And the green shoots brigade gained a firmer hold on investor sentiment. It has become okay to say that the global economy is out of the woods and that the rally in US stocks could be the beginning of a new bull.

Is this optimism justifiable? This is the question we’ll attempt to answer in today’s Notes.

“The whole credit collapse and the recession must have been a hoax,” writes our favorite underground analyst David Rosenberg at Gluskin Sheff.

Rosie is talking about the latest Investors’ Intelligence survey. It shows bullish sentiment at 47.7% (versus 42.5% the week before) and bearish sentiment all the way down to 23.3% (from 25.3% the week before).

Meanwhile, net inflows into US equity funds have been positive now for 12 consecutive weeks, with a total of $2.83 in fresh capital pouring in the week before last. Another sign of exuberance, as Rosie points out, for contrarian investors.

Maybe the bulls haven’t been paying attention to the catastrophe in exports. This from Rosie’s Friday missive:

The latest data on China’s outbound shipments showed renewed hints of slowing. Same for Korea. German exports plunged 4.8% in April and are off 28.7% from a year ago. Canadian export volumes sank 5.1% in April — and this transcended the problems in the auto sector — on top of 2.3% slide in March, taking Canada into a deficit position of $178 million in what is a vivid sign of a hugely overvalued loonie. U.S. export volumes also dropped 4.3% in April after a 0.5% decline in March, taking the YoYo trend down to a new all-time low of -20.4% from -13.8% in March.

Maybe the bulls just don’t care. This has been our suspicion here at Notes since the current rally US stocks kicked off in March. Let us explain…

The credit crunch and the collapse of onetime Wall Street darling Lehman Brothers last September spooked investors bad. Fear spread over a 1930s style great deleveraging, and stocks plunged as a result.

But are we really experiencing a great deleveraging? The upsurge in US stocks signals that we’re not… as does the more recent rise in crude oil prices. A deleveraging is by nature deflationary. But the rise in base metals, stocks and oil reveal that traders and investors are counting on deflation’s nemesis – and the nemesis of earners and savers – inflation.

We’re learning the lessons of history not by studying it but by repeating it. Warns underground investor Bob Carver over at MarketClues.com:

When the Bankster Debt Bubble burst in 2007 and 2008, it was popular for most to think that a great period of de-leveraging had begun. This happened in the Thirties and led to the Great Depression. It wasn’t pretty, but debt was either written off or paid off. The country learned a big lesson about banksters and how their bad decisions blew up the economy. Once those who had learned those lessons were gone, we had to re-learn those lessons, not by studying history, but by repeating it.”

Or, have we learned the lessons? Today, we not only have not learned the lessons of the Bankster Bubble, we are repeating and expanding the bubble of debt. Instead of a Bankster Bubble, we have a Government Debt Bubble that subsumes the Bankster Bubble and expands it. There is no de-leveraging going on. We are simply blowing a bigger bubble, waiting for the day when our lenders cut off the flow of funds.

Total debt is still rising sharply, according to the Fed’s Flow of Funds Report. In 2008, Federal debt grew 24% and in the first quarter of 2009 grew by 22.6% at an annualized rate. Household and business debt was virtually unchanged, while state and local government debt is rising at a 4.9% annual rate in 2009. Don’t take our word for it. OptionARMaggedon did some charts which show that the debt bubble is still expanding. The last two years were simply a sneak preview of what’s coming when the, by then much larger, debt bubble blows up in the future. The longer this goes on, the worse it will be. The public is sitting idly by while this pile of explosives is being built higher and higher, just waiting for the day when someone with a match lights the fuse.

Put simply, the only way out of a debt induced depression is to pay down debt or write it off. Leveraging up only delays the inevitable.

Given this “leveraging up,” it should come as no surprise that oil prices have risen sharply recently. The black goo is now trading at over $70 a barrel, just off its nine-month high of $73.20. The rate of gain is astonishing: oil prices have risen 100% since their $38 low in January.

Underground investor David Fessler at Investment U recommends four ways to profit from oil’s price moves (three long and one short).

• 1. Certainly one of the big drillers like TransOcean  (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
  2. The United States Oil Fund LP  (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
  3. If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN  (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
  4. But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone. For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

Unfortunately – at a time when consumers can’t afford a wallet drain – retail gasoline prices across the United States have risen to $2.55 a gallon on average, and over $3.00 a gallon in places like California.

As you drive by the gas station and see the now familiar price changes – sometimes by the hour – you might wonder what’s really affecting the price you pay…

Investors, of course, want to know if there’s a good way to play the price moves. Let’s take a look at the two biggest drivers of oil prices and ways you can play its movements.

Oil Prices Rise As Production Costs Vary Widely

As with any natural resource we use, crude oil has costs associated with its production that are relatively clear, but nonetheless can vary widely.

Those variations come about almost entirely based on where the oil is. Since we’ve been using the black goo for nearly 100 years, it stands to reason that most of the easy, cheap oil deposits have already been found.

Taking a look at the costs to even find the stuff:

• You’ll find deep-water exploration is far more expensive than land-based exploration. You need a sizeable exploration vessel, capable of operating in some of the world’s angriest oceans for months at a time.It has to be equipped with highly sophisticated instrumentation and software to be able to “see” potential crude oil deposits as deep as seven miles below the surface of the ocean. You also need a crew of mechanics to keep it all working, and petroleum engineers and geologists to interpret the data.
• Land-based exploration – on the other hand – can be done from a well-equipped van, by one or two petroleum geologists.Then there’s production costs: land based oil is cheap to drill for. Land-based drills can fit on the back of a few tractor-trailers and can be torn down, moved and setup at a new location with relative ease. In addition, it’s much less expensive to extract.

Land based production is definitely preferred. Unfortunately it’s not where the big new finds are made.

As you go offshore into deep water, things get expensive fast: deep-water extraction is a financially losing proposition with prices anywhere below $75 to$80 a barrel, compared to as little as $25 to$30 a barrel for some land-based deposits.

But exploration isn’t the only cost of crude oil. Refining, transportation and taxes make up the remaining cost of what you pay at the pump. And that’s really just the start of what we pay for gas…

The Other Price Drivers: It’s Not Always What You Think

When crude oil prices spiked to $147 a barrel, there was no question that speculation played a significant role in getting it there. But speculation also played a role it getting it to $38 a barrel, too.

In the end, for oil and just about everything else, it all comes down to supply and demand. We’re in a recession, and demand continues to slacken. OPEC’s response has been to cut supply, with the thought that – everything else being equal – prices would eventually stabilize at some level.

But everything else isn’t equal: The Federal government has been dumping cash into the financial system at unprecedented levels. It’s caused the dollar to drop in value with respect to other world currencies and with respect to gold.

Since oil on all the world markets is priced in dollars, its price rises as the value of the dollar declines. It’s one of the reasons many oil-producing countries have suggested that the price of oil be tied to a basket of currencies instead of just to the dollar.

Unfortunately, there aren’t any other currencies that are as abundant or – more importantly – strong enough to handle the sheer volume of the transactions that occur daily in the oil market.

So we have demand and supply destruction in a race downward here in the United States that’s kept oil inventories high – up until a few weeks ago. Add to that steadily rising demand coming from emerging markets around the world. Throw a declining dollar into the mix and stir.

The result is rising oil prices – in all likelihood heading to $80 a barrel or possibly even higher by the end of the year.

Three Ways to Play the Pickup in Crude Oil Prices

As for investing in crude oil, here are three ways to get long in oil and one way to short it:

• Certainly one of the big drillers like TransOcean (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
• The United States Oil Fund LP (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
• If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
• But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone.For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

Any way you play it, you need to be aware that there are many factors that can affect oil’s price, and by extension, any investments you have that are tied to it. Keeping an eye on the biggest drivers of these prices will give you a leg up on the average investor.

Good investing,

David Fessler

Source: Rising Oil Prices: Here’s Four Ways to Play Crude Oil

After all, this could easily just be a bear market rally. And bull markets rarely begin with a bear market rally and head straight higher.

Beware The Bear Market Trap

It makes sense to hedge against a renewed decline. Here’s why smart investors are doing so using inverse ETFs. Read on to find out what they are, how they work, and why you should consider adding one or two to your portfolio in order to protect it…

ETFs: A Safer, More Effective Way To Short The Market

Just a few years ago, investors who wanted to profit from a market/stock downturn had to borrow shares from their broker to short the asset in question. But today, betting against banks, small-cap stocks, or even entire market averages, is just one convenient ticker symbol away.

You can short the market by using an inverse exchange-traded fund (ETF).

And while I’m generally an investor who subscribes to the fact that stocks ultimately rise and produce solid, long-term gains, there are certain times when using inverse ETFs can be very appealing – particularly in the current market environment.

Exchange Traded Funds: A Brief Overview

Before we talk about the hedging advantages of inverse ETFs, let’s quickly review what ETFs are, and how they work…

• Exchange-traded funds are securities that closely resemble index funds, but are more flexible because you can buy and sell them during the day, just like common stocks.
• ETFs give investors a convenient way to purchase a broad basket of securities in a single transaction, offering the convenience of a stock along with the diversification of a mutual fund.
• From a humble start in the early 1990s, the ETF industry has exploded, particularly over the past several years. There are now over 700 ETFs, with $450 billion in assets.

And the advantages? ETFs boast several major ones over mutual funds and common stocks…

• Better diversification
• More flexibility
• Lower costs
• More liquidity
• Tax efficiency

Going Short The Smart Way With Inverse ETFs

Inverse ETFs (or short ETFs) are designed to move in the opposite direction of an underlying index. That means you profit when the benchmark tanks. The lower the underlying asset goes, the higher these funds advance.

Perfect for a bear market like this one.

Think of inverse ETFs as a type of insurance policy for your portfolio. Investing a modest amount in one of them can be a useful way to hedge against market declines, or protect your profits in certain asset classes.

And when an index or stock heads south (as we’ve seen many do with a vengeance recently), an inverse fund can help soften the blow – and in some cases, even generate enormous profits.

For example, on September 30, 2008, four days before the Dow went below 10,000, I sent a special newsflash to my ETF Authority readers identifying 14 securities that could skyrocket as the market heads south.

*Source: Bloomberg. Total returns from 9/30/08 – 3/5/09

As you can see, most of the inverse ETF have done exactly what they were designed to do in this rough market. And it doesn’t stop there…

Double Your Money with Inverse ETFs

Some ETFs can even return double the inverse of the underlying security. For example, if you buy shares of the ProShares UltraShort S&P 500 (NYSE: SDS) and the S&P 500 declines by 5%, SDS gains 10%. (Keep in mind that these funds compound daily, so if you invest for longer, the returns won’t line up exactly).

So how are these ultra-short funds able to double the inverse performance of indexes? Simple… by using leverage. The math doesn’t always work out exactly, but you can usually expect it to return double the inverse within a reasonable range.

The trade-off, however, is that these funds can be incredibly volatile – and if you’re wrong, you lose twice as much. So only consider going ultra-short if you have the stomach for it.

Why You Haven’t Missed Out on Short ETFs…

You may think you’ve missed the boat on short ETFs… but think again.

With the market coming off depressing lows, the current rally may simply be a “dead cat bounce” (which have been known to soar), as the market attempts to form a new bottom.

With this in mind, you may want to consider adding an inverse fund or two to help smooth out some of this unprecedented market volatility.

Good Investing!

Nathan Slaughter

Source: Inverse ETFs: How To Profit From The Bear Market Trap