RSI is Saying Sell! Sell! Sell!

Wall Street Santa StocksA big fundamental index I enjoy watching for overall buying/selling trends in the stock market is the Relative Strength Index (RSI). This index essentially compares the recent gains with recent losses, while factoring in the trading time line and magnitude of momentum. In Wall Street, many look to this index as a an indicator of whether the market is currently overbought or oversold.

Sure, the movement in stock market is purely dependent on the mass trending of traders and has no fundamental dependence whatsoever (as we have seen quite clearly the past year and a half), however, the RSI has remained to be a pretty reliable index for indicating upcoming trends.

An index level passing lower than the 30 mark is usually a strong sign that the market is well oversold, which tends to bring a nice rally in the short future. On the flip side, a movement above the 70 level, is known to fundamental investors that the market is probably overbought for the time being.

For the first time in over 30 days, we just surpassed that key 70 mark, which history shows that indeed a pull back should be in our near future. Sure, we've seen the index go into the 90's before seeing an actual pull back, however, those levels are very rare.

This number combined with the very low volume that accompanies the last couple weeks in December could open the doors for a bit of selling going into 2011. Consumer confidence is what continues to fight the battle upward, but I have to think that even the extra bullish investors are starting to feel the time to pull some chips off the table for the time being. Keep your eyes out. Happy Trading.

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Small Company Making Big Noise

Augme Chart
As we grow closer to the end of the year, I try to start thinking about next year and new strategies and positions I will be considering. The past two years have been wild ones, and I'm not sure that 2011 will be that far off. We continue to see some companies become obsolete and thus fail, while others thrive on new innovation and technology that you and I cannot live without. Apple has done an amazing job the past 5 years in positioning themselves as the media giant and had no problems penetrating the cell phone market.

No one has a crystal ball, but trends can tell a lot. Lately, we have seen big trends towards hand held devices and social networking. Utilize both of these successfully and you will most likely be golfing most of the year.

There is a company that has been on my radar for quite some time and I think 2011 could be a break out year for them. Their name is Augme Technologies (AUGT). Sure their under $2 stock price doesn't make you jump out of your seat at first glance, but a bit of research and due diligence makes me like the company.

Augme is developing the technology to help large businesses communicate with consumers through their hand held devices. Already, the company has a client list that includes HBO, Ralph Lauren and Johnson & Johnson. They are ahead of the game in helping consumers be able to interact with these businesses, all from their handheld.

Right now, the company has a near $20 million of committed sales in their pipeline, which is a large leap compared to their current $4 million per year revenue stream. The cell phone marketing industry as a whole is projected to have a $5 billion value by 2012.

From a technical value, their stock has a strong trend going up. Their 20-day moving average is strong and their regression line has a strong uptrend for 2010. Don't be surprised if 2011 is their year to shine. Happy Trading.

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Holiday Buying and An ETF on the Rise

DBA ETF Chart
Markets were able to put on a big rally to end the week in the close having the Dow close up almost 20 points, after being in red for the entire day. Bulls are looking to finish out the year strong (as they usually do) as shopping malls look crowded, the noise of cash registers opening are filling stores, and consumers seem to be much more positive this year, looking forward, then they were last year. Whether they have good reason to be, is still yet to be seen, but at any rate, Wall Street should benefit from it here in the short term.

I am always looking for good plays in our current economy, because it still remains a unique one and could change its face at any time. One ETF I have been eyeing has a strong upward trend and has been performing, and should continue to perform quite well. This is the PowerShares DB Agriculture Fund (DBA), which is mostly comprised of the most liquid and most traded agriculture commodities (corn, wheat, cattle, etc).

As you can see from the chart above, it has put on some good momentum in the last couple days. I think we may see it pull back a bit near the $30.05 range, but if the stock can stay at that first support level and bounce back, I believe we will see some great gains from it. Either way, like gold, it is a good one for me to stock away, as commodities are a good hedge against inflation.

We should see things begin to heat up in the market next week, as that year end date grows near and hedge funds become a bit more antsy. Happy Trading.

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High Yields Hiding in Wall Street

high yielding stocks It has definitely been a roller coaster the past two years in the stock market. On both the Bull and the Bear side, there has been a lot of money made. As of now, it has become much more difficult to find "high yielding" investment instruments than it was a couple of years ago. Banks are lucky to give you .5%, and even more riskier investments (or illiquid) may offer you in the 3-4% range. But it seems as if the days of 9-10% dividends are gone...or are they?


There continues to remain several opportunities to pursue high yields in equity markets, despite being in a recession. I thought I would share a few tips.


First, is to look outside of the usual common stock play. Stocks are great and there are opportunities, however, it is where every Tom, Dick, and Harry invests when they open a bank account. It is harder to find opportunities, in a market like ours currently, in the stock realm. For me, I enjoy adding preferred shares to the mix of my portfolio. For many companies offering yields, you may find a 3% yield on their common shares. A lot of the times, you can purchase their preferred shares and enjoy a 6-7% yield. This is common with major companies like Verizon, GE, and Proctor & Gamble.


Second, dig deep. Sometimes, large company stocks get a bit "over trendy" which equates to an inflated stock price. There are many hidden jewels out there that for whatever reason, do not have a high trading volume, but offer some very enticing yields. Do be aware, that there are some stocks out there claiming ridiculous yields that should cause for a red flag. Make sure to do a bit research on the company before purchasing, as to not get scammed.


Income Deposit Securities and Master Limited Partnerships (MLPs) can be great investment vehicles. These act as traded partnerships, in which equity (units) are offered to investors in a particular industry. These are very common in the Real Estate and Financial sectors. These instruments commonly have much greater yields than common stock trades.


I have also found that there are many Canadian REITs that are offering very high yields. There are several strong companies that are offering near 10% yields on their stock. Sure, in Canada, you do not have the "security" you do in the US, but there hasn't been any problems there in quite along time. For those of you have big appetites for big returns, I would definitely check out a few Canadian REITs.


Many bonds have taken a beating of this market due to a strong pullback in consumer confidence. Well, heading into the holiday season, we usually see our spike in consumer confidence, which usually tends to bring back the bond markets for a short period. A great way to get some big yields is by purchasing discounted bonds. Exchange Traded Bonds can be a great buy for those that have been oversold due to uncertainty. Look for those strong bonds that are trading well below their par for a chance to see some very high returns.


As it is with the game of risk/return, remember that seeking higher returns usually means taking on higher risks. This is no exception. As I do feel that my above noted practices do provide pretty secure investment opportunities and have for me in the past, there is still always the possibility of not reaching high returns or losing money. Make sure to do your own due diligence before purchasing any investment vehicle.

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Don't Want GM? Try This Auto Giant

TTM Indian stock
GM has recently been stealing the spotlight from many other auto companies. Auto sales seemed to have endured rather well, especially this past year. Though many mainstream auto companies don't interest me that much at this time, there is an emerging auto company that is making a lot of noise.

India has 12 cars per thousand people, which seems like nothing when compared to the US's number of 842 cars per thousand. For India, this number is rapidly growing every year and has plenty of room to keep growing.

Tata Motors (TTM) (yes, I'm sure there were many who giggled at the name) is the largest Automobile maker in India, building buses, tractors, trucks, and passenger cars. The company owns 60% of India's marketshare and has a rather strong buying pool outside of the country as well.

In 2009, TTM stock returned over 281% to its investors and in 2010, the stock is up over 90% so far. Indeed, as is the case with many emerging markets, the stock is very volatile, but when looking at the chart (above), you can see the MACD is leveling out and should be due for yet another jump in price, if the recent trend continues. With the US economy still questionable at this point, India is not a bad place to look for some alternatives.

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Is GM a Good Buy?

gm stock chart
Much has been made of the largest IPO in history...General Motors (GM). After their brief time away from Wall Street (Bankruptcy), they have been able to rearrange their liabilities column to hopefully be able to survive the rest of the storm. Of course there have been many large companies that have been able to take the road of bankruptcy, only to come back stronger, however, I am not sure GM will be one of them.

First of all, they have been out competed the last 10 years to the Japanese in the construction of automobiles. Sure, they do get their "American" made claim to their brand with their big trucks and SUVS, however, as consumers tighten their budget, they shop for efficiency and longevity. All signs point to Japanese in that regard. Now, GM is attempting to re-brand themselves into a competitive brand to the Japanese, while still trying to keep their loyal "American Only" customers. At any rate, their stock seems to be gaining a bit of momentum in the short term (see graph above), however, if post holiday stock woes are in our midst, this trend can quickly change. In my next post, I will discuss an auto stock (Indian) that is definitely worth noting and watching. Happy Trading.

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New Chinese IPO to Look At

bita ipo
With all the hype of the recent GM IPO after their short vacation away from Wall Street while in bankruptcy, I believe this Chinese IPO has been overlooked.

China is the largest customer for vehicle purchases and their number one source to purchase vehicles are through online vendors. Last year, online vendors attracted 140 million unique visitors, which was up from 29 million in 2005. Bitauto (BITA) is the largest online vendor that services vehicle information in China. On Wednesday, Bitauto issued 10.6 million shares to the NASDAQ for $12 per share.

Since going public, there has been some downward pressure on the stock price and volume has remained relatively low.

As with many Chinese public stocks, BITA carries risk. It has a higher forward multiple, which is typical for Chinese companies. Due to the recent release of shares, their market cap has been put to $492 million. Once this company gets some more exposure, I would not be surprised to see some strong, positive movement.

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Uptrend for Gold

gold spot forex
Nice solid movement coming from the Gold Spot (Forex XAUUSDO). Good regression line and also a pretty solid crossover on the MACD. Definitely a beginning of a good uptrend. Markets rallying pretty good today, which should continue the last hour. I would not be surprised to see half of the profits returned tomorrow as many got a nice little pop today.

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Stocks on the Move

IMGG stockIt seems as though Wall Street approves of the latest changes in politics that took place on Tuesday. The Dow enjoyed a 200+ point move today as investors seem to have a bit of optimism. In reality, there is little that the changes will be able to do. Sure, efficient incentives and policies can mitigate damages done to the economy and ease the pain, but the careless management and banking that has taken place the past 10 years cannot be erased by the signing of a pen or printing new money. It will take a lot of time and, unfortunately, pain.

Last year I discussed a penny stock with you that I had invested in and seen a great deal of success. The company is Imaging3 (IMGG). We were able to buy into this stock a $0.05, where the stock remained at for a few years. Well, last year, rumors of a near FDA deal caused for the stock to leap the the near $2.00 range, which we then opted to sell all of our shares. I have dealt with FDA pending stocks before, and history has shown me that it is much better to get out on the hype then to roll the dice on whether it really happens. Well, in this case, it was a wise decision.

This past week, IMGG had a shareholder conference call in which they announced that their application for FDA was rejected which greatly surprised IMGG management. Much of their notes, related to administrative deficiencies more so than actual performance of their product. You could sense the frustration of the CEO in not knowing exactly why it happened. As a result, the stock has now plummeted back down to the near $0.10.

Sure, the news is frustrating for investors, but this does not mean they will not get approval. In fact, the stock price is starting to become very appealing for re-entry at this point, as it is clear they will continue to fight for FDA approval. If it becomes clear that once again they are near that approval, I expect the stock to react much like it did the first time around. So, IMGG is definitely on the hot watch list for me and anymore decay in its price will force me to have to make a move.

First Friday of the month coming this week, which you know what that means...Unemployment data. Once again, unemployment will act as the main driver of sentiment in the marketplace and until we can consistently start to reduce that number, massive problems will still be in our midst. Anyway, look for this political rally to quickly be squashed of the numbers come in disappointing. Happy Trading.

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With Voting - Expect Volatility

stocks voting boothWe have reached yet another November 2nd voting day and I expect to see some fireworks that usually accompany the day. It is been estimated that Wall Street has already factored in the expected "change of power" that is to take place with a Republican victory, however that may not be the result. If it is not the result, I would definitely expect to see a big drop in markets, financials especially.

We are starting to see some unique transactions that are new to this cycle that we saw in the 90's. This is the trading of distressed and performing notes from one bank to another. Banks benefit greatly to profit off of written down loans from other institutions. For the selling bank, there is not much net effect as the asset has already been written down following an appraisal. If this action is reversely repeated, then it can turn out to be quite beneficial and profitable for banks.

So what does this mean for the economy. Well, banks making money does not necessarily mean a healthy economy. Sure, we need the banks to be liquid and healthy, however, banks have been making record profits the past year and as for the commercial lending market, well, it remains pretty frozen. In fact, providing a route for banks to be so profitable without having to lend, may come back to bite us in the near future. As of now, banks are able to borrow 12 times the dollar you deposit and put them in treasuries, yielding a sub 3% return when they only have to pay you 0.45% on your dollar. When you do the math, you can quickly see how profits are piling up.

As of now, the profits are severely needed and banks are pacing their disposal of distressed properties at what they perceive a healthy rate to coexist with their profits. This is why a defaulted loan may get ignored for a year, only to have a speedy eviction notice pop up one day. The question is, when banks begin to become more balanced, will we begin to see lending occur. Why should the bank take on that kind of risk for profits that are pennies compared to their current arrangement. You can quickly see the paradox that exists.

We will know by tonight, whether or not big movements will be made. Either way, history tells us that day after voting days are usually a bit more volatile than the rest. No matter what happens, new uncertainty is created, which in turn shakes investor confidence a bit. So it will be interesting to see how it all unfolds.

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Reinvesting Dividends When Stock Trading

reinvesting dividendsMany have the question when going to purchase a stock or mutual fund, "What does the dividend reinvest option mean, and should I do it?"

First of all, for those that are not aware of it, there is usually a dividend reinvest option that your trading account offers you when taking a new position. If it is not there visibly, call your brokerage company.

For my platform, I am given the option to check the dividend reinvest box right before confirming my trade.

To start it off, dividends are cash distributions given by companies to their shareholders following a profitable time period. For the most part, companies have two options when dealing with profits.

First, companies can choose to retain earnings in the company, making the company ultimately worth more (higher asset value), thus hoping to increase the stock price. Apple is a prime example of this. Rarely will you receive a dividend from Apple, however, owners have enjoyed a rather steady increase in their stock price.

The other option companies have is to share a portion of their profits with their shareholders. Sure, for the most part, this is not anything significant due to the amount of shareholders, but you might be surprised at how big dividends can be. Because of the cash distribution, stock volatility is usually much lower. Verizon is a good example of this, as they have really low volatility with a rather strong dividend for investors.

Neither approach is ultimately better than the other. It all depends on the individual company and how they choose to handle it. From an investment standpoint, the two different scenarios can be more intriguing, depending on your investment goals. For instance, I prefer to load up on high yielding dividend stocks for my retirement accounts, because over time, the dividends can pay off, despite the stock price moving with lower volatility.

In addition, I always choose to reinvest my dividends. By doing this, I then utilize the principle of compound interest. When reinvesting your dividends, you opt out of taking the cash and purchase more shares with it instead. Thus, after time, you can end up with double or triple the shares you started with, while continuing to earn dividends from the increased shareholding. Hopefully, if the company remains strong, your position will be great increased over time.

Dividends are an important trading principle to consider when taking a position. For some portfolios, it will not make sense to buy dividend yielding stocks, for others it definitely will. Happy Trading.

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Welcome Back Foreclosures

bank owned homesOnce again, I apologize for my limited updates to the site, as times continue to be busy. As we can see, there has definitely been upward movements in stock prices. In fact, with my last post, the Dow was lingering around the 10000 mark at which I said that I expected a "rubber bottom" at around that point and expected to see a rather steep jump from there. As of now, we can clearly see that has been the case. Now the question is how much is left as we begin to head near the always interesting "end of year" times.

One luxury that the housing market has enjoyed throughout most of the summer months was the lack of foreclosing from banks. Hundreds of thousands of potential foreclosed homes have been delayed due to a variety of reasons. Now, we are starting to see the banks move forward more aggressively. In fact, Bank of America announced today that it plans to resume paperwork for over 100,000 cases of foreclosures in 23 different states. Not only will the housing market now have to endure the off season, they will also have to do it while competing with a fresh load of foreclosed homes. Let the auctions begin!

The housing market will not be the only sector to get affected by the change. For several months now, hundreds of thousands (if not millions) have enjoyed the extra disposable income that has been generated from not having to pay their mortgage. This can be quite significant. As banks begin to foreclose more aggressively, this means that more and more people will be forced to pay occupancy costs again (duh!), which in turn will affect several other sectors. We have seen in recent studies that much of the recent economic activity is a result from government stimulus. If these go away, market growth goes away with it. So now the decision is, when do we make the decision to pay the bill of this party we have been enjoying for the last year and a half.

As of now, I believe we are nearing a rather aggressive pullback. November is known for the massive hedge fund redemptions that take place before year end as well as other year end pressures begin to pile up. Shorts should perform well during the end of October/beginning of November. Happy Trading.

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Decreasing Dollar Cause For Panic?

dollar decline Well, as I expected, we are continuing to see a rather strong "bouncing bottom" at around the 10000 level of the Dow. This last bounce has taken us above and beyond the 10700's, which seems to be a trend at this point. However, signs of a decreasing dollar is starting to raise concerns for investors.

Nothing could be more dangerous to our economy at this point than a sustained, low value dollar. There already exists massive threats of hyperinflation as the government continues to run ramped with government spending and bailouts. Recent jumps in gold are confirming investor's worries about inflation as gold prices are the best measure for investor's sentiment towards the dollar.

Many worry that declining dollar will not continue to "prop up" the market. A declining dollar would also equate to a decline in US consumer's spending power, which in turn will be a direct effect on GDP and economic growth. It is because of this, eyes are closely watching and hoping that we see strides of progress in regards to the dollar's strength.

There are others who feel that the dollar is primed to launch at this point. Some optimists feel that they expect to see some big gains in the dollar in the short term. I cannot agree with them at this point, when considering other lagging indicators that are still existing at this point, but we will see.

One big problem with a declining dollar is that we have not seen much inflation in the marketplace, which would be a normal sign of inflation. So although we are seeing the value of the dollar go down, consumers do not have an inflated amount of dollars in order to compensate for the drop in value. Thus the drop in spending power. Although it may seem to some not a big deal, the value of the dollar is critical at this point. Happy Trading.

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One For You Daytraders

pacific capital bank investmentFor the most part, I usually choose to not actively participate in day trading, most due to the time commitment required as well as the stress levels it can cause. However, every now and then something comes along that is worth a look.

PCBC is a Bank that has been on the decline since the turn in the market and has been flirting with FDIC takeover for the past 6 months. Just a few months ago, the bank found a saving investor to hopefully salvage sinking ship. Gerald Ford, founder of Ford Financial Fund, opted to invest $500 million in capital into the bank, in return for a majority of stock. Although, temporarily, it seems as though the transaction will be enough to keep the bank going, it has also heavily diluted shareholders of the stock, which has sent the stock sailing down.

The interesting part is that now the bank will be offering a unique opportunity for shareholders of the stock. According to their filing (which has also bee confirmed by their investor relations department), any shareholder of the stock as of close of August 30th (which is the day before the Gerald Ford transaction is set to close) will be given rights to purchase up to 15.335 times the shares they currently own at an offering price of $.20 per share. You do not need to be a preferred stock holder, this is open to the public.

Due to this, we have seen enormous amounts of volatility in this stock (up 20% yesterday, down 45% today). As we approach this August 30th deadline I expect to continue to see extremely large amounts of volatility followed by what should be a rather steep decline in the stock, as the $.20 offering deadline passes. Obviously, the main risk in this investment is whether or not the bank stays afloat. As for me, I am familiar with the bank, and am comfortable with their operations and I am also comfortable with Mr. Ford's ability to see a good deal. If you want to see some fireworks the next few days, tune into PCBC.

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Big Banks Beefing Up & Emerging Markets

big bank profitsFirst of all, please excuse my lack of updates for the past while. Those that are active readers of this site know that this is merely a hobby of mine to update many of you of the changing in markets as well as my own two cents on the always changing economy... and hopefully to profit from it. The past several weeks have been extremely busy for me in other affairs and I have been pursuing a variety of different investment projects that has, unfortunately, eaten up a lot of time. It actually has a bit of irony in all of it, because the overall economy is behaving in a similar manner. In fact, I have not been the only one to be loaded with new projects and possible scenarios that was not available the past two years. The big question is, is it feasible and will it last.

No doubt, investment activity has picked up this year. There is money out there and it is getting itchy. Although many small businesses and middle America investors continue to see no light in this tunnel, know that there are several big businesses and banks who are seeing some of the best profits and deals they have ever seen. Unfortunately at this point, it is all about who you know and do you have the cash (isn't it always about that?). At any rate, phones are ringing more, people are at least trying to make things move, but there still remains a big elephant in the room. What is the economy's next move?!

Many "conservative" economists (myself included) strongly believe that we are directly headed for a "double dip" recession. It is very evident that the job market is not recovering nearly at the rate that was hoped by the Fed. Overall market growth continues to be sluggish, despite monumental bailouts and credits that have been given by government. Keep in mind that during all of this, interest rates remain at essentially 0%. So the big question, can Obama afford to continue to ruthlessly spend to continue this "mirage" of prosperity or will he finally come to the realization that a bit of pain needs to come before a true recovery can begin? It is his call and unfortunately either way calls for tough times ahead.

With that being said, it makes it hard to try and anticipate short term changes in markets. Although I have been busy recently pursuing new investment vehicles, I am making sure that everything I am pursuing is sustainable in an even stronger declining market. I have been offered many investment opportunities that forecasts massive jumps in activity the next five years and projects very rewarding returns, however, I continue to believe those forecasts to be far too optimistic.

One bright spot that seems to be benefiting from the collapse of large economies are the emerging markets. Sure, they will struggle with the rest of us and are somewhat tied to larger market performance, however, they have strongly outperformed most indexes this past year. ETFs like EZA, EWM, EWZ, and RSX have seen some extremely large returns and have rewarded investors who took the risk. The have traced back recently here, but as the Dow lingers near 10000, I would expect a short term "trampoline bottom," thus rewarding these ETFs even more. Time will tell, but I am in them.

Big banks are also strongly benefiting from recent government concessions. The foreclosure market has picked up tremendously, which is a direct correlations with the strength of their balance sheets. Earlier on, banks could not afford to take the hit on foreclosed assets, thus forcing them to modify loans or just not respond to delinquent borrowers. Now, they have replenished the vaults (at the Fed's and taxpayer's expense) and are much more aggressively taking back assets. As these assets hit the market, expect more declining prices in both residential and commercial real estate. It is definitely starting to get interesting. Happy Trading.

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Don't Rule Out Deflation

Many analysts have quickly written off the possibility of deflation due to the large amounts of government spending that has taken place. However, there are still many who know the adverse effect of market crashes, one of which is huge deflation risk. As for me, I continue to believe the beast still lies ahead for us and I'm not alone. Jeff Cox at CNBC writes about how deflationary worries are causing for a spike in the long term bonds. Here is what he said:

With investment advisors convinced the economy may be headed for a bout of deflation, they're turning to longer-term bonds for safety.

The uncertainty of the current environment creates acomplicated picture for investors, but many advisors continue to feel comfortable with the safety of bonds, particularly those from the US government and for a longer duration.

It's part of a mindset that believes inflation could well be the economy's long-term worry—going out two, three or four years from now—but in the near term prices could turn negative and bring about deflation.

"It's hard to see where the inflation is going to come from," says Brian Nick, investment strategist for Barclays Wealth in New York. "The longer-duration bonds look expensive but also look like stable, safe assets."

NYSE Traders
Oliver Quilla for CNBC.com

Nick recommends investors target 7- to 10-year durations in bonds and Treasury notes, though some strategists are even backing the 30-year long bond [US30YT=XX 4.0663 0.0783 (+1.96%) ].

Long-term bonds are a bad bet in an inflationary environment as their value erodes as costs go up.

But in deflation, they make attractive tools for investors who have the security of decent yields but also see increases in their face value and collect handsome coupon payments. Prices and yields move in opposite directions, with higher demand driving up prices and pushing down yields.

Government bonds had a remarkable July, with the yield on the benchmark 10-year note [US10YT=XX 2.9681 0.0631 (+2.17%) ] ending the month virtually unchanged even as the stock market roared higher by 7 percent. Stocks and bonds often move in opposite directions as risk dims the allure of safe-haven investments like government debt, so a stronger stock market would drive yields higher

Nick recommends a barbell strategy, with longer-dated US Treasurys on one end and triple-A rated sovereign notes from companies like Germany and Sweden on the other end. The middle would include investment-grade corporates, high-yield Treasurys, convertible bonds and defensive stocks.



Jeff Cox
Staff Writer
CNBC.com

"Equities are going to be tough to pick individually in a declining market...You want to be in our opinion looking at higher-quality fixed-income," says Steve Baffico, senior managing director at Claymore Securities in Chicago. "That brings you to things like corporate bonds, asset-backed securities, even into the high-yield market, where there's a degree of undervaluation and some pretty high-quality product that's mispriced."

As with the question of whether the economy will enter a double-dip, the situation with deflation may be as much perception as reality.

Analysts say the economy may not actually meet the dictionary definition of a double-dip, though it will still feel like one. The same may be true for deflation, defined as a drop in prices often due to a decrease in money supply.

The Consumer Price Index has declined for three straight months but is up 1.1 percent for the 12-month period ended June 2010. And inflation slipped to 1.05 percent in June but trended above 2 percent for the preceding five months, according to the Bureau of Labor Statistics.

"A base case could be made for generally improving growth and moderate inflation. From an investment perspective, long-term assets such as long-term Treasury equities, corporate bonds and structured products are relatively attractively valued," says Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, N.J. "A diversified portfolio among these longer-term assets is going to offer some protection against deflation."

But with a $13 trillion debt looming and about $1.8 trillion on corporate balance sheets, the timetable for the deflationary environment is very much in question.

"This is a little bit trickier than going out to the long end of the curve, because we could see some sort of implosion in the Treasury market," says Abigail Doolittle, founder of Peak Theories Research in Albany, N.Y. "It's a matter of timing that very carefully."

Doolittle says investors can use longer-term bonds, including the 30-year, but not as hold-to-maturity vehicles. Trading bonds is common for institutional investors but is a little tougher road to navigate for less sophisticated retail investors, who are best off using an experienced advisor for help.

She is an even bigger advocate of cash, including foreign dollars such as Canadian and Australian denominations—countries that have raised rates and defended their currencies.

"Just because of the massive deficit, it's really going to put pressure on the dollar and Treasurys. When that happens you could see a spike higher in yield and a spike lower in prices," she says. "That's something the retail investor does not want to get caught in."

Indeed, today's deflation tremors might only be a precursor to tomorrow's inflation earthquake, as easy-money Federal Reserve policies and huge cash reserves make their mark.

"Investors need to be very cautious to try to protect themselves against systemic risk and dollar risk," says Doug Noland, manager of the Federated Prudent Bear Fund, which holds a balance of shorted stocks and benefits on the stock market falling. "It's time for investors to hunker down through this period without big losses. This is an incredibly uncertain environment."

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An Update From Dr. Weiss

Anyone who is familiar with this site, knows that I am a big advocate of Martin Weiss, whom I believe is accurate in evaluating the effects of our current fiscal practices. As we know, last week was a pretty critical meeting with Fed Chairman Ben Bernanke and congress. Since then, we have seen the market rally almost 500 points, which once again shows that investors are not picking up on the signs. Dr. Weiss outlines some of these critical signs and gives real, practical reasons why we should be a bit skeptical when feeling that we are out of the recession:


Martin D. Weiss, Ph.D.

In his testimony before Congress last week, Ben Bernanke lifted the Fed’s skirt and gave us a glimpse of the disasters now sweeping through the U.S. economy.

But there are four bombshells he did NOT talk about:

FIRST and foremost, what’s CAUSING the economy to sink? The stock market has not yet crashed. Interest rates have not yet surged. Gasoline prices have not skyrocketed. There has been no recent debt collapse, market shock, or terrorist attack.

So what is the invisible force that’s suddenly gutting the housing market, driving consumer confidence into a sinkhole, and killing the recovery that Washington was so avidly touting just a few months ago?

Bernanke won’t say. But the answer is clear: The recovery had very little substance to begin with. Rather, it was, in essence, a mirage — a dead cat bounce bought and paid for by Washington’s massive bailouts, stimulus programs, and money printing.

Put another way, the recession never really ended. Yes, we saw some growth in GDP. And yes, thanks to that growth, some companies are still reporting better earnings — the news that spurred a rally in the stock market last week. But at the core of the economy, the fires that started the recession are still burning intensely.

SECOND, Bernanke failed to point how that …

The U.S. Housing Market Is Now LOCKED Into a Chronic, Long-Term Depression

Houseing sector resumes worst collapse in U.S. history!

Housing starts — the most important measure of the housing industry — is still a disaster zone.

Beginning in January 2006, they suffered their worst plunge in recorded history — from an annual rate of 2.3 million to a meager 477,000 in April 2009. Thus …

In just three years, 79 percent of America’s largest industry, impacting more Americans than any other, was wiped away.

Then, despite a series of government agency programs to shore up the industry … plus $1.25 trillion poured in by the Fed to buy up mortgage-backed securities … plus a big tax credit for new homebuyers, housing starts perked up ever so slightly: They recovered to an annual rate of 612,000 in January of this year.

But this recovery was so small, it retraced just 7.5 percent of the prior fall. In other words,

Even after massive government efforts, and even at the highest point in their recovery this year, the housing industry recouped less than one-tenth of its historic three-year bust from 2006 to 2009.

Worse, the housing industry has now resumed its decline.

The most alarming factor: Widespread “strategic defaults” on home mortgages.

These are defaults by homeowners who can afford to meet their monthly mortgage payments, but have deliberately decided to stop paying.

They realize their home is worth less than they owe on the mortgage — transforming it into a dead asset they’re willing to give up. They know their bank, already overwhelmed with foreclosures, won’t get around to evicting them for as long as two years, allowing them to live in the house cost-free. They also know this tactic can give them tens of thousands of dollars in extra cash. So they’re defaulting en masse and getting away with it.

End result:

  • New supplies of foreclosed homes hitting the market as far as the eye can see …
  • Bankers who would rather cut their wrists than finance new homes, and …
  • A new slump in housing that’s worse than even some pessimists were expecting.

THIRD, despite his now-famous quote that this is “the worst labor market since the Great Depression,” Bernanke failed to reveal that …

Official Government Data GROSSLY Understates the Magnitude of Unemployment

Long-term joblessness worst ever recorded!

Bernanke did not mention that the percentage of long-term unemployed in America is the worst it’s been since the government began keeping records in 1948. Two facts:

Fact #1: A record 4.39 percent of the work force — or 46.2 percent of the unemployed — have been out of work for 27 weeks or more. That’s DOUBLE the worst level ever recorded and TRIPLE the peak level seen in five of the past six recessions.

Fact #2: On average, America’s unemployed have been out of work for 35.2 weeks, also the highest on record.

Bernanke did not remind Congress that, based on the government’s own broad measure, the true unemployment rate in the U.S. is not 9.5 percent. It’s 16.5 percent — or seven full percentage points more than the figure Mr. Bernanke likes to refer to.

This broader measure includes workers seeking full-time employment, but temporarily settling for lower paying part-time jobs. Plus, it’s supposed to also include “discouraged workers” — those who have given up looking for work because there are no jobs to be found.

Nor did Bernanke confess that, during the Clinton administration, discouraged workers were “redefined” to EXCLUDE those who had been out of work for more than a year — and that definition continues to be used to this day.

That makes absolutely no sense. If they’re out of work for a year, they’re discouraged. But as soon as they’re out of work for a year and one day, it’s suddenly assumed they’re happily going about their life?!

Thus, precisely when economists now recognize that one of the biggest challenges of this Great Recession is long-term unemployment … the Obama administration, both parties in Congress, and all U.S. government agencies continue to exclude the longest term unemployed from every single one of their unemployment statistics.

This could go down in history as one of the greatest deceptions about the true state of U.S. labor markets. And according to John Williams of Shadow Government Statistics, it’s big:

When you add these long-term discouraged workers back into the jobless count, you find that the real unemployment rate in the U.S. is actually 21.6 percent!

FOURTH, Bernanke failed to point out that all this is happening despite …

The Biggest Government Interventions of ALL TIME!

The full scope of the government’s interventions is now official:

In its July 21 Quarterly Report to Congress, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) tabulates the government’s bailouts, stimulus programs, and money printing escapades since the debt crisis struck in 2007, as follows:

Incremental Financial System Support

According to SIGTARP, at mid-year 2010,

  • The Fed has pumped in $1.7 trillion through its massive purchases of mortgage bonds, Treasury bonds, and agency bonds.
  • The FDIC has thrown another $300 billion into the pot, shutting down over 100 banks so far this year.
  • The Treasury has pumped in a net of $300 billion in TARP money (even after paybacks), plus another $500 billion in money outside of the TARP program.
  • Plus, several other government agencies have chipped in another $800 billion.

These official numbers are actually LARGER than we were estimating. We had the total pegged at $3.5 trillion (not billion), including the 2009 stimulus package.

SIGTARP has it at $3.7 trillion, excluding the stimulus but including a myriad other rescue programs — by the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), the Government National Mortgage Association (GNMA), the Federal Housing Administration (FHA), and the Veterans Affair (VA).

But no matter how you count it, some outstanding facts are absolutely self-evident:

FACT: The enormous magnitude of the government’s intervention FAR surpasses anything ever witnessed in the history of humankind.

FACT: It’s not working! Housing is still collapsed. Long-term unemployment is the worst ever recorded. And the recovery, already anemic, is aborting prematurely.

FACT: Most important, it’s winding down! Through mid-2009, the government intervention programs tabulated by SIGTARP were being ramped up at a furious pace — a total of $3 trillion overall.

So over the 12-month period from mid-2008 through mid-2009, we estimate they were running at the average monthly pace of about $160 billion.

But since mid-2009, they have been far slower, running at an average monthly pace of only $58 billion, or just one-third the prior level.

And right now, the pace of new funds injected into the economy through these government rescues are merely a trickle compared to their earlier rate:

  • No new stimulus is in the works.
  • No new TARP funds are forthcoming.
  • The Fed has wrapped up its bond buying splurge.
  • And the ONLY significant continuing programs are for housing — the one area where the government has admittedly seen the WORST overall results, according to SIGTARP.

Bottom line:

If you were counting on the government to prevent the second major leg in this great double-dip recession, don’t hold your breath. To the contrary, the primary CAUSE of the second dip is the government’s conspicuous absence from sectors where it was, until now, the biggest mover, shaker, buyer, and financier.

Your ACTION

With this rapidly shifting quicksand, you must NOT be lured by Wall Street’s siren songs. You must not get trapped again in vulnerable stocks, mutual funds, or ETFs. Instead …

  1. Greatly reduce your exposure to stocks, especially in sectors tied to housing, such as construction, home improvement, consumer appliances, and mortgage finance.
  2. Move the proceeds to cash and cash equivalent, regardless of low yields.

Good luck and God bless!

Martin

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"Unusually Uncertain Economy" -Bernanke

Bernanke economic updateFed Chairman Ben Bernanke graced us with his presence on Wednesday as Big Ben gave a formal economic update to the senate. Wall Street was not very pleased.

After opening the day in the green, just shortly after Bernanke's opening remarks, the Dow sold off quickly into the red over 140 points. It remained down under 100 for the remainder of the day.

So what caused the negative response. Well, quite a few things. First of all, investors are getting more and more impatient with the recovery. Here we are, well over a year into the so called "recovery" and we have seen just minor blips in the economy. Keep in mind, this is after enormous amounts of government spending as well as record setting Fed policies that are in place to help the consumer. With all of this, we have only seen a slight improvement and from how Bernanke sounded today, he does not see it getting much better anytime soon.

Bernanke said that the current economy is in a very "fragile state" and that plans are in motion by The Fed to take action if conditions worsened. He says that although we've seen in slight rebound in unemployment, now at 9.5%, he expects that rate to slow and remain above 9% for the rest of the year. Consumers did not like that.

In addition to that, he said that the housing market continues to be in a weakened state due to mass amounts of distressed and foreclosed inventory that is weighing on home values. Thus consumers will continue to be forced to tighten consumer spending, which will effect the overall economy. This is the devastating domino effect I discussed way back last year.

Bernanke said that inflation was not a current concern at the moment, which is pretty obvious, but he failed to address the issue of deflation, which would seem to be the more imminent beast at the moment. Despite many economists dismissing the idea of deflation, many Fed officials are quite worried about it. Also, when you look at fundamental data, deflation becomes a huge concern. It may have been a wise choice for Ben to dodge that subject.

At either rate, I expect this news to weight pretty heavily with investors. I expect overall momentum to remain down for the next week, which should provide a good short trading environment for the time being. I will be making some trades early tomorrow. Happy Trading.

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New S&P Technicals

S&P TrendsMarkets have had quite the rebound this week, being up over 4% just this week. Technicals and new key resistance points are moving with the market and we are beginning to see some interesting charts.

Intel helped markets rise by a very favorable earnings report, which I believe will set the mood for much of tech. Many analysts were pessimistic about Intel's performance, but they proved many wrong. So what will this entail for Apple when they report. Let's just say I think they are going to have a very good month.

Yum brand's stock fell today due to weak guidance and disappointing earnings for the fast food giant. They do say that they are beginning to see recovery in the US and that they see great revenue growth potential internationally in some of their new emerging markets, like China. However, the public was sold as their stock closed down.

Key S&P technicals are being formed as you can see from the rooftop chart above. New crucial technical points are a break at 1103. Even strong would be a break at 1129, which would most likely quickly put bears back into hibernation. We will see if investors are able to crack these new thresholds. If so, watch out. Happy Trading. (Chart from slopeofhope.com)

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A Flat Monday

dollar indexNot a lot of movements in markets today, which is typical as we get deeper into July and more and more go on vacation. There are some definite take aways though. The dollar index is making some big technical moves which could bode well for investing. Check out INO's latest video showing the movement of the dollar index and how there are some trading opportunities up and coming! See Free Video Here.

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Earnings Are Key - Signs to Returning Bear Market

retail earnings seasonThe market has had two consecutive days of pretty strong rallying, which has to make bulls feel a bit better at this point. However, it continues to hit resistance at strong technical levels and is having a hard time staying above 10,000. Just as any stale mate in the markets is, earnings seems to always be the key for the next momentum. Last quarter, it was earnings that bolstered up the already rallying markets. It may be harder this time around, has it will be hard to beat 1st quarter numbers. So we will see.

Claus Vogt, from Money and Markets, gave a great update of why bear market scenario looks optimal right now. For those that read technicals, it makes a lot of sense:

The stock market’s rise since the March 2009 lows was nothing more than a bear market rally. Yes, it was a huge rally, but not out of the realm of similar historical examples.

Low trading volume, still high valuations and lingering economic problems — especially within the real estate sector and the banking system — have been strong arguments for my outlook. And the history of burst real estate bubbles could serve as a blueprint for our current dilemma.

I’ve never departed from that assessment of what was going on …

In fact, over the past months I’ve regularly predicted that the March lows would finally be broken and the stock market’s valuation would decline. What’s more, they would go all the way down to levels seen at historical secular lows and hit single digit price/earnings ratios.

Now it looks as if the bear market rally is over and the next cyclical bear market has begun. I say that because my cyclical stock market model has given me …

Five Bearish Signs

Sign #1— Valuations never fell Valuation metrics never fell to undervalued levels. But they quickly rose to overvalued again, as soon as the stock market recouped a good part of its losses.

Sign #2— Money dried up The liquidity indicators turned outright bearish. Not just in the U.S., but globally, too. These indicators are especially important during this cycle, because the rally since March 2009 was mainly liquidity driven.

It was simply a reaction to monetary and fiscal stimulus never heard of before, aside from during war times. And with liquidity drying up the uptrend was on rented time.

Sign #3— Excessive optimism Sentiment indicators reached levels indicating high complacency and even extreme optimism. Some put/call ratios fell as low as during the heights of the 2000 stock market bubble.

And the cash level of mutual funds fell to a record low. Lower than in March 2000, and lower than during the summer of 2007, the two former record lows. Both marked excellent times to get out of the stock market.

Sign #4— LEI fell

The Economic Cycle Research Institute’s Leading Economic Index fell below the zero line in early June. This leading economic indicator (LEI) for the U.S. economy came in at minus 7.7 percent. If history is our guide, this reading is a clear recession warning.

Until recently the only component for my model that wasn’t bearish was the technical situation of the stock market. Typically, important turning points are accompanied by negative divergences in market breadth indicators, such as the advance/decline line or the number of stocks making 52-week highs.

But that changed last week when …

Sign #5— The technical picture turned the corner

The technical component of my cyclical stock market model turned bearish on June 30. Have a look at the S&P 500 chart below to see what I’m talking about.

SP 500 Chart
Source: Bloomberg

The market’s behavior since October 2009 looks like a well formed topping formation. Its lower boundary or neckline is the 1,040-1,050 area. The shape of the formation is a head and shoulders top, with the right shoulder having formed in June, accompanied by low volume, as it should be.

Then last Wednesday, the S&P 500 broke below this neckline. In doing so the topping pattern was finished with a clear technical sell signal.

This sell signal gets additional strength from the much oversold condition the market was in before last week’s breakdown took place, which is a sign of remarkable weakness. Normally a market as oversold as this one at least experiences a short-term bounce.

But that’s not all …

There is another strong technical argument signaling the end of the bear market rally and the beginning of a new cyclical bear market.

The upward trend of 200-day moving average of the S&P 500 has started to level off, also shown in the above chart. This moving average is a slow moving trend-following indicator. It won’t help you pick market tops or bottoms. But you can use it as a good sign post to tell you whether the cyclical trend is up or down.

And the 200-day moving average is not only a good indicator of the S&P 500 and most other major U.S. indexes, but also for the EuroStoxx 50 and the Nikkei 225 as shown in the two charts below.

Euro Stoxx 50 Index Chart
Source: Bloomberg

Nikkei 225 Index Chart
Source: Bloomberg

Indeed, this adds fuel to the overall bearish message.

It’s Time to Get Out of the Stock Market

The evidence that a new bear market has begun is compelling. And I believe this downturn can easily last until 2012 with prices going much lower than in 2008.

In my opinion, the prudent thing to do now is to consider selling.

Best wishes,

Claus

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BP - Forgive & Forget?

BP stock price I said last week that soon we would see an opportunity to re-enter BP as the stock has taken a huge beating throughout the oil spill clean up fiasco in the Gulf. Well, today, we saw it jump nearly 9%, as they announced that they are a week ahead of schedule in their clean up efforts. In my opinion, for the most part, BP has endured and absorbed most of the bad media from the spill. I see nothing but upside for them at this point of time, and that was reflected in their stock price today. At the end of the day, they are still a massive oil company. Let alone they are at risk of a buyout at this point as well. BP may bounce around as the clean up continues to go on, but I see a lot of upside from this time forward.


Trading was mixed throughout the day today, as news continues to come in both good and bad. Many feel that retailers are having a good month, however, home prices are coming in sluggish. We are also entering in an interesting time of the season. Historically, retail sales tend to be down for the next couple months until back to school and energy prices tend to tick down due to weather. Considering the recent resistance we've seen in markets, this may not bode well for Wall Street.


UNG has been on my radar as an overnight play. Lately, it has consistently trended as a day trading play, by starting high at early morning, only to close much lower. As this trend continues, I plan to play it rather aggressively as to take advantage of some of those short term gains.


Technically, this market is on the verge of selling, however, we know that technicals have been lying as of late. I still like to stay on their side. There are a lot more reasons to go short in this market than to go long, and I expect to see us well under 10,000 for quite a while. Happy Trading.

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Tomorrow's Employment Number Big Factor

unemployment ratesNerves are beginning to rise as the largely anticipated employment prepares to hit headlines tomorrow. Many economists are expecting a increase in the unemployment rate, which would be a tough blow after the strong numbers that came in May. For many analysts, a bad enough number tomorrow will be enough to convince them that indeed a "double dip" recession is at hand. Manufacturing and home sales already support the notion. The only thing missing is employment.

If the number does pan out to be negative, expect a violent reaction from investors, especially going into the weekend. Regardless, even if we do open up strong in the green from a positive report, I still expect the market to trail down by close, especially the last 20 minutes, so be on the lookout.

One element that has me divided about the number tomorrow is what we saw today. Many are privy to early viewing of this employment number, which is why we see negative results many time factored in the day before. Today's just slight down day is slightly leading me to believe that the number may not be as bad as many are fearing. So tomorrow will definitely be exciting regardless.

Despite having mortgage rates at record lows, home sales are struggling. With this being the case, we have to remember that we are in the peak season as well for home sales. I can't help but think that when the fall and winter months come, we shall see one big tidal waves of foreclosures come, which will directly effect prices. As of now, the bear in me is definitely making much more noise than the bull. Happy Trading.

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Financial Reform Brings Uncertainties

Markets sold off on Tuesday when new questions arose regarding the much unknown Financial Reform Bill which has been floating around, not being able to get approved as of now. However, it was announced today that certain bank taxes would be eliminated to help entice some of the moderate republicans to vote it on through to approval. As such, financials sold off as many do not quite know all of the consequences that will follow with the passing of this bill. At any rate, I expect to see continual weakness throughout this week (despite the good possibility of a rebound tomorrow). I thought I would post a good article going into more detail about the changes that was posted on Reuters:

Democrats on Tuesday planned to strip out a controversial tax from their landmark financial reform bill in order to win the swing votes needed to pass it through Congress.

With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.

Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, which got under way shortly after 5 p.m. EDT Tuesday.

Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill's costs by shutting down a $700 billion bank-bailout program.

"I haven't talked to everybody, but I gather from a number of people they like this option,'' said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.

The bill had been expected to pass both chambers of Congress this week in time for President Obama to sign it into law by July 4. But supporters have been forced to scramble for votes in the Senate, putting that goal in jeopardy.

Analysts said while that timetable may slip, the bill was still likely to become law.

"We believe that this legislation will pass, timing and the bank tax remain the final question marks,'' wrote FBR Capital Markets analyst Edward Mills in a research note.

Democratic aides said it was still possible to pass the bill out of Congress by the end of the week.

Democrats are now two votes short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democratic Senator Robert Byrd died on Monday, depriving his party of a needed vote, and Republican Senator Scott Brown said on Tuesday he would withdraw his support unless Democrats strip out a $17.9 billion tax that would apply to large financial institutions.

The tax was added to cover the costs of the bill during a final all-night negotiating session last week.

"It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis,'' Brown wrote in a letter to the Democrats who are handling the bill.

Other moderate Republican senators who previously supported the bill have also expressed reservations over the new tax.

One of those Republicans, Senator Susan Collins of Maine, told reporters she was working with Dodd to get away from the tax and they were "making progress.''

"The bill is not perfect. But I believe if you take out the new bank tax that, on balance, it would improve our financial system and I would support it,'' she told reporters.

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More Recession Indicators

Thursday marked yet another day of strong selling as the Dow sold off almost 150 points by close. What really becomes surprising is that much of this was done in the midst of positive news. We've had a few strong earnings reports and yet investors are not feeling confident. I do feel tomorrow will be aggressively green as there should be some week end profit taking, so I picked up some longs before today's close.

With that being said, I think there are still a lot of downward pressures on the market. I wanted to share an article by Claus Vogt, an economic writer, in which he discusses some key things happening at this time which point to a longer recession. I've always been a believe in a probably double dip, and here are some good technical reaons why it will probably be the case:

There are two well-known and important leading economic indexes for the U.S. economy:

• The Conference Board’s Leading Economic Index (LEI), and

• The Weekly U.S. Leading Economic Index published by the Economic Cycle Research Institute.

I use them both in my analytical work to better understand the economy’s actual position in the business cycle. And in 2007, they gave me clear, recession warning signs.

So what are they saying now?

Leading Economic Index (LEI) Peaked in March

The LEI is published monthly. Historically its year-over-year percentage change has been one of the best recession forecasting tools available. Whenever it fell below the zero line for three months in a row, a recession followed. And it has never missed calling a recession since the 1960s.

The chart below shows you the history of this indicator. It looks like the LEI saw the high for the current business cycle in March 2010 when the year-over-year change shot up to 11.6 percent. In April it declined to 10.4 percent. And then last Thursday the May figure was released — a drop to 9.2 percent.

LEI YOY Chart
Source: Bloomberg

These are still high readings and far from the recession warning level. But what’s important is that the trend of this index has changed direction and is now heading down.

Also noteworthy is that the major positive contributors were the financial components. If you strip them out, the indicator’s recent readings were much worse …

Instead of plus 0.4 percent month-over-month in May, the reading comes in at minus 0.4 percent.

I think it makes a lot of sense to strip the financial components out since history shows that monetary policy looses much of its effects in a post-bubble economy. Hence it’s probable that the LEI is actually overestimating the outlook for the economy!

This apprehension is underlined by the behavior of the second leading economic index for the U.S. economy …

The ECRI Weekly U.S. Leading Economic Index Is Nearing Recession Levels

Last week the Economic Cycle Research Institute’s Leading Economic Index had its second negative reading when it fell to minus 5.7 percent from minus 3.5 percent. As you can see on the following chart, this indicator has been in a steep downtrend for many months and is now at its lowest reading in a year.

ECRI Chart
Source: Bloomberg

Historically, readings as low the current one have ushered in a recession 80 percent of the time. And readings below minus 8 percent have had a hit rate of 100 percent. So even though it’s not there yet, it’s getting dangerously close.

Lakshman Achuthan from ECRI said that it was premature to call a recession. The negative readings have “not persisted long enough.” I agree. And we’ll have to wait a little longer to know for sure.

Yet one thing is undeniably clear: The risk of a double-dip recession has grown considerably.

Best wishes,

Claus

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More Worries For Consumers

energy stocksMarkets once again acted with volatility on Tuesday as continuing weakening conditions are existing for consumers. Data was released today that showed a bit of increase on the manufacturing side, however, on the consumer side, weakness remained. From the data (and what I have seen and heard) we are getting a bit of traction on the large business side, but conditions continue to remain tough for consumers. Much of this is due to government policies that have been placed on banks and lending. At any rate, many economists do not expect this to change anytime soon for the consumer.

Energy suffered in today's trading due to a judicial ruling that overruled the moratorium that had been placed on offshore drilling by President Obama. As a result, the Dow sold off almost 150 points by close after being in the green for most of the morning. Volatility is continuing to ramp up, which is dangerous element in a sensitive market.

Current bond trading is pointing to worries of deflation. That's right, deflation is still weighing heavy on many investor's mind as large amounts of activity on the short side of Treasuries have been seen. There is a lot of danger of playing in long term bonds at this point, as interest rate risk is at record high levels.

Look for another volatile day tomorrow. For you day traders, you will probably make out great. I expect to see a rather large difference between what the market opens at then where it closes. I will be very active in the morning while at the same time issuing strict stop losses. I will keep you posted. Happy Trading.

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Housing Double Dip Expected

housing recessionStocks once again showed volatility risk on Monday, as what was once a 140 point gain on the Dow in early morning trading, turned into 8 point loss by close. Investor confidence is experiencing intra-day shifts which can pose as a disaster for trading (especially with stop losses). As a result, sources have told me that a lot of money has returned to the sidelines for the time being as things become sorted out.

Today's blip happened when China announced their decision to float their currency. China hopes that the move will stimulate inflation and help with exports in their economy. However, other countries reacted negatively to the announcement, considering that China has been the bailout source for many economies. It will be interesting to see how this effects trading in the long term.

Meredith Whitney publicly announced her concern for a "double dip" in the housing sector. This is not a new theory by all means, but anything being vocalized by Whitney definitely gets investor's attention. As of late, it seems that whatever comes from her mouth, becomes a reality. Today it was dealing with the decline in the residential market.

This should not be that hard to fathom. Just as Whitney said, banks are now beginning to accelerate their foreclosure process. Last year, this could not happen due to the extremely large demand of foreclosures mixed with the large lack of staffing in the banks to handle all the paper work and processing. Well, the banks have been ramping up the past year and have rebounded quite well, from a stock price standpoint, and are ready to take over your property (for the most part). The days of not paying a mortgage for a year will soon be at an end. As we do see an increase in foreclosures, you better believe that it will directly effect supply and home prices.

In addition to this, unemployment pressures continue to beat upon consumers. Thus, delinquency rates continue to climb. As foreclosures continue to be on the rise, a suggestion for a recovering (or even stabilizing) residential market does not make sense. Economics 101 states the simple principle of supply and demand, which when you apply to the housing market, supply way outweighs demand. I expect steep housing price drops as we move out of the busy season of summer into fall and winter.

As a result the market continues to be a volatile instrument. I expect to continue to see large volatile swings, which can be fun for you day traders, and dangerous. I do still think there is much more long term upside on the short side of the market at this point. As more uncertainties pile up, it will be reflected into market trading. Happy Trading.

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In Times Like These, Follow The Dividends

verizon dividendWhen you look at days like today in terms of trading trends, it may be a bit frustrating when trying to decide what positions to take. Short term trends have been very strong, however, looming economic pressures are still very much present, making it a risky move to move into a bullish position. On the flip side, bears have been severely punished for the last year and a half, so holding a bear portfolio may seem out of the question.

Sure, eventually the more macro trends will begin to take place, but that has yet to be seen the past couple of months. The market has been ping ponging back and forth. As a result, unless you want to partake in the guessing game, there are certain positions which are definitely more appealing in this type of trading environment.

For me, I am finding a bit of a safe haven (with less risk) in investing in stocks that are yielding higher dividends. There are a couple of reasons why it make sense at this point.

First, historically, high dividend yielding stocks outperform during a downward market. In 2002, when the S&P fell 23%, companies who did not issue a dividend fell an average of 30%. Companies that did only fell 11%. In 2008, we saw this also be the case, as dividend paying stocks outperformed non-dividend paying stocks over 6%.

So why is this the case? First of all, the thought is that if stocks are going down anyway, you might as well receive a good dividend in the process. Also, good dividend paying stocks are very popular for retirement accounts (401K and IRA) which helps keep the volatility much lower. Not only can you enjoy a greater hedge against a potential market crash, but you also get nice monthly dividends as well.

Another reason these securities tend to do well is because stocks issuing strong dividends is because if companies have the retained earnings to issue them, they are usually performing with strong revenues. Thus, companies with these trends historically hold up better in worse times. Here are a few companies with extremely large dividends. KSP, AGNC, CMO, CIM, VZ and RSO. Happy Trading.

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