The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114.

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing, the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see… in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ‘80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights.

For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success.

And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had.

Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall.

Click here to read the rest of Mr. Bonner’s article.

With the nation’s unemployment rate officially in double-digit territory and the under-employed rate ready to the 20% mark, the politicians that promised bliss in the days ahead are eating their words today.

And that means Wall Street is eating its recent gains.

For nearly a month, the Dow has hovered around the 10,000 mark. After hundreds of billions of dollars were withdrawn earlier this year, it was relatively easy to put that money back to work and send the equities market higher.

But now that the economic data is showing facts of slower-than-expected expansion rather than “ideas” of growth, investors are forced to explain their logic. The Dow doesn’t want to budge from 10k.

So far, I’ve heard very few reasons for prices to go any higher. Maybe in China or Australia, but certainly not here in the land where everything is changing.

Think about what has occurred over the past twelve months and tell me if you believe today’s companies are worth as much as they were two years ago or even five years ago.

We’ve had government takeovers of major banks, mortgage lenders, auto manufacturers and insurers. Washington has told people how much they can make in a year. Legislators even introduced retroactive taxes.

Then there is the threat of cap and trade blowing energy prices (an input to nearly every American business) sky high. Now it is mandatory healthcare and the risk to corporate payrolls, tax structures and discretionary spending.

After all that, I hate to think about what is next. An assault on allergens?

*** Maybe I’m just being too pessimistic. After all it has been a long week and I spent five hours at the airport in the middle of the night yesterday waiting to pick up my mother-in-law.

Don’t get me wrong. I think there are some fantastic buying opportunities out there. There are just not in the places most Americans are looking.

But since the mother-in-law brought me eighty pounds of fresh Alaskan salmon, halibut and moose meat (she’s as close to Sarah Palin as you can get without committing to Playgirl), I am starting to feel a bit generous today.

That means I’m going to share with you what I am certain will be the biggest gainers of the next twelve months.

First… healthcare. Think about it. Who is easier to rip off than the federal government?

Just ask Haliburton, Goldman Sachs and whoever sold those $750 toilet seats.

Within a year of signing some diluted version of Pelosi-care, the headlines are going to be filled with record-breaking profits out of the nation’s largest healthcare providers and drug companies.

If Wall Street has the nerve to toss out billions in bonuses while the ink on their bailout checks is still drying, imagine the kind of zeroes that will be added to the paychecks of healthcare executives.

I can hear the excuses now. “If we want to save lives, we have to retain the best workers.”

It is going to be a feeding frenzy when Uncle Sam is the third-party payer.

Next, forget about gold.

One reader wrote to me yesterday and said, “I think it will hit $2,000, but it will probably hit $600 first.”

Could not have said it better myself. Gold’s value is too tied up with political moves and currency fluctuations. With one well-timed press release, China can send the price wherever the heck it wants.

I don’t want my wealth facing that kind of risk, especially after we just rammed Beijing with the largest tariffs yet.

That’s why my money is on palladium. It’s much harder to find and has a huge industrial demand.

Palladium is at the heart of the world’s commodity carry trade. I told TFN Strategic Traders to play Stillwater Mining several months ago and the trade nearly doubled in a week. It is still a good buy, especially as China’s auto industry takes shape.

Finally, go short on natural gas. Get as much leverage as you can because prices are about to plummet fast.

On Wednesday, the International Energy Agency was one of the first major groups to back my opinion. In a draft of a report due out next week, the influential group warned of a massive glut of natural gas as global demand begins to top off and turn around just as we are pulling more of the stuff out of the ground than ever.

But don’t wait until Tuesday to read the report. You can read my version right now. In it, I recommend three ways to play the situation.

So far, two of the plays would have already doubled your money. All three are well into positive territory. Prices are almost out of my buying range, so do not hesitate to take action.

*** Before I go for the week, I need to make a correction. Yesterday, I inadvertently said the Senate extended unemployment benefits for 14 months. The actual extension is 14 weeks.

I apologize for accidentally releasing my psychic secrets. The 14-month extension won’t come until next spring, when Congress finally makes it illegal to layoff any employee.

Enjoy a great autumn weekend,
Andrew Snyder

The Waxman-Markey Bill, the much-ballyhooed clean energy legislation passed recently by the U.S. House of Representatives, is an economic and political mess.

It introduces huge new distortions in markets, imposes onerous new regulations on a number of industries, requires a large addition to bureaucracy and risks a trade war.

And it does very little to fight global warming.

At this point, however, investors really only need to know two key things about this legislation in order to set themselves up for profit, while avoiding any losses from the bill’s fallout:

• From a political standpoint, Waxman-Markey is likely to become law in something close to its current form, meaning investors can craft a plan of attack with a fairly high degree of confidence.
• And, from an economic standpoint, it seems to define a pretty clear set of winners and losers, enabling us to flesh out that plan.

A “Good” Tax?

I’m not sure whether I believe in global warming. We clearly seem to be producing more carbon dioxide than we used to, but it’s not clear how much of an effect that’s having on global climate. Equally, the effects of extra carbon dioxide are long-term and largely irreversible, so even if the warming effect is limited in our lifetime, we probably owe it to our grandchildren not to leave them living in a steam bath.

To the economically minded who share my skeptical-but-cautious view, the optimal policy is pretty obvious: We should enact a carbon tax. Government operations have to be funded somehow, and there’s no obvious reason why a carbon tax should be any more economically damaging than any other kind of tax.

A carbon tax has two advantages over other alternatives:

• First, it can be varied easily, as we get new information and become more worried or less worried about global warming.
• Second, it allows investment and purchase decisions to be made by the market, just tweaking the price mechanism a bit to reflect our concerns about carbon emissions.

We’re not going to get a carbon tax, because it has the politically deadly word “tax” as part of its name. Still, during the presidential campaign, then-candidate Barack Obama showed off a pretty sensible “cap-and-trade” program. All the carbon emissions permits were sold, so the market was able to work properly, with no freebie giveaways to politically favored recipients. Further, there were no  “offsets” by which companies could satisfy domestic permits by persuading the Chinese not to build a dirty coal-fired station, for example (these have given rise to innumerable scams in the European Union cap-and-trade system).

Such a system would have raised lots of revenue, helping to close the budget deficit and pay for healthcare reform, which ought to be one of its major objectives, given the United States’ now-dire fiscal position.

The Lowdown on Waxman-Markey

That’s not what we’re getting with Waxman-Markey, under which 85% of the emissions permits will be given away for free. That depresses the amount of carbon emissions saved, because with so many free permits available, the price of permits will be low.

Also, Waxman-Markey forces new buildings to use 30% less energy by 2012, intruding the U.S. federal government into yet another business previously regulated at the state level. It allows “offsets” for 2 billion tons of carbon emissions a year – 50% domestic and 50% international.

Finally, it doesn’t even raise any net revenue, because the giveaways and administration costs match the fairly paltry revenue raised through selling permits; according to the Congressional Budget Office (CBO) it’s just barely “revenue neutral” in the 2010-2019 time frame. That’s a major problem for President Barack Obama’s budget, which had assumed $624 billion in revenue from cap-and-trade in that same period.

The Winners and Losers

Needless to say, with the government rearranging deckchairs and giving out goodies in such a big way, there will be winners and losers. Clearly that’s what investors most need to understand.

One winning category will be distribution-oriented public utilities – the guys who actually send out electricity bills, including Consolidated Edison Inc. (NYSE: ED), Pepco Holdings Inc. (NYSE: POM) andNortheast Utilities System (NYSE: NU).

These companies will be given permits for 35% of the total “cap” amount in the early years, with instructions to provide rebates on electricity prices. Some of the value of those free permits is bound to flow through to shareholders. In fact, the bill was passed on a Friday, and it was notable that on the following Monday that the distribution-oriented utilities showed a nice bounce. If you can get a 7% dividend yield from the company that sends you electricity bills, it’s probably a buy!

Clean-coal technologies (primarily carbon capture and storage) are due to get 5% of the emission permits over a lengthy period. Most of the companies experimenting in this area are privately held, but Duke Energy Corp. (NYSE: DUK) is planning a carbon-sequestering power station in Indiana, so may be a beneficiary here – as well as through its operation as a major power distributor.

Another group of winners will the sharper (most-creative) operators in the financial-services arena. Since emissions permits will trade, somebody will have to trade them. What’s more, there will quickly arise the whole paraphernalia of futures, options, swaptions, and default swaps. Bear Stearns and Lehman Brothers are, alas, no longer with us, but Goldman Sachs Group Inc. (NYSE: GS), as always, will be prominent at the front of the queue!

Losers? Well, all of us who will pay more for power, but also the Canadian oil sands companies, such as Suncor Energy Inc. (NYSE:SU), who seem fated to pay a hefty premium for their carbon-expensive operations. Probably, the major petrochemical companies such as The Dow Chemical Co. (NYSE: DOW) will be losers, too, as will other carbon-intensive industries. Housing companies will be losers – they use quite a lot of carbon-emitting materials, and will be forced to adopt expensive energy-saving technologies, making their products less affordable.

Of course, all this analysis depends on whatever changes the U.S. Senate may make to the legislation. And that chapter has yet to be written.

Five Ways to Profit From the New Waxman-Markey Clean Energy Bill ]]> http://www.contrarianprofits.com/articles/five-ways-to-profit-from-the-new-waxman-markey-clean-energy-bill/18856/feed 0 http://www.contrarianprofits.com/articles/the-market%e2%80%99s-new-trading-opportunities/17935 http://www.contrarianprofits.com/articles/the-market%e2%80%99s-new-trading-opportunities/17935#comments Tue, 16 Jun 2009 16:25:53 +0000 David Grandey http://www.contrarianprofits.com/?p=17935 If you just look at the daily closes on the indexes, one would conclude that the market is relatively healthy and is still providing opportunities to buy. But when you look at it from other perspectives, you could draw a conclusion that is much different.

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

The superhero S&P 500 added 3.4%. This means it’s 0.4% in the black for the year so far.
And here we were at Notes fretting over the recent dramatic spike in insider selling, the role of short covering in pushing stocks higher and the government’s funny games. In fact, so horribly emasculated did we become that we even wimpishly fretted over the lessons of history.
We recalled the Nasdaq crash of 2000 to 2002. It spawned two “healthy” rallies it spawned – one of 30.8% and one of 44.7% – before continued selling pressure took the market down to even greater lows. We also remembered the poor old Nikkei Index. Starting in 1990, it showed three very “healthy” rallies of 55%, 51.7% and 131% before collapsing and setting new lows.

And if you take a look at the chart above, you can see that during the Great Depression, the Dow saw no less than eight double-digit percentage-point rallies between 1929 and 1932 – a period when the index lost 90% of its value.

The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

“I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets,” Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.

The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.

“Most banks will have to raise capital in some form,” Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. “The capital raises will be much bigger than people think.”

Miller said that uncertainty about what the tests might reveal has made banks stocks “uninvestable” in the near term.

The issue for investors is that “you just don’t know how the government is going to view it,” Miller said.

Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).

Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.

Why wait for the U.S. Treasury Department’s bank stress test when Money Morning can highlight the four secrets that will let you separate the winners from the losers in the U.S. banking system?
Call it the “Money Morning Bank Stress Test.”

Money Morning Contributing Editor Martin Hutchinson last week evaluated the 13 largest U.S. banks and rated them as either “Zombies,” “Walking Wounded,” “Risky But Proud,” and “Hidden Gems,” and concluded that nine of the banks pose some degree of risk. But he also found that four of the financial institutions are “Hidden Gems” that might be worth a look for investors.
On Thursday, we’ll finally see how it all plays out.

Market Matters

Chrysler LLC filed for bankruptcy and then forged a potentially “game saving” partnership with mighty Fiat SpA (OTC ADR: FIATY), Italy’s largest car manufacturer.  General Motors Corp. (NYSE: GM) will be saying good bye to its Pontiac brand (any interest, Fiat?).  Bank of America’s Ken Lewis was stripped of his board chair, but will continue to put out fires from the chief executive office.   Earnings season moved forward and Exxon-Mobil Corp. (NYSE: XOM) did NOT set a new record for a change.  International Business Machines Corp. (NYSE: IBM) bucked the cost-cutting trend and actually raised its dividend.

With Treasury set to release the stress test results on Thursday, rumors are circulating that Bank of America and Citigroup may be in need of additional capital, though both are pleading their cases.  Meanwhile, Citi began lobbying for permission to pay retention bonuses to key employees [it worked for American International Group Inc. (NYSE: AIG) and Merrill Lynch (NYSE: SQD)], who may seek the greener pastures of other (ailing) financial institutions.

Telecommunications firms were in the spotlight early in the week as chipmaker Qualcomm Inc. (Nasdaq: QCOM) raised its revenue outlook and Verizon Communications Inc. (NYSE: VZ) actually announced increased earnings in the first quarter.  Verizon may be teaming up with Microsoft Corp. (Nasdaq: MSFT) to develop its own touch-screen cell phone to cut into Apple Inc.’s (Nasdaq: AAPL) iPhone market share.

Drugmakers Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY) posted quarterly results that beat Wall Street expectations, as did The Dow Chemical Co. (NYSE: DOW) and Starbucks Corp. (Nasdaq: SBUX), though the latter’s major restructuring (store closures) prompted a 77% decline in profits.

MasterCard Inc. (NYSE: MA) confirmed that 2009 will be a challenging year, though rival Visa Inc. (NYSE: V) beat earnings estimates, as debit card usage increased, resulting in greater fee income.

The Procter & Gamble Co. (NYSE: PG) struggled last quarter, with weaker sales, as shoppers traded down to lower-priced consumer goods.  Exxon-Mobil, Chevron Corp. (NYSE: CVX), and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) were victims of the declining global demand for oil.  Still, Exxon’s long-term outlook remains strong as the company continues pouring money into development projects to be fully prepared once the recession ends.  In fact, management even boosted its stock dividend.

Economically Speaking

While the U.S. Federal Reserve seemed to offer some “cautious optimism” about the overall direction of the economy, the policymakers avoided any sugarcoating and hedged their comments for fear of an unforeseen development (such as the “swine flu,” also known as the A/H1N1 flu).

While the virus quickly expanded across the globe, most of the worst cases have been limited to Mexico, where the already depressed economy will be further impacted from business closures and travel restrictions.

When SARS (Severe acute respiratory syndrome) hit in 2003, China’s gross domesic product (GDP) was estimated to have been hurt by about 1%; According to early projections by Moodys Corp.’s (NYSE: MCO) Economy.com, the Mexican economy will contract by 6.2% in 2009 (revised from the -4.5% estimate to account for the flu).

The Fed plans to leave rates at near 0.0% and stands prepared to purchase more Treasury and mortgage-related securities to keep the economy moving in the right direction.

The first quarter’s gross domestic product (GDP) highlighted a relatively hectic week on the economic front.  While the economy contracted from January through March at a worst-than-expected 6.1% clip, analysts found some positives deep within the release, as consumer activity actually picked up during the quarter.

The spending component rose by 2.2%, after falling by 4.3% in the fourth quarter.  Additionally, a decline in inventories hindered the release; however, economists point out that such a reduction indicates that manufacturers have scaled back production and will not be burdened with excessive supplies that may need to be deeply discounted to be sold. As demand slowly returns, they will be able to boost production once again.

Meanwhile, consumer confidence surprisingly soared to levels not seen since November 2008, which is especially good news, since the consumer accounts for about two-thirds to 70% of the activity in the economy.

Weekly Economic Calendar

Source: Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

The manure began accumulating when we rode up to the high pasture on Tuesday. More about that below…

In the meantime, the Dow rallied a bit yesterday – up 127 points…barely half of what it lost on Monday.
Is the bounce still bouncing? We don’t know. But we don’t trust it. They say the stock market ‘looks ahead.’ So, it is possible for it to see things we can’t see. On the other hand, what was it looking at two years ago? Didn’t it see the economy going over a cliff? Apparently not.

But investors tend to believe what they want to believe. And what they want to believe is that the stock market has had its vision corrected and now sees a recovery.

Our guess is that they are wrong on both scores. The stock market is just as blind now as it was in early 2007…and there is no recovery coming any time soon. As to the first point, we have no further evidence to present…but as to the second; at least we have a theory.

By our reckoning, this is not a recession…this is a depression. In a recession, the bull market formula still works. It just needs a little time to rest…catch its breath…work off inventories…and rebuild cash accounts. But in a depression, the formula stops working.

The basic formula that drove the U.S. economy for the last 60 years has been the expansion of consumer spending. At first, that spending was healthy spending. People had built up savings during the war. In the Eisenhower years, they were ready to get back to work in the consumer economy, get married, have children, and spend money. America was the world’s leading lender…leading exporter…leading manufacturer…and leading everything. Gradually though, having so many advantages caught up to the United States of America. By the ’70s, the Nixon administration thought it could do away with the gold backing for the currency. By the ’80s, the United States slipped from being a net creditor to being a net debtor to the rest of the world. By the ’90s, American consumers were spending more than they made…and by the ’00s they had given up saving all together – depending on the savings of poor people in China and elsewhere in order to continue living beyond their means.

Each time this system was faced with a recessionary correction, at least in the last 25 years, the feds tried to stimulate consumer spending with easier credit. And each time, consumers took the bait and got hooked on more debt. That’s why the financial industry expanded so much…it sold more and more debt in more and more grotesque and amazing ways.

This time is different. This time the feds have responded with zero interest rates…and $13 trillion worth of bailouts and boondoggles. But the old magic doesn’t seem to work anymore. This time, the formula no longer works. Consumers already have too much stuff – and no way to pay for it all. They have no choice; they have to cut back. This is not a pause in the long cycle of increasing consumption, debt and speculation. It is a reversal of the cycle – with less consumption and less debt (more savings). This is a depression.

If left alone, this cycle will see falling asset prices, falling bond prices and rising savings for many years. Stocks should sell down to levels where they are attractive again – at average P/Es below 8…7…or even 6. And with dividend yields above 5%.

Of course, when that happens people will have lost interest in stocks. The financial magazines will have pronounced the stock market “dead” and Jim Cramer will have been booted off the air.

By that time, the economy will have been restructured too. There will be less retail space. Many malls will have gone broke. Living standards in America and Britain will have gone down. And many of the people in the financial industry will be doing what they ought to have been doing all along – taking lunch counter orders.

Now, we turn to Addison for news on the global financial losses:

“Banks, brokerages, fund managers…you name the financial firm…they’ve now seen nearly $4.1 trillion in digits evaporate since the beginning of the credit crunch, says the International Monetary Fund (IMF) this morning.”

“More than half the losses – $2.7 trillion – were sustained by U.S. firms,” explains Addison in today’s issue of The 5 Min. Forecast.

“So far, global financial losses in this bust are almost equal to the entire market cap crunch of the tech bust early in the century:

“In an effort to paper over the losses abroad, the IMF has already funded over $55 billion in emergency loans to European nations including Hungary, Serbia, Romania, Iceland, Ukraine, Belarus and Latvia.

“Last week, Mexico became the first Latin American country to put up the white flag, asking for a $47 billion line of credit. Just yesterday, Columbia followed suit, seeking $10.4 billion. We’ll go out on a limb here… they won’t be the last.”

Each weekday, Addison brings readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill, with more thoughts:

Compuel is a huge valley…probably about 10,000 acres…above 3,000 meters in altitude. There are no trees. And a cold wind blows through the sage even in summer. This time of year, at least it is green.

The summer rains came late this year. A river runs through the center of the valley, wide and shallow…you can splash through it on horseback. For a few months of the year, it turns the center of the valley into wetlands. Later, in the winter months, it will be dry as Death Valley and as cold as a tax collector’s heart. But last week it was wet and marshy…with ducks flapping up suddenly wherever you go.

You can get to Compuel in a 4×4…but it is an almost impossible drive…not to mention dangerous. There are sections of the road that are hardly as wide as the wheelbase…with a 1,000 ft drop off the edge.

“It was probably an old Inca or pre-Inca trail,” explained Veronica. She was one of three archeologists who showed up at the house on Saturday. They asked if they could camp out and do some digging in the Indian ruins on the ranch.

“We won’t take anything. Besides, the law requires that anything we find belongs to the state,” she anticipated our questions.

“This area is very rich in archeological evidence,” Veronica continued. She was from Buenos Aires, a cheerful, talkative woman with a librarian’s air about her. With her was Paola…another archeologist from Buenos Aires …and Hector…an archeologist from Salta. They were trying to figure out dates.

“We don’t really know much about the Indians who were here before the Inca,” Veronica went on. “All we know is that they were brave and independent. This tribe resisted the Inca…and the Spanish. The Incas tried to subjugate them…forcing them to pay tribute. But they fought them off. I guess they figured that if they could beat the Incas they could also beat the Spanish. In fact, they were the last Indians in all of Argentina to surrender. And the story is that women took their babies up into what they call the ‘fortress’ – a natural stone formation – and threw them onto the rocks down below rather than see them enslaved by the conquistadors.

“But we don’t know much more than that. So we dig down to try to find bits of pottery…and seeds…and soil samples that will tell us what they ate and which groups of other tribes they were related to. Then, we put the pieces together and gradually develop a better picture of who they were and how they lived.

“That’s why we need to go to the ruins at Compuel.”

“How are you going to get there?” asked Jorge, the farm manager.

“We’re going to hike. What do you think…can we get there in 4 hours or so?”

“Ha…ha… it will take you at least 7 hours… depending on how strong you are. And of course, you will need a pack mule to carry your equipment.”

On horseback, you can get to Compuel from the ranch house in 4 hours. The trail is rugged…with the horses stepping from stone to stone in some areas. By the time we got there we were already tired and saddle-sore. When we arrived, the roundup had already begun. The vaqueros – our local cowboys – had already rounded up the cattle from the whole valley and driven them into a big stone corral. They were roping the calves and separating the bulls from the cows. Occasionally, a bull would charge…but the cowboys were fast, they dashed to the side and jumped up onto the stonewall. Their dogs stood on top of the stonewall watching attentively. This was a once-a-year spectacle they didn’t want to miss.

Source:  Is the Bounce Still Bouncing?

Many of the larger cap indexes tested their 50-day moving averages  last Wednesday, with the S&P500 also testing the all-important 800 level.

Some of my longer-term technical analysis tells me that the recent rally is part of a large consolidation pattern, which could eventually come back down and test the recent lows.

The reason I mention this is that although the Dow and S&P 500 have gone low enough to satisfy their weekly charts, the Nasdaq Composite, the NYSE Composite, Wilshire 500, and the smaller-cap indexes did not appear to go low enough.

Also, the bear market that ended in 2002 took over seven months of consolidation before the bull market began. It’s only been about four months since the November lows. If history repeats itself, a lot of choppiness lies ahead.

If my “consolidation theory” is correct, watch for it in the Nasdaq 100 (NDX). Take a look at the chart below…

Note the two resistance lines – one at the January high and the other at the October high. If either of these two levels are tested and the indexes begin struggling around one of them, I would trade lightly until the move plays out.

Source: Ticker Of The Week: Nasdaq 100 (NDX)

That means the market is only 34 points away from the low on November 20.

It seems that the market will test the previous low, and I can’t stress enough how important it is for the market to hold its ground and close above the 7552 level.

If the market breaks down below that mark and closes under 7552, look out below.

For all the technical market analysts out there, a critical support level will be broken, and that’s a big deal. Once a support level is broken, not only does the market typically fall down until the next one can be found, but the old support level can now become a resistance level if and when the market rallies back up.

Holding the line can be seen as a bullish sign that the market is fighting to hold that critical level. Of course, if it doesn’t hold, the bears will have taken over and shorting the market is the best play.

Either way, watch this critical number and make sure you are safely positioned either way. If you are bullish and the market holds, going long the Diamonds could make some short term gains, and if you are a Bear and the market drops below the 7552 level, shorting the Diamonds could prove rewarding with some quick gains.

Source: Will The Market Hold The Line?