and proceeded to jump 38% higher over the next two months.

When I wrote that column on March 5, the wheels were well and truly coming off the market and the economy, with many investors in full-on panic mode. I suggested holding on for a rally…

Now Is The Time To Sell Your Stocks

Now is the time to begin selling your stocks.

I also said the bear market won’t be over until the P/E ratio of the S&P 500 falls below 10. The expected earnings for the S&P 500 in 2009 is $54.15. Keep in mind, that figure could go lower if the economy is worse than expectations.

Considering the difficult economic times, I believe investors should prepare for an S&P 500 that is below 500. My official target is 487.

I know that’s not a popular stance to take. There are many good analysts who believe just the opposite. But considering market history and the lack of improvement in the economy, I don’t see how the market doesn’t make new lows from here.

Do you agree? Think I’m a crackpot? Maybe both? Feel free to send me your comments.

Marc Lichtenfeld

Source: Sell Your Stocks Now: If You Have Short-Term Gains, Take Your Profits

But ignore the chatter. Although plausible, the arguments are profoundly false.

As I explained in an interview for Oxford Club members, we’ve witnessed seven similar stock market rallies of 25% or more in eight weeks for the Dow…

And guess what? Every time, the rallies have continued. For at least six months. And in six out of seven cases, they have lasted for another year.

My point is not to be the lone voice of dissension – or an unabashed, ignorant bull. I merely want to shed some truth on the subject. Because it’s perfectly possible the rally could continue…

Then again, it might not. Which brings up the real reason for writing today.

Whether you believe we’re in a new bull market, a bear market rally destined to collapse, or as one pundit put it oh so clearly, “A cyclical bull market in a secular bear market” (come again?) – I’ve got the perfect stock for you. Coinstar is positioned to rally no matter what the markets do next.

Coinstar Inc. – Profiting From Pocket Change and Cheap Thrills

While we can argue all day long about the next move for the markets, we can agree on two things.

• First, unemployment is destined to rise. It’s a lagging indicator, so even if the economy perks up in the second half of this year, as many expect, the layoffs will continue well into next year.
• Second, the severity of the current recession dramatically impacted consumer spending, presently and for the foreseeable future. That tends to happen when you lose your job, fear it’s imminent or see others around you coping with no income.

Both conditions play right into Coinstar Inc.’s (Nasdaq: CSTR) hands.

You see, the average U.S. household has about $90 of spare change just sitting around. The severity of the current economic slowdown will prompt many of them to convert it into cash to fund life’s mini-indulgences.

Coinstar eliminates the tedious and time-consuming task of rolling coins. The company operates more than 18,000 coin-counting machines in supermarkets and other retail stores. All you have to do is dump the change into a sorting basket. The machine counts it and then spits out a voucher, which can be redeemed for cash at the nearest register.

International expansion and the addition of 3,200 new machines in Wal-Mart stores this year will only make the company’s services more accessible.

Coinstar Positioned to Profit From Ultra-Thrifty Consumers

But Coinstar’s positioned to profit from the new class of ultra-thrifty consumers in yet another way. Thanks to timely acquisitions of DVD Express and Redbox, they also operate the largest network of self-service DVD rental kiosks.

Instead of shelling out $5 at Blockbuster, consumers can pay $1 a night at any of the company’s 12,900 kiosks located in supermarkets, drugstores and McDonald’s throughout the country. Each machine holds 150 titles (with multiple copies) at a time, almost all of which were released in the last six months.

And the recent results prove consumers are buying into the concept:

• Redbox’s sales soared 180% in 2008 to $400 million. And the momentum is continuing this year. In the most recent quarter, Redbox sales jumped another 156%.
• A bankruptcy filing by Blockbuster (NYSE:BBI), which appears imminent, should only drive more consumers to the company’s kiosks.

• And they will be readily available, as management plans to almost double the number of kiosks to 20,000 in 2009.

To sum it all up, whether this stock market rally continues or falters, this recession will impact consumer spending for a long while. And more people will be forced, or choose, to look for cheap thrills and a way to “monetize” their pocket change. Coinstar is the only way to capitalize on both… and rally, regardless where the markets head next.

Good investing,

Louis Basenese

Source: Coinstar Inc. (Nasdaq: CSTR): The Perfect Stock for Bulls & Bears

The problem I have with this dogmatic definition of a bear market rally is the following: Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and then declined to 500, as an investor should you care if the move to 1350 — a 100% gain! — was a bear market rally?

My impression is that investors’ fixation on the recent rally being a bear market rally has actually kept most investors on the sidelines and hoarding cash. Now, put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ money and missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative.

Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate-term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

Another factor to consider is that there has been a significant improvement in the technical position of world stock markets. In the US the largest number of new 12-month lows was reached in October. At the November 21 low at 741 for the S&P 500, the number of new lows had already contracted, and even more so at the index’s March 6 low at 666. Also, market breadth and the number of stocks moving above their 200-day moving averages have taken a decisive turn for the better, indicating that the stock market advance is broadening and that the number of stocks that have bottomed out (at least in the intermediate turn) is expanding.

I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by “printing money” in order to lift or support asset prices, it can be done. However, the result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic long-term consequences for its economic and financial volatility.

It forces individuals and institutions with cash to buy something…anything. So, this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate, and consumer goods and services, but obviously with different intensities and at different times. For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little dose of manipulation). The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by “money printing”.

This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-term consequences! Another positive factor for stock markets is that a large number of Asian stock markets and individual stocks in the region had already bottomed out in October and November of 2008 and didn’t confirm the new low in the S&P in early March.

In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by more than 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it is not only the Asian equity markets that have outperformed the US and Western European markets over the last few months; since late January 2009, the RTS Russian Index is up 66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008 low.

This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn’t mean that a new bull market in global equities à la 1982– 2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world’s central banks and fiscal deficits have begun to impact asset prices positively. Therefore, in the case of resource and mining stocks, as well as Asian equities (and, for that matter, most emerging and other stock markets around the globe), the lows thatwere reached between October and March of this year are likely to hold — that is, for now.

The markets that have the highest probability of having made major longer-term lows are resource-related equities, emerging markets, and Japan. Conversely, the asset market that has the highest probability of having made a secular high (such as Japan in 1989, or the Nasdaq in March 2000) is the US long-term government bond market.

Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside. I have listed again below all the equity recommendations I have made since December 2008. Some of these equities have already moved up substantially (resource and mining companies, in particular) and, therefore, I would only buy most of these recommendations on a correction.

In addition, a number of BRIC and other (mostly emerging market) closed-end country funds and ETS were recommended, such as Brazil ETF (EWZ), the Templeton Russia Fund (TRF), the Greater China Fund (GCH), the Asia Pacific Fund (APB), Taiwan iShares (EWT), the Japanese ETF (EWJ), the Japan Smaller Capitalization Fund (JOF), the Morgan Stanley India Fund (IIF), the Turkish Fund (TKF), and the MSCI Emerging Market ETF (EEM).

In the US, late last year we recommended buying the iShares iBox Investment Grade Corporate Bond (LQD) and Nicholas Applegate Convertible & Income Fund (NCV), while earlier this year we recommended the accumulation of stocks of high-tech companies such as Cisco (CSCO), Intel (INTL), Oracle (ORCL), and Yahoo (YHOO). More recently, we recommended beaten-down insurance companies and financials as rebound candidates, including Leucadia National (LUK) and CNA Financial (CNA), Citigroup (C), the BKX, the Financial Bull 3x Shares (FAS), and the Financials Select Sector SPDR.

The market’s advance had been broadening and that more and more groups such as airlines (AMR), homebuilders (TOL, CTX, HOV), and cyclicals such as Dow Chemical (DOW), International Paper (IP), and Alcoa (AA) are showing signs of having bottomed out. Among commodities, I am particularly intrigued by natural gas. There are natural gas ETFs (UNG, GAZ), but costs are high. A better way is probably just to buy future contracts, or Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG).

Source: What to Buy…or Not Buy

I love my coffee.

But it really doesn’t matter what I think. All that matters is what the market at large does. So I’ve been seeing the possibility for a rally.

Back on January 15th (my how time flies!) I wrote about how the Dow Jones would find support around the 8,000 mark.

As expected, the Dow Jones has defended that mark ferociously over the past two weeks. Take a look at this hourly chart below…

Dow Jones Short-Term Chart

As you can see the Dow Jones was able to hold its support at 8,000 three times in the past two weeks. This, despite all the negative news that has hit the wires can be a bullish signal.

But only a move above 8,300 would confirm a rally in the Dow Jones.

As dumb as I think it is for the market to move higher, it doesn’t mean that you can’t make money off the foolishness.

But trying to make money on a short-term rally in a long-term downtrend can be tricky.

That’s why you have to be extra conservative about your entry points (that means waiting for confirmation!) and stick to your stops.

If this rally pans out, the Dow could go to 9,000 before it hits some headwinds.

This from The Sovereign Society:

Does market-timing work? Better yet, does it matter if you’re a long-term investor dedicated to stocks or other asset classes? Don’t most investments appreciate over time?

The evidence suggests that knowing when to enter and exit a market can make all the difference in the long run.

Investment pros ranging from Warren Buffett (Berkshire Hathaway) to John Bogle (Vanguard Funds) chastise market timing. Hedge funds – which charge high fees to time entry and exit points in global markets – failed miserably in 2008, posting an average 18.3% loss according to Hedge Fund Research. Worse, only several U.S. mutual funds actually earned a profit last year while the remaining 8,500 or so suffered 40%-plus losses.

In 2008, the S&P 500 Index plunged 38.5% – its worst year since 1931. The MSCI World Index, a composite of global mature market common stocks logged its worst year since its inception in 1969 – down 42%. Within the emerging markets universe – including New Frontier countries with esoteric markets like Vietnam, Bahrain and Croatia – not a single bourse recorded a profit, according to MSCI Barra.

Ten Years and Counting…

Investors can’t time the market consistently. And that applies to both individuals and professionals. But does it really matter? The answer is a resounding “Yes!”

Investors who purchased the S&P 500 Index at the height of the last bull market in March 2000 are still licking their wounds almost ten years later.

A US$10,000 investment in the S&P 500 Index in 2000 would be worth $7,000 through December 31, 2008. That’s a 30% decline and confirms America’s “Lost Decade” as it pertains to stock investing.

Despite the dollar’s big decline since 2002, which boosted the value of foreign shares when measured in dollars, the MSCI World Index turned an original US$10,000 in 2000 into US$8,007, a 20% loss. So much for passive long-term investing…

Timing a Depression Low

Yet the same investor who plunked US$10,000 into the S&P 500 Index back in 1982 – the last secular bear market low – would have seen their original investment grow to more than US$150,000 through December 2008.

What’s even more amazing is how market timing paid off in spades even during the Great Depression. An investor with the dreadful foresight of investing US$10,000 back in October 1929 in the Dow Jones Industrials Average (Dow) would have seen his investment crash to just US$1,400 by June 1932 or a massive 86% wipe-out. Yet again, timing the market paid off brilliantly starting that same year when the U.S. market hit a low for the cycle.

From its bear market low of just 41.22 in June 1932, the Dow skyrocketed all the way to 194.40 by late 1936 – a whopping 372% return, excluding dividends. By 1937, however, the Dow began to fall apart again and crashed 33% before finally bottoming in 1942.

Yet under FDR, the market seemed to gain traction by rallying a cumulative 121 points or rising four consecutive years starting in 1933. Once again, timing the market made a huge difference.

An investor who purchased the Dow in mid-1932 would still have earned a profit through 1942, the year the market finally bottomed.

But the poor unsuspecting investor who came aboard in September 1929 would have waited until 1955 to break-even. Waiting 26 years to recover your capital isn’t exactly the Field of Dreams; yet that’s exactly what might be in store for those investors who bought stocks at the height of the dot.com bubble in early 2000.

Bear Market Bottom still Lies Ahead

I’m not convinced the November 20 low was the ultimate bottom in this bear market. It might be another in a series of intermittent lows since stocks peaked in October 2007.

Stocks might appear to be cheap against all valuation measures, including government bonds, inflation, T-bills and risk, including the VIX Index. But it’s hard to make a compelling case for equities when corporate earnings will remain hostage to a crash in domestic consumption, a freefall in residential housing and soaring unemployment. Valuations alone don’t terminate bear markets.

The Mother of Buying Opportunities

Sometime over the next 12-18 months the stock market will form “the” bottom. That event will mark the greatest entry point for stock investors in more than 27 years, possibly longer. And just like 1932 when the market hit its low point investors will sow the seeds for humungous long-term profits.

Timing the market does make a big difference. The historical evidence strongly suggests that knowing when to buy or sell stocks can either make or break the individual investor. History also tells us that stocks are likely to muster a massive calendar year rally or more under President-elect Obama, similarly to FDR starting in mid-1932.

Source: Market-Timing and the Mother of Market Bottoms

I’ve plotted two resistance and support lines on the Dow Jones Industrial Average (INDU).  These four lines should guide you moving forward as to when to turn bullish or bearish on the Dow.

As you can see, the 9,000 mark has proven to be quite hard for the Dow to break above. Likewise, I believe 8,000 will be hard to get under.

That’s not to say the Dow couldn’t go under 8,000 (the RSI readings prove this). But it’s going to be harder considering it’s already dropped nearly 1,000 points in under two weeks. Likewise, its slow stochastic reading also shows it as oversold. So buying pressure could certainly emerge.

The take home: Be careful about shorting the Dow here unless you see it pass under 8,000. If you’re a gambling man, you could buy shares of the Dow Diamonds Trust ETF (NYSE:DIA) which tracks the Dow Jones, and ride it until the Dow hits 9,000.

Stay Free,

Charles

This from Investment U:

Forget the grim news that Alcoa (NYSE:AA) is slashing costs and cutting 13% of its workforce. We all know times are tough. But the market’s a forward-looking beast. And right now, it’s doing exactly what I predicted on November 19. It’s favoring small caps over large caps.

In December the little guys put up big numbers – a 5.8% gain versus a mere 1.1% uptick for the large guys, based on the Russell 2000 and S&P 500 indexes.

Before I get to my favorite ways to screen and play this emerging small-cap rally, let me first address my critics.

My last column failed to convince some of you. Others thought I simply skimped on the proof. Or more specifically, that I failed to tell you why NOW is the right time to buy small caps.

As they put it, “We all know small caps lead the markets out of a recession. But what makes you so convinced we’re on the way out?”

As my college physics professor liked to say before each lecture, “Prepare to be enlightened.”

Why It’s Prime for Small-Cap Investing

Let me first disclose, I’m not a market timer. I don’t look for single infallible data points to signal my buys or sells. Instead I track trends (both long and short term). And there’s no denying the trend at the National Bureau of Economic Research – the committee responsible for officially uttering the economic curse word, recession.

You see, these guys – albeit a collection of the most educated and intelligent economists – have a knack for being late. By the time they make the call, the recession is usually close to over. Or in the case of the last two recessions (1990 and 2001), over completely.

This time will be no exception. The government’s about to dope up the economy on stimulus packages. In other words, plenty of economic growth is in the works. If you’re skeptical spending massive amounts of money we don’t have will do the trick, I understand. But just realize, something will prove to be the catalyst for a turnaround. And the numbers belie that something will materialize very soon:

• Since 1900, the average recession lasted 14.4 months.
• And since World War II, only two recessions (1973 and 1981) lasted longer than 15 months.
• So strictly by the numbers – based on a start date of December 2007 for the current recession – odds are this recession will be history by early spring.

You could argue, if you dare utter the words that “this time will be different,” that we’ve never experienced such a financial collapse. And the averages could be meaningless.

Fair enough. But again, I challenge you to recall any other period when so much stimulus (in the form of obscenely low interest rates, tax breaks and massive government spending) poured into the markets with no impact.

It doesn’t exist.

Ultimately, we’re at the tail end of this recession. And we know that means a small-cap rally is next. If you really want to press your luck, you could wait to until the end of the first quarter to consider small caps stocks. But I wouldn’t.

Being late could mean missing out on serious profits. Whenever you decide to jump in, here’s how I would go about finding the best opportunities…

Small-Cap Investing: The Big 3 Screening Criteria

In this market, our primary concern needs to be credit. Companies need it to operate and grow. Small caps are no exception.

That’s why the first thing I screen for is small companies with no or little debt (debt-to-equity ratios below 0.3). This alone will narrow down your choices significantly. But it will also reduce your risk.

Next, screen for companies with a sustainable competitive advantage. It could be revolutionary products, an insurmountable first-mover advantage, or extremely high barriers to entry. Anything that protects the underlying business from competition and enables the company to do the most important thing of all – increase earnings by at least 30%.

Yes, such companies do exist. And a market panic can only hold them back so long. Eventually, share prices will follow earnings. If you stick to the fastest-growing companies, I guarantee you’ll be holding onto the fastest-growing stocks, too.

Beyond these criteria, look for companies within three years of an initial public offering. Wall Street tends to overlook many of these firms. Plus, smaller and/or newer companies have more room to grow.

2 Small Caps Stock Investments to Bank On

In November, I singled out Genoptix, Inc. (Nasdaq:GXDX) and American Pubic Education, Inc. (Nasdaq:APEI). I still consider both strong buys. I’d also add these two small caps to the list:

E-House Holdings (NYSE:EJ).

Debt-to-equity checks in at 0.07. It could easily be zero as the company has enough cash to pay off debt almost six times over. E-House possesses an insurmountable first-mover advantage in the real estate agency services industry, with 1,800 professionals in offices in more than 20 cities. And its earnings have increased 62%.

I know. It’s a real-estate stock. And a Chinese stock, to boot. But that doesn’t matter. Nothing’s going to put a stop to the Chinese wealth creation machine. And the next big ticket item (after a television, refrigerator, air conditioning and a car) for the Chinese middle class is a home. If you have any doubt, consider E-House increased sales 63% in the first nine months of 2008. Despite such impressive fundamentals, shares trade for just 15 times forward earnings. But they’re on the move, up 51% since December 1, 2008.

American CareSource Holdings, Inc. (Nasdaq:ANCI)

Debt-to-equity checks in at zero. ANCI has just $16,000 in outstanding debt and over $8 million in cash. The company’s competitive advantage comes from its size and position as the first ancillary benefits management company. ANCI helps companies control health care costs by offering cost effective alternatives to physician and hospital-based services through its network of 2,400 providers. It also uses a proprietary software platform to help clients identify additional areas for cost improvement. Growth is off the charts with revenues up 127% and earnings quadrupling in the most recent quarter.

It goes without saying that controlling health care costs is a big concern. For the government and individual business owners alike. As a result, demand for ANCI’s services will only increase. And just because you probably never heard of the ancillary health care market, don’t think it’s small. At $574 billion it accounts for 30% of total national health expenditures. Given the current fascination with cutting costs, that percentage will only increase, leaving endless opportunities to grow for ANCI.

Source: Small-Cap Investing: How to Play The Emerging Small-Cap Rally

This from Taipan Daily:

Has the U.S. Treasury bubble popped? It’s starting to look that way.

USTs gapped higher in mid-December, traded in a quiet range til year’s end, and then immediately went into freefall with the start of the new year.

This wasn’t a total surprise. On Dec. 23rd, in a Taipan Daily piece titled “A Treasury Bond Mystery and a Currency Clue,” I gave a summation of what was happening and how to play it:

Based on end-of-year accounting factors and a supply-limited window of foreign investor buying, USTs could be a good candidate for a quick, sharp break (much like the dollar’s swift fall) early in the 2009 calendar year.

An aggressive put option trade – near-term firecrackers relatively close to expiry – could be one way to play this. If done right, it’s the kind of trade where you either lose the small amount you invested or make five times your money in a fingersnap.

There were multiple trading days available to follow up on that hunch. If you chose to act on it with near expiry options as I suggested, you should be sitting on some very nice gains right now.

With that in mind, I still stand by the rest of what I said in that piece:

If I were to make a short-term play like this, I would do it with money I could afford to lose – probably no more than one or two percent of my total trading account. And if the trade paid off, I would take the money and run at the first sign of stabilization (rather than waiting around for the Fed to bid bonds up after the break).

The Yogi Berra Effect

Now, it may well be that treasuries keep tumbling. But this isn’t a trade I would look to build on… at least not for now. As I said two weeks ago, I’d pocket the cash sooner rather than later.

Why? For one, the play just feels too damn obvious now. Everyone and their brother “knows” treasuries are overvalued.

That kind of consensus makes me nervous as a long-tailed cat in a room full of rocking chairs, and Barrons heightened the feeling by putting USTs on their Jan. 5th cover. Get Out Now! the Barrons headline blares.

“The bubble in Treasuries looks ready to pop,” the lead piece goes on to add, “sending prices on government debt sharply lower.”

With the whole Barrons yelling “Get Out Now!” bit, I can’t help but think back to some famous old Economist covers, two of which I have framed. “Drowning in Oil” and “The Disappearing Dollar” both marked major trading bottoms. When a view becomes conventional wisdom – or popular enough to merit cover treatment – odds increase that the news is fully discounted.

It’s the Yogi Berra effect, slightly modified for markets: “Nobody’s in that trade anymore, it’s too crowded.”

Reasons to Be Wary

Another factor that makes me nervous, as I also mentioned in December, is the Fed.

Falling treasuries mean rising interest rates. The Fed doesn’t want rising interest rates… especially when the central banker worry du jour is deflation.

And speaking of deflation fears – which are tied to factors like forced saving, canceled business, and overall economic contraction – how about the recent ISM data?

As the above FT chart shows, ISM readings for both new orders and prices paid just hit their lowest levels in more than half a century. Evidence further shows that manufacturing has slowed markedly all around the world.

In other words, the threat of global slowdown still looms large. If the current market rally is just a trading rally – which can’t be ruled out – then treasuries could head back up again.

The Dollar is a Three-Time Loser

So despite the recent downside action – which was predictable based on end-of-year accounting factors – USTs still have a few things going for them. The Fed could yet intervene in a big way if treasuries fall too far, and investors could scurry back into USTs if the new year trading rally fades.

The U.S. dollar, on the other hand, looks like a three-time loser to me. Consider:

• If the Fed intervenes to support treasuries (in order to keep interest rates low), they will do so at the expense of the greenback. The Fed has to print dollars, or otherwise release dollars, in order to buy USTs in the open market.
• The powers that be (a.k.a. the Fed and Treasury) are implicitly supportive of strong treasuries (per the stimulative effect of lower interest rates) and a weak currency (also stimulative for exports).
• Whether the global economy rises or falls in 2009, the U.S. dollar no longer benefits from the foreign investor inflows that were once so strong.

In the “good old days,” when Americans were buying shiploads of “stuff” on credit from China – and paying with mountains of paper dollars – China happily recycled those dollars back into U.S. assets: equities, treasuries, mortgage backed securities, stakes in private equity firms, and so on. All this recycling was supportive of the greenback.

The same thing happened with the oil bought on credit from the middle east. The paper dollars sent to Saudi Arabia, Abu Dhabi and so on came right back home in the form of large purchase orders for dollar-denominated assets. This recycling factor kept the game going.

Now those U.S. dollar props are history. China’s risk appetite is shot, the oil exporters are no longer flush, and all parties are aware that the Fed wants a weakerdollar, not a stronger one, in order to stimulate U.S. exports and encourage local spending choices.

Multiple Scenarios

For these reasons, I am looking to build a sizable short U.S. dollar trade in the near future. I like the fact that a falling dollar is a probable outcome in multiple scenarios.

For instance, if the global economy bounces back in 2009: Emerging markets outperform, banks begin to lend, the Fed’s “quantitative easing” prescriptions kick in with a lag… and the dollar falls.

If the global economy gets worse: The new year equity rally fades, treasuries move higher, the Fed takes even more radical measures with its “quantitative easing” plan, the trillion-dollar stimulus ceiling is shattered… and the dollar still falls.

If the global economy gets much, much worse: Foreign holders of USTs get nervous and start dumping all remaining dollar-denominated assets… the Fed loads up on treasuries as a desperate buyer of last resort to keep interest rates low… and the dollar flat-out crashes.

You get the idea. There are certainly “dollar up” scenarios one could concoct, but in my view they are outnumbered by “dollar down” at least three to one.

In light of all this, I’ve been keeping an eye out for a tactical point of entry ever since the dollar’s sharp break a few weeks ago.

Based on the old trading truth that failed breakouts are some of the most convincing signals, we could see an excellent short-side entry point if – and it’s important to note the “if” here – the USD follows through on a reversal-type failure to the downside.

Source: Don’t Stay Short Treasuries – Short the Dollar Instead

This from Investor’s Daily Edge:

We thought we were in a “New Era.” We thought the party would never end.

Saving was out. Why save when stock prices were going up so fast. For almost eight straight years the stock market knew only one trajectory and that was up. “Buy now and pay later” defined not just a financial strategy but a lifestyle. And not only for the rich and well-off. Everybody was convinced that they could get rich.

Of course Wall Street was getting all the credit. And a big part of Wall Street’s success was enticing great swathes of the population into buying stocks for the first time.

A lot of these investments were hugely leveraged. When you win, you win big. (Of course, when you lose, you can easily lose all your money and then some.)

It didn’t matter that much of it was pure speculation. Many of the stock prices had little to do with a company’s profits. The economy had peaked years before.

Nobody seemed to notice or care. A sense of euphoria had overtaken the market. The head of Morgan Bank wrote the President, “The future appears brilliant. Our securities are the most desirable in the world.”

And Tom McCormick, a stock sales clerk, described it this way: “Geez, I’d go to get a shoeshine and they’d say, “How’s the market?” You’d go to the barber to get a haircut, “How is the market?” Everybody was in the market.”

Where was the SEC in all this? On the sidelines. With everything going so great, they weren’t about to spoil the party.

The SEC was merely following the lead of the Republican President who was convinced that unfettered capitalism was the foundation of our prosperity. He ran an administration determined not to interfere with the “magic” of the free market.

Of course, all this couldn’t take place without the hype of the financial media. Wall Street may have made the hot dog. But it was the journalists who heaped on the mustard.

This is how bubbles are formed. Unfortunately, we’ve been witnessing a series of huge bubbles bursting. As the old saying goes, “the bigger they are, the harder they fall.”

But the “New Era” where everybody has the God-given right to be rich wasn’t the 1990s or earlier this decade.

It was the roaring ’20s.

And the bursting bubbles didn’t just happen this past year. It happened in the Great Crash of 1929.

The similarities are many. Before the crash, it was commonly believed that America had entered into a period of “permanent prosperity.”

The euphoria that elevated the market up in the late ’20s until it came crashing down in a two-day spasm of falling prices in October 1929 mirrored the euphoria that drove the market to record highs in 2007 (well after housing had imploded).

The market lost $30 billion that week in 1929 – ten times more than the annual budget of the U.S. government and far more than the U.S. had spent in all of World War I.

By July 1932, the Dow was 89 percent off its peak.

Credit immediately dried up. And the economy went into a tailspin, leading to the Great Depression. Automobile sales in America fell from 4.5 million in 1929 to 1.1 million in 1932 (and didn’t climb above their previous peak for 20 years).

In both bubbles, regulators were disabled.

In both bubbles, personal debt levels spiked. The credit problems weighing on consumers today originated in the 1920s.

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You see, consumer credit came of age in the 1920s. Before then, the average worker couldn’t get credit. And individual investors were allowed (even encouraged) to invest by putting only 10 percent down. With $1,000, they could buy $10,000 worth of stocks.

Instead of George Soros, T. Boone Pickens and Warren Buffet, the 20’s had its own investment legends.

… William C. Durant who founded General Motors. It was said he managed between two to five billion dollars (an enormous sum for that day) and in a bullish period, he was the bull of bulls.

… Charles Mitchell, who as president of National City Bank, virtually invented the idea of mass-marketing stocks and bonds to the general public.

…and one of the greatest market manipulators in U.S. history, Michael Meehan. In 1929 he made $100 million (equivalent to about $115 billion in today’s money) in one week from pushing up the stock of RCA.

And then there’s the similarity between President Hoover and Bush. Both espoused a laissez-faire approach to the economy.

Hoover was a terrible steward of the economy, but a great cheerleader. He stayed on message with the best of them, saying how wonderful times were and how prosperous everyone was going to be.

As late as October 25, 2008, in his weekly radio address, Bush said “the American people have reason for optimism” about the country’s economic outlook.

The great lesson of the Great Crash supposedly lies in the time it took the market to recover. The Dow did not return to pre-1929 levels until late 1954.

Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.

Will this be the last of the similarities between the two periods?

I have another lesson for you…

If you had invested around the bottom of the market in 1932 with the Dow at about $42 and got out in 1937 at $190, you would have made 350%.

As you can imagine, stocks were practically being given away in 1932, just like many stocks today.

Admittedly, after 1937, the market went flat for the next decade and then tripled in price in the 1950s. The ride up (and down) is never smooth.

I can’t tell you how the market will zigzag its way up this time around. But I do know that this is an historical opportunity to buy stocks of fundamentally strong companies at ridiculously low prices.

If you’ve been in the market, chances are you’ve taken some hard hits. This is your big chance to get up off the canvass and secure your financial future. Who knows when an opportunity like this will roll around again?

Market crashes represent historical disasters, but also historical opportunities to score big.

Source: Haven’t We Seen This Before?

This from Taipan Daily

Which is better for playing the 2009 rally – small caps or large caps?

As a general rule of thumb, “small cap” stocks have a market cap of $1 billion or less. “Large caps,” in contrast, have market caps in the $10 billion range or higher… often much higher.

(Microsoft and GE, for example, have market caps in the neighborhood of $180 billion as of this writing. Exxon Mobil, the big dog on the block, is worth more than $400 billion.)

Small cap stocks have outperformed large caps for most of the decade, as you can see from the following chart.

From 2001 onward, the small cap stocks of the Russell 2000 Index trounced their S&P 500 peers in relative performance terms.

In 2006 the small cap outperformance trend peaked and stalled… came dramatically back on form in March of 2008… and then declined sharply again as markets fell apart.

Now let’s take a closer look at the same chart (daily view this time).

As you can see more clearly from the above chart, small caps peaked relative to large caps in September 2008.

This makes intuitive sense; as fear gripped the markets and panicked investors dumped shares left and right, the lesser known small cap names were hardest hit.

It appears, too, that the small cap exodus played itself out in late November/early December, as tensions eased and credit began to loosen somewhat.

In the context of what’s next for stocks, John Authers of the Financial Times points out that 2009 could wind up looking a bit like 1932.

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Get Ready for a Roller Coaster

In 1932 – the year FDR was elected President – stocks rallied 20% by early March. Then a vicious sell-off took the market to new lows… and then in July a new surge of optimism took hold, leading to 100%-plus gains in just two months. July 1932 wound up registering the all-time depression low.

So buckle your seatbelt, because there could be some wild trading days ahead.

I think, too, that if we do see a multi-month 2009 rally (or maybe even more than one), small caps could resume their outperformance trend. There are at least half a dozen reasons for this.

Small Cap Edge #1: Scrapping the $10 Rule.

Before the 2008 carnage, many institutional money managers had rules and restrictions on the books like “don’t buy stocks under $10” or “don’t buy stocks under XYZ market cap.”

Those rules made sense in more normal times, when there were plenty of higher-priced stocks to choose from. But now so many names have seen their share prices driven down to bargain-basement levels, the institutional $10 rule could be widely loosened if not scrapped.

On top of that, when animal spirits return to the markets – as they did with a vengeance in 1932 – there will also be a lot of temptation to scoop up the attractive large and mid-cap names that turned “small” by default.

Small Cap Edge #2: More Hidden Gems.

Truly great opportunities are often a result of market distortion. It requires a sustained period of sheer investor panic to create the kind of environment where $100 bills are left laying around on the sidewalk.

The investing equivalent of a $100 bill on the sidewalk is a company whose market cap is trading for less than its unrestricted cash in the bank, or whose lines of business and assets on the balance sheet represent eye-popping values in comparison to the discount Mr. Market has placed on the stock.

Simply by the nature of how Wall Street works, more of these “hidden gem” type opportunities are likely to be unearthed in the small cap arena. Diamonds in the rough don’t get market coverage from fifteen analysts and write-ups in USA Today – it’s much harder to find an edge in names that every mutual fund manager knows by heart.

For this reason, combined with what we just lived through, there could be more value to unlock in lesser known small caps.

Small Cap Edge #3: Survival of the Fittest.

The depths of the 2008 panic were so brutal that many of the weaker small cap players have been carried out. For those companies with too much leverage or precarious lines of business, the freezing of bank credit lines and sharp drop in commerce served as a death knell. This “culling of the herd” has left the 2009 crop of small cap survivors in stronger position.

(Remember, too, that small caps don’t get bailed out by the Treasury or the Fed. You have to be “too big to fail” to enjoy that dubious privilege.)

Small Cap Edge #4: A Crisis at the Top.

Whereas small caps were subject to the Darwinian hand of free markets, many large cap players (particularly in the financials) were bailed out. When Treasury Secretary Hank Paulson spoke of sweeping financial crisis, he was actually talking about the screw-ups of the biggest (and supposedly more sophisticated) players.

The injection of government funds in an effort to save jobs – and to spare the weaker of the “too big to fail” names from a harsh free market verdict – will not do much to enhance future competitiveness on the large cap side.

As Jim Grant points out, the large cap institutions who wake up in bed with the government may find that Uncle Sam has cramped their style, and thus their profit potential, for a long time to come. This could create an opening for scrappy small caps.

Small Cap Edge #5: More Diversity/Less Consumer Exposure.

Many of the large cap behemoths in the S&P 500 got that way by leveraging their exposure to the eighth wonder of the world: the all-singing, all-dancing, all-spending American consumer. For the better part of a quarter century, relying on the consumer to fuel growth was a great play. Not anymore.

Plenty of investors now lick their chops over depressed large cap values in the consumer-linked space, assuming that it’s only a matter of time before the future again resembles the past. But what if the past is gone for good? What if the “structural impairment” of baby boomer wallets is permanent, or at least long-lasting enough to keep the U.S. consumption glory days from ever returning?

If the world has indeed changed, and if adaptability and diversity are better strategies than big consumer-linked playbooks put together over the past quarter century, that reality could again favor the more nimble and diverse world of small caps.

Small Cap Edge #6: Gravity.

If a high-performance motorcycle (a.k.a. “crotch rocket”) and a supercharged Range Rover race each other off the line, who wins?

That’s easy – one is 2.8 tons of luxurious bulk. The other is basically an engine strapped to a wheel.

Small caps tend to outperform large caps in periods of expansion for a simple reason: it’s easier to blow the doors off performance-wise when you’re small and light. The more a company bulks up, the harder it becomes to “move the needle” in terms of profit growth.

Small caps could also be the benefactor of aggressive optimism in 2009. If the feeling takes hold that the war on deflation has been won – and just as importantly, that the banks are beginning to lend again – both those factors could act like a turbo-kicker for the “crotch rockets” of the investment world.

In conclusion: if you’re looking for long-term investment opportunities, there are bargains of the decade to be had in overlooked small caps now.

And if you’re ready to ride the 2009 roller coaster for big trading profits, small could still be the way to go.

Source: Six Reasons Why Small Caps Could Lead the 2009 Rally