In fact, some stock market mavens are even starting to bandy about the “E” word – exuberance – and say it’s time to adopt a highly defensive position, or to even take some money off the table.

“Awhile back, I said that fair value on the Dow Jones Industrial Average was 7,800 – and that was if the economy was operating efficiently,” said Money Morning Contributing Editor Martin Hutchinson, a former international investment banker who now operates the Permanent Wealth Investor trading service – and who was recently cited by Slate magazine for having called the stock-market bottom. “But the economy isn’t operating efficiently. We’re rolling up huge deficits, and are rolling out huge stimulus packages. Those will both be highly inflationary. I’d say that – right now – fair value on the Dow was about 6,500 to 7,000, though it could easily bottom out at around 5,500.”

The closely watched Dow zoomed 214 points, or 2.6%, on Monday to close at 8,426, although it dropped modest 16.09 points to close at 8,410.65 yesterday (Tuesday).

U.S. stock prices have been on a two-month roll. On Monday, the Standard & Poor’s 500 Index gained 29 points, or 3.4%, to close at 907, a four-month high. That broad index, used by investing professionals to benchmark the market, opened the year at 903.25. It closed yesterday at 903.8, meaning it’s actually in positive territory for the year.

The tech-heavy Nasdaq Composite Index jumped 44 points, or 2.6% Monday, to close at 1,763. Even with yesterday’s 0.54% decline, the Nasdaq is up 11.0% for the year.

It’s not just the fact that the market has bounced back that has Hutchinson and some other investors concerned – it’s the forcefulness with which stock prices have escalated. After closing at a 12-year low on March 9, the S&P 500 index has rallied about 34%.

Investors have become increasingly optimistic that the U.S. government finally has a handle on the credit crunch and the financial crisis that’s grown out of that nightmare of bad debt and parsimonious lending. There’s a belief that the U.S. housing crisis has reached bottom. Even Money Morning’s Hutchinson says that the rate of decline in the U.S. economy has almost certainly slowed substantially, meaning a bottom may not be far away.

But a bottoming out in the economy doesn’t necessarily mean the U.S. economy’s many problems are at an end, Hutchinson says. With all the stimulus money flowing through the economy, inflation is certain to be a problem, meaning interest rates have to increase, Hutchinson says.

For instance, during the 1990s, inflation averaged 2.9% and the 10-year Treasury bond averaged 6.67%. The gross domestic product (GDP) deflator inflation index was at 2.9% for the first quarter of this year, and yet the 10-yearTreasury was trading at 3.15%, Hutchinson says. That means interest rates have to increase – a lot, a process that’s certain to blunt an economic recovery, he believes.

And if that happens, U.S. stock prices – ahead of themselves already – will drop back, as well.

It was back in mid-October when Hutchinson said the fair-value level of the Dow was 7,800. To drop back to that fair-weather/fair-value target of 7,800 from its current level, the 30-stock, blue-chip index would need to fall 7.0%

That’s more than just a modest decline, and would clearly be painful in its own right. But the Dow would have to drop an alarming 17% to 23% to reach Hutchinson’s foul-weather/fair-value range of 6,500 to 7,000, and a downright sickening 35% to hit his possible market bottom of 5,500.

And Hutchinson isn’t the only investment expert preaching caution.

Take Pacific Investment Management Company LLC’s (PIMCO) fixed-income guru Bill Gross, who says investors are far too optimistic about the U.S. economy’s near-term prospects.

“Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for new bull markets in a multitude of asset classes,” Gross wrote in PIMCO’s May outlook. “Stable and secure income is still the order of the day.”

In theory, the stock market is forward-looking, meaning stock prices reflect a future – three to six months down the road – that is obviously unknown to investors. The hard-charging rally of U.S. stocks in recent weeks has prompted an even stronger belief that the economic rebound is at hand, and that the recession that started in December 2007 may soon be over – if it isn’t already.

That doesn’t mean there are no profit opportunities available. Plenty remain. But it does mean investors need to invest cautiously, and may need to make some profit plays more suitable for bear-market environment – just in case.

Some “smart-money” strategists say that it’s time to take money off of the table, MarketWatch.com reported. In a recent research call, for instance, Raymond James Financial Inc. (NYSE: RJF) market strategist Jeffrey Saut says he has put his trading account all into cash, and has taken defensive positions (typically those that are designed to rise in price if the market falls) in case of a correction in stock prices.

“We have made a lot of money over the last eight weeks and continue to think the trick from here will be to keep that money,” Saut wrote in that research call.

Converting your profits to cash is one way to play this uncertain stretch, Hutchinson says. But there are several other strategies that will position you to continue generating profits, while also hedging against potential market unpleasantness. In his Permanent Wealth Investor trading service, Hutchinson says to:

• Buy high-yielding stocks for both income and capital gains.
• Buy gold both to profit, and to hedge against the inflation that’s certain to arise from the big government spending programs.
• And buy so-called “inverse funds,” to hedge and to profit. One such suggestion is the ProShares UltraShort 20+ Year Treasury Fund (NYSE: TBT), which seeks investment results that correspond to twice the inverse daily performance of the Barclays Capital 20+ Year U.S. Treasury Index.

A new bear market isn’t a foregone conclusion, either. U.S. Federal Reserve Chairman Ben S. Bernanke says the U.S. recession could end this year, and says that economic activity could pick up substantially in the year’s second half.

And there’s also an interesting wildcard at play. It’s a bit of anecdotal evidence that has proven bothersome to some investing professionals because it doesn’t fit with the way market rallies typically play out.

In most stock-market rallies, the initial catalyst comes from the big institutional players, who ignite the upturn. As the media drumbeat of the rally grows stronger and louder, retail investors start to join in – a little at a time at first, but then in growing intensity. By the time the main group of retail investors make the move, however, it’s usually almost time for the institutional players to cash out, since the trend they invested to profit from is typically almost played out, MarketWatch reported.

That’s pretty much what happened during the dot-com bubble, and is why individual investors took it on the chin.

This time around, however, it’s been different.

But this time around, anecdotal evidence – such as trading data from online brokers E *Trade Financial Corp. (Nasdaq: ETFC) trade and TD Ameritrade Holding Corp. (Nasdaq: AMTD) seems to suggest that it’s been the retail-investing crowd that’s driven this rally from the very beginning, while institutions have stayed on sidelines, cash in hand, Barry Ritholtz, chief executive officer and the director of equity research at Fusion IQ, told MarketWatch.

“The ‘dumb’ retail money is leading the gains,” Ritholtz said.

That could end up being good news for the stock market: Institutional investors, afraid to have missed the rally, might step in more forcefully, fueling a new-and-longer leg of the current bull market for U.S. stock prices.

If it turns out that this is just a “bear-market rally,” however, bad economic news will halt the rally and cause investors to punt.

The bottom line: Over the long haul, economic reality will guide stock prices, Ritholtz says.

“In this type of environment, the market is guilty until proven innocent,” he said. “We have to assume this remains a bear market until we see a more normalized economy, a recovery in some employment measures, and real estate to actually start improving – not just to stop free falling.”

Source: Is the Stock Market Rally For Real?

This stock is just waiting to explode. He recommends you take advantage of this investing opportunity and says, “because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound.”

This from Horacio:

In the face of the global financial meltdown, the price of oil has plummeted from a record high of almost $150 a barrel in July to less than $40 recently. And now it seems to be bottoming.

Clearly, this isn’t the precise moment to call a market bottom, but it is reasonable to think about a bottom around this range for a few reasons.

For starters, the forward curve of oil futures prices is showing a very marked upward slope, known in the commodities business as a forward curve in “contango.”  This means that – the farther out we go – the higher and higher oil futures prices climb. To see what we mean, let’s take a look at the projected price of oil as depicted by this graph.

A futures curve as upwardly skewed as this one provides a great opportunity for profits:  One can just buy oil today, sell it forward and hold it until December 2016 and make a guaranteed rate of return of about 62%.  In a year, you can make about 11% by just buying now, holding it and delivering in a year.  If you add some leverage to the transaction, you can make a nice return.

Some sophisticated players are doing just that: They’re buying oil, and are holding it in a tanker in port – with the obvious intent of capturing these profits.

However, this very favorable contango arbitrage is not going to last for long, as more players have been jumping into it, thus flattening the futures curve with time.  It is easy to see that, at some point, as oil gets absorbed into storage, and the curve gets inverted, the speculative players that shorted oil by selling futures long ago without having production or physical oil will be squeezed into covering at much higher spot prices.  This spike in spot prices situation will develop in less than a year, as demand recovers.

The slope of the curve also indicates widespread expectations for inflation.

From Stimulus to Inflation

The U.S. government has launched a huge stimulus package and its plan for a $3.6 trillion budget for fiscal 2010 will elevate the fiscal deficit to a staggering $1.75 trillion this year – a numbing 12.3% of gross domestic product (GDP).

And we have yet to deal with the massive social-security and health-care entitlement programs, which pose a huge fiscal threat ahead.

The financing of the announced deficits will come through issuance of U.S. Treasuries, which means that the U.S. Federal Reserve will have to monetize the debt. That is, the U.S. central bank will have to print money in order to make it available to buy the debt, since the level of issuance is so high that foreign buyers will not be able to purchase all the debt.

In addition, the Fed has already been very busy expanding its balance sheet in order to pump liquidity into the markets to buy mortgages and other assets. And it has already lowered its benchmark Federal Funds rate to a range of 0.00%-0.25%.

Why are the Fed and the government so intent in stimulating the economy?

The nightmare scenario for any central bank is falling into the so-called “liquidity trap” – a situation that exists when an economy’s asset prices enter a deflationary spiral and people reach the conclusion that by merely sitting in cash, even at a zero interest rate, they are getting richer by the day.  In that situation, monetary policy becomes ineffective, since rates are already at zero, and since it is very difficult to get out of that deflationary spiral.

That is precisely what happened in Japan during its “Lost Decade.” By the time the Japanese figured out that they needed to do something very dramatic in terms of stimulus, it was too late. The drop in prices had already created too many losses in the banking system and taken the entire system into bankruptcy.

Therefore, the theory goes, very aggressive monetary and fiscal action is needed right at the outset, in order to prevent the deflationary spiral and to actually generate some inflation.  At the same time that the United States, at the epicenter of the global crisis, is acting in this manner, countries around the rest of the world, which have been affected to different degrees, have launched their own stimulus initiatives.

China’s Stimulus Points to Strong Global Demand

China, which is at the forefront of global commodities demand, is of particular interest.  China needs to grow its economy at a minimum rate of 8% a year in order to employ the 18 million workers that join the labor force annually.  This is an imperative for a country that has dictatorial government, in order to avoid massive unrest.  That’s why in November, Beijing announced a $585 billion (4 trillion yuan) stimulus plan. It’s also why the country is taking such aggressive steps to assure access to supplies of key commodities.
Since then, the government has been aggressively buying long term access to commodities in such countries as Brazil and Australia.

Aluminum Corp. of China (NYSE ADR: ACH), otherwise known as Chinalco, has invested $19.5 billion in Rio Tinto PLC (NYSE ADR: RTP) to acquire stakes of up to 50% in nine of Rio’s mining assets.

China also struck a deal with Brazil’s Petrobras (NYSE ADR: PBR) for a long-term supply of oil.

China Development Bank, one of China’s largest state-owned enterprises, agreed to lend $10 billion to Petrobras for its ambitious deepwater-development program in order to ensure a long-term daily supply of 160,000 barrels oil. That followed a similar deal with two Russian giants. China Development Bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

Hence, the outlook for commodities – given easy global monetary and fiscal policies, and a reflationary bias – is very favorable, and we are going to take advantage of it.

Enter Diamond Offshore Drilling Inc. (NYSE: DO).

Drilling for Profit

Diamond Offshore is the world’s second-largest driller by market capitalization, right after Transocean Ltd. (NYSE: RIG).  It has 31 floating rigs: nine sophisticated deepwater semi-submersibles, one drill ship for very deep water, and 21 other semi-submersibles.  In addition the firm owns only 13 jack-up rigs, of which only seven are in the Gulf of Mexico.

What I like about Diamond Offshore is its conservative, shrewd management and its commitment to shareholders.  The latter is especially ensured because of the situation of its controlling company, the New York conglomerate Loews Corp. (NYSE: L), which owns 54% of the Diamond Offshore’s stock.

Loews, run for half a century by the Tisch family, initially acquired Diamond Offshore’s assets in an opportunistic transaction in 1992.  It then sold 30% of the company to the public in 1995 and later acquired Arethusa (Offshore) Ltd. in 1996, using stock, a move that reduced its participation to the current 54%. Since that time, Diamond Offshore has been using its ample cash flow to repurchase shares from public hands.

Diamond Offshore, also referred to as DO, has been managed very wisely.  As the world’s No. 2 contract driller, DO has concentrated on the higher-priced equipment, that is, the semi-submersible rigs, which operate in deep waters.  And deep water, which require that higher-priced equipment, is where the biggest action is.

And since the specialized deepwater equipment is all taken, DO’s mid-depth equipment benefits because it can be adapted for use on bigger projects.

DO has minimized its exposure to jack-up rigs (those that rest on the ocean floor) and especially to work in the Gulf of Mexico, which has more competition and lower daily rates.

No wonder that DO’s fourth-quarter results handily beat analysts’ consensus estimates of $2.34 per share by posting operating earnings per share of $2.53.  Revenue also beat expectations, showing a 1% increase over the prior quarter.  The company also realized higher day rates and higher utilization rates.

These are all indications of strong management execution.  What is impressive about DO is that the company used the run-up in oil prices last year to enter into long-term contracts at very high prices, registering an impressive $10.3 billion backlog.  That gives Diamond Offshore a great earnings visibility going forward.

But the upside does not stop there.

There is a special situation in the making, because the Loews Group owns CNA Financial Corp. (NYSE: CNA), an insurance company that is trading at half of its book value.  You see, insurance companies have been hit hard financially by markdowns in their fixed-income and hedge-fund holdings, but Loews invested $1.25 billion in CNA last fall in a move to improve the company’s balance sheet.

And in order to be ready to defend debt ratings, a conservative management like Tisch has all the incentive in the world to keep maximizing Diamond Offshore profits to support CNA – should it be needed despite CNA’s current strong liquidity and financial flexibility.

DO recently paid one of its regular special dividends of $1.85 a share, bringing the dividend yield to almost 13%.  If this dividend is safe – and we believe that it is – this is a winning strategy for the group, given the current financial environment, and it will greatly help to maximize profits and cash flow from Diamond Offshore.

Mark Urness, a friend of mine at Calyon Financial, one of the leading energy research specialists on Wall Street, concurs with our assessment of this sky-high dividend. He estimates that DO will continue to offer the 12.5% dividend yield, which is unparalleled in the oilfield-services segment. We, like Mark, expect the company to distribute $8 a share in 2009 in the form of both the regular and the special dividends that DO has been using.

DO has been extremely disciplined with costs and with new investments, maximizing free-cash flow to almost $900 million last year.  In fact, with the ample backlog at higher prices of the contracts signed, DO should increase its free cash flow and net income to about $1.4 billion to $1.5 billion in 2009.

DO’s profit margins are impressive – and exorbitant – thanks to the shortage in rigs: Gross margins are 64% and operating margins are 54%.

These margins are likely to keep growing as management continues to execute thoroughly and oil prices rebound.  This strong growth in revenue and earnings – driven by DO’s savvy positioning in deepwater and mid-water rigs, and bolstered by rebounding oil prices thanks to global monetary and fiscal conditions – will surely help deliver much higher multiples than the meager six times earnings that Diamond Offshore’s shares are currently trading around these days.

Diamond Offshore’s shares closed Friday at $55.58. They are down 62% from their 52-week high of $147.77.

This cash-rich, profit-fountain company is a resounding “Strong Buy,” as its stock is waiting to explode to the upside.

Recommendation: Buy Diamond Offshore Drilling Inc. (NYSE: DO), a top player in its sector, and a company that is poised to capitalize on a projected resurgence in oil prices. Because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound (**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest in Diamond Offshore Drilling Inc. (NYSE: DO).

Source: Buy, Sell, or Hold: Profit From the Projected Oil-Price Rebound With Diamond Offshore

This from Mike:

It’s not the time to try to call a bottom… but it is time to plan for it.

Our favorite leading indicator of economic activity, the Baltic Dry Index, will likely be the first to signal the end of a recession. And it provides a convenient clue to one stock I believe will comeback faster than most others, once the market-wide comeback is underway.

The Baltic Dry measure shipping costs, and therefore shipping activity, and is therefore a great “boots on the ground” measure of what’s going on in the world economy. When costs are up, it benefits shipping companies. My favorite right now is Frontline (NYSE: FRO).

Frontline focuses specifically on tanker ships for transporting oil. When economic activity picks up, so will oil prices and shipping rates. And that plays right into Frontline’s hands.

The oil focus means Frontline’s recent quarters haven’t been as bad as other shippers because of oil stored offshore to take advantage of the contango situation.

Overall, the company still posted growth for 2008, but last week’s quarterly numbers were certainly lackluster. Earnings per day on a “very large crude carrier” dropped to $61,500 from $96,500 a year earlier.

Still, Frontline management seems to be making the right moves in tough times. It’s proceeding with cautious investment in new capacity, switching some of its more profitable daily arrangements to more predictable long-term contracts.

Even so, the stock is getting hammered again today, down another 4% as of this writing.

But that puts the stock price at about two times trailing earnings. And with enough cash flow to cover interest costs, I’m sure Frontline can remain a going concern through the crisis.

When spending does pick up those who buy Frontline at, or near, the market bottom will likely be the first to benefit.

Source:  Frontline (NYSE: FRO): Stock of the Day

Lock a Washington economist, a Wall Street analyst and a Main Street broker in a room, tell them their lives depended on what they said next, and you’d still get five different answers, not a one but so much practical use.

By now you have probably caught on that I have a definite opinion on this matter (my bearish stance has become legendary around the Taipan Publishing Group coffee room) and what you ought to be doing about it (buy puts!).

But heck, I’m just one guy with a mere 30 years or so of business experience, and I write for a small outfit out of the somewhat less-than-major financial center that is Baltimore, Md. Why should anyone listen to me (other than the fact that I have pegged this entire crash to a tee)?

What if I told you that the oldest technical indicator in the book – a system of signals established by the best-known name in the financial business – was telling you to sell blue-chip stocks immediately?

First, a little back-story. Okay, a good bit of back story, but bear with me and I promise to get to that sell signal (and what you can do about it) in the end.

Back in the days when beards, tails and top hats were de rigueur for gentleman in the financial biz, Charles Dow wrote a series of 255 editorials for his quaint new paper, The Wall Street Journal.

After his death, William P. Hamilton, Robert Rhea and E. George Schaefer took his various cogitations, stray comments and bits of sentiment, and hammered them into a cohesive “Theory of Everything.”

The Six Commandments

This eponymous trading system had six primary tenets:

1: The market has three movements
Major trends last one or more years, secondary reactions retrace the major trend over some 10 to 90 days, and short swings oscillate within reactions over either hours or days, depending on whom you ask.

2: Market trends have three phases
Accumulation (when insiders are buying a into a good deal), public participation (when every Tom, Dick and Harry gets involved), and distribution (when the wise guys sell off their shares for profit).

3: The stock market discounts all news
Also known as “the efficient market theory,” there are three flaws to this idea of a level playing field. The first presumes that all companies are completely transparent and all information is universally available. The second presumes that this information is universally understandable. The third is that investors will always act in their own best interest.

(Now things get interesting: While the first tenet is technical in nature, relating to the time it takes for the market to uptake ideas, and the oscillating reactions to that uptake, the second two are really philosophical, relating to our presumed intelligence and sanity. But with item 4, Dow et al. resume contemplating empirical data.)

4: Stock market averages must confirm each other
Back in Chuck Dow’s time, our buying population had spread from coast to coast. Industrial centers were cropping up all over the darn place, and raw materials were even further astray.

It was all well and good to set up a saddler in St. Louis. If you want to make money, you have to be able to get cowhide at a decent price from Montana and then profitably ship your saddles to riders in Philadelphia.

So the gist of this rule is that an increase in manufacturing isn’t a trend until it is confirmed by an increase in shipping. The same holds true in inverse: It ain’t a genuine bite-you-where-it-hurts bear market until the steam ships stay in port and the railroads stop rolling.

5: Trends are confirmed by volume
This one’s easy: Trends aren’t hiccoughs, twitches or momentary indigestion. They require the full force and faith of millions of investors putting their money where it matters.

6: Trends exist until definitive signals prove that they have ended
Finally, Dow lived in an era where science was remaking the world. Because he trusted the tangible over the ephemeral, he tried to link the concept of physical momentum to the psychology of crowd behavior. To wit: “A market in motion tends to remain in motion.”

So What Happens Now?

Let’s set rules 2 and 3 aside for a moment. They are, as I said, more philosophy than science, and depend on a certain level of rationality and honesty that is in short supply these days.

I think that we can all agree that the requirements of rules 1 and 5 for a genuine bear trend have been satisfied beyond a shadow of doubt. The question at hand is: “What happens now?”

Will Washington suddenly uncover some unfound well of competence, and drag our collective behinds back from the brink? Or are we about to tip into another yearlong round of bloody sell offs?

Bad News and Worse

I could point out the worst GDP reading in a quarter century (except I think I already have several times over the past few weeks). I could read you chapter and verse on current unemployment (7.2% according to the government, already cresting 12% according to some more “inclusive” calculations).

I could quote no less a luminary than British Prime Minister Gordon Brown, who confessed in the House of Commons that we are truly mired in a great depression akin to the 1930s. (The apparatchiks at #10 Downing Street are desperately trying to retract the statement, but I’m afraid that this particular cat is out of the bag, through the door, and out of sight down the street already.)

Or I could simply go back to Charles Dow’s tenet 4: “The Transports must confirm the Industrials.”

The Facts of the Matter

If you look at the Dow Jones Industrial Average for the past few days, you can’t help but see the fact that last Monday’s low of 7867.37 beat the previous low of 7909.03 set on Jan. 23.

If you look to the Dow Transports’ chart you can see consecutive lower lows of 2926.66 on Jan. 27 and 2865.58 on Feb. 2.

The Only Sane Solution (and a Sure Shot at Triple-Digit Gains)

The trend is already in place. The counter-reaction is ending. The next leg down has been signaled and confirmed. The only protective tactic that makes any sense is to buy puts against both the Industrials and Transports similar to the ones I have asked WaveStrength Options Weekly (WOW) readers to purchase.

Several of these WOW puts have already doubled in value. I expect the rest to do so over the next few weeks as Mr. Dow’s predictions come to pass.

Source: The Oldest, Most Trusted Technician in the World Is Telling You to Sell Now

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

This from Taipan Daily:

I’ve got an interesting stat for you concerning unemployment. It doesn’t predict recessions or crashes mind you, just presidential elections.

Seems that our economy has a really tiny window of tolerance in this area. Looking back about as far as the modern records go, I noted that anytime unemployment is over 7% (deflationary) or below 4% (inflationary), the party in power loses the White House.

I was starting to wonder if this rule would hold up, when today’s announcement of 7.2% unemployment came across my wire service feed. My friend Christian Dehaemer says that “A: it happened after the election; and B: the statistical string is too short to generate any reasonable presumptions.”

Still the rule is holding up better than most.

Oil’s Big Bounce begins on January 21st

In just days, two key conditions for soaring petroleum prices coincide for the first time in history.

Here’s how you could play it for 190 times your money or more…

More Guesstimates

Other folks with other rules are also tossing their wizard’s hats in the ring: Boston Fed Reserve Bank President Eric Rosengren claims that he sees the recession deepening in the first half of 2009, but showing signs of improvement shortly thereafter.

Parsing through his notes, Rosengren seems to think that folks will bank their relative gains from fiscal stimuli and falling home and energy prices for the first few months of the year. But come summer, or perhaps early fall, some of that largesse will finally begin to flow to (surviving) retailers.

Others are putting out a less optimistic timeline. Both Justice and I always look forward to Nouriel Roubini’s comments, as he was one of the few mainstreamers whose ideas on the dangers of our profligate ways jibed neatly with our own.

Mr. Roubini is calling for a two-year recession with unemployment rising to 9% and a GDP falling a cumulative 5%. Since we have already seen one year and a drop of around 1.6%, Roubini figures the recession will last through to 2010, with GDP drops each quarter totaling some 3.4%.

The Law of Averages Gets a C-Minus

Finally, there is a stat chart floating about the financial blogosphere (I believe that this is the very first time I have every typed that word without gagging: It is a new century indeed) noting that the average duration for recessions from 1948 through 2001 was a little over 10 months.

More importantly for stock guys and gals, it points out that in nine out of 10 recessions, the stock market sets a bottom about halfway between the beginning and end of the recession.

So let’s see how this all adds up: if the average is 10 months, then the average corner ought to come around the five-month mark. Hmmm: doesn’t quite seem to work this time around, as we are already at the 12-month mark for the recession, and we haven’t seen a real corner yet.

Come to think of it, it didn’t quite work last time around either: The 2001 recession was only eight months long (as least so far as Washington is willing to report), and came smack dab in the middle of a crash that lasted about three years.

Another Rule That Works Every Time

I am not really in a position to tell you for a fact how long this recession will last. But I do have an unerring system for calling crashes and corners.

I’ve shown it to you before: I overlay a seven-month and 13-month average on top of the S&P 100. When the faster seven-month line crosses under the slower 13-month line, it’s a crash. And I am not talking some little localized dip here, but rather a full-on bear market.

It may be simplistic but it works every time. It also calls real rallies with the same unerring accuracy: When the fast line crosses over the slow line, we are in for a pretty good time for the next couple of years.

Maybe not a perfectly straight line up: heck it’s not like this thing predicts wars in the Middle East or typhoons in Malaysia or any such foolishness. But it is an unerring summation of the long-term intentions of millions of investors.

No Bottom Yet, But That Doesn’t Mean No Opportunities

And what it tells me is that we have not seen the bottom yet. Indeed those two key averages are as far apart as they have been in the recorded history of this system. In fact, we haven’t even seen an initial signal, wherein share prices cross up and over the fast average.

So when can folks start to buy stocks? And what should they buy? Come on, that’s all you really want to know, right?

Since everyone else is making educated guesses, I suppose I can extrapolate just a touch without going off the ranch. Throw on a couple of long-term trend lines and a probable bottom shows up some time around mid-July 2009. With any luck, at all, we should see stocks trend upward for the next two to four years after that point.

Hold Your Nose for a Year or Five

As for what to buy and when to buy it, I suppose it all depends on your tolerance for volatility.

If you are willing to buy now and hold your nose till, say, 2012, I suppose you could buy most any of the surviving finance stocks. I know some pretty smart guys who are picking up shares of American International Group (NYSE:AIG) right now, figuring on quadrupling their holdings over the next half a decade.

On the same theme, I suppose Ford (NYSE:F) looks like it will be the survivor amongst the big three American automakers. It actually doesn’t want a bailout from Washington right now, just access to the same sort of lines of credit any large manufacturer needs to survive in the modern era of just-in-time inventories.

A Better Short-Term Bet

Looking to the shorter term, I favor putting a toe in the water now with call options against some the companies that will be immediate recipients of President-elect Obama’s stimulant efforts. In WaveStrength Options Weekly, Bryan and I recently recommended Granite Construction Inc. (NYSE:GVA), a smallish infrastructure contractor that is positioned to rake a fair share of Washington’s “Really New Deal.”

With some luck, and several billion of Washington’s fancy new dollars, GVA investors stand to make a 75% gain between now and mid-July.

However, without a genuine buy signal under my belt, I am still recommending that portfolios remain weighted to the short side overall.

And personally, I very much hope that the folks who call the stock market bottoms at the midpoint of recessions are really wrong this time around, as that would indicate a grueling three-year recession on par with the worst modern history has offered up.

I really don’t have that much room on my couch.

Source: Handicapping Recessions and Rallies for Fun and Profit

This from Sovereign Society:

The “Elastic Rubber Band” theory is a popular investment term to describe wide price swings in asset markets. Market moves are usually exaggerated on both sides of the trade and this year’s volatility in oil prices is a testament to that swing.

In a bull market, trends tend to rise far above anyone’s boldest predictions while the same is true when a major reversal lends to big price declines. Could anyone have possibly predicted crude oil would be trading at $35 six or even twelve months ago?

Now oil producing countries are looking to arrest a crash in oil prices – down a formidable 76% since peaking in July at US$147 a barrel. Oil now trades at a 4-year low and is down a dizzy 62% in 2008 – its first calendar year decline since 2001. In late 1998, amid the Asian economic crisis and the Russian debt default, oil prices bottomed at US$10.50 a barrel (see above chart).

Is it possible we’ll see US$10 oil again? I don’t think it will happen, barring another Great Depression.

Global governments are in the midst of the greatest expansion of credit in modern history. As liquidity eventually finds its way back into credit markets and lending commences once again, commodities, including oil, should find a bottom. That’s what happened in 1998 as the Asian economic crisis ended; ten years later, oil is still trading 233% higher though down a mind-boggling 76% from its all-time high in July.

O.P.E.C. (Organization of Petroleum Exporting Countries) announced production cuts of 2.2 million barrels per day this week to stem the rapid decline in crude. With the global economy now either in recession or heading into a serious period of economic contraction in 2009, demand for oil and other distillate products has declined sharply since September. China, the largest importer of most raw materials and the world’s third largest importer of oil, saw exports decline in November for the first time in years.

It would seem logical to assume that oil prices have clearly overshot to the downside at this point. I would imagine most of the decline in global demand has already been priced into oil at $35 a barrel. The fact is, global long-term supplies are not being replaced by annual production, with most oil fields now in decline.

Only several months ago, the world stood at a net deficit of about 2 million barrels per day or, roughly, 86 million barrels of demand per day against supplies of 84 million barrels. Now that gap has not only narrowed but, in the span of just three short months, has turned into a gusher as supplies overwhelm producers.

It’s unlikely that a new bull market is taking hold in oil any time soon. We’ve just had a bust. Yet it would be a mistake to dump oil and the energy stocks at this point after huge declines since July. If anything, this is the time to buy oil ahead of aggressive U.S., European, Chinese and Japanese economic stimulus in 2009. If history is any guide – the Asian experience ten years ago, a depression by all accounts, eventually saw oil bottom at a ridiculously low level – it’s hard to believe we’ll see $10 oil again.

Source: Elastic Band Theory Stretches Oil Price Crash

That got me wondering if there was any correlation between the beginning and end of historical bull and bear markets.

A quick search on the internet turned up a chart that showed bull and bear markets since 1942. Since the chart was created last September, it is a bit out of date, but the historical data serves our purpose.

Utilizing this data, I was hoping to find that the recent market bottom would be 393 days after July 19, 2007. Unfortunately, that’s not the case. That would have put the bottom of this bear market on August 16th, when in fact the recent low (and by some estimates the end of the bear market) was three months later on November 20th.

Then I took another look at the chart. As I mentioned, this chart was originally published on September 6, 2007. Looking at that date on the S&P chart, there is a higher close than July 19. The S&P actually hit a high on October 9, 2007 at 1565.15 before it began the current slide.

Therefore, I re-ran the numbers using October 9 as the end of the bull market. Guess what day is 393 days later? No, it’s not November 21, that would be too perfect.

However, November 21, 2008 is 408 days after the ‘revised’ end of the bull market, so only 14 days more than the average.

What does this all mean?

Well, if you are like Rick Pendergraft and me, the eerie coincidences lead you to believe that November 21, was the end of the bear market, and we are now in the beginning stages of the next bull market.

It also allows you to make strange predictions, like this one:

This bull market will last until May 11, 2013 when the S&P hits 1878.46

Source: Why The Number 393 Is So Important

As you can see from the chart above, the S&P 500 has broken the accelerated downtrend it’s been in since September.

Now, it’s true that this chart is only current as of Monday’s close. I’m writing you these words early Tuesday morning before hopping on a plane.

Perhaps while I’m up in the air at 35,000 feet, Treasury Secretary Paulson will say or do something alarmingly idiotic and help stocks return to form.

But if not, just imagine! The very idea that stocks don’t always go down and down… who’d have thunk it?

Whisper it Quietly

Okay, that was a wee bit of sarcasm (in case you hadn’t noticed).

If I felt like really pushing my luck though – being out of pocket for Tuesday’s market action and all – I could point out that the upmove from 750 to just under 910 on the S&P is a greater than 20% advance… and thus technically constitutes a new bull market.

Not that it’s time to go around shouting new bull market! That would be insane, and worse still not very helpful in terms of making money. Plus, with the volatility levels we’ve seen, 20% just doesn’t carry the same heft that it used to.

Wholly artificial and backward-looking labels aside, it’s eye-opening to note the backdrop against which stocks chose to rise these past few days. Just consider what the beleaguered bulls had to deal with:

• We got word of the ugliest jobs report since 1974 – 533,000 jobs lost – with gloomier-than-thou pundits falling all over themselves to point out why the report was actually even worse than it seemed.
• Treasury bond yields effectively hit zero as panicked investors parked their last slugs of cash with Uncle Sam. On Friday the U.S. Treasury three-month T-bill yield fell to 0.01 percent.
• Credit spreads on investment-grade bonds versus treasuries – a measure of what it costs for companies to borrow money – widened to super-panic levels last week, as the below FT chart shows.

In spite of that awful trifecta, stocks managed to put in a rather impressive reversal Friday… then powered higher again on Monday with news of the Obama infrastructure plan.

If Mr. Market has been fighting off a fever, we may have just seen that fever finally break.

When Yes Means No and No Means Yes (Maybe)

Does this mean that stocks have bottomed? Or, at the very least, that it’s time to again take a harder look at long-side opportunities, from both a trading and investing perspective?

To be honest, I’d rather prefer you didn’t believe that. Well, okay, maybe not you. But as for the investing public at large – we’re better off without their agreement at this point.

I should probably explain…

In order for stocks to bottom, we need to see maximum pessimism. It needs to be thoroughly common knowledge just how bad things are, with everyone and their brother fully aware that things are “only going to get worse.”

This reality is precisely what makes it so hard to buy near the actual bottom. By the time the market gets there, positive sentiment is all but washed out. At the bottom, the true believers have all been converted to cynics.

This ironic sliver of market reality creates a paradox. If you were to go around taking a survey of investors asking, “Is this the bottom?”, the results of the survey would have inverse value.

The more investors who responded to your ad hoc survey with a firm “NO” – or better yet with a “what are you, crazy?” – the greater the odds would be of a bottom having been reached.

Hardly anyone trusts the first ascent from the pit. Everyone is half-waiting for the whole thing to break again. Coincidentally, that’s why professional traders and investors tend to get the best prices… they’re the ones who can steel themselves against queasiness and uncertainty when the odds tell them to act.

Bottoms Aren’t the Point

At this point I have to share a confession with you.

In spite of what the thrust of today’s piece might imply, I don’t really care whether the market has bottomed or not. And you probably shouldn’t either. Here’s why.

If you are a trader, you act based on odds and probabilities (or at least you should). Solid trades, like solid poker hands, are all about getting a handle on odds and reward to risk.

If the reward to risk is right – if the probability and the setup is right – then you take the trade. If not, then you don’t. Trading gains are accumulated over time in this fashion – with large wins overpowering small losses – just as pro poker players accumulate their winnings over an extended series of hands.

If you are an investor, you act based on valuations and long-term assessments of what companies are worth. Like Warren Buffett, you may not “time” things, but you do “price” things. A skilled investor has the habit of looking at a stock quote and seeing the actual value of the business behind it.

For sharp investors the question is less “How much are the shares really worth” and more “How much is the business really worth?” How good a shape is the business in? What kind of cash flows does it have? What kind of long-term potential does it hold? If I could get the financing and the go-ahead to buy this company outright and run it myself, would I want to do it?

Some of you are traders, some of you are investors, and some of you (like yours truly) have a consuming passion for both.

Either way, if you’re really focused on your process – on using all the tools you have available to make money – then picking “the” bottom doesn’t matter so much.

Why Talk About This Stuff At All Then?

Okay, some of you may be wondering now, if calling the bottom isn’t all that meaningful for the trading and investing process, why talk about bottoms then?

The reason to talk about this kind of thing is because there is real value (in your editor’s humble opinion) in analyzing the tone and tenor of market action.

It’s useful to get a handle on how the market is acting, just as it’s useful for a doctor to have means of checking the symptoms and vital signs in a patient.

The key differential comes down to purpose – it depends on what you do with the information you collect, and what your mindset is in collecting it in the first place.

Following market action with the goal of saying “I called such and such a move,” or to win an argument or bolster a pre-existing opinion, is one thing.

Dissecting market action with a cool, dispassionate eye – looking to inform the choices you make with a better sense of odds and probabilities – is quite another.

A Possible Inflection Point

What we’ve seen in the past few days, I believe, is a possible inflection point… a point in the cycle at which the news got about as bad as it could get, with credit spreads on investment-grade debt about as wide as they could be… and yet stocks shot up anyway.

I think, too, that we just might be in the midst of a psychological inflection point here.

After an extended nightmare of government dolts who screwed up at every turn, and banks that blew up every time a Wall Street CEO turned around, we are finally starting to get a handle on what tomorrow might look like.

Source: Source: The Perverse Logic of Market Bottoms

This from Today’s Financial News:

Well look at that. Government intervention is actually helping in a way our lawmakers intended. While not all of the Fed’s programs have been a success, the one it created last week is working to get the nation’s economy back on track.

You may recall the Federal Reserve announced last week that it planned to purchase up to $500 billion worth of mortgage-backed securities from government-sponsored agencies like Fannie Mae and Freddie Mac. Its goal was to grease the rusty gears of the real estate industry and force mortgage rates lower.

The plan worked.

The Mortgage Bankers Association announced this morning that last week’s mortgage application rate skyrocketed a record 112%. With the gauge at 857, applications last week were at their highest levels since late March.

Of course, buyers were not gobbling up homes during the Thanksgiving week because Fannie and Freddie were getting a break. They were applying for mortgages because interest rates are at their lowest rates since 2005. Buyers are getting a fantastic deal.

The boosters are ignited

A week or so ago, a 30-year fixed mortgage came with a rate of close to 6.5%. Today, perspective buyers can lock in a rate with Wells Fargo (NYSE:WFC) of just 5.375%. That is enough to pull monthly mortgage payments down by several hundred dollars each month.

With rates this low and homes this cheap, buyers are finally realizing the opportunity they have on their hands. Out of all of the deals the Fed has created over the past three months, this one has the most potential of directly helping the American people.

But what about you as an investor? Well, the news is even better. The real estate industry has traditionally been a leading indicator. In other words, it rises ahead of the financial markets. An increase in home purchases and therefore home values, is a surefire indication that the equities market will be making similar moves in the near future.

There are some great investment opportunities out there.  But for now, stay away from traditional real estate plays like REITs and the nation’s large homebuilders. The deleveraging tsunami is still pulling these sectors under and there will likely to be more pain in the near future.

If you want to make conservative investments with larger-than-usual profit potential, stick with the big guys. Blue Chips are a great investment as the nation gets back on track. Companies like General Electric (NYSE:GE) and Altria (NSYE:MO) with their strong dividends and proven history of healthy revenue growth are worth your money.

The Federal Reserve is making positive moves, the real estate market is on the rebound and moneymaking opportunities are all over the place. If you are not going to buy a house or two at these great prices, at least invest in a few discounted stocks.

Source: The real estate industry gets a favor from Bernanke