London , England

We got back from South America on Friday… ready for a rest. So, we spent the weekend reading… and occasionally, thinking.

What we’ve been thinking is that the dollar is dead meat in the long run. But in the short run, it might have enough life in it to bite investors on the derrière.

The US stock market rose 73 points on Friday, to bring the Dow just 30 points south of the 10,300 mark. Why is this level important? It’s not really. But it reminds us that this is still just in “bounce range.” Big drops in stock prices are followed by bounces – always. A bounce of 50% of what was lost is not unusual. That’s what happened after the Crash of ’29, for example. So, there’s nothing exceptional about what we’re seeing on Wall Street.

But here at the Daily Reckoning we’re not smart enough or fast enough to play the countertrends. We want investment positions that we can ignore for years… We want to be able to go on a long trip… say, down the Inca Road or over the Hindu Kush. And when we come back, we want to find that we have at least as much money as when we left.

If stock market buyers – in the US – have more money a year from now than they have now, we’ll be surprised. The private sector is still more than 2/3rds of the economy. And the private sector has begun de-leveraging. Nothing that has happened in the last 8 months makes us think that that trend is going to reverse any time soon. There are 70 million baby boomers who need money for retirement. They’ve got to save. That means cutting back on spending. And that means less income for business. Are stock prices really going to go up when business income is going down? No.

We leave our “Crash Alert” flag flying, here at the worldwide headquarters. We don’t know when… or IF… stock prices will crash. But the downside risk is not worth the possible upside. Daily Reckoning readers should be out of all US stocks, except those they wouldn’t mind holding through a 50% correction.

The other thing we mistrust – aside from politicians, stock promoters and tap water – is the dollar. But here the story is more complicated. Because the next downswing in stocks could push the dollar up! Everyone is betting against the dollar. And most think it is a one-way gamble. But it’s not like Mr. Market to grant investors a one-way bet. He’s got something up his sleeve.

Last week, the Financial Times reported that a group of IMF economists had made a “Plea to reduce demand for dollar reserves.”

That is another way of saying: find something else to put in your vaults rather than dollars!

To read the complete article at The Daily Reckoning, click here.

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.

Super-investor Warren Buffet once said that his investment philosophy was to buy stocks when others were fearful, and to be fearful when others were buying. Right now isn’t the time to be fearful along with the herd; it’s time to stock up on stocks.

As I predicted earlier in the year, right now the market is zooming higher like there’s no tomorrow.

Let’s begin with this chart of the S&P 500, a good proxy for the broader U.S. stock market…

As you can see, shares of U.S. companies have been soaring. In fact, from a low of 667 on March 6 to a recent high of 1033, the market is up a mind-boggling 366 points.

Translation: U.S. stocks have improved a whopping 54.9% in just a matter of months.

The fact is the market made positive moves long before the economy was showing a ton of life. And if you don’t jump in early, you’re likely to miss the best moves.

And now, with the 960 level for the S&P 500 — the top of the resistance range — clearly out of the way, U.S. stocks are now setting their sights on the next big resistance level of 1313, set way back in August of last year.

Now, getting there won’t be a straight line: 300-plus point moves don’t usually happen like that. So there will likely be the occasional, healthy pullback along the way.

But there’s no doubt: From a technical perspective, the 1313 level on the S&P 500 is the next order of business.

And don’t forget: When we make it back to this level, we’re getting very close to the pre-recession highs of 1500-plus. While that’s by no means a done deal, there’s little doubt we’re headed in the right direction at a solid pace.

But it’s not just the market’s technical factors that have me jazzed. The fundamentals are on the right track, too…

Fundamentals Improving Big Time!

For a while now, I’ve said that the housing market got us into this mess and the housing market will get us out.

Well, the facts are in: Housing is beginning to show consistent signs of life.

Sales of existing single-family homes jumped 7.2% in July compared to the month earlier. That’s the largest increase since the National Association of Realtors began tracking data way back in 1999. Plus, it marked the fourth monthly increase in a row.

In other words, the improvement in the real estate market isn’t just a flash in the pan. It’s here to stay.

But that’s not all. Compared to July 2008, home sales were up a solid 5%. That’s the first year-over-year gain since November 2005. And that means the real estate market is showing significant legs, even when dealing with tough year-ago comparisons.

Another positive: The improvement in home sales is geographically broad-based. Take a look at this chart…

As you can see, home sales improved across the board during July. In fact, they’re up 13% in the Northeast, 11% in the Midwest and 7% in the South. Only the West region showed a small 2% decrease.

And it’s not just the real estate market that’s showing solid fundamental action. The broader economy is looking good, too. According to Federal Reserve Chairman Ben Bernanke…

“Fears of financial collapse have receded substantially… After contracting sharply over the past year, economic activity appears to be leveling out, both in the U.S. and abroad, and the prospects for a return to growth in the next year appear good.”

And he’s not alone. According a survey of economists by the Wall Street Journal, 28 of 45 respondents say the recession is already behind us, and 16 say it will end by December of this year.

I don’t know about you, but that’s a hugely bullish factor to me. But there’s more: GDP forecasts are also on the rise. Take a look…

As you can see, economists are calling for a big improvement in GDP over the next year. In fact, even though GDP contracted 6.4% and 1% in the first and second quarters of this year respectively, analysts are looking for improvements for next four consecutive quarters in the 2.1% to 2.8% range.

Bottom-line: Stock prices are zooming higher and are now cleared to take out levels not seen since August of last year. In addition, strong fundamental factors — including an improving real estate market, a huge call for an end to the recession and solid GDP projections — are adding solid foundation to more price surges. And no matter how you slice it, that’s positive for your portfolio.

Best wishes,
Wayne Burritt

Source: Stocks Are Set to Rocket in September

The Dow rose 155 points on Friday. And today, stocks are rising in Asia. Oil is over $74. Gold rose $13 on Friday… to close at $954. And the dollar is killing us softly… sinking to $1.43 per euro on Friday.

Stocks and oil are at their highest levels so far this year. With such profits at hand people figure they don’t need the dollar. Investors run to the safety of the greenback when financial storms approach. But now… they think it will be clear sailing.

“Worlds bankers suggest rebound may be under way,” says a headline at the New York Times.

Is the world economy really recovering? Should you buy stocks now to take advantage of this new bull market?

You already know the answer, don’t you, dear reader.

After a fall comes a bounce. And along with the bounce come a lot of silly ideas. You see how it works? “Markets make opinions,” say the old timers on Wall Street. When stocks are going up investors find reasons why they are going up. Pretty soon, they’ve convinced themselves that they’ll go up forever.

But bounces do not last forever. They aren’t giant turtles… they’re moths. After a few months of flitting around bright lights, they dry up. When exactly this summer of winged love will end, we don’t know. September or October is our guess. But we have little doubt it will come to an end soon.

Ultimately, stock prices depend on earnings. People compare the rate of return they can get from stocks to what they can get from other investments. Rising earnings signal higher rates of return, so investors pay more.

During the great credit expansion of 1945-2007, businesses could anticipate, generally, rising earnings. People were buying more and more things on credit. In a national economy, businesses pay wages and then the employees use the wages to buy products. The wages are a ‘cost’ to the business… but they are also the source of business revenue. When sales come from credit, on the other hand, businesses have the revenue but no wage cost. Profits go up.

Now, the cycle has turned. Businesses still have the wage cost. But instead of using the money to buy things, the employee uses it to repay loans for purchases made last year or the year before. Now the business has the cost but not the revenue.

As they say in the economic textbooks: bummer.

The process of de-leveraging will be slow. Maybe 5 years. Maybe 15. Maybe 25. It will up and down… with high unemployment (businesses will cut their wage costs as sales fail to recover)… low prices (at least in real terms)… low profits… and slow growth, or none at all.

Is that bad? No, not at all. It’s good. Economies need to adjust to the new realities of the post-credit bubble world. It will take time. And with the world’s financial authorities fighting it every step of the way… it could take a LONG time. As we’ve explained in these Daily Reckonings, government is a profoundly conservative, parasite-protecting enterprise. It cannot draw forth the future – it has no idea what the future will be. Instead, all it can do is to try to recover the past. That’s the idea of the ‘recovery’… to try to coddle, protect and pay-off yesterday’s success stories. From Wall Street to welfare… governments attempt to prevent correction.

And more thoughts:

*** The Obama administration announced that it expects $9 trillion in deficits over the next 10 years. One of the great mysteries of our time is: where will the money come from? As we pointed out last week, even if every dollar of US savings is applied to the task, the feds will still be short. And if they make up the difference with funny money – from their quantitative easing scam – the Chinese vigilantes are likely to get cheesed off and dump their US Treasury bonds.

The evidence shows that the Chinese…and other Asians…are already trying to lighten up on their US debt holdings. This from the New York Times:

“Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month.

Monthly figures can be volatile, and can be revised, so it is risky to draw conclusions from one month’s data. In May, China increased its holdings by $38 billion, according to the Treasury figures.

“Nonetheless, the decline highlighted a fact… Asia’s appetite for Treasury securities is not growing as fast as it once did. That means the United States will have to turn to other buyers, including American citizens, who are now saving as they did not do during the boom years, to finance the deficits… In the first half of 2009, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasuries that were sold.

“ Japan, which was replaced by China as the largest foreign holder of Treasuries last year, has been a larger buyer this year, taking up 11 percent of the new supply of Treasuries.

“Ownership of US Treasuries by China, Hong Kong, Japan, South Korea, Singapore, Taiwan and Thailand — since 1994 — rose to 25 percent, from less than 8 percent. Since then, as budget deficits in the United States grew, the share has fluctuated within a narrow range. In June, it was 24.7 percent.”

If Asians don’t finance US debts, who will? We don’t know… But the fewer bonds Asians buy… the more they are bought with funny money by the Fed. And the more the Fed buys with funny money the fewer Asians want to buy with real money.

How will this end? Badly…we keep saying. There is no way out. Either the feds cease spending more than they can raise honestly, by taxation and reasonable borrowing. Or, the system runs into chronic, mega deficits…like the chronic deficits in the private sector during the bubble years. Then, it blows up.

That is why we caution readers against the dollar and against Treasuries. Most likely, they will both go up this autumn…as investors flee to safety from the next market downturn. But the chances of them blowing up completely are too great. That’s why we stick with gold – even though we would not at all be surprised by a period of weakness in the gold market.

*** On Friday night, we went to a ‘dinner in white’ at a nearby chateau. It was a jolly affair, at an ancient chateau entirely surrounded by a moat.

We set up our table, alongside the others. We gathered for drinks. We saw old friends. And then we prepared for dinner.

Why “white?” The dinner marks the occasion of the Assumption of the Virgin. It’s held each year in this rural area of France. Everyone brings a full dinner service – table, chairs, candles, etc. etc. Then, after setting up outside, under the stars… there’s a twist. Couples switch around so that your editor ends up having dinner with a woman to whom he is not married.

Having dinner with someone else’s wife can be a delight. At least, you have nothing to argue about. But how much of a delight it is depends entirely – or perhaps mostly – on chance.

In our case, we were trebly lucky. In front of us was a charming woman who turned out to be a relative of many people we already knew. So we kept up a lively conversation about cousins, uncles, aunts… family tragedies… and upcoming marriages. On our right, was a cute woman with a bright smile and a friendly manner. On our left, was another charming woman with a shrewd, fast wit.

Time passed quickly. We crossed swords with the woman on our left – over education policies. We chatted with the woman in front of us – about family, the weather, local trends, food and whatever. We flirted with the woman on our right:

“Do you come to these dinners often,” we asked.

“About as often as you do,” came the reply, “once a year.”

“Well, the dinners suit you. You look very nice in white.”

“Thanks… but I really don’t have any choice. It’s a ‘dinner in white,’ after all. If I had a choice, I’d wear black.”

“Why… because you have a black, cruel heart? Or is it because you are in a sad mood? I hope not. And if so, perhaps I can cheer you up by telling you joke. How many Belgians does it take to change a lightbulb?”

“I’ve heard that one.”

“Then why does the guy from Belgium go to sleep with one full glass of water next to his bed and one empty glass?”

“I don’t know… why?”

“Because he never knows if he’ll be thirsty or not when he wakes up in the night.”

“Oh…”

Source: The Future Will Come

“No rally can be sustained with yields and P/Es so poorly valued,” says underground investor Chris Weber, writing for DailyWealth. Chris is a very special kind of investor. When he was 16 years old, he turned just $650 (saved from his paper route) into $1.8 million through a series of remarkably insightful investments. So naturally we’re all ears when Chris gives his opinion on the direction of the market.

Chris is bearish on US stocks. (He’s mainly in cash and precious metals.) Why? Because there’s no value in the US stock market.

As of the end of July, the dividend yield on the S&P 500 has fallen to only 2.13%. When the rally began in March, the yield was over 3.5%. That is a huge fall in a short time.

Then, as stock prices have soared, earnings of companies have just not kept pace. In many cases, they are down sharply. This imbalance in price to earnings is shown in the weird spike in the P/E ratio on the S&P 500. It is now up to 127 times annual earnings, up from less than 20 times earnings at the rally’s start in March.

In other words, the dividend yield and the P/Es were not what you see at real bottoms. In really low markets, investors are shaken so much that years are required for them to regain bullishness.

Instead, I think what we’ve been seeing are the types of violent rallies within bear markets we saw throughout both the 1930s and the 60s-early 70s.

So once again, I’m just watching the stock markets. My position is that if the Dow Industrials and Transports can both better their previous record highs that they reached back in the second half of 2007, then I’ll be interested and ready to say that we are really off to the races again.

What I think is more likely is a repeat of the period of 1966 to 1975, where we’ll see a series of rallies within a bear market. In other words, this will be an easy time to lose money, and a hard time to make it.

Porter Stansberry has another take on stocks. He reckons we’re in the early stages of a “massive inflation.” Porter’s argument is simple. As long as the government keeps printing up trillions of dollars a year and holding short-term rates at nearly 0%, financial stocks are going to rise… And as long as financial stocks rise, the rest of market will follow.

Financial stocks are on a roll, as you can plainly see from the nearby chart of the financial sector ETF (XLF). Now, ask yourself a very simple question: Are investors buying financials because of their strong balance sheets and smart management or are they buying because they know that the government intends to keep pumping money into these boated behemoths?

Say what you like, US stocks are rising. All we know is we don’t like it one little bit. And we wouldn’t touch stocks knowing what we do about the market. As Chris Weber says, “This will be an easy time to lose money, and a hard time to make it.” Amen to that.

So today we turn away from the markets and focus on something more important: basic investment principles. As Alexander Green, investment director of The Oxford Club, puts it over at InvestmentU.com, “It’s not uncommon to run into investors who are knee deep in option trading, currencies, short selling, or sophisticated arbitrage strategies without mastering – or even understanding – basic investment principles.”

Here’s what Alex believes are the six factors that determine the value of your portfolio’s. Only one of these six factors is beyond your control: your assets’ annual compounded return. That means it only makes sense to focus on the other five.

1. The amount of money you save. To put it bluntly you have to start by maximizing your income, minimizing your outgoing and paying yourself first. Why? Because expenses always rise to meet the income available. As soon as you get a raise or a higher paying job, you’ll find that you need a new car, a bigger house, better furniture and a new set of Callaway irons. But you have to draw the line somewhere. You can’t save a pittance and expect your portfolio to perform miracles each year.

2. The length of time your money compounds. The sooner you start investing the better. And the longer you leave it alone the better. If you start too late – or raid your portfolio to redo the kitchen or take the kids to Disney – you’re going to have a lot of catching up to do down the road. The old chestnut is true: Don’t touch your capital. It’s like eating your seed corn.

3. Your asset allocation. Studies consistently show that how you divide your portfolio among non-correlated assets – stocks, bonds, real estate investment trusts, precious metals, etc. – determines 90% of your portfolio’s long-term return. (The rest is due to security selection.) If you’re too conservative – or too aggressive to stick with your program – you simply won’t meet your goals.

4. Your assets’ annual return. This, of course, is the great unknown. Not even Warren Buffett or Ben Bernanke can say what their portfolio will return each year. But the better your security selection and asset allocation decisions, the higher your annual compounded returns.

5. What you pay in expenses. Don’t be oblivious to what all those financial intermediaries are charging you. You can sacrifice far too much in commissions, bid/ask spreads, wrap fees, management expenses and other costs. All things being equal, the lower your expenses the higher your net returns.

6. How much you pay in taxes. Too many investors are oblivious to the tax ramifications of their investment moves. When possible, put your high-yielding investments in your tax-deferred accounts and your tax-efficient funds and individual stocks in your non-retirement accounts. (I call this your asset location strategy.) Hold positions 12 months or more to qualify for the lower long-term capital gains tax rate. Offset your capital gains with capital losses if possible.

You see what most investors don’t understand (and probably never will) is that market timing and stock picking make up only a small part of serious wealth building. It’s a secret the “ultra wealthy” have known for a long time. And they spend a lot of time and money making sure these six factors are right (and others, too, that would be too complicated to explain here). It’s how they hold onto their wealth for generations.

It’s actually what we’ve been working on while here in France. Along with my dad and your Notes co-editor, Chris Hunter, we’ve been researching these wealth preservation secrets. And we’ve discovered that wealthy families nearly always have something called a “family office.”

Most of these require massive amounts of cash to join. (One group in London my dad went to talk to was looking for a $200 million minimum!) So that’s why we decided to set up Bonner & Partners Family Office. It puts all of the money management secrets of the ultra wealthy to work… without the massive price tag.

Partners will enjoy the following benefits:

Access to what my family is doing with its money. Over the years we’ve spent literally hundreds of thousands of dollars on high-level wealth management advice. It’s been distilled into our family portfolio, which partners will have full access to.

Twice-daily market advice from full-time money manager Simon Mellon. The family has spent a lot of money, and considerable time, finding the right investment director for the family office. Simon has a resume as long as your arm. And his insight into the market is the kind that comes only with years in the trenches in New York and London.

Full-time tax planning advice from Raife Nueman. Raife went to university with your editor at St John’s College. And he’s one of the brightest attorneys we ever come across. (He has been elbow deep in the US tax code over the past two months, and he’s identified a way to drastically reduce your tax spend – to as much as 0% in some cases.)

Access to all of Agora trading advice and investment research. Family office partners will have full access to the entire daily output of Agora, the family publishing company. This amounts to 34 trading and investment research services. (A total of over $97,000 worth of subscription services a year.)

We will be sending out an invitation to join us as a family office partner this week. As a Notes reader, you can join the invitation list early by sending an email to info@contrarianprofits.com. Just make sure to put “Family Office” in the subject line so our staff will be able to quickly add you to the list before the invitation goes out…

This chart blew us away. Stock prices are supposed to move at random. So how do we explain such a seemingly orderly pattern? To answer this question you have to also consider the cyclical movements of commodities prices. Take a look at the chart below. It shows the trend in commodity prices between 1982 and 2000 – an 18-year upswing in equity prices.

As you can see, commodities entered a secular bear market just as equities entered a secular bull market. And vice versa.

The reason for this is actually relatively simple. As costs for raw materials increases corporate profits decrease. Eventually, the decrease in profits causes demand to fall for commodities… and prices fall.

This fall off in prices then reduces investment in the acquirement and production of raw materials, which in turn reduces supply. As supply gets tighter prices begin to rise again. Investment in commodities becomes once again profitable, and the cycle completes itself.

This story gets really interesting when you consider that during the vicious sell off in commodities last year prices bottomed far higher than in previous recessions.

According to Rosenberg:

In the 2001 recession, the oil price bottomed at $19.33/bbl; in 1990, it bottomed at $16.81/bbl; in 1982 at $28.48/bbl; and in 1975 at $10.11/bbl. We bottomed this cycle at levels that were peaks in prior cycles. The same holds true for copper – it hit its trough at $1.39/pound this time around versus $0.630 in 2001 and $1.00 in 1992. Ditto for the ‘softs’ – soybeans bottomed at $8.48/bushel this time, compared with $4.15 in 2001, $5.42 in the recession of the early 1990s and $5.32 in the early 1980s downturn.

What does this mean for your investments? Put simply, this implies that “the floor is in” for commodities. Consider adjusting your portfolios accordingly.

So… When I came in on Tuesday, the euro was 1.3920… When I came in this morning, the euro was trading 1.3925… Trading with yesterday’s clothes on. Back and forth, back and forth, the currencies seem to be in a rut… So, what happened to all the thoughts yesterday that China was making its first of many baby steps toward removing the dollar as the reserve currency? Well… They had the cold water of denial thrown on them… And the fact that apparently traders out there don’t believe the “China story” that I put on the table yesterday.

That, and the fact that U.S. stocks saw selling to the tune of -161 points in the DOW… I saw a story last night that came from a report by UBS, that said the euro will suffer in the coming weeks because of the U.S. earnings season putting pressure on stocks… Now, I agree with that statement sort of… I agree that right now, currencies are tied to risk assets like stocks, all thrown in the barrel like some college fraternity drinking party mix.. Not that I would know anything about that… But I’ve heard about it for sure! So, any way, back at the ranch… And I agree that the Corp earnings season in the U.S. is going to be very disappointing, causing stock prices to be weaker, and that will put pressure on the other risk assets, like currencies, and commodities…

But it doesn’t have to be that way! For as long as I could remember, well, back to 1992, when I began dealing currencies, I have not seen stocks, currencies and commodities all tied together for any long period of time… Whey they are thrown together now, has not been rationally explained to me by any one! But they are… The markets have done this, and the markets are “never wrong”… And once again, my thought that the markets always do what they are supposed to (which in this case would be a split of currencies and commodities from stocks), just not “when”!

So… Even though we’ve seen signs of the “break-up” the link / tie is still there, maybe not as strong, but still there…

So… I can hear you asking… “Hey Chuck, what’s it going to take to get these asset classes to break the link to each other?” Whoa there partner! You’ve learned well grasshopper, what a wonderfully crafted, and well thought out questions! Thank you sensei… You’ve trained me well!

OK, enough of all that! Let’s see… What’s it going to take?… Hmmm… Well, it will take a return to fundamentals… And I don’t think we’ll see that in earnest until the U.S. shows some life, and all the talk about additional stimulus goes away… The more we put 100 miles of desert between the financial meltdown and where we might be going, the better the chances of a return to fundamentals.

OK… There’s a BIG debate going on with the two sides in completely different colored corners… In the Blue corner we have those that fear the $1.1 Trillion in money supply that the Fed has put into the economy, and the fear that the Fed will leave rates too low for too long, thus creating inflation on the other side of this current phase of asset price deflation… In the Red corner, we have those that are true believers of the Fed and that they will be able to remove the stimulus of money supply and low interest rates without even a hint of inflation…

In the Blue corner is where you’ll find me… John Williams… And Morgan Stanley among other notables… In the red corner is where you’ll find a handful of economists, and Goldman Sachs… Speaking of Goldman, you wouldn’t expect them to say anything else but to support the Gov’t / Fed on this would you? I mean, it’s almost like they are related to each other! It gets a little creepy for me… But I think you get what I’m saying here…

And down south in Brazil, where one piece of good news from the country is followed by another, as witnessed by yesterday’s announcement that Moodys was going to review Brazil’s ratings for a possible upgrade, which was followed by a research report from Merrill Lynch. The brokerage that owns a bull, but is now owned by Bank of America, issued a research report saying that “Brazil’s real may gain the most among Latin American currencies in the 2nd half as a rebound in prices of the country’s commodity exports buoy the trade surplus.”

Well… The 1st half wasn’t so darn shabby for the real, as it gained over 16% VS the dollar in the 1st half of 2009… But we must temper this euphoria with the real with a dose of “reality” (get it?) This real is one volatile currency! The wild swings are enough to give the faint of heart a need to grab the heart pills! And… It IS AN EMERGING MARKET! And we all know that EMERGING MARKETS can be trying on one’s patience…

OK, having said that… You can’t deny that Brazil has really turned things around from 8 years ago… And now they’ve teamed up with heavyweights Russia and China, and brought along India, to form the BRIC’s, which have been giving dollar bulls major headaches in recent days as they demand to be a part of the world’s financial discussions, and work together to bring an alternative currency to the world’s stage…

The G-8 meeting that has been on most currency traders’ minds is going on as I write… At this point, China has not been allowed to speak, but they will be given that chance soon enough… Right now, the discussion is going on about how to make oil markets more stable… Hmmm… I’ve got the answer to that one… Find an oil reserve in your country, and then forget about everyone else’s oil problems! HAHAHAHAHAHA!

In Australia overnight, Consumer Confidence is on the rise, even if the currency has taken a step back… Consumer Confidence is up 9.3% in the recent month, following the 12.77% gain in June… Unfortunately, as I said the currency has taken a step back… The A$ has lost not only the 80-cent handle, but the 79-cent handle too, in the last two trading sessions…

All the March through June euphoria regarding a global recovery is getting dragged through the mud right now, and the U.S. earnings season won’t help matters any either… So, watch this currency as a proxy for world economic recovery… It will all be on the sleeve of the Aussie dollar…

Do you know what “shadow inventory” is? Well, it’s the new buzz-word that’s getting quite a bit of attention… Shadow inventory comes in several forms. It includes homes in or close to foreclosure but not yet put up for sale — a number that’s increasing. It also includes homes that owners want to sell but are waiting to put on the market until it improves.

Well… I told you a year ago that the housing problem was being made worse by all the inventory of houses that needed to be sold… And even our Mr. Magoo, former Fed Chairman, Big Al Greenspan, noticed the inventory as being a problem… Well, this shadow inventory could be adding to the already too big inventory… It’s like this “inventory” is hanging over the housing market like the Sword of Damocles!

So according to the data I saw… 3.5 million homes are now for sale… This Shadow Inventory is larger than that! The result, as this inventory comes into the market? Well… It will continue to put pressure on home prices downward… Oh boy! Just what house prices need, more downward pressure!

As this housing meltdown drags on… (and I might add, for those that were drinking the kool-aid, and wouldn’t listen to me when I kept harping about the housing bubble bursting, this has got to be very painful) you can see why there are those (and I’m one) that believe the housing recovery won’t come for some time… Maybe not until 2012! But probably 2011…

And then there was this… Google has announced that they will be selling an operating system to compete with Microsoft… I guess they didn’t take too kindly to Microsoft’s entry into the search engine arena! HA! I say that in jest, as these things take long periods of time before bringing them to the markets, obviously! I just found this story to be interesting…

And did you hear about how the Swiss government said Wednesday that it was prepared to seize UBS client data rather than allow the bank to hand it over to the United States to settle a tax case? Another interesting story…

And finally… The Eurozone printed 1st QTR final GDP results at a negative -2.5%… So… Again, we go back to the conversation regarding who’s car is uglier? The U.S. contraction in the first quarter was -5.7%… And in the Eurozone it was -2.5%…

Oh… And one more thing… I get people all the time telling me that China is fudging the numbers with their growth figures… Well, that may be, but it’s all we have to work from, we don’t live there, we don’t have any idea but what the Gov’t tells us! And the Gov’t told us in April that it was +6.1%, and I fully expect for them to tell us it will have risen to 8% in the 2nd QTR… Just go with it… It’s all we know… It’s not like here in the U.S. where we can see the difference from the reports the Gov’t tells us are true…

OK, on to the Big Finish… This has dragged, uh, I mean carried, no, I mean moved along so nicely that you don’t want it to end… Yeah, that’s the ticket!

Currencies today 7/8/09: A$ .7865, kiwi .6285, C$ .8590, euro 1.3920, sterling 1.6090, Swiss .9185, rand 8.1315, krone 6.5290, SEK 7.6575, forint 199.25, zloty 3.1780, koruna 18.68, yen 94.30, sing 1.4615, HKD 7.7505, INR 48.89, China 6.8325, pesos 13.42, BRL 1.9975, dollar index 80.63, Oil $62.47, 10-year 3.47%, Silver $13.07, and Gold… $921.65

That’s it for today… A crazy day in the currencies yesterday… Glad that’s behind us! Had a nice long talk with my economist friend yesterday. She is always so upbeat about stuff, and I’m always so reality based that we even out the conversation! I look forward to these conversations that take place about twice a year… I wish it were more, but she’s busy, and I’m busy, and there just aren’t enough hours in the day sometimes! I asked the question… If the Gov’t thought AIG was too big to fail, how can they sit there and watch what’s going on in California, the world’s 7th largest economy falling deeper and deeper into the abyss? We came to the conclusion that the Gov’t probably won’t watch it too much longer without reacting… So, there! You were a part of an economist discussion! Made your day, I’m sure! OK… Time to get to work… Let’s say this over and over again this morning… It’s going to be a Wonderful Wednesday!

Source: Back and Forth We Go!

The greenback pared some of its earlier gains as stock markets in Europe gained ground and U.S. stock futures pointed to a higher opening on Wall Street .

Analysts said currency movements would remain subdued ahead of U.S. payrolls data and European Central Bank (ECB) and Sweden’s Riksbank comments expected later this week, while some said that the dollar may eke out some gains.

“There is some position squaring … Normally the week before payrolls numbers investors tend to be defensively positioned and right now being defensive means to be long dollar,” said Geoffrey Yu, FX strategist at UBS in London.

The market will pay close attention to U.S. payrolls figures, due on Thursday, for any signs of improvement in the economy’s health. According to a Reuters poll, forecasts are for a reading of -363,000 in June compared to -345,000 in May.

By 1035 GMT, the dollar index was essentially flat at 79.922. The euro slipped 0.1 percent to $1.4033, having touched the day’s low of around $1.3984 earlier in the day. The dollar was up 0.2 percent at 95.40 yen .

H1 PERFORMANCE

The dollar has suffered broadly in the first half of 2009 as recovering stock prices has stoked demand for risk — chipping away at the U.S. currency’s safe-haven appeal — while concerns about the U.S. fiscal position has also weighed on the currency.

The dollar has struggled the most against higher-risk currencies including sterling and the Australian and New Zealand dollars, which have each gained more than 10 percent this year.

Some analysts said that market focus may turn away from risk issues in the second half, while economic fundamentals may take up more of the spotlight, which could reward currencies whose economy are seen improving in the mid-term.

“The dollar should recover in the second half if U.S. recovery expectations increase,” said Johan Javeus, chief currency strategist at SEB Merchant Banking in Stockholm.

Other analysts agreed, but said the dollar may falter if concerns grow about Washington’s debt burden as it borrows aggressively to help its economy out of recession, along with ongoing speculation about reserves diversification.

The dollar had come under pressure last week as debate intensified about the use of an alternative global currency to the greenback, with China’s central bank renewing its call last week for a super-sovereign reserve currency.

However, China said at a meeting of central bankers in Basel at the weekend that the policy governing its currency reserves, which comprise mainly U.S. Treasuries, was stable and consistent with no sudden changes, giving some respite to the dollar.

Analysts said that while the issue of diversification would likely continue, any move away from the dollar as the reserve currency of choice could take a long time to materialise.

“There will be a structural shift away from the dollar as global players begin to diversity away from dollar assets as well (but) people are so cautious on the outlook right now. No one is too sure when to pull the trigger and they’d rather err on the side of caution,” said Yu.

In a sign that the economic downturn may be easing, euro zone economic sentiment improved more than expected in June.

A survey by the European Commission showed economic sentiment in 16 countries using the euro rose to 73.3 points in June from 70.2 points in May. The data had little initial impact on the euro.

LONDON, June 29 (Reuters)

“So while I look at the housing market as something that gives me grave concern, we are finally beginning to see the seeds of a bottoming,” Alan Greenspan declared Tuesday to a friendly crowd at the National Association of Realtors conference in Washington.

And yet, the Dow slipped another 184 points yesterday, as if utterly ignoring Greenspan’s confident declaration. The tumbling Dow also seemed to be thumbing its nose at Greenspan’s pronouncement that “it’s very easy to see” that the recovery in the capital markets “is going to continue for an indefinite period.”

A couple bad days in the stock market do not make a reliable trend, of course. But unbeknownst to Greenspan, neither do a couple good months. Stock prices have been inflating. There’s no denying that. But meanwhile, the economy has continued to deflate. There is no denying that either. So what is an investor to do? Trust the stock market or trust the economy?

The answer to this question is never clear, except in retrospect. But one thing is always clear: never trust Alan Greenspan’s predictions. “Whatever virtues Greenspan may have displayed during his 19-year tenure as America’s most famous bureaucrat,” we observed in a former edition of the Rude Awakening, “clairvoyance was not one of them. Indeed, his feeble powers of prediction are legendary. Every time he looks into the future, it refuses to look back…

“We admire this cowboy for climbing back onto the same mustang that keeps bucking him off,” we continued, “but that doesn’t mean we expect him to remain in the saddle for very long.”

Indeed, Greenspan seems to spend a good deal more time dusting off his chaps than holding the reins. And yet, the former Fed Chairman continues to draw $100,000 speaking engagements as if he actually had something useful to say. Hiring Greenspan to offer guidance on financial market trends is little like hiring Charlie Manson to lead an anger-management class. There are probably better qualified candidates.

Let us not forget that Mr. Greenspan is the same individual who declared in November of 2006, “Most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter.”

Not content to make only a boneheaded prediction about the housing market, Greenspan embellished his November 2006 remarks by volunteering a boneheaded prediction about the U.S. economy. “A lot of people are going to lose their homes,” he said. “It’s a family tragedy. It’s not an economic – or macroeconomic — tragedy.”

Obviously, Greenspan was dead wrong. If he had offered 100 different forecasts in November of 2006, none of them could have been more wrong than the forecast he actually offered. Therefore, the former Fed Chairman’s recent confident assurances about the housing market impart neither confidence nor assurance.

In addition, Greenspan’s latest public appearance seemed to break new ground, as his oracular pronouncements featured more “psycho-babble” then “Fed-speak.” Here’s a representative sample:

“Let me just say that in the most recent period, even after the incredible shock to the world economy that occurred as a consequence of the $35 trillion collapse of equity prices, we saw a bottoming and indeed that bottoming essentially reflected the fact that there is a limit to how far human fear can go.

“All of our history, or I should say our psychological history, shows the fact that we adjust to extraordinary circumstances. And we’re starting to adjust here because history tells us that all measures of fear…tend to have an upside and a downside range; they are range bound. We cannot get too euphoric; we cannot get too fearful. The markets turn on you. And the market started to turn in November of last year and flattened out…and when fear began to ebb, we began to see stock prices move up and this essentially added $10 trillion of market value from March 9th…”

So you see, dear investor, this stock market stuff is not really about dollars and cents after all – and its certainly not about the legacy of colossal errors made by a former Fed Chairman – it’s about the limitations of human fear. Because fear is “range bound,” says Greenspan, so too are the consequences of wayward capitalism. The Dow simply cannot drop to 5,000, if Greenspan’s theory holds, because that would be way too scary.

Ummm…okay.

Your editors have encountered more intelligent theories from 5-year olds. But that does not mean we are rushing to judgment. 5-year olds are right sometimes. But this we know: The future is utterly unknowable, no matter how many predictions Alan Greenspan makes…and no matter how many wacky theories he advances. The future is utterly unknowable…almost.

One thing we know:

Central bankers will print lots of money, especially during times of extreme crisis.

Source: The Stock Market vs. the Economy; Who to Believe

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?