Investment Education

10 Common Investors Mistakes

2011-03-22T20:22:00.000-07:00

Everyone makes mistakes, but knowing what can go wrong puts you one step ahead. Here are 10 common mistakes investors make. How many of them apply to you? Here’s where your investment manager can really add value.

No investment strategy. From the outset, every investor should form an investment strategy that serves as a framework to guide future decisions. A well-planned strategy takes into account several important factors, including time horizon, tolerance for risk, amount of investable assets, and planned future contributions.

Investing in individual stocks instead of in a diversified portfolio of securities. Investing in one or a few individual stocks increases your risk. Investors should maintain a broadly diversified portfolio incorporating different asset classes and investment styles. Failing to diversify leaves individuals vulnerable to fluctuations in a particular security or sector.

However, it is also possible to over-diversify and own too many investment products − particularly if an investor has a modest portfolio. This unfocused approach will generate higher overall fees and is less strategic. The best course of action is to seek a delicate balance between the two. Often, this can best be done with the advice of a professional or trusted advisor.

Investing in stocks instead of in companies. Investing is not gambling and shouldn’t be treated as a hit-or-miss proposition. When you invest, you assume a reasonable amount of risk to help finance enterprises you believe have positive long-term growth potential. Before buying a stock, analyze the fundamentals of the company and industry, and make sure it has basic corporate governance protections. You shouldn’t look at day-to-day shifts in stock price. Buying a particular stock because it looks like it's going up or because you like a company’s product or service is not a sound investment strategy.

Buying High. The fundamental principle of investing is buy low and sell high. So why do so many investors end up doing the opposite? The two main reasons are performance chasing and following investment fads. Just because a stock, a fund or an industry has done well in the past, is no indication of future performance. Similarly, buying a popular stock often leads to investing at the height of a cycle or trend – just in time to ride it downward.

Investors often end up buying high and selling low because they think short term instead of maintaining focus on their long term investment strategy. This is tactical, not strategic investing. Investors should not draw conclusions from the past but always look critically at the prospects for future performance past.

Selling Low. When a stock goes down, too many investors are slow to cut their losses and sell -- they hold on hoping to regain at least some of what they have lost. Smart investors realize that may never happen. Not every investment will increase in value and even professional investors have difficulty beating the S&P 500 index in a given year. Always have a stop-loss order on a stock. It’s far better to take the loss and redeploy the assets toward a more promising investment.

Churning your investments. Trading too frequently cuts into investment returns more than anything else. A study by two professors at the University of California at Davis examined the stock portfolios of 64,615 individual investors at a large discount brokerage firm between 1991 and 1996. The study found that, without transaction costs, these investors received a 17.7% annualized return, which was 0.6% per year better than the stock market itself. But, after transaction costs were included, investors' returns dropped to 15.3% per year, or 1.8% per year below the market. The solution is a long-term buy-and–hold strategy, rather than an active trading approach.

Acting on “tips” and “soundbites.” While breaking news and insider tips may seem like a promising way to give your portfolio a quick boost, always remember you are investing against professionals who have access to teams of research analysts. Too many investors use the media as their sole source of investment thinking instead of pursuing a professional relationship with an advisor. Seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis before making an investment decision.

Just because information is new to you doesn’t mean it's really new. You can be sure that if you’ve heard it, so have many others. That means the information is likely already factored into the market price.

Paying too much in fees and commissions. Incredibly, investors are often hard-pressed to cite specifics on the fee structure employed by their investment service provider, including management fees and transactions costs. Before they open an account, investors should make sure they are fully informed about the expenses associated with every potential investment decision. To really gauge your overall performance, adjust all your investment returns for fees and expenses paid.

Decision-making by tax avoidance. While you should be aware of the tax implications of your actions, the first objective should always be to make the fundamentally sound investment decision. Some investors, to avoid capital gains tax, will allow the value of shares in a well-performing stock to grow to account for an inordinate percentage of their overall portfolio. Similarly, don’t hold on to a security past the one-year purchase date simply to take advantage of a lower capital gains rate. If you are concerned about tax, find a good tax advisor – don’t let it change your investment decisions.

Unrealistic expectations. Expecting returns of 20-25% annually can only result in disappointment or excessive risk-taking. According to Ibbotson Associates, the compound annual return on common stocks from 1926-2001 was 10.7%, but only 4.7% after taxes and inflation. Returns on long-term bonds over the same time period were 0.6% after taxes and inflation. It is important to take a long-term view of investing and not allow external factors to cloud actions and cause you to make a sudden and significant change in strategy.

Neglect. Individuals often fail to begin an investment program simply because they lack basic knowledge of where or how to start. Likewise, periods of inactivity are frequently the result of discouragement over previous investment losses or negative growth in the equities markets. To be certain, investors should continue investing in every market − albeit through different investment vehicles − as well as establish a mechanism to make regular contributions to their portfolios. Investors should also regularly review their holdings to ensure they are adhering to their overall strategy.

Not knowing your real tolerance for risk. There is always risk in investing. Determining your appetite for risk involves measuring the potential impact of a real dollar loss of assets on both your portfolio and psyche. You should be realistic and evaluate your level of risk tolerance and invest accordingly. In general, individuals planning for long-term goals should be willing to assume more risk in exchange for the possibility of greater rewards.

Content adapted from CFA Institute

CFA Exam Prep Level 1

2010-10-23T15:07:00.000-07:00

Mr Short Missed BP !?

2010-06-17T15:18:00.000-07:00

How is it possible? The man noted as the short expert missed a no-brainer. Jim Chanos, founder of Kynikos Assoc. and famous for finding money making opportunities buy shorting stocks missed the whole Gulf of Mexico shorting opportunity in BP and deepwater drillers like TransOcean (RIG). How is this possible? This was a no brainer? Purhaps Jim is just to focused on talking down China stocks and realestate. Purhaps Jim didn't get the news.

PIIGS MUST FACE FACTS - America Next

2010-06-03T21:46:00.000-07:00

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What's The Biggest Problem With Socialism?

Margaret Thatcher once said that “the problem with socialism is that eventually you run out of other people’s money.” Right now the PIIGS (Portugal, Italy, Ireland, Greece and Spain) are learning that the hard way.

Greece, on the verge of total economic collapse, has received a $1 trillion bailout from the European Union and the International Monetary Fund. America, as the biggest contributor to the IMF, gave 17% of those funds (China, in comparison, gave 3%). Yes, the same America who's military budget exceeds that of the World combined and who can't even take care of our homeless and budget problems is the largest contributor to helping Greece. Greece the country where a hairdresser qualifies for full social security pension benefits at age 50. German Chancellor Angela Merkel, one of the architects of the bailout, admits that with the bailout “we have done nothing more than to buy time until we have brought order to these competitive differences and to the budget deficits of individual Euro countries.”

Things have gotten so bad that even the so called "liberal media" has started to call it to our attention. The Washington Post warns that “one false move in Europe could set off a global chain reaction.” Though Greece and Portugal are usually the focus of the conversation, the debt crisis is bigger than them. Spain, in a similar debt crisis, recently had their credit rating downgraded by Standard & Poor. They two had a realestate bubble and now have 19% unemployment. A failing Spain, whose economy dwarfs that of Greece and Portugal, would be a much bigger problem. According to Angelos Pangratis, head of the European Union delegation to the United States, “if what happened in Greece were to happen in a large country, it could fundamentally mark our times.” Royal Bank of Scotland analyst Jacques Cailloux warned that Europe faces “the biggest coordination failure in modern history.”

What Caused The Current European Economic Crisis?

But what caused the economic crisis to begin with? Doesn't take a PhD in accounting to know the government continued for decades to spend more than it had in tax revenues. They continued to expand social benefits beyond even the most liberal American's view of entitlements. The socialist programs in Europe bought votes and were treasured by all to the point where 50% of the population worked for the government. As Ronald Reagan loved to say, "The government consumes tax dollars and produces nothing." Does anyone know of a product made in Greece that the world wants to buy? You'd think with all the paid vacation time and retirees on full pension benefits they'd have invented Face Book instead of a 20 something American college kid.

Paul Volcker, former Federal Reserve Chairman and current Obama financial advisor, said that Europe shows the repercussions of “uncontrolled borrowing.” Volcker, who sits on Obama’s Economic Recovery Advisory Board, stated that the “time is growing short” for America to restore economic prosperity. He stated that the biggest problem relates to “the sustainability of our commitment to growing entitlement programs.” In short, our government cannot continue to spend on the scale that it is spending and pay out more money in benefits to the citizens than it is taking in.

Why Do We Continue With Our Wealth Transfer From Savers To Spenders Program?

Baby Boomers remember Volcker , as one tuff cookie, who bashed inflation with ultra high interest rates. Ultra high interest rates motive every American to save more and spend less. Over the last decade our economic policies have been to create bubbles and reward the spenders by transferring wealth away from the savers. The savers earning near zero on their Money Market Mutual Funds for years forgo their earnings so others can buy $35,000 luxury vehicles and get six years free financing. Our government forces saves to give up their interest earnings so spenders can afford luxury homes twice the size of their parents. And no worries if you can't pay for it, turn in the keys and walk away from the debt. Your free to make it somebody else's problem.

Are We Really Even Close To A Greece Crisis?

A recent study by the Bureau of Economic Analysis concluded that income from the private sector is at an all-time low of 42%. Meanwhile, a historic high of 32% of America’s income now comes from the government, whether it’s government jobs or handouts. If the government uses private wages to generate tax revenue for their spending and Americans as a whole now have less than half of their income coming from private wages, that economic model can't work in the long-run, as seen in Greece.

Yes, the “stimulus” bill "saved jobs" but through increasing spending on more government jobs. Those jobs stimulate the economy less, considering government salaries are paid with taxpayer money.

What Are Three Simple Examples Of Fiscal Solutions We Can Do Today?

Here's three that neither Republican or Democrat Politian's will talk about. Why not? Simple, for fear of losing votes, from the many who pay no taxes, get the freebie gifts and the mighty military spending promoters.

#1) In America today, almost 47% pay No federal tax. A large segment of American's actual welcome the annual tax filing! The bottom 40% of earners in this country actually make more money from refundable tax credits than they pay in income tax. That's a serious fiscal problem. And it's been on-going for years.

How can we continued to expand social programs, and refundable credits with 47% of Americans paying NO federal tax? The same group pays very little to no state tax too. Surely everyone should pay a nominal 5% minimum federal tax.

#2) America's need to wake-up. We can't continued to be the Worlds Private Police and Military Force. Sure we want to keep fighting terrorist but Ronald Reagan did it with a very tiny middle-eastern footprint through a policy of funding your enemies - enemy, not building expensive military bases in every country.

This isn't the cold-war where the terrorist have real WMDs like the Russian's. The rag-tag Al-Qaeda has no nation; doesn't have a nuclear navy; nor intercontinental ballistic missiles with thousands of nukes inside MRV's pointing at every American military base and major city.

This isn't WWI, WWII, Korea or even Vietnam. So why are we spending like it is? True, it does create jobs and profits. But, American military spending promoters will say we can't afford to provide shelter for American's homeless but we'll spent billions to rebuild a nation we had no reason to invade nor occupy.

The U.S. spends almost as much on its military as the rest of the world combine. No wonder other countries have better health care and social security systems.

Many attributed the rapid rise of Japan's economy, after WWII, to its absents of military spending and total economic focus. The oil rich kings and princess of the middle-east enjoy our military protection with out paying a dime to the US taxpayers.

Compare China's economy during its military focus years (50's, 60s & 70s) to its record breaking growth economy over the last 20 years.
"For 45 years of the Cold War we were in an arms race with the Soviet Union. Now it appears we're in an arms race with ourselves." Admiral Eugene Carroll, Jr., U.S. Navy

We spend SIX TIMES MORE than the second-largest spender, China. We now spent TEN TIMES MORE than Russia. Even as the U.S. sunk under increasingly crippling levels of debt over the last decade, defense spending rose steadily. Why has China and even Russia become such growing economic powerhouses? Because, they chose to focus more on their economic might then military might.

It's time we do the same.

#3) Keynesian economics, doesn't mean taxpayers need to give $8,000 gifts to first-time home buyers to benefit realestate brokers and give sellers a more inflated price. It doesn't guarantee every American a home nor profit. It doesn't have to mean $3,000 cash-for-clunkers. Although, with that program the states got most of the federal money back in the form of a sales tax and you keep factor workers employeed.

But not even during the recessions of the 70's and early 80's did we force interest rates to historic lows for homeowners and homebuyers. Nor did we giveaway $8,000 house warming gifts. So why did we feel the need to do have to do it this time?

During the depression government worried about providing food and shelter and work for people. So, let's just keep it simple and get back to real Keynesian economics and focus on non-government job creation.

Facelift A Work Of Art & Security

2010-04-27T10:09:00.000-07:00

Benjamin Franklin gets a facelift as the Treasury Department just unveiled a new $100 bill, the first remake of the denomination since 1996.

The $100 note is the highest value denomination of U.S. currency in general circulation and 2/3 circulate outside the USA. The denomination is popular when large amounts of cash need to be carried internationally.

Anti-counterfeiting measures are the main reason the United States has been making changes in currency. The currency changes started in 1996 with the $100 bill, followed by a new $20 bill in 2003. The $50 bill got an overhaul in 2004, and the $10 was redesigned in 2006. The $5 bill was upgraded in 2008.

The US government is redesigning the $100 bill to incorporate advances in currency security to make it more difficult to counterfeit and easier for the public to authenticate. The $100 is the highest denomination the US government issues and the most widely circulated outside the US. Although less than 1/100th of 1% of the value of US currency in circulation is reported counterfeit, the $100 note is the most often counterfeited denomination outside the US, according to the US Treasury department.

The new security features added to the $100 bill will help people spot bogus bills. The new security features include:

1. a 3-D security ribbon that runs vertically across the note, with images of bells that turn into 100’s and back into bells as the note is tilted back and forth;

2. and a bell within the inkwell, found on the front of the note, whose color turns to green from copper as the note is tilted.

3. The new note retains the old bill’s security features that have been found effective against counterfeiting: a portrait watermark of Benjamin Franklin, whose image graces the front, that is visible on both sides;

4. a security thread running vertically through the note which glows pink when exposed to ultraviolet light; and

5. the number 100 on the face of the bill that turns to green from copper when the note is tilted.

Mother-of-all-V Recoveries Continues

2010-04-22T09:54:00.000-07:00

The steady economic recovery is continuing according to the Conference Board economic indicators released on Monday.

The US has major long-term economic and social issues to manage. Still, there can be no denying that this Stock Market and Leading Economic Indicators (LEI) has been the greatest V shaped recovery of my lifetime.

The index of leading economic indicators beat even the most optimistic forecasts and rose 1.4% in March. Following upward revisions for Jan and Feb, the surprise surge in March now completes 12 consecutive gains for the index.

The coincident index, which measures the current economic conditions, also rose 0.1% in March. Of the four indicators in the coincident index, the largest positive contribution came from nonfarm payrolls. You'll recall that for March, the Labor Department reported that the U.S. economy netted 162,000 jobs -- the largest seasonally adjusted increase in three years.

Ataman Ozyildirim, an economist with The Conference Board, highlighted the positive jobs metric: "Payroll employment made its first substantial contribution to the coincident economic index, suggesting a recovery that is beginning to gain traction."

Now 12 Months Strong of LEI Increases

While recovery skeptics remain, it will be difficult for the economic naysayers to find any negative news should the labor market continue its positive momentum toward significant net new jobs in 2010.

The index LEI has shot above the levels it saw during the 2007 USA stock market run up to DJIA 14,400 levels. But note how the coincident index indicators look like they've barely begun to rise. I've never seen this great of a divergence, has anyone else? Is this a good or bad sign? Does this foretell a reversion to the mean?

Corporate Short-Term Bonds A Safe Play

2010-04-07T13:07:00.000-07:00

If you were smart enough to have invested during the dark days of 2008's fourth quarter and 2009's first quarter congradulations. Now what? Well, one alternative is to just let it ride. The market is always forward looking and all leading economic indicators remain high. If you have a long-term plan then stick to it.

But like all markets nothing ever goes straight up or down so you may want to protect a large percentage of your gains by moving into something more conservative. And if you liquidated your stock investments during those dark days now's probable not the time to jump back in. You'd be better off hoping for another 5-8% pull back. Whatever your situation one conservative alternative to doing nothing or hiding your money under the mattress is to invest in Short-Term (no-load)Bond Funds.

Steven Huber, co-manager of the T. Rowe Price Strategic Income fund, says corporate bonds - domestic and foreign - are a good conservative investment within a improving economy and near-term ultra low interest rate enviorment.

Here's a list of some Short term: Bond Funds with the best performance in their category for the last 3 months.

My favorites for those who want no risk but seek yields above the Mutual Fund Money Market Funds (MMF) less than 1/2% yield is to just move your money to an FDIC insured US bank MMF which currently pay just over 1%. It's a pittance return but that's still a 50% increase over Mutual Fund Money Market Funds which are not FDIC insured. So, it's more yield, less risk.

Individuals with more than $3,000, willing to take a tiny bit more risk, should consider my favorite four no-load, extra conservative Bond Funds, from Vanguard:

#1)Vanguard Short Term Bond Index Fund - Investor Shares Class - VBISX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________101%
Total Portfolio Assets ($B) _____________$10.5
Minimum Investment ____$3,000

#2) Vanguard Intermediate Term Bond Index Fund - Investor Shares Class - VBIIX
Annual Management Expense Ratio _____0.18%
Annual Portfolio Turnover _____________86%
Total Portfolio Assets ($B) _____________$3.2
Minimum Investment ____$3,000

#3) Vanguard Short Term Federal Fund - Investor Shares Class - VSGBX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________89%
Total Portfolio Assets ($B) _____________$8.6
Minimum Investment ____$3,000

#4) Vanguard Inflation-Protected Securities Fund - Investor Shares Class - VIPSX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________28%
Total Portfolio Assets ($B) _____________$19.3
Minimum Investment ____$3,000

#5) Vanguard Short Term Investment Grade Fund - Investor Shares Class - VFSTX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________49%
Total Portfolio Assets ($B) _____________$20.4
Minimum Investment ____$3,000

#6) Vanguard GNMA Fund - Investor Shares Class - VFIIX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________63%
Total Portfolio Assets ($B) _____________$32.6
Minimum Investment ____$3,000

#7) Vanguard Intermediate Term Investment Grade Fund - Investor Shares Class - VFICX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________48%
Total Portfolio Assets ($B) _____________$9.6
Minimum Investment ____$3,000

Investment research overwhelmingly shows that lower cost fixed income funds tend to yield higher bond investing returns.
The fixed income asset market is no place for you to try to beat the market and to attempt to get higher returns by picking your own bond. Even professional fixed income asset market money managers do not beat the bond market. The higher the mutual fund company expenses, the lower the net returns to individual investors.

Why Not Long Term Treasuries Bonds Now?
If Treasuries have been such a success story, why not stick with what’s worked? Here’s why: Because they were too successful. When investors rushed into the safe arms of a U.S. government guarantee last in the fourth quarter of 2008, Treasury prices soared and yields evaporated.

Yields have been slowly rising on long-term government bonds. Between the Federal Reserve’s recession-fighting rate cuts and the panicky investors flooding the market, Treasury yields are so low that prices have nowhere to go but down. Bond prices and yields move in opposite directions which is the primary reason I'm suggesting short-term investment grade corporate bonds. “For the most part, today’s Treasury market is a place where the average investor can only lose money,” says 80-year-old Ben Jacoby, co-founder of Brinton Eaton Wealth Advisors and a veteran of the long bear market of the 1970s.

Going forward, the picture looks bleak for Uncle Sam’s bonds. To pay for the gargantuan stimulus package, the government will issue even more of them, flooding the market. “Yields will have to rise for those bonds to find buyers,” says Dan Fuss, vice chairman of fund company Loomis Sayles, and that will depress the value of existing bonds. Now that investors may have regained their appetite for stocks, it’s entirely possible that they’ll dump bonds, further driving up supply. Another threat to bond values is inflation, which, by reducing the future value of bond yields, also puts downward pressure on prices.

You might think that if the stimulus spending proves inflationary, you should take a look at Treasury inflation-protected securities, or TIPS. But those have low yields too, and Fuss isn’t upbeat about their prospects. “It will be a while before there is any inflation to protect yourself from,” he notes. Still, everyone agrees as the economy continues to improve inflation will return. The price of Oil has already doubled from 2008's fourth quarter low.

Investing : Iraq vs. California Bonds

2010-04-05T09:11:00.000-07:00

I have never considered the relative merits of an Iraqi bond versus a California state bond, but a reader of my toolbox for finance article, Military Entitlements Are Impoverishing Us, forwarded me an article from the Boston Globe on investing. This short excerpt from the Boston Globe makes an alarming comparison that indirectly makes one of my articles points. The piece is about two intrepid buyers of really scary emerging markets bonds from places like Venezuela, Dubai, Pakistan and Iraq. The comments about California and Iraq are most amazing.

Michael O’Hanlon, who tracks indicators of progress for the Brookings Institution’s Iraq Index, said that “Iraq has continued its remarkable trajectory of improvement.’’

“It is still fairly violent by Mideast standards, but many countries in places like South America have higher overall levels of violence now from crime,’’ he said.

Traditional Wall Street investors have taken note. Iraq is now considered a safer bet than Argentina, Venezuela, Pakistan, and Dubai — and is nearly on par with the State of California, according to Bloomberg statistics on credit default swaps, which are considered a raw indicator of default risk.

“Compared to California, I’d rather bet on Iraq,’’ [Emerging market bond investor Saleh] Daher said. “Iraq is a country where there are still bombs going off and people getting murdered, but they are less indebted than the United States. California is likely to have more demands on its resources, and there is no miracle where California is going to have more revenue coming out of the sky. Iraq has prospects for tremendously higher revenues, if they can manage to get their act halfway together, which they seem to be doing.’’…

America has wasted a fortune to invade and occupy a nation that was no military treat to the US nor did it have WMDs. Now America Taxpayers are forced to spend another fortune to maintain security and rebuild Iraq at no cost to Iraq. We got the world to forgive Iraq debt as we piled up debt. Iran loved the fact taxpayers paid the cost of eliminating their number one enemy, Saddam. Now the Middle East, Oil Sheiks enjoy $85 dollar oil and the protection of the American taxpayer military, thanks to their Uncle Sam.

The cost of Iraq and Afganistan occupation nearing ONE TRILLION DOLLARS.
Now this astronomical number doesn't include the cost of a life time of medical and psychiatric care nor disability payments for wounded soldiers.

It's time the US concentrate more on its Economic Might, if it wishes to keep its Military Might.

Mother-of-all-LEI Recovers

2010-03-23T19:22:00.000-07:00

Did you find the sharp turn in the market upward last year surprising? Is the continued thundering stampede of bulls running upward still totally baffling to you? Yes. Well then, take a look at one of America's most accurate predictors of future economic health (above).

The LEI index (leading economic indicators) has gone straight upward,for one year. It now stands at a new four year high. A high point above the 2007 level when the DJIA reached the 14,000 level.

This has been the mother of all LEI recovers. While we're not experiencing a V shaped employment recover we sure had one of the sharpest V shaped LEI recovers in history.

Hopefully this sharp 2009 market reversal, which was even greater than the 2003 bull run has convinced everyone that, if you're going to invest in the market, you need a long-term plan. No, your plan shouldn't be: I'll only invest after everyone agrees the economy is firing on all cylinders and sell only after I've watch my portfolio decline by 50%.

Over 35 years of market experience has taught me, more than all my finance classes, that stock markets are forward looking not backward looking.

Too many people choose to liquidate all of their stock holdings during the horrible market down days of November 2009 through February 2010. Worse yet, many choose to lock in their market losses AND take the money out ignoring their Uncle Sam's 10% early distribution penalty.

So, they: 1) Locked in there market losses; 2) Where not able to take any capital loss deductions on their tax returns; 3) Had to pay a tax 10% penalty for early withdrawal; 4) Most likely where pushed into a higher tax bracket which resulted in more tax due than normal; 5) Missed out on a once-in-a-life-time market turn around.

Below are the micro details of the LEI along with economist comments. The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.1 percent in February, following a 0.3 percent gain in January, and a 1.2 percent rise in December.

Ataman Ozyildirim, Economist at The Conference Board: “The LEI for the U.S. has risen rapidly for almost a year now and it has reached its highest level. But, the sharp pick up in the LEI appears to be stabilizing. As the economy moves from recovery into early phases of an expansion, the leading economic index points to moderately improving economic conditions in the near term. Correspondingly, the coincident economic index has been rising since July 2009, albeit slightly because of continued weakness in employment.”

Adds Ken Goldstein, Economist at The Conference Board: “The indicators point to a slow recovery this summer. Going forward, the big question remains the strength of demand. Without increased consumer demand, job growth will likely be minimal over the next few months. ”

The Conference Board Coincident Economic Index® (CEI) for the U.S. rose 0.1 percent in February, following no change in January, and a 0.1 percent increase in December. The Conference Board Lagging Economic Index® (LAG) increased 0.3 percent in February, following a 0.2 percent decline in January, and a 0.4 percent decline in December.

Note: I'm still sticking to my prior post regarding caution, buying more conservative dividend plays and selling the biggest winners into this advance now. It's possible we can hit Dow 11,000, before any pull back. But I'll be selling into advances and still betting we see another 5-10% pull back beginning no later than May. See prior post for more details.

Pause or Pull Back Time ?

2010-03-19T20:25:00.000-07:00

Ok, so we made some more money, now what? Hold'em or fold'em? I'm in agreement with Mr. DoJo above. I'll keep it simple. The probability of another two weeks like the last two is slim and none. I hate to try to play the market timing game but after a monumental run up this is a better time to sell than buy. At best I'd guess we have a sideways zigzag trending to the downside. So if you're in an index type fund and want to be safe rather than sorry sell Monday or into the next up day.

Now this is not to say in a pull back all stocks will fall. No. Some stocks will hold ground and some will even rise. But can you tell me which ones? If you're smart enough to know which ones those are please post your picks for all to see. Since I'm not that smart I'd say if you want to hold or buy some stock now than first look at those blue chips paying fat dividends which have not enjoyed any big increases like BP, XOM, LLY, VZ, T, PFE and MO. Utilities can work here too.

The oil sector service stocks that were sizzling hot in 2009's first two quarters look sick and weak. Still if you get a chance to buy RIG or DO around $80 or below do so. Mr. Cramer says buy WFT. The natural gas index UNG declined the whole month of March. While there is good reason not to like this ETF index I'm buying at $7.45-7.50 today. This index has now been declining for two years, so I'm betting my downside risk is low. A related stock pick would be CHK.

So, I'd sum up my view as selling all big winners this month and reinvesting ( or holding)1/3 to 1/2 in the areas I've discussed.

Market Making You Nervous Nelly?

2010-03-11T08:20:00.000-08:00

In 2009 the USA market had the greatest nine month advance since the 1930's. Now what are you planning to do with your money in 2010? Do you feel like nervous Nelly?

No faith in the stock market, short-term outlook? Worried our government's monetary policy will lead to rapid inflation that will reduce the value of your high grade corporate bonds? No interest in investing in tax-free muni-bonds, because of the rising financial problems within states? Not ready to lock-in your money for 5 years in a CD paying a whopping 2.0%? Tired of sitting safe and liquid inside a stable Money Market Mutual Fund paying a ridiculously low 1/4%?

If you've answered YES, it's time to consider investing in some blue chip dividend paying stocks.

When your money earned 5.5% in safe FDIC insured bank accounts owning a stock paying 2.5% sounded unappealing. But today it's a whole different financial ball game. And you need to wake up and smell the dividends.

These companies recently raised dividend distributions, a sign of positive business outlooks.

AT&T (T), which is one of the top telecommunications companies in the US, increased its quarterly dividend by 2.40% to 42 cents per share. AT&T has increased its quarterly dividend in each of the past twenty-six consecutive years. The stock currently yields 6.00%. (analysis)

“Our 26th consecutive annual dividend increase underscores the Board’s continued commitment to stockholders and confidence in our strong financial position,” said Randall Stephenson, AT&T chairman and chief executive officer."

This was the slowest dividend increase for the telecom company in 8 years. The company already has a very high payout ratio of 83%, which leaves little room for further dividend increases, without a substantial increase in earnings per share. Still a steady rise in smart phones and iPhones sales (with consumers buying more expensive wireless internet connect services) should more than off-set landline sales declines. Verizon (VZ) which I own, is a similar investment play.

Pfizer Inc. (PFE), which engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide, increased its quarterly dividend by 12.5% to 18 cents per share. The stock currently yields 3.90%. The company cut its dividend in early 2009 after announcing its intent to acquire rival Wyeth in a 68 billion deal. Although the dividend appears to be well covered today, the business model which had previously allowed Pfizer to raise dividends for 41 years appears to be broken. Over the past decade the company has acquired new drugs through acquiring rivals and not organically through R&D. Without solid underlying strength in fundamentals, which would propel future earnings growth, the possibility for a long-term sustained dividend growth is low.

Dominion Resources (D), which engages in the generation, transmission, and distribution of electricity. The company generates electricity through coal, nuclear, gas, and oil resources, increased its quarterly dividend by 4.60% to 45.75 cents per share. This is the seventh consecutive year in which Dominion Resources has raised its quarterly dividend. Dominion Resources (D) does look like an interesting utility company, with one of the lowest payout ratios in the industry plus some solid earnings and dividend growth. The only issue is that the company does not have a long history of raising distributions. The stock currently yields 4.50%.

Hatteras Financial Corp (HTS) invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity. The company announced its fourth consecutive distribution increase to $1.20/share. The new dividend is 4.3% higher than its Q3 dividend, and 20% higher than the distribution from this time last year. The stock currently yields 15.80%. While the yield might be tempting it is important to understand that the company makes money by borrowing money using short-term rates and then investing it in long-term government agency bonds, while earning a return in the process. This exposes the company to fluctuations in interest rates. If the FED starts raising rates in 2010, companies like HTS might be negatively affected in the process.

Waste Management, Inc. (WM), which offers collection, transfer, recycling, disposal, and waste-to-energy services, increased its quarterly dividend by 8.60% to 31.5 cents per share. This marks the sixth consecutive year that the Company has increased its quarterly dividend. The stock currently yields 3.50%.

BCE Inc. (BCE), which provides a suite of communication services to residential and business customers in Canada, increased its quarterly dividend by 7% to 43.5 cents per share. This is BCE's third increase to the annual common share dividend since the termination of its proposed privatization agreement in December 2008. The stock currently yields 5.90%.

General Mills (GIS), which engages in the manufacture and marketing of branded consumer foods worldwide, increased its quarterly dividend by 4.2% to 49 cents per share. General Mills has increased its quarterly dividend in each of the past six consecutive years. The stock currently yields 2.80%.

This is just a small list of possibilities. I'll share with you in a future blog a list of blue chips many consider the Best-of-Breed.

Remember, I advise low net worth investors, to consider the benefits of a diversified Mutual Fund Portfolio as a safer alternative to putting all your financial eggs into a couple of stocks. The odds of us picking the next GOOGLE or APPLE stock are slim.

Financial Disclosure: On 3/11/2010 of the stocks discussed within this article I held positions in Version and Pfizer

Large-Cap Stocks Are The Cheapest They've Been In 30 Years

2010-03-08T20:10:00.000-08:00

Barton Biggs the crusty old 1999 Bear now turned Bull is betting on one more year of another positive market.

Nothing like last year but still something better than a 1.8% Bank CD.

(This guest post comes courtesy of The Mad Hedge Fund Trader)

Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish.

Today, Barton can say with "real certainty" that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years.

Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF).The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all.

Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a "new normal" of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one.

But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation. Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton's sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems.

Commodities had their run last year, and won't do much from here, but they aren't going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your "Rip Van Winkle" investor, as they represent poor value for money. Real estate is dead money.

To hear my interview with Barton at length, please click here.

Featured Trades: (MSFT), (INTC), (CSCO), (ORCL), (FXI), (PIN), (EWY), (THD), (EWT), (EWH), (TUR), (PLND), (RSX), (EWZ), (USO).

NOTE: Give me a pat-on-the-back for my last months call on the third mini-market correction (-7%) ending. I'll call your attention to just one good guess...AIG then $23 now $33.

Now lets just hope the market can inch out a new high. But I'd be shocked if we got above 11,000 before May. And the biggest opportunities in this bounce came from the stocks that rolled-over last Sept. many in the Oil Service and Financial sectors, along with my two China small cap. picks.

We Got Our Pull Back

2010-02-05T20:35:00.000-08:00

The correction may not yet be over but bears were in covering shorts today after a two day 400 point decline. Best to buy on down days and sell on up days until the market shows signs of life again. We've yet to get one 10% correction but this one should come close. Frankly I'd love to see a pull back to 9,500 but 9,800 may be it (for now).

This video calls attention to Exxon as hitting a double bottom. Integrated oil stocks often do poorly in the first year of a market bounce. As the market climbed in 2003 most oil names like Exxon, BP and Marathon were flat in 2003 and didn't start climbing until 2004. They tend to lag the market and refiners have been hurt by the high cost of crude oil and relatively low pump prices. Oil stocks not impacted by refining with bounce potential are DVN and service stocks like SLB.

For those who like safe plays with great dividends time to buy Exxon, Lilly, Verizon and Intel. Other low risk plays at current prices are: DELL, PFE, BAC, HIG. For those who want international safe plays with very fat dividends consider VOD, DT or SKM at current price levels. For those looking for long term growth plays in China consider investing in RINO and YONG at these price levels after a major correction in price to both. The China telecom stocks (CHL and CHA) look very interesting at these prices too. Every since China announced they were tighting up on Bank lending the China market has been falling. The inverse ETF FXP hit a record low this fall but has been climbing upward for eight weeks.

All commodities connected stocks have had a major correction. So if you believe in an improving world economy then it's time to buy stocks like US Steel or Alcoa. US Steel below $43. Natural gas in the USA should hold strong after a two year decline. The ETF UNG has issues but more and more people have been buying into it expecting the USA cold winter to increase demand for NG. Lots of oil service plays look like big values e.g. MRO, HLX and ESV at current prices. The worlds largest deepwater driller RIG is always a great buy on pull backs (below $80 is ideal). For those who want a high risk high reward and high octane possible play, consider AIG right now. It was the talk of the town when it went from $10 to $50 last summer (after a major reverse stock split). It's been falling back all fall and winter. AIG is now back down to $22. Insurance companies have all turned in good earnings reports and if Yahoo's earnings forecast for AIG in 2010 are even close with a current market cap of under five billion I'd expect AIG to have lots of upside potential. Citi at these current prices below $3.50 is another low risk wild card play.

Note: I do a lot of USA TAX work during tax season so my post will be fewer from January through March.

2010 Market Probability & 5 Focus Areas

2010-01-17T19:44:00.000-08:00

Is it 1931 or 1983? The bulls see the market mimicking 1983, the bears point to 1931. Those in the middle see many similarities with 2004. Barron's Michael Santoli reports. Not that 2010 is likely to disappoint. "We're back to an environment where the fundamentals have to come through," Doll said. "Companies have to deliver the earnings. When it's an earnings-driven market, there are gains but more muted gains."

Indeed, the biggest difference could be that stocks in 2010 are founded on tried-and-true measures -- financial strength, earnings power -- rather than high-octane speculation. That would favor big multinational firms in cyclical and growth industries that stand to benefit from economic improvement, namely technology, energy and industrials.

Technical and historical factors are at work as well. Sam Eisenstadt, former research chairman at Value Line Inc. and a veteran market observer, wrote in a recent MarketWatch commentary that evidence points to an above-average 2010 for stocks.

"After the first nine months of the stock market's rally from recession lows, the average pace of the stock market's advance clearly slowed," he noted. "But, and this is crucial, the market tended nevertheless to continue rising." He pegs the S&P 500 at 1320 by year-end.

MarketWatch commentary. This year the bulls have a good chance to retain the upper hand, though not without setbacks, and investors will have to be more selective. In that light, here are 10 ways to position your portfolio through 2010:

1. Buy stocks with a global footprint
In a slow-growth environment, bigger is better. Big companies have the clout to counter adversity and capitalize on it. "Bigger" in this case also refers to companies of any size with a broad global presence. Global companies have diverse revenues and operations, which both insulates core businesses and fosters innovation and expansion.

U.S. companies in the past decade have been impressive examples of how to operate effectively overseas. Moreover, these companies are exporting their business to fast-growing emerging markets. Almost half of the revenues for companies in the Standard & Poor's 500 stock-index now come from outside of the U.S.
"The demonstrated ability of S&P 500 companies to replicate their business [overseas] and earn attractive margins and returns abroad is the most important development of the decade," wrote David Bianco, Bank of America Merrill Lynch's chief U.S. equity strategist, in a December report.

"The global economy is going to continue to integrate," added Gary Motyl, chief investment officer of Franklin Resources' Templeton Global Equity Group. "Companies that have the best managements, strategies and balance sheets are going to take advantage of this." He said Pfizer Inc., is a good example. "What isn't reflected in the stock price," Motyl said, "is this company's ability to move into the emerging markets."

2. Use stock dividends as a bond substitute
Shares of companies with strong balance sheets and stable earnings growth are not only better-equipped to handle the economy's waves, but their dividend income is a welcome alternative to the uncertainty swirling around bonds.

"Current dividend yields relative to bond yields provide an attractive opportunity for investors," wrote Brian Belski, chief investment strategist at Oppenheimer Asset Management, in a recent research report. "A prolonged period of low bond yields may encourage investors to begin seeking alternative ways to increase income, and high-quality, dividend-paying stocks may be a solution."

Oppenheimer's recommended stocks fitting this bill include Johnson & Johnson, AT&T ( Bill Wright suggest Exxon, VZ, LLY, MO, PFE, VOD and DT at todays prices)

3. Buy larger-cap index funds
Large-cap stocks lagged their small-cap and midcap counterparts in 2009, but many observers say that big firms' time has come.

"Large, blue-chip companies are the last remaining pocket of undervaluation," said Keith Goodard, co-manager of Capital Advisors Growth Fund. "A basket of blue-chip companies with a 3% to 4% dividend is not a bad place to be."

If larger-company U.S. stocks outperform small-caps, then shareholders could do well holding index mutual funds and exchange-traded funds that track plain-vanilla, large-cap benchmarks such as the S&P 500, the Dow Jones Industrial Average .

Many S&P 500 companies, for example, provide global exposure, high-quality earnings, seasoned management and attractive dividends -- attributes that investors could increasingly value as the year unfolds.

"We believe that 2010 will be another positive year for stocks, and we established a 2010 price target of 1,300 for the S&P 500," Oppenheimer's Belski said. That would mean a gain of almost 14% for the index from Friday's close of 1145 -- a standout return for the market.

4. Stick with technology stocks
Technology funds were the best-performing U.S. sector in 2009, up about 63%, and technology is again the largest S&P 500 component. ( Bill Wright says buy intel on the pull back, even Dell at todays prices)

That's a cautionary note, but the sector's earnings prospects are nonetheless strong. S&P analysts are among those upbeat on tech stocks. "The sector is poised to benefit from a healthier global economy, a notable PC replacement cycle and considerable international exposure," the analysts noted in a recent report.

"They've got robust balance sheets, phenomenal free cash flow, and while the stocks have done well and valuations aren't as cheap, there is room for them to outperform," BlackRock's Doll said of the tech sector. He favors computer software and services companies over hardware and semiconductor firms, namely Microsoft, IBM and Oracle

5. Plug into the energy sector
Energy stocks have been on a tear so far this year. Energy-sector mutual funds are up almost 7% on average, on top of a 46% gain in 2009, according to investment researcher Morningstar Inc. The energy bulls are banking on a continuing global recovery and strong emerging-market demand, and strategists at Bank of America Merrill Lynch are squarely in that camp.

"Energy is our preferred global recovery play" and could be the year's best-performing sector, depending on oil prices, Merrill strategists wrote in a recent research report.

S&P analysts are also bullish, particularly for companies in the integrated oil and gas industry. But it's a tempered call that hinges in part on the global economy making a smooth transition from one that has relied on government stimulus to one that is earnings-driven. S&P's favorite energy stocks include Chevron Corp., Exxon Mobil Corp. and Superior Energy Services Inc.

For more market news and education go to Window To Wall Street®.

Note: Small investors should always first consider the benefits of a professionally managed (or unmanaged index) diversified mutual fund portfolio over owning individual stocks and bonds. All investing can result in losses.

Disclosure: At the time of this blog post I hold positions in the following stocks discussed in this article: Exxon, Lilly, Verizon Wireless, Vodafone and ESV.

USA Revenue Tax Facts

2010-01-11T21:03:00.000-08:00

How progressive is your tax structure?

This chart illustrates the progressive structure of the federal income tax system as seen in the average tax rates (center column) computed from tax returns filed in 2007. For example, the top left block indicates that the top 1% of tax returns reported $2.0 trillion in adjusted gross income, which was 22.8% of the total adjusted gross income of $8.8 trillion for the year. The top right block indicates that $451 billion in income taxes was collected from that group, which amounted to 40.4% of the total $1.1 trillion of income taxes for the year.

The progressivity of the income tax system is further demonstrated by the fact that the top 1% paid more income taxes ($451 billion) than the bottom 95% ($438 billion).

I'm not at the top or bottom of the USA Tax food chain. No doubt everyone's view is reflective of where they are on the tax ladder. It is no surprise your view on (FICA taxes) Social Security and Medicare taxes (and health insurance) most often reflect ones age.

Instead of the stereotypical conservative or liberal view, I'd like to examine this from a business or investment prospective.

For example, in investing like business, it pays to diversify. A business built on ten jumbo whale clients is at greater financial risk than one built on ten thousand little tuna's. So, I'd say the USA (like any school district) needs to focus on growing a vibrant middle class tax base. We can't continuously seek to fleece the top ten percent. Now just to show I'm not one dimensional in my thinking, I've continued to lobby against the notion that having a ultra low Zero to 15% capital gains rate will reverse the decline of America. A few Conservatives need medication for their Capital Gains OCD. Some liberals need medication for their tax, spend and giveaway OCD.

The linchpin hinges on America's ability to expand taxpaying middle class jobs again.

The Internal Revenue Service uses percentile categories (Top 1%, 95% – 99%, 90% – 95%, etc.) for purposes of analyzing income tax data. A total of 141,070,972 tax returns were filed by individuals in 2007.

The IRS analyzes tax return statistics to determine various percentages. For example, this table indicates that the top 10% of taxpayers paid $794 billion, which accounted for 71.2% of the total income taxes paid by individuals in 2007.

This shows just how progressive a burden is put on upper income earners. One might even gasp with amazement if one saw the tax revenues collected from homes and sales taxes broken down buy income group too.

It will be interesting to see the results for 2008 and 2009 during the Great Recession.

Taxes, even among those who pay no federal taxes, always generates much heated discussion. It's always easy to look at those earning jumbo sums of money and say they can afford to pay any and all taxes.

But seeing how dependent America is on so thin a tax base, makes it even harder to reduce our government debt. I'd rather see more people earning more, who in turn will pay more tax. Building on a broader base (with the upper end never having to pay more than 35%) would be more idea for rich, middle-class and poor alike.

I also found this on IRS.gov Tax Stats at a Glance for 2007

It shows a summary of Collections Before Refunds by Type of Return, FY 2007

This table shows 138,893,908 individual income tax returns that collected $1,366,241 million. This means an additional 2,177,064 returns where filed and rebated $266 Billion. If I remember correctly, the budget in 2007 was $2.8 Trillion. This means the individual income tax was only 39.3 percent of the budget. Corporation income tax was only 14 percent. Employment(FICA)taxes were 30 percent.

Since high earners have their social security taxes capped and many say consumers pay corporation taxes as well as sales taxes, some people say taxes are more evenly spread across the population than simply comparing who pays the most federal income taxes. Still I've got to believe the annual real-estate taxes on those multi-million dollar first and second homes plus sales tax on those million dollar yachts, more than make up for any cap on social security tax.

Any thoughts on the current tax system? Should we raise the marginal tax rate up to 39.5% or cap the top federal tax rate at 33% and just have FICA taxes on incomes up to $250,000? Anyone from another country wish to trade tax systems?

Note: In 2007 no earned income above $97,500 paid FICA taxes of 3.5%. Today FICA has gone up to 4.7% on wages up to $106,800.

Is Another Breakout Possible?

2010-01-09T14:58:00.000-08:00

Hard to image, but with the VIX at a 30 month low and Oil sticking again at $80 a barrel we could see many commodities related stocks break to new highs before we roll over.

USA stock fundamentals have been improving. Even if the top lines are not expected to grow, profits will, resulting from two years of layoffs and hiring freezes. This market has been like a snowball rolling downhill and picking up momentum as it goes. It just feels like the worst case scenario near term is only a 5% downside risk. But of course, that's for the aggregate market, not individual stocks. Still plenty of 10-20% pull-back risk in individual stocks. At this point in the game I'd beware playing break-outs and look more for quality names in a pull-back (falling wedge patterns)e.g. Exxon. U.S. Steel for example is back at the top of it's range. It's been climbing for two months to reach new 12 month highs. Purhaps the US declaring China is dumping steel and plans a small but important tariff caused US Steel (X) to hit those highs. Long term you know USA steel is in recover but you can also see how easy it was for it to fall back 20% last fall. Note how it dropped 20% even as the market continued to climb.

Keep an eye on those individual stock trendlines and range bands. I've seen to many market tech. newbies only recommending buying individual stocks on breakouts to new highs. At this point in the game thats a very high risk play. Best to buy cyclical stocks only after a falling wedge pullback. I read two Seeking Alpha gurus telling people to by POT after it had a 30-35% run up. POT and gold stocks (GG, ABX) where at the top of their buy list two months ago. Why can't these guys right these articles before the 30-35% run up? As expected the big boys sold into those new breakouts and the stocks just fell back down 20-25% making those recomendations look stupid and sending the sheep to their financial death in a roaing bull market. But you can bet as they hit those imaginary support lines the big boys come into to buy them again. Note how deepwater drillers RIG, DO and ESV had been in a fallen wedge pattern like Steel stock X and Bank stocks C and BAC since early fall. All these stocks began climbing again in December when it was clear oil was not falling below $70.

Now steel stocks like X have hit new highs. I sold my US Steel(X)much to early into this advance. Health care providers like AFAM and AMED hit new highs. Two weeks ago the deepwater drillers began their climb and oil transport tanker FRO is holding close to highs. Now the drybulks shippers like DRYS, GNK and DSX are showing strenght and look set to move backup to their highs from a few months ago.

Over the last three months little money has been made on betting on any 10% move in the index up or down. The market is so stable it's hard to make money with the ususal ETFs. Best to look for turning points and pull backs. One ETF I've continued to make money with in spite of it's issues is Natural Gas play UNG. It fell all last year but on three occassions I made money buying at new low extremes and selling into the bounces that always followed. This year with a recovering economy and winter cold snap I'm betting the institutional buyers will be pushing this into a new upward trend.

In a steady eddie stable market the money has beem made in selling cyclical stocks reaching new highs and buying those stocks on major sector(falling wedge)pull backs.

One need only look at the charts of Steel stock X or Oil driller RIG and ESV along with refiners to see examples. At this point I'm selling airline CAL which recently hit new highs to buy Exxon (XOM) and more drybulk shipping. I loaded the boat on the dog with fleas stock Citi (C) along with a little BAC and GE on this most recent pull back. No need to sell them until they return to their old highs of last year. No need to worry about any panic sell-off in the first quarter like last year with bank stocks.

Health care and big pharma stocks like PFE (3.5% yield) and LLY (5.5%) paying high stable dividends are safe value plays. Lots of telecom dividend plays, with VZ yielding 5.5% and VOD with 5.5%. Korean play SKM and China Mobile paying 3.5% in a strong growth markets have fallen back from last summers highs. I recently picked up both shares alone with steady eddie MO. With USA money market funds paying less than 1/2% any steady eddie 3.5% or higher dividend play is a safe bet in this market.

The eBook Play

2010-01-07T16:04:00.000-08:00

Happy New Year! Wishing you all a fantastic happy new year. May good fortune shine it's light on you.

The future is now. Finally we're starting to get serious about digitizing text books. But don't think you'll save hundreds annually by getting all your college text books free throught Bit Torrents. Or am I wrong? Have you already figured out how to get the most current digital versions or just the old versions? Either way I'd image there are problems utilizing them. Students who like digital everything, say they still prefer the printed book at this point. So, it looks like there is lots of product, price and place details to work out. Nothing new, that was true with the cellphone, mp3 players and laptops too.

You know the management teams of printed textbooks don't want to lose their cash cows. You know the thousands of university college bookstores don't want to lose their on campus monopolies'. Each will want a cut of the pie.

Still, you guessed correct...Amazon's Kindle has companies like Sony and Apple scrambling to create a similiar product to sell to you. Early adapters always pay preme prices for the newest must have gadget. These things will are selling for as much as a new mid-level budget PC's or high end notebooks. How many gadgets can we carry at one time? Can Kindle's do text books too? Not at tech issue. It's your basic open source system vs closed code system issues.

On the day after Christmas, Amazon said the Kindle was the most-purchased gift in its history and sales of its electronic books surpassed physical book sales on the holiday itself. Amazon Kindle is a software and hardware platform developed by Amazon.com subsidiary Lab126 for rendering and displaying e-books and other digital media

Now Coursesmart, a joint venture of five textbook publishers, shows how students might use tablet-based textbooks. It is based on their own renderings, not specific applications being developed with Apple. Yes, I said Apple. No suprize Steve Jobs is returning to his special niche with Schools. In the 80's it was a wedding business strategy to give the schools Apple computer at large discounted prices. A loss leader, to capture their hearts and mind for future sales. But by the late 90's many parents wanted their kids to be learning on PC's for the business world which helped Dell and Gateway grow within the school system. And what about Dell? Surely, after watching the Kindle success explode they have been working on a Kindle knock-off? Right?

Now at this point in the game is there an investment play? Clearly in 2009 the play most related to this subject was Amazon and Apple. No Apple's not even announced a Kindle killer. But most Apple investors are holding onto thinking this stock is going higher based upon iPhone China sales alone. At these levels, I can't own either stock but the mighty Jim Cramer says don't sell, he perdicts both will go higher. No question American consumers are hooked on using Amazon and Apple products has become an American status symbol.

Can we see people buying two ebook readers? One for Standard Print Books and one for School Text Books? Gadget lovers yes, but the vast major of budget minded people will want to find just one device that can due multiply funtions. In 2005 the concept of a tablet laptops was gaining momentum -it faded fast. By 2007 the selection, power and price points on laptops under $1,000 was motivating record levels of buyers. In 2009 regardless of the greatest American recession notebooks where flying off the shelf's at $399 price points.

Given there's nothing extremely unique behind any of these technologies, can anyone see one primary light-weight high-powered device that does it all. Assuming we'll always want a very small mobile phone, I'm referring to the possibility of the Tablet PC/Laptop returning to the lime-light. I'm wondering if a Tablet PC as light as Apple Laptop Air and with a phone like slide out or flip up key board can do it all? What do you think? Does anyone have any micro-cap plays related to the future of ebooks?

Dec 16th Market Updates

2009-12-16T18:42:00.000-08:00

We are back to the top of the channel. Will we fall back a few hundred points or just continue inching our way upward? Health care, home builders and oil service stocks looking strong. A number of possible short-term stock trades are discussed in this video.

Here's another view on the market along with the nose bleed stocks.

Frankly, I'm playing it safe ( meaning holding more defensive or way oversold positions ). The market advanced into the meeting knowing what was going to be said. Now the question is will oil continue to climb back to the high $70's knowing that the fed has no plans to raise interest rates? If oil holds strong there are many oil service plays that have fallen back on oils fall from $79 to $69 to consider. I jumped into WFT, HLX and SUN today but hedged buy selling X, CHK and RIG. Sold my AMED medical stock yesterday as it hit the top of my target but I'll be looking to buy it back. Both AMED and AFAM are in the same markets and are forecasting very strong outlooks. Still holding dividend producer LLY. Sold my three day trade on China stock GIGM for $4.30 a fast 22% gain on the announcement and pop today. I'll consider buying back at $4. I'll be looking to get back into CHK and RIG on any market pull back ( assuming oil holds strong) or strong oil market.

The Future Of : Made In The USA

2009-12-02T14:57:00.000-08:00

Watch it on CNBC tonight....Meeting of the Minds: Rebuilding America

Premieres Wednesday, December 2nd 8p ET

Manufacturing led the United States to become the richest nation in the world and has been the foundation of the middle class. But times have changed and today's economy values innovation and design over manual labor -- emphasizing mind over matter. This sea of change has spurred many questions: Are the manufacturing jobs in the US gone forever? Does an economy that doesn't produce anything have any real value and has 'Made in the USA' died, taking with it the soul of our country? CNBC’s Maria Bartiromo gathers some of the most influential leaders in manufacturing for a Meeting of the Minds at Carnegie Mellon University to answer those questions and plan for the industry’s future.

The CEO of GE points out an interesting fact: Germany exports are 40% of GDP and it has a more expensive labor force than the USA. The USA now only exports 7% of GDP down from 25% just 10 years ago. The CEO of Nucor points out that it's America's failed trade policies that has been distroying the middle class not the unions.

Here are just a very few moments from the business special. Forgive the commercial. I was unable to remove it from the free videos:

A steelworker asks GE CEO Jeff Immelt where the constant outsourcing of American jobs is likely to lead this country.

Unions are the focus of this comment by Bill Ford of the Ford Motor Company, who fields a difficult question from a student. Mr. Ford forgets to explain to the student VW is a higher cost Union shop than the USA.

GE CEO Jeff Immelt has a number of suggestions for how America can move beyond its current manufacturing crisis and get back on track.

Discussing America's once-great manufacturing base, and Nucor Steel CEO DiMicco's comment to one of the steelworkers in the audience, with CNBC's Maria Bartiromo.

Students, steelworkers and businessmen discuss the US manufacturing crisis. Bill Ford offers special advice to students.

Seven Reasons Why The Trend Is Your Friend

2009-11-24T14:15:00.000-08:00

I will often joke about market technical analysis.

Daytraders often live and die by minute-by-minute moves and magical voodoo terms. Technical analysis is no more the holy grail than buy-and-hold investing. The presumption that the tail waggs the dog is dangerous and not grounded in any scientific evidence. Yet, my experience says it's of as much value as fundamental analysis in helping you determine if a stock could rise or fall. Above is the most recent analysis of the S&P Trend line which can help one reduce risk and increase profit opportunities. The idea is simple. Know when to plant seeds. Know when to harvest profits.

I was trained in Modern Portfolio Theory (MPT) in my business BBA program in the 70's.

Naturally at a University you'll learn what is believed to be the best researched and scientific based thinking of the time. Most often based upon utilizing mathematics to identify correlations and relationships in search of the holy grail of reducing ones risk while increasing the probability of maximizing your returns. So, all the Professors contributing to the knowledge of MPT, were strong mathematicians not past professional money managers.

The founding fathers of MPT, people like: Harry Markowitz Nobel Prize in Economics, 1990. Diversification reduces risk. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Single-Factor Asset Pricing Risk/Return Model. William Sharpe, Nobel 1990 Prize in Economics, for Capital Asset Pricing Model. Efficient Markets Hypothesis, Eugene F. Fama, University of Chicago. Fama was first to get access to using a Mainframe IBM computer to analysis massive amounts of historical data that had been collect in print.

Fama's, extensive research on stock price patterns was the foundation for Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. This was among the easiest of concepts to grasp. Yet, to this day this is the most misunderstood theory. Often those with no formal investment training such as journalist, will imply Fama's theory means the market must always be rational.

But the most valuable concept that I learned outside of the class room in real life money mangement pertaining both to the market and individual stocks was how to spot a simple trend and capitalize on that trend.

We spend a great deal of time trying to spot stocks heading in the right trend, or direction. Careful attention needs to be given to the support and resistance lines. These lines are also called trend lines.

Here are seven reasons why the trend can be your friend in investing:

1. These lines draw the general trend, or direction, the stock is heading. They’re not used for daily tracking, they’re more of a longer-term direction that the stock, mutual fund or commodity is heading. If you are using a longer term approach, the trend is what you really want to know, not necessarily the day to day wiggles in a stock.

2. Often times, the trend line will give you guidance in a stock for years, not just weeks or months. But these support and resistance lines are often bumpers, or guardrails, along the way. Stocks often drift toward their support or resistance lines and then bounce back in the opposite direction.

3. If you can pick off a stock you find attractive as it is bounces off the support line, it could be a terrific time to buy. The reason is you have a strong, logical place for your stop point...just under the support line, which is really close by. This helps minimize the amount you have at risk.

4. Some of the best winners come from stocks that are purchased just as the stock breaks through overhead resistance and forms new patterns. Holding the stock until it breaks support line (which might be possibly many months, or even years later) can really help your overall performance!

5. The reasons behind why a stock jumps through a brick wall are often not clearly visible. The reasons for the move may emerge days or weeks (or even a year!) down the road. But when a stock or a mutual fund breaks through the trend line, either up or down, it’s important news.

6. If a stock or mutual fund we are following breaks through it’s overhead resistance, we have a high level of confidence that the stock will continue to climb upward.

7. Lastly, if the support line of your mutual fund or your stock is broken, beware! This is a very clear signal we should consider selling a portion (or maybe even the entire) position. Breaking the support line is the ultimate sign that supply is now clearly in command. Your principal is now at risk.

Bullish Momentum or Bearish Mojo ?

2009-11-23T21:41:00.000-08:00

Bearish triple Ms? Doje? Bearish flag? Bearish Cross? Bearish Reversal Candlestick Patterns? Advance on low volume bull trap? Say all the mojo vodoo you want, but the market exploded open today moving up 100 plus points within the first 15 minutes today.

After a year of listening to people say buy-and-hold and passive investing and EMT is dead...those who did nothing but stick with a passive index fund, are the real market gurus. I've listen to high paid money managers and CNBC "experts", say the market would turn south for months once it hit 8,500...then 9,500 for sure was the top...and now were at 10,500. Hay, I thought 9,800 was tops. I too was expecting a little 5% pull back, that never came in the index. Lots of stocks have pulled back but the market index has continued to climb higher.

Gold and commodities explode up today. No idea why the 180 reversal from last Fridays stronger dollar. India must be passing out free glasses of Champane to Americans visiting their country, as their new stock pile of gold rise in value.

Triple shorts and double short ETFs got clobbered today regardless of low volume. So should we change our thinking? Dow 11,000 now? Well,today was great for index investors but I saw a ton of selling during the first 30 minutes with many prices falling thereafter. So, lets listen to Ron explain this from his market technicals point of view. He explains why he's staying short and bearish near-term on the market.

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DOW Hits 10,400 What's Next ?

2009-11-21T19:29:00.000-08:00

Now that the Market hit a new high 10 days ago what next?

What next? Dow 11,000? or 9,800? Well, after listening to all the newly minted market wizards on Seeking Alpha.com make continuous market crash perdictions, since the mother-of-all-bounces (in our lifetime) began, they final stopped about two weeks ago as the market was agin hitting new highs. Now that they stopped I'm ready to get very defensive. No as, I've said before, I see no 20% correction for certain in the next few weeks. Getting defensive, for me, means selling the stocks and sectors that have risen the most and rotating into stocks with perdictable earnings and good dividends that have not enjoyed a big market advance. And if there were a 5% correction you can bet I'd be looking to buy unless we had new negative economic data, in addition to our serious unemployment problem. Remember unemployment is a a very serious problem but if companies are expected to earn more resulting from these lay-offs and if the future economy is expected to get better then stocks can continue to slowly rise or go sideways as they did in 1983-84 and 1991-92 even as unemployment was high. But lets just consider whats more likely for the next few weeks.

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So, to help me confirm or reject my guess I'm calling in advice from the Voodoo Chartist as us EMT boys like to joke about. I'm not one to get excited about minute by minute market technical's and charts. But I do make major portfolio shifts in allocation between sectors, industries and cash based upon my technical advisors in addition to fundamental analyst recommendations.

When one chooses a technical advisor I recommend one be chosen based upon their knowledge of fundamentals, market history and knowledge of how portfolio managers think too. I'm going to share with you Ron Walker ( one of my advisors ), a man who's ego is in check and is worth your listening time. Now given the market has had its greatest move up since the 1930's I'm worried the markets now ready for another minor 3 maybe 5% pull-back similar to the last two.

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Another technical advisor I follow Carter Worth, of Oppenheimer Fund Management has also advised me a correction is now the most likely near term outlook. And we've said all along that the market seemed insistent on going back up to the pre-Lehman bankruptcy level of last September. We've hit those levels. Based upon his training and experience Carter says, "that's the wall we'll not climb above for some time now." He believes a correction is due. Does it mean we must have a sharp correction? No. It can be a slow back and forth but continuous drip down into December. Even if we have no correction now, I'd bet it would come in January when large investors choose to take capital gains for all of 2009 profits, on their 2010 tax return, simply by waiting to sell on January 1st 2010. Most likely the big winners in commodities related stocks will sold. But let's not start speculating beyond the next few weeks.

Last week I saw the fertilizers companies and telecom companies rise while oil drillers like my favorite RIG were extra weak. I've sold my fertilizer play IPI and oil tanker shipper FRO. I'll look to buy it back below $25, I hope. I'm holding my DRYS due to the rising BDI rate rising. I'd be looking to buy more RIG below $82. Metals like X and AA can be bought on any noticeable drop. Large banks and insurance companies like BAC, WFC, C, STI, GE, PRU, MET and HIG seem on very firm ground and in little risk of falling down more than 6-10% compared to other jumbo winners in 2009. I'd be looking to buy BAC, GE or HIG on any noticeable pull back. I also notice that some of my favorite defensive plays with excellent yields continued rising as other socks weakened last week. Finally boring defensive stocks like WMT, MO, LLY, PE, VZ and CHL (I hold positions it all four stocks) moved up. These stocks may finally be in a mini-break-out mode which makes them a safe play to hold (even in a correction) as one takes other short positions ( as Ron describes ) or moves to 50%+ cash levels ( which I am ).

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These videos are more for individuals with some good basic understanding of technical analysis. It's for those who want an in-depth market analysis and opinion on if the market is more likely to move down or up in the next two weeks.

Special Note: The average individual needs to spend more time developing a long-term savings and investing plan instead of a market trading plan. Market timing and market trading and daytrading is a very time consuming activity. Those selling monthly subscription services will always tell you "passive index" or "monthly dollar cost averging plans" or "buy and hold" is dead. Yet, many traders make less money than a simple buy and hold passive investing strategy. The down side of daytrading is rarely discussed. What does it cost you to be spending 8 hours a day five days a week on market trading?

Death Of A City - 1/2 Million Buys Silverdome

2009-11-19T22:01:00.000-08:00

A once great domed football stadium built as just one part of the Detroit MI area mid-70's reveal plan just sold for about 1 percent of what it cost to build.

China, India, Kuwait take note. You want a deal on real-estate? Do you want to buy at prices below the usual going-out-of-business 65% off everything? How about prices at 90% off?

The Pontiac Silverdome — once home to the NFL’s Detroit Lions — was just sold for $583,000, or about 1% of the $55.7 million it took to build in 1975.

The Silverdome, an 80,300-seat stadium located in Pontiac, Mich., is the latest example of how comprehensively the recession has socked southeastern Michigan.

Mass layoffs and automotive plant closures have wreaked havoc on the local economy. Budget deficits are deep, foreclosures are widespread, and the population shrinking – from about 2 million people in the 1960s to about 900,000 today.

As a former Michigander and Detroit resident I'm sadden by the death of the area. The once great Silverdome stadium may be a metaphor for the state of business and employment in Detroit MI.

Here are just a few other examples of the death of a city.

When I worked in the Detroit area the K-Mart headquarters was a shiny new showpiece (employing thousands)and business was booming. K-Mart filed bankruptcy in 2002.

Rockwell International(my Detroit employer) was number 27 on the Fortune 100 corporation list. Rockwell International had a workforce of over 100,000, organized into nine major divisions. By 2001 what was left of Rockwell was split into two smaller companies.

Just 10 years ago most believed GM was at the top of its game, a much leaner and more efficient company from the 70's and now their bankrupt.

Michigan unemployment now exceeds 15%, but real unemployment in the whole Detroit metro area is at depression levels (25%). It's just one more example in a long string of examples of the shifting sands of world economic fortunes.

Death of a Great City, an article written in September by Daniel Okrent, a Detroit native, outlines the city's economic plight and compares it to a natural disaster we all recall, hurricane Katrina, which devastated the city of New Orleans.

" Three years after Katrina devastated New Orleans, unemployment in that city hit a peak of 11%. In Detroit, the unemployment rate is 28.9%. That's worth spelling out: twenty-eight point. Unemployment in Pontiac is at 35.0%."

He concludes with:

"...the story of Detroit is not simply one of a great city's collapse. It's also about the erosion of the industries that helped build the country we know today. The ultimate fate of Detroit will reveal much about the character of America in the 21st century. If what was once the most prosperous manufacturing city in the nation has been brought to its knees, what does that say about our recent past? And if it can't find a way to get up, what does that say about our future?"

Brasil is Hot -Part 2

2009-11-18T22:06:00.000-08:00

Here is the editor of Intelligence Report discussing why he likes Brazil. This follows on the heals of my prior post on Brasil.

Richard C. Young, editor of Intelligence Report, says Brazil is an emerging economic power with a stable democracy and a healthy financial system.

As an investment destination, Brazil offers profound promise. Slightly smaller than the continental US, Brazil [has] a population of 190 million. More than half the population is now considered middle-class by Brazilian standards.

Unlike many emerging-market countries, Brazil is not overly dependent on commodities or exports. Its economy is highly diversified, with personal consumption expenditures accounting for 60% of [gross domestic product] and exports accounting for only 14.3% of GDP. Manufactured goods account for 60% of exports. Brazil is the world's seventh-largest manufacturer of automobiles and the fourth-largest manufacturer of airplanes.

Brazil is the only BRIC nation that is both a stable democracy and at peace with all its neighbors. Brazil's financial system is healthy: Total credit to GDP is only 41%. Brazil has $233 billion in foreign exchange reserves, which is equal to 19 months of imports and fully covers the country's public and private external debt.

Brazil is also endowed with natural resources. It is the world's leading exporter of iron ore, coffee, soy, orange juice, beef, chicken, sugar, and ethanol. Brazil has 958 million acres of highly productive arable land, with 222 million acres that have yet to be farmed. The country generates 73% of its energy needs from hydroelectric power. Brazil is also home to one of the ten largest oil reserves in the world, the Tupi field.

Decades of recurring turmoil, arcane lending laws, and high inflation have kept Brazil's economy underleveraged. Mortgage debt in Brazil is equal to only 2.5% of GDP, compared to 80% in the US. There is huge pent-up demand waiting to be unlocked in the housing sector. Mexico, which has 60% of the population of Brazil, builds four times as many homes.

Lower interest rates and changes to lending laws are likely to unlock Brazil's pent-up demand for housing over the coming decade. Falling interest rates have already begun to unlock credit growth in consumer loans—65% of car purchases are now made on credit, and purchases with credit cards have been growing at 22% annually during the past decade.

Brazil has always had great potential, but has consistently managed to stumble. Change is now under way. Inflation has been tamed, the state has found an acceptable balance with private industry, excessive government debt is no longer a problem, and stability has returned to the economy. A more stable Brazil should result in higher earnings multiples on Brazilian stocks, lower interest rates on Brazilian debt, and a more valuable currency.

You should continue to expect wicked volatility when investing in Brazil. The government still has its hands deep in the private economy, as evidenced most recently by the implementation of a tax on capital inflows. Plus, while Brazil is headed toward developed market status, it is not there yet. Begin with a starter position in Market Vectors Brazil Small-Cap (NYSEArca: BRF) or iShares MSCI Brazil (NYSEArca: EWZ), and add to your position on dips.

Brazilian Stocks Are Hot

2009-11-17T07:52:00.000-08:00

International stocks continue to gain popularity as investors look to align their portfolios with emerging market economies and creditor nations.

China, India and Brazil are all economies with a growing middle-class on the rise. A rising middle-class in America was accompanied by a rapidly rising 20 year market from the 1950's to 1970. Just something to consider. I'm not totally comfortable with investing in emerging markets. But my eyes can not deny the trend in growth and in stock prices.

Consider Brazil. Brazilian stocks have been among the top of the emerging market list, with the South American juggernaut being fueled by a pro-growth government, booming exports and the modernization of its infrastructure.

Pro-Growth Government

Brazilian President Luiz Inácio Lula da Silva, otherwise known as "Lula", has led the country's pro-growth strategy, appointing the market oriented economist and former CEO of Bank Boston Henrique Meirelles as head of the Brazilian Central Bank. Lula and his administration quickly strengthened the country's relationship with the IMF by renewing agreements and paying off its debt early.

Next up was the Growth Acceleration Program, an initiative designed to free the country's economy from growth constraints. By 2008 Brazil had became a creditor nation, with its debt recently getting the nod from Standard & Poors as investment grade.

Booming Exports

Much of Brazil's incredible growth trajectory is being driven by its strong export business as a commodities powerhouse. Here is a big surprise to me. Brazil is the world's leading beef and soybeans exporter, and ranks high in a number of other agricultural categories like chicken, orange juice and coffee. With the exception of coffee these are all areas where I was use to the USA being the agricultural export powerhouse. Brazil's service industry is also on the rise, with new exchanges and financial services companies helping to create a more balanced economy.

Infrastructure

An infrastructure story will be a recurring theme associated with emerging markets, but infrastructure development is literally and figuratively the road that leads a country to prosperity. In 2007, Brazil launched a four-year plan to spend $300 billion to modernize its roads, power plants and ports. The development of modern infrastructure and middle-class amenities has helped Brazil establish credibility as a progressive nation and future economic leader.

Now comes the important part, how to capitalize. One way would be to move to Brazil and invest in a textile plant or soybean farm. That actually sounds like a lot of fun, but might not be realistic for most of us. Here is an easier way; buy Brazilian stocks.

There are plenty of great Brazilian stocks that trade as ADRs on American exchanges, providing a nice dose of transparency and regulation to a less familiar investment destination. Here are four Brazilian stocks to watch. Interesting to note that while the USA stock market stands near it's 1999 high our market has been used to raise trillions for foreign stocks.

Basico do Estado (SBS - Analyst Report) provides sanitation and environmental services in Sao Paul, the most populous Brazilian city. As a utility, this is one of the more conservative Brazilian stocks, but that helps create a more balanced approach to the market. The Zacks #2 rank stock looks like a great value pick, trading at just 6.5X projected current-year earnings.

Petrobras (PBR - Analyst Report) is a oil stock many may be familiar with as one of the more popular Brazilian stocks. This integrated energy company will be involved in some of the largest oil projects in the world in coming years as it works to tap into the deap-sea discoveries off the coast of Brazil. The next-year estimate looks solid at $3.57, a 22% growth projection.

Gafisa SA (GFA - Analyst Report) is a Brazilian real-estate developer. The company just reported amazing third-quarter results, with its revenue more than doubling from last year. Analysts are looking for next-year earnings of $2.79 per share, a bullish 72% growth projection. Based on the current-year estimate, GFA has a forward P/E multiple of 20X, a reasonable valuation for a company growing this quickly in the strong Brazilian economy.

Price-to-Cash Flow

2009-11-13T06:06:00.000-08:00

The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued. I would add that a much better measure used on Wall Street is Price-to-Earnings-to-Growth (or PEG. And one must always put more weight on Forward Earnings not Trailing Earnings.

The Price to Cash Flow (or P/CF) is another great ratio. Cash is vital to a company's financial health, especially in tight credit markets, in order to finance operations, invest in the business, etc.

And cash can't really be manipulated on the Income Statement like earnings can.

The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures.

Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio.

Many analysts prefer using the Price to Cash Flow metric to judge a stock's value.

And just like the P/E ratio is calculated by dividing the Price by its Earnings per share -- the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share.

Also like a P/E ratio, the lower the number, the better.

Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 9.6. For the 12-month forward P/E ratio, it’s 15.3.

But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.

But make sure you compare the stock's P/CF to its Industry, since different Industries will have different numbers that are considered normal.

For example: the average Price/Cash Flow for Gold Mining companies is about 30, whereas it’s about 3 for Telecom.

There were 30 stocks that came thru this week's screen. Here are 5 of them:

BARE - Bare Escentuals, Inc.
CMN - Cantel Medical Corp.
HS - HealthSpring, Inc.
TTC - Toro Company
VIA.B - Viacom Inc.

USA Unemployment Hits 26 Year High

2009-11-06T15:18:00.000-08:00

The American unemployment rate surged to 10.2 percent in October, its highest level in 26 years, as the economy lost another 190,000 jobs, the Labor Department reported Friday.

The nation’s jobless swelled to 15.7 million. Since late 2007, payroll employment has fallen by about 7.3 million. Only 1.8 million jobs were lost in the 2001 recession. So, this is 3 times worse. More than a third of the nation’s unemployed — 35.6% — have been out of work long-term, defined by the Labor Department as a period of 27 weeks or more — that's the highest proportion since World War II.

The jump into the realm of double-digit joblessness— provided a sobering reminder that, despite the apparent "technical" end of the Great Recession, economic expansion has yet to translate into jobs, leaving tens of millions of people still struggling. And many with a job are wondering if their next.

The labor situation is actually worse than what these figures and the 10.2% rate show. The government doesn't count as officially unemployed the so-called discouraged workers who have given up looking for jobs -- which in October numbered 808,000, up from 484,000 a year earlier.

There also were 9.3 million people who reported they had little choice but to work part time because their hours had been cut or they could not find full-time jobs. If this group and discouraged workers are included, along with others on the fringe of the labor market, the nation's unemployment and underemployment rate in October was 17.5%.

The last time the jobless rate crossed double digits was during the recession and initial recovery period of the early 1980s. Then, unemployment hit 10.1% in September 1982 and stayed at or above that level, rising to a high of 10.8%, until June the following year. This time around, unemployment has risen even faster and, by many analysts' and economists' predictions, could hold above 9% through 2010.

While it seems counter intuitive the stock market in 1982 was similar to 2009, as it also rose over 60% -even as unemployment was rising. Now let's hope the 2010 stock market is more like 2004 then 2002 market. Even, some market bulls find it hard to believe (with this recession dwarfing 2001) that we are at levels above DJIA 10,000.

Current Ratio Analysis

2009-11-02T05:24:00.000-08:00

Current Ratio Education Combined With Zacks Analysis By: Kevin Matras

Current Ratio is calculated by dividing current assets by current liabilities. The higher the ratio the better, meaning the company has more liquid assets to meet its short-term obligations. A ratio of 2 or more (meaning a company has at least twice as many short-term assets than short-term liabilities) is generally considered good.

Currently, the average current ratio for the stocks in the S&P 500 is 2.09. This is a nice improvement from mid-year when it was at 1.75; and an even bigger improvement from the beginning of the year when it was at 1.67.

Screening for this is quite easy to do.

It's a ratio, so on any stock screener programs, including the Zacks Research Wizard, you'd want to first go to 'Ratios'. And then go to the 'Liquidity and Coverage' section. From there, you'll find an item called 'Current Ratio'. That's the one.

As for what value to use, I prefer to compare a stock's Current Ratio to the median for its Industry. And in this week's screen, were doing just that. We'll also add in some other items to help us find sound companies with solid prospects for the future. But please keep in mind variables like the individual companies and industry outlook are far more important than its current ratio in moving stock prices.

Screen Parameters. Below is just one example.

■Zacks Ranks = 1
(Only Strong Buys allowed.)

■Current Ratio > median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.)

■Current ratio > 2
(And at the very least, we want the companies to exceed the commonly held definition of good, which means greater than 2.)

■Projected 1 Yr. Growth Rate > median for its respective X Industry
(This means we’re looking for the companies with the best growth rates within their groups.)

■Projected 1 Yr. Growth Rate > 0
(I only want positive projected growth rates.)

■Price >= $5

■Volume >= 100,000

Here are 5 stocks that passed this week’s screen:
BLK - Snapshot Report BlackRock, Inc.
CBT - Snapshot Report Cabot Corp.
FIRE - Snapshot Report Sourcefire, Inc.
ISRG - Analyst Report Intuitive Surgical, Inc.
VRX - Snapshot Report Valeant Pharmaceuticals

Note: Current Ratio Analysis is only one of many financial ratio's and I'd say you would only use this as a confirmation of your investment choice based on economic and industry outlooks combined with the more important earnings and revenue outlook for the company you are considering investing into.

First GDP Growth in Four Qtrs

2009-10-31T14:06:00.000-07:00

The 3.5 percent GDP growth rate in the July-to-September quarter represented the first positive growth in the figure after four straight quarters of declines.

It was the largest gain in two years. But the concern is that this growth will falter given the huge problems still facing households.

Yes, much of the increase can be attributed to the governments controversial Cash-for-Clunkers and New Home Buyers refundable tax credit program. The real test for the economy will be the upcoming Q4 2009.

Most economists don't expect the economy to grow quite as much in coming quarters, but they aren't forecasting a double-dip recession, either. Most see growth in the 2% to 3.5% range. The adjustment in inventories could add to growth for several more quarters.

The big question confronting policymakers, investors, consumers and economists is whether the economy will be able stand on its own as the federal government's stimulus begins to wane.

Here is a breakdown of this quarters GDP drivers:

2.36 percentage points of the 3.5 percent third-quarter growth in GDP came from consumer spending. Car sales alone represented 1 percentage point of total growth, reflecting the success of the government's Cash for Clunkers program.

This is the biggest question facing the fledgling recovery, given that consumer spending represents 70 percent of total economic activity. Can consumers keep spending with unemployment at a 26-year high of 9.8 percent and expected to keep rising until next summer?

1.22 percentage points of the 3.5 percent GDP growth came from investment, with nearly half that strength coming from a surge in residential construction, an area that had been plunging since 2006.

The $8,000 new home buyer refundable tax credit was a major contributor along with falling prices. much of Business spending on computers and other equipment showed gains but spending on commercial structures such as office buildings and shopping centers continued to decline.

0.48 percentage points of GDP growth in third quarter came from the increase in government spending.

All the strength in third-quarter government spending came from a 7.9 percent rise in spending at the federal level, reflecting in part the boost from the stimulus program. That offset a 1.1 percent drop in state and local spending, where budgets have been hard-hit by the recession. The expectation is that the stimulus program, which is helping states weather the recession, will keep government spending growing in coming quarters.

Baltic Dry Index Rising Again

2009-10-29T18:09:00.000-07:00

In September the outlook for shipping and dry bulk shipping rates, was very poor even while the stock market surged up in September. The video above tells the story. But in October the rate has moved up, as world trade in the Atlantic is expanding.

The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk

This would be a good time to consider names like DRYS, EGLE, DSX or GNK.

US National Activity Index

2009-10-27T09:04:00.000-07:00

Consumer sentiment is greatly impacted by the jobs market and their perception of the USA economy going forward. Consumer sentiment began rising in the first two quarters but has most recently declined.

The magnitude of the surge in the stock market was a surprise to everyone. Examining the US National Activity Index helps us better understand the panic market selling in Q4 2008 and Q1 2009 followed by the biggest V-shape market bounce back from the deep dark abyss since the 1930's.

CHICAGO FED Business Activity Report-- At –0.63 in September (up from –0.96 in the previous month), the index’s three-month moving average, CFNAI-MA3, suggests that growth in national economic activity was below its historical trend. However, the CFNAI-MA3 in September improved to a level greater than –0.70 for the first time since the early months of this recession. For the four previous recessions, the first month when the CFNAI-MA3 was above –0.70 coincided closely with the end of each recession as eventually determined by the National Bureau of Economic Research (see top chart above showing the last three recessions).

The chart above shows the monthly change in the CFNAI-MA3, which has been positive for the last eight months (February through September), the first time since 1975 of eight consecutive monthly increases, and similar to the seven consecutive monthly increases from December 2001 to June 2002 that marked the end of the 2001 recession (see shaded areas).

What is the National Activity Index?

The index is a weighted average of 85
indicators of national economic activity.
The indicators are drawn from four
broad categories of data: 1) production
and income; 2) employment, unemployment,
and hours; 3) personal consumption
and housing; and 4) sales, orders,
and inventories.

A zero value for the index indicates that
the national economy is expanding at its
historical trend rate of growth; negative
values indicate below-average growth;
and positive values indicate above-average
growth.

The Committee Failed America

2009-10-22T08:57:00.000-07:00

In 1987 Ronald Reagan's, anti-government free-markets philosophy had gained a solid foothold in the American economic physic.

The newly appointed federal reserve chairman Alan Greenspan (an Arthur Burns protégé) subscribe to economist Milton Friedman and philosopher Ayn Rand's laissez-faire philosophy of no government intervention.

In the early 90's a powerful private financial committee was formed in Washington D.C. to promote the free-financial markets philosophy and to overturn the last great regulation hold-out from the 1930's financial crisis, the Glass-Steagall Act. The boys title for the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."

By 1999 TIME's World section, takes you inside the most powerful economic triangle in Washington in its cover story on the Committee to Save the World, a.k.a. Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Deputy Treasury Secretary Larry Summers.

The Glass-Steagall Act was created after the first great financial crisis

The Glass-Steagall Act is the Depression-era law that separated commercial and investment banking. It was functionally repealed in 1998, when Travelers (the parent company of Salomon Smith Barney) acquired Citicorp. And it was officially repealed in 1999. And just seven years later the world found itself in another 1930's style worldwide financial crisis.

Recent events on Wall Street...the failure or sale of three of the five largest independent investment banks-have effectively turned back the clock to the 1920s, when investment banks and commercial banks cohabited under the same corporate umbrella.

Ironically the very ideology that said monopolies are bad and capitalism should allow bad businesses to fail...failed us. In the end we had private Capitalism of profits and excessive compensation but when the losses from those bad decisions came they were Socialized with taxpayer money. Amazingly both right and left wingers came together to say, "No Bail-Outs". Yet, the fear of systemic risk ( finance code for risk of collapse of an entire financial system or entire market ) seemed so great two presidents of two parties came to the same conclusion, government action not in action was required.

The architects of that failed philosophy now get promoted to clean up the mess. Thank you, Timothy Geithner and Lawrence Summers. These boys have make a great political living for themselves. Here is just one recent article on Larry Summers connections.

The Young Turk Gives Greenspan Advice

Last October Alan Greenspan, former Federal Reserve chairman, at a hearing on Capitol Hill (during the financial crisis) makes a profound self discovery. Greenspan Concedes a possible flaw in his thought process. This is classic Greenspan. He's incapable of admitting mistakes were made. Instead he carefully admits there may be a "flaw" in his ideology that says less financial regulation is always better for the public. He talks as if his decisions were based upon scientific models and rocket science rather than personal opinion.

Alan Greenspan is a classical intellectual. He's ideally suited to discuss macroeconomic issues, musical history and Adam Smith or Ayn Rand philosophy. Unfortunately that background is of little value in monitoring the realities of microeconomic details and human nature. He's not the type of detail oriented person you need to develop a minimal intrusive yet efficient and effective regulation system to protect America. And paradoxically the man who believed in free-markets and Laissez-Faire/hands-off government was in charge of the Federal Reserve, an entity created by government.

Over the last 10 years I've had the pleasure of listening to Treasury Wizard Greenspan speak many times. He is the master of grace and speaks with such elegance. Greenspan, a musician at heart, could make words dance to please democrats and republicans alike. Unlike others, I do not blame a few men or one party for the greatest financial crisis of our lifetime. There is plenty of blame to go around in Washington D.C., Wall Street and on Main Street. What's done is done. The question is will anything change for the better?

Listen to the PBS Frontline Special Report ( $25 DVD Video) for free (while we still have the viewing rights) below.

Shattering Glass-Steagall

The Senators, Economist and Glass-Steagall

Worldwide Bounce Back

2009-10-20T21:19:00.001-07:00

The worldwide recession appears to have ended, with surveys showing manufacturing activity is on the rise nearly everywhere. “It is the emerging markets that are leading, with the U.S. following and Europe lagging,” said Chris Williamson, the chief economist of Markit, a company that surveys manufacturers in many countries.

The surveys, conducted in the United States by the Institute of Supply Management and in other countries by Markit, measure not the level of manufacturing output but the way it is changing. The surveys have a reputation for showing turns in the economy, often before other indicators do. In the charts above, the index figures have been converted to show the number of points over or under 50 for each of 12 countries, from the end of 2007 through September.

While details vary, the slump was sharp in nearly every country, reflecting the sudden decline that came after Lehman Brothers collapsed in September 2008. That worsened a credit squeeze, which meant some companies had no choice but to cut back on everything they could, from inventories to marketing expenditures to jobs. Others, fearing that the economic outlook could become much worse, cut back voluntarily.

It now appears that companies cut too much, and the surveys of manufacturing show that companies are expanding in most countries. Over all, the surveys indicate that the manufacturing sectors of China, Taiwan, South Korea and India had begun to grow by April, but that the United States did not follow suit until August.

Source: New York Times

Brand American Rising?

2009-10-20T16:30:00.000-07:00

Every now and then you come across a little piece of news that has great importance, yet is under reported in today's news sensation world. Here is such news. If I'd heard it from a friend I'd say that's not possible (not that I'd expect the USA to be in the bottom 10). What does this have to do with investing? Peoples attitudes about countries affect their desire to invest in the companies of that country.

Why the change? Why does the ranking shake out this way?

NEW YORK, Oct. 5 /PRNewswire-USNewswire/ -- Brand America is now ranked #1 by global citizens, according to the GfK Roper Public Affairs & Media, a division of GfK Custom Research North America. Results from the 2009 Anholt-GfK Roper Nation Brands Index(SM) (NBI), which measures the global image of 50 countries, show the United States taking the top spot as the country with the best overall brand, up from seventh last year.

"What's really remarkable is that in all my years studying national reputation, I have never seen any country experience such a dramatic change in its standing as we see for the United States in 2009," explains Simon Anholt, NBI founder and an independent advisor to over a dozen national governments around the world. "Despite recent economic turmoil, the U.S. actually gained significant ground. The results suggest that the new U.S. administration has been well received abroad and the American electorate's decision to vote in President Obama has given the United States the status of the world's most admired country."

Anholt-GfK Roper Nation Brands Index(SM)
Overall Brand Ranking
(Top 10 of 50 Nations)

2009
1 United States
2 France
3 Germany
4 United Kingdom
5 Japan
6 Italy
7 Canada
8 Switzerland
9 Australia
10 Spain, Sweden (tie)

Source: 2009 and 2008 Anholt-GfK Roper Nation Brands Index(SM)

"This improved perception of the U.S. is not only in the area of Governance, there are improved perceptions for People, Culture and even Tourism of the United States," adds Xiaoyan Zhao, Senior Vice President and director of the NBI study at GfK Roper Public Affairs & Media. "While most nations' reputation does not undergo major change from year to year, the U.S. has clearly bucked the trend. What's key for the U.S. and other world's leading nations is to strike while the iron is hot and develop focused policies and communication that draw businesses, financial investors and tourists -- in order to help lift their national economies and their global credibility."

The NBI is based on a global survey in which people from across 20 major developed and developing countries are asked to rate each nation in six categories: Exports, Governance, Culture, People, Tourism and Immigration/Investment. The NBI ranking is based on the average of these six scores.

Turning to the rest of the NBI rankings, mostly the same countries are in the top ten as in 2008 - but also with some shifts in position. France again captured second place overall, while Germany and the United Kingdom fell to third and fourth, respectively. Japan (5th) and Italy (6th) did not shift rankings from 2008. However, Canada lost ground, slipping from fourth last year to seventh in 2009. Switzerland, Australia, Spain and Sweden round out the top 10.

Other major movers in the overall ranking include several developing countries - such as China, which climbed several spots from last year to 22nd in 2009.

This year's NBI study also includes questions on the impact the global economic crisis is having on people's opinions and perceptions towards the nations tracked. Top-line results from this area will be released late fall 2009.

To request a copy of the Anholt-GfK Roper Nation Brands Index(SM) (NBI) 2009 Highlights report or for more information on the Anholt-GfK Roper Nation Brands Index(SM) (NBI) and Anholt-GfK Roper City Brands Index(SM) (CBI), please visit www.gfkamerica.com and/or www.simonanholt.com.

About the Anholt-GfK Roper Nation Brands Index(SM)

Conducted annually in partnership between independent advisor Simon Anholt and GfK Roper Public Affairs & Media beginning in 2008, the Nation Brands Index(SM) measures the image of 50 countries with respect to Exports, Governance, Culture, People, Tourism and Immigration/Investment. Each year, approximately 20,000 adults ages 18 and up are interviewed online in 20 core panel countries

Given the China economic success why do you think they only rank 22nd.?

Interest Rates Foresee No Inflation

2009-10-17T09:22:00.000-07:00

(10-18-09 update)
A run away inflation train is what many believe we'll see resulting from tons of USA money printing and borrowing.

Many of us recall the rising inflation days of the 70's exploding into ultra high interest rates that peaked around 1981. But if history is to repeat itself then we should be seeing rising interest rates in 2009 not declining (or stable) rates. And our governments selling of 30 year bonds at less than 1/2% interest rates to investors (during the fall 2008 financial panic) was the shrewd financial move of this decade. What does that make the buyers of those bonds? Can you say...fools.

The charts below show no rising interest rates (for now).

The times, as Bob Dylan sang,"..they are a changing" and someday we (USA) may have hyperinflation or stagflation again. But for the next year just expect Japanese style stagenation. After all, if the Japanese can be in a 20 year stagnation cycle of low inflation and low interest rates why can't the USA have the same. Japan has even had much lower average unemployment than the USA with low inflation. But wait, I'm forgetting one gagantic detail. Our excessive national debt. True that will come into play but I'm perdicting later not sooner.

The countries with the greatest potential for inflation are India and China. But they can view that as more a sign of their positive economic outlook and growth from much lower GDP levels of 20 years ago.

Why has the USA market continued to climb?

Less market fear and lower interest rates combined with some economic green shoots has resulted in the greatest American market bounce back since the 1930's. And lower corporate borrowing cost and slashed employee staffs mean higher future profits for large corporations even if revenues do not grow.

Forget what you want to believe and examine the data. During the 70's and 80's interest rates rose and fell but as you see in the charts below the trend was rapidly rising. This is the opposite trend of what we've experience over the last 20 years. So, while traditional beliefs may not have changed clearly the data shows something has changed. So what has changed?

What causes inflation?

Milton Friedman noted, “Inflation is always and everywhere a monetary phenomenon....It is a situation in which too few goods are being chased by too much money". The monetary policy is as lose as it gets. Economic's teaches us that inflation has two key drivers. #1. Cost-Push Inflation, workers’ ability to negotiate higher wages for themselves and business ability to raise prices. Rising commodities prices and product shortages can also cause this problem. We have neither. #2. Demand-Pull Inflation, resulting from an increase in aggregate demand, caused by an increase in money supply and increases in government and consumer purchases. We have both with one big exception. Consumer spending is only modestly recovering.

True, government gifts for spending like Cash for Clunkers $4,500 and $8,000 for first time home buyers resulted in a spike in spending. But at this point no bear or bull nor economist believes consumer spending is rapidly rising.

Therefore the U.S. monetary policy will (most likely) maintain the Fed-Funds rate under 1% through 2010. You can thank (or curse, if you have large amounts of savings earning near zero rates) our governments for keeping rates low like they did in 2001-2004. But unlike 2001-2004 we have record breaking amounts of unemployed and under employed people. And the (2001-04) housing building and spending boom is now bust. So, I'd bet we'll not see any meaningful spike inflation until late 2010.

What about our gargantuan national debt?

There’s also the inconvenient truth of U.S. debt, running up such gargantuan fiscal liabilities, both privately (consumers) and publicly. And just like the 70's once again were spending a fortune on war and the military. This time it's in Iraq and Afhganistan. Combine this with our future social security and medicare liabilities. No question we have long-term issues that could result in rapidly rising future inflation. The only hint of big inflation now is oil prices. Oil prices are now inversly correlated to the value of the dollar more than world demand and supply factors. Still one big variable has changed from the 70's that is keeping inflation low.

One big change from the 70's. One word. CHINA.

Yes, our enemy for 35 years has evolved into the worlds factory for cheaply built products (thanks to it's inclusion into the World Trade Organization). China has become our banker and product supplier. We have become their most important export market. We are their consumer market.

Why all the worry over China's willingness to lend us money? Why the worry over China dumping dollars? Why the worry over China wanting to cash in their USA treasury bonds? Folks, forgive my bluntness but these are nonsense worries (if only in my mind). It's like saying we need to worry about drug dealers not wanting to sell drugs for profit and employment to drug users.

I hear a few people saying: what is this Madman-Across-The-Water saying?

Think about this. The USA is China's number one export market. China will gladly work to keep us (and the world) addicted to buying their goods to keep their labor force employed. And do you really believe that China wants to kill the U.S. Goose that lays their golden eggs? No. Just because you're a Communist does not mean you're an Economic Neanderthal Man. There's no better way to beat a Capitalist then at his own game and on his home field!

30-Year Conventional Mortgage Rates, 1971-2009:

30-year Treasury bond yields, 1977-2009:

Baa Corporate 30-year Bond Yields, 1962-2009:

AAA Corporate 30-year Bond Yields, 1962-2009:

Prime rate, 1955-2009:

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. He (and many other economist) have pointed out that historically low 30-year mortgage rates reflected relatively low market expectations of future inflation. Some commenters (and Robert Shiller on CNBC) pointed out that the Fed is buying mortgage securities, which is temporarily keeping 30-mortgage rates low, rather than low inflation expectations keeping rates low.

What we believe and what is, are often two sides of a coin.

But the charts above show that other long-term rates (30-year Treasury bond, 30-year AAA corporates and 30-year Baa corporates) are historically low, as well as the prime rate being historically low, and these low rates wouldn't necessarily have anything to do with Fed purchases.

Question: How could all of these long-term rates be so low if there were inflationary pressures building up in the economy, which would lead to higher expected future inflation, and higher nominal long-term interest rates, and not historically low long-term rates?

We each have different inflation rates.

Now when it comes to inflation, each person or family will have a different index based upon what you must buy and want to buy. If you are an older American family, whose house was paid off years ago and who now needs to spend large sums of money for health care and college education (for your children or grandchildren) then your real inflation rate is sky high.

If you are young with no health care expense and renting or buying a home at today's ultra low mortgage rates along with lots of fantastic electronics goods at excellent low prices your inflation rate has been declining dramatically from 20 years ago. In the 70's I recall getting annual letters from my landlords explaining why due to inflation my rents would be rising by 7% even thought 85% of the landlords ownership cost in the property were fixed. But everyone just came to expect rising rents. Today rents have not only been level but in many cases they had to declined to keep renters. Each person or family's situation will be different.

But while each person's inflation index will be different, in aggregate the USA CPI is still the best gage of our nations inflation rate (consistently applied over time). I would agree with the debate that we need to examine the relevance of the variables making up the index to our lives and required expenditures' vs. desired expenditures'.

Buy Doom Sell Boom

2009-10-15T15:08:00.000-07:00

Now that the DJIA just hit 10,000 (again) I thought it would be interesting to listen to what the wanabe market gurus and high paid experts were saying in the first half of this year. Here are just two examples of the many classic doom perdictions.

I'll be the first to admit the most advance I was looking for was DJIA 9,500. But it has become clear to me I need to be looking to buy stocks on break-outs and pull-backs. And one can always find lower risk stock laggers to hold into year-end (as discussed in prior articles). Each day as I scan the market details I continue to find strenght in many stocks. Many stocks are above their 2007 levels. A few with excellent earnings outlooks like Apple and IBM are near their 2008 all-time highs!

But even in July, I was reading non-stop articles on SeekingAlpha.com from their mega posters preaching how, at DJIA 8,200, the market was due for a correction back to 6,500. When it didn't happen they wrote articles telling you why the market was wrong and they were right. The real problem was just to many kids with great educations but like knowledge of market history.

The lesson to learn? One must establish a long-term savings and investment plan. And one must understand that the market is a leading economic indicator not a lagging indicator. If you wait to invest only when the economy is ideal...you are too late! If you only invest when the economy is horrible and the market has declined by 40% you certainly stand a better chance at higher long-run returns.

What now? You, need to understand this market momentum can continue to push the market up, back to last summer's pre-Lehman Brothers collapse levels ( around DJIA 10,500 or S&P 1200 ), by year's end. Yes, at this point forget thinking you will see a 10% correction, about the most we'll get is 5% because traders and investors see benefits in buying the dips again. Now this momentum can turn negative in 2010 just as it did in 2002. But as professional traders say, "You need to trade the market you see not the one you think it should be" and "The trend is your friend" the two best money making ideas they never taught me in BBA or MBA investment classes.

The young man above was just one example of how individuals will extrapolate out the current trend (when making market predictions). Listen to one of the many high paid experts who was perdicting the DJIA would fall to 5,500 and the S&P 500 would fall to 400! Folks the S&P 500 is now at 1,100 ---- 275% above this guys perdiction.

In September I gave readers just one more example of how Blogger Youthful Investment inexperience (in understanding stock markets and the data behind charts) cost his followers thousands
Eleven Reasons These Charts Are Worthless

6 Articles 92 Stock Ideas

2009-10-10T16:25:00.000-07:00

Want a stock idea that has been prescreened from a trusted source. Here you go...6 articles and 92 stock ideas. What's your favorite stock to buy now? Why?

5 small-cap stocks to buy now

5 Best Stocks to Buy Now

12 top stocks to buy at the bottom

4 Cheap Stocks to Buy Now

6 Best Stocks to Buy Now

7 Dividend Stocks Increasing Cash Payouts

33 Relatively Safe Dividend Stock Yields

20 Stocks with the Potential to Pop

Dividends For Defensive Investors

2009-10-08T20:54:00.000-07:00

Turning to dividend-paying stocks in times of market turmoil is not a new concept. In fact,noted analyst Benjamin Graham recommended shares of large, prominent and conservatively financed companies as a defensive equity strategy when he wrote The Intelligent Investor more than 50 years ago.

And with a population of nearly 80 million baby boomers starting to retire, this need for income will become even stronger. With longer life expectancies and the potential for rising inflation, income-seeking investors will need to make sure their money continues to grow.

Consider the facts uncovered in a Legg Mason Study:

Especially relevant to today’s volatile markets is the record of outperformance that dividend-paying companies have posted in down years for the market. Our chart below illustrates how, since 1980, dividend-paying stocks of S&P 500 Index have outperformed non-dividend-paying stocks in each year the broader index generated a negative total return. Dividend-Paying stocks have outperformed non-dividend-paying stocks in down years for the S&P 500 Index (%)

Especially in a difficult equity market, dividends do matter.

For the defensive investor, dividends have the potential to cushion returns in a down market period, as they have in every down market period since 1980. Of course, past performance is no guarantee of future results.

As illustrated the Legg Mason study of Standard & Poor’s “Dividend Aristocrats,” on the front side, companies with a long-term history of rising dividends have generated higher total returns with lower risk over time.

Remember, too, that dividends have always been an important component of total return, especially when they are reinvested and compounded over time. As illustrated in the Legg Mason study, $1 invested in the S&P 500 Index from 1929-2008 would have grown to $37; but with the reinvestment of dividends, the same $1 would have grown to $929.

Note: Past performance is no guarantee of future results. All
investments involve risks, including loss of principal
amount invested. Common stocks are subject to market
fluctuations. Dividends and yields fluctuate and are
subject to change. Yields and dividends represent past
performance and there is no guarantee they will continue
to be paid. While dividends may cushion returns in down
markets, investments are still subject to loss of principal
amount invested.

Recent Article on Which Dividends Are Safe Now?

Unemployment Ominous Jobless Recovery

2009-10-05T17:21:00.000-07:00

In my prior post I reported on the speck of light we saw in the Septembers unemployment report. We said the positive sign was the fact that new unemployment claims as a percentage of the labor force had declined. This was a positive sign relative to the recessions we had in the 70's and 80's.

Now for the really bad news. As a result of are outsourced and imported economy, beginning in 1991 American began experiencing what economist call "jobless" recovers. In other words unlike the 70's and 80's were we saw big spikes in job hiring at the end of recessions, we no longer see large job creation improvements.

Why? Because unlike the 70's and 80's we now purchase much (maybe most) of what we buy from foreign lands. In fact the economic training I and every economist gets totally ignores the negative impacts of importing more than you export. Instead economist will dwell all day on elementary examples of the benefits of "Comparative Advantage" which like their theory of "The Rational Man" has value but are far to simplistic to exist in a complex world of humans and changing economic tides. And so it is you will be hearing more of this cherry coated term, "jobless" recovery in the future.

Yes, economist called attention to this in the 1990-91 recession when unemployment continued to rise after the "official" recession end. The chart above shows the monthly U.S. jobless rate back to January 1990 (BLS data here), highlighting (in grey) the 1990-1991 and 2001 recessions, and the two periods following the last two recessions that were referred to as the periods of "jobless recovery." Following the 1990-1991 recession, the unemployment continued to increase for 15 months until it peaked in June 1992 at 7.8%, and following the 2001 recession, the jobless rate increased for 19 months until June 2003 when it peaked at 6.3%.

Assuming that the most recent recession ended in June 2009 (as many economist believe) and we have another jobless recovery of at least 16 months, we can expect the unemployment to realistically continue to increase at least through the end of 2010 before it reaches its post-recession peak in the current "jobless recovery."

How can this impact the stock market? Well, the most recent example was the 2001-2003 market which climbed for months after the 9/11 final sell-off which proved to be the end of a much shorter recession. But by March of 2002, after a period of inventory restocking similar to our current experience the market fell for 9 straight months back to its 2001 lows before rebounding again in 2003 when unemployment finally began declining.

Let's just hope history doesn't repeat itself.

New Unemployment Claims Show Hope

2009-10-04T16:43:00.000-07:00

You can forget using cold heartless statistics to define the difference between a recession and depression for a family. Former President Harry S. Truman defined it best without using one number. He said, "It's a recession when your neighbor loses his job; it's a depression when you lose yours."

Yes, unemployment is now standing at 9.8% and that's bad. I'm not here to paint you a rosy economic picture. But one must always keep in mind night is followed by day. Actual unemployment is considered a lagging indicator while changes in weekly unemployment claims is considered a leading indicator of what's to come. And there we are seeing signs of light on the horizon. Signs that daylight is coming.

This chart shows weekly claims as a % of the total workforce. That percentage dipped with last week's report to its lowest level for the year. Comparing the severity of this recession to others based on this metric, we are in better shape now than in the recessions of '74-'75 and '81-'82. The economy is now about 3 months into a recovery with a workforce disruption metric that has fallen to 0.42%. It took almost one year of recovery for that same metric to drop to this level following the '81-'82recession, and almost 18 months of recovery following the '74-'75 recession.

Now, I find this little speck of light positive for another reason. Back in the 70's and 80's it was easier to have a more powerful job creation uptick when the economy was improving due to the lack of outsourcing jobs to foreign countries back then. It would also be interesting to know how high the underemployment rate reached back then compare to now.

If anyone has any additional interesting facts to add about last weeks unemployment report, please let us know. Here is the official American September Unemployment Report for all to see.

Conservative Investors Should Consider Dividends

2009-10-03T13:58:00.000-07:00

In today’s low interest rate environment with $3.5 trillion dollars earning almost zero, concervative investors might want to consider investing in financially strong blue chip companies that offer the potential for stable and solid dividends. A filtered of the 200 largest U.S. stocks (by market cap), reveals the 20 highest dividend yield companies (sort by yield %).

Company, Ticker, P/E, Yield & Debt/Cash Flow

Reynolds American Inc. RAI 16 7.4% 2.3
Altria Group Inc. MO 12 7.4% 3.4
Progress Energy Inc. PGN 14 6.3% 13.6
Duke Energy Corporation DUK 17 6.2% 6.0
AT&T, Inc. T 13 6.2% 2.1
Consolidated Edison Inc. ED 16 5.9% 14.7
Lilly & Co. LLY 5.9% 1.4
Verizon Communications Inc. VZ 14 5.9% 2.3
Southern Company SO 15 5.6% 7.7
Bristol-Myers Squibb Co. BMY 8 5.6% 2.1
Lorillard, Inc. LO 13 5.5% 0.9
Spectra Energy Corp. SE 13 5.3% 5.9
Dominion Resources, Inc. D 12 5.2% 4.4
American Electric Power Co. AEP 11 5.2% 7.7
EI DuPont de Nemours & Co. DD 44 5.1% 2.9
FirstEnergy Corp. FE 10 4.9% 4.9
PPL Corporation PPL 15 4.7% 6.9
Merck & Co. Inc. MRK 11 4.7% 2.6
Philip Morris International, Inc. PM 14 4.7% 1.9
HJ Heinz Co. HNZ 13 4.4% 4.1

Out of 20, 9 of them are utilities. Keep in mind utilities traditional carry high debt loads but benefit in todays low interest rate environment.

Out of 20, 9 of them are utilities. Keep in mind utilities traditional carry high debt loads but benefit in today's low interest rate environment.

Four of them are tobacco companies. Tobacco, specifically international tobacco, (USA market has been dying for years) is proving to be exceptionally resilient to recession. However, not all of them are created equal. For example, Reynolds American and Altria Group Inc’s payout ratios are more than 100%. The best seems to be Lorillard, Inc. Its debt to operation cash flow ratio is 0.9. In other words, in theory it could pay off all its debt within 1 year.

Three of them are pharmaceutical and 2 are tech related. Mary Buffett and David Clark point out in their new book Warren Buffett And The Interpretation of Financial Statements, what seems like a long-term competitive advantage is often an advantage bestowed upon the company by a patent or some technological advancement. If the competitive advantage is created by a patent, as with the pharmaceutical companies, at some point in time that patent will expire and the company’s competitive advantage will disappear. If the competitive advantage is the result of some technological advancement, there is always the threat that newer technology will replace it. Today’s competitive advance may end up becoming tomorrow’s obsolescence. This has always been true and one must always keep in mind change is constant. Still, it's doubtful that there is anything within the next 12 months that will radically change the investment outlook for the companies above products and services demand. And even utility stocks will benefit from a improving industrial output economy.

Mutual Funds or Exchange Trade Funds (ETFs)are an even more conservative diversified investment play. The following are the top 10 dividend ETFs(by net assets)you may wish to consider:

# Fund Name & Ticker

1 iShares Dow Jones Select Dividend Index DVY
2 Vanguard Dividend Appreciation ETF VIG
3 SPDR S&P Dividend SDY
4 WisdomTree LargeCap Dividend DLN
5 Vanguard High Dividend Yield Indx ETF VYM
6 WisdomTree International SmallCap Div DLS
7 PowerShares Intl Dividend Achievers PID
8 WisdomTree Europe Total Dividend DEB
9 WisdomTree Dividend ex-Financials DTN
10 WisdomTree International Div ex-Fincls DOO

While these are all conservative alternatives it doesn't mean they can't decline in value if the market declines. Still, for those with large stock investment exposures now (or those just getting started) these stocks are worth considering now. Most of the dividend stocks listed above have barely risen in value, as investors passed up conservative stocks in favor of the most depressed stocks over the last 6 months.

Disclosuer: I hold long positions in AEP, LLY, VZ, MO

FINRA SaveandInvest.org

2009-10-02T05:44:00.000-07:00

FINRA BrokerCheck® This is an excellent source for investors to check out people who solicited them with investment products. You always need to know the background of the person and company you are talking with when considering investments.

FINRA saveandinvest.org is a great place for both young military people and older people wanting basic personal finance education from a trusted source thats not selling products. FINRA is the largest independent securities regulator in the US their chief role is to protect investors by maintaining the fairness of the US capital markets.

A new educational video on investment fraud is coming out soon.

The Mutual Fund Money Market Fund Dilemma

2009-09-29T21:44:00.000-07:00

$3.5 Trillion dollars earning almost zero.

In my comparison to the 1981 economy I noted how savers were paid to save not spend. The dilemma for today's savers is what to do with over $3.5 trillion dollars earning almost zero sitting inside Money Market Mutual Funds. In 1981 you could have locked in a 5 year CD earning 12%. Today you would be lucky to get 3.4%. This is just another reason contributing to the 55% rise (with only small temporary pull backs) in the American stock market since its march lows. Now that the major 10% pull back you were waiting for never came what do you do? Now you feel it's just too risky moving into the stocks that have risen the most.

What to do now is the dilemma. Here are some possible options cautious conservative investors can consider. These options were researched by Glenn Rogers a longtime contributor for BuildingWealth.ca and Seekingalpha.com.
Dividend ETFs

There are some relatively low-risk ETFs where you could park some money while we see how all this plays out. For example, take a look at these three funds, all of which are designed to track baskets of U.S. companies that offer respectable dividends.

The three are the iShares Dow Jones Select Dividend Index (NYSE: DVY), the Vanguard Dividend Appreciation ETF (NYSE: VIG), and the Power Shares High Yield Dividend and Equity Achievers (NYSE: PEY). Although all three of these ETFs have the same general goal, it's somewhat surprising to find that their performance has varied greatly. At the time of writing, DVY was down 12% year-to-date, VIG was flat, and PEY was down almost 20%. So, interestingly, these issues have not participated in the market rally so far, which may make them have much less down side risk if a 10% market correction does come in October.

Take a look at the holdings of these three baskets you'll notice some fairly dramatic differences. PEY is made up of the 50 highest yielding companies with at least 10 years of consecutive dividend increases. DVY is composed of companies that have provided relatively high dividend yields on a consistent basis over time while VIG looks a lot like the Dow Jones 30 Industrials to me.

Currently, PEY has a trailing 12-month yield of 5.3%, based on last Friday's closing price of $7.45. However, I should note that the monthly payments have dropped off significantly this year and I would expect the yield will be lower over the next 12 months. This ETF has the most diverse collection of holdings among the three, split between industrials, materials, utilities, telecommunications, and a few healthcare, media, and consumer goods stocks. About 40% of the fund is in the financial services sector. The portfolio emphasis is weighted heavily towards small to mid-cap companies, which explains why this fund fared worse than the other two in the market meltdown. However, it also appears to have more upside potential if the rally continues. The Management Expense Ratio (MER) is 0.59%.

The iShares ETF (DVY) has 101 positions and is a mix of large, medium, and smaller companies. Some names in the portfolio are immediately recognizable such as Kimberly-Clark, Chevron, and Dow Chemical. Others will only be known to dedicated stock-watchers, Watsco Inc., PPG Industries, and Scana Corp. among them. Distributions are paid quarterly and the last two have been about 39c a share (figures in U.S. currency). The trailing 12-month payout totalled $1.79 which would translate into a yield of 4.4% based on Friday's closing price of $40.78. But based on the payouts for the last two quarters, I suggest it is more realistic to expect distributions in the $1.60 range over the next year for a projected yield of 3.9%. The MER is 0.4%.

The Vanguard ETF (VIG) is the most conservative play. It is designed to track the Dividend Achievers Select Index, which is administered exclusively for Vanguard by Mergent, Inc. There are 186 securities in the portfolio with a focus on large-cap stocks. Top holdings include Wells Fargo, IBM, Coca-Cola, PepsiCo, Wal-Mart, and Johnson & Johnson. As I said, it looks a lot like the Dow 30 Industrials, only bigger. It pays quarterly distributions which have recently been running at about 23c a unit. The trailing 12-month payout is 99.5c for a yield of 2.26% based on Friday's closing price of $43.99. My yield projection for the next year is around 2%. The MER is a very low 0.24%.

Bank of America preferreds

If you are looking for higher yields and are prepared to take more risk, consider the preferred shares of Bank of America. They were downgraded to junk status last winter amid fears that BoA might not survive, however Moody's announced last month that it is reviewing their B3 rating with a view to a possible upgrade now that the company is profitable again.

The Series J issue, which trades on the NYSE under the symbol BAC.PR.J. This is a fixed-rate, non-cumulative preferred that pays a 7.25% dividend based on its issue price of $25. That works out to $1.81 a year so based on Friday's closing price of $21.50 the yield is 8.4%.

These preferreds traded for as little as $4.02 last February at the height of the credit crunch and the U.S. banking crisis. Obviously, they have recovered strongly since then as confidence in the banking system was restored by the massive U.S. government bail-out. The high yield indicates there is still some concern about BoA's future, but at this stage I think the company is recovering well and that the dividend is safe. There is also some capital gains potential here. The preferreds are not callable until Nov. 1, 2012.

Naturally holding only one bank preferred stock is more risky than a basket of dividend paying stocks so this is for more aggressive investors looking for more yield. However, note that they are very thinly traded so enter a limit order.

PowerShares Financial Preferred Portfolio

If you prefer more diversification, consider the PowerShares Financial Preferred Portfolio (NYSE: PGF) currently trading at $16. It is based on the Wachovia Hybrid & Preferred Securities Financial Index, which tracks the performance of about 30 U.S. listed preferred shares issued by financial institutions. At least 90% of the assets are normally invested in these securities.

As you are aware, the U.S. financial sector has gone through an extremely rough period and it is not clear that the full extent of the damage is known even yet. As a result, preferreds issued by the banks, insurers, etc. have been beaten down in price and are offering unusually high yields. The situation is not dissimilar to the one we saw in Canada late last year, except it is more extreme in the U.S.

This has resulted in preferred share yields that have never been seen before and may never be seen again. Currently, this ETF is paying monthly distributions of 11c to 12c a unit. Projecting this forward for 12 months, using the 11c figure, we could be looking at a cash yield of 8.25% based on last Friday's closing price of $16. But a word of caution: the distributions are not eligible for the Canadian dividend tax credit and will be subject to a 15% withholding tax if paid into a non-registered account in Canada. (The same holds for the BoA preferreds.)

PGF units dropped all the way to $5.16 but have since rallied strongly. However, they are still well below their 2006 issue price of $25 and I believe there is upside potential here in addition to the handsome payout. Top holdings include preferreds from Bank of America, Wells Fargo, Barclays, and JPMorgan Chase. About 69% of the assets are rated BBB or better by Standard & Poor's. The MER is 0.74%. This is my top pick for this month and we are adding it to the IWB Recommended List.

All the above are fairly defensive plays given the uncertain market we are likely to have over the next few weeks. Generally, I think the trend will continue higher after a correction, but it is wise to protect yourself on the downside, play a little defense, and add some more yield your portfolio. So hold your breath for the next few weeks. It's going to be an interesting October.

Here is are the highest paying FDIC insured CDs

7 dividend stocks you can count on

The 80's vs 2009 Economy

2009-09-25T14:28:00.000-07:00

Did you think a 6.5% mortgage rate was high? How would you like a 1981 18.5% mortgage rate?

You can bet those 1981 Paul Volcker (Treasury Secretary) induced interest rates prevented the housing bubble created by the 2001-2005 monetary policy.

This chart is for all those not old enough to experience truly high interest rates and those who forgot how we earned 9-12% risk free in our Bank CD's back in 1981. Back then it paid to take no investment risk.

Today there is around $3.5 trillion dollars inside mutual fund MMFs earning just a speck more than zero (1/4%). Today is the inverse of 1981. The savers are subsidizing consumer spending, business borrowing and the big federal government bail-outs for the financial industry.

So, if you happen to be in this boat, go find yourself a good dividend paying mutual fund or portfolio of high quality dividend paying stocks in different industries. Stocks like Lilly (LLY) or Verizon (VZ) which both pay 6% yields and give you the possibility of appreciation. Neither of these two stocks have not participated in the markets 55% because they were considered defensive stocks by money managers.

Here are some recent articles on dividend paying stocks worth reading.

Dividend stocks for low excitement, high returns

The World's Best Dividend Stocks

Seeking Alpha dividend stock articles

disclosure: On 9/23/09 I invested in Lilly and Verizon.

Eleven Reasons These Charts Are Worthless

2009-09-22T19:37:00.000-07:00

Recently an individual (who unfortunately liquidated most of his stock holdings close to the market lows) ask me to explain how it was possible for the Stock Market to go up 55% when he had these two charts as proof (in his mind) it should be back to 1945 levels with earnings so low and P/E's at such an outrageous levels.

He showed me a "Blogger" he followed had also advised selling everything after posting these charts and his commentary. The "Blogger" saw these (among other information) as clear and present doom the market would fall back to the March lows by August. Yes, last last month we were to have a 3,000 point drop. Why didn't it happen he's wondering. Perhaps, he's more upset about the reality he missed the explosion up.

After I ask what formal investment education and experience the "Blogger" had he said he had no idea only that he like his postings (more like he like his rants). It's best I skip my response to that response and get right down to and example of the valued "Blogger" words of wisdom below:

"Forget hoping for the rally to continue and forget "buy and hold" for the long term. Without earnings to support them over the next year, stocks are toast. And where are the earnings going to come from while banks are failing in increasing numbers (yes, it's getting worse not better), unemployment is rising (no, it's not stabilizing), and the residential and commercial real estate crash continue unabated (no, they're not stabilizing either)? If a business is not part of the fascist keiretsu business model that has evolved in this country, that business is likely to be in trouble.
.....
It's official: Gold Versus Paper is calling the top in the stock market (I think it was yesterday and today confirmed it).....next comes a re-test of the March lows before mid-August (i.e. at least a 25-30% drop in less than 12 weeks). General stocks, corporate bonds and commodities are going to get shellacked.....Now I am not saying the March lows will hold in the general stock markets - there's a good chance we go right through them. But this is a minimum downside target for the major indices....This bear is hungry for some bull meat. GRRRRRrrrrrrrr!"

Now aside from the GRRRRrrrrr ,which I thought was cute, I hope no one gets hurt by this type of financial entertainment.

Now, to be fair, I've heard many non-financial professionals with excellent educational backgrounds and desire to be viewd as a "guru" with thousands of followers, give similar commentary. Commentary on why these charts are proof the market is not rational and must fall to 1945 levels now. Over the last three months they keep modifying their perdictions to: "any day now".

You can bet, if I didn't know what I'll share with you these charts would have caused me to not have invested any money into the market during November Q4 2008 and February Q1 2009 too. But ask yourself why no Goldman Sachs type analyst hasn't published the same warning using these charts? Perhaps they can not afford www.chartoftheday.com charts? Oh, there free. Well, maybe its a world wide conspiracy? No, then lets get into more plausible explanations.

I've learned if the market is not responding to my logic maybe there is something I don't know.I'll give you eleven detailed reasons why the these charts have caused so many people to be wrong. Wrong because they do not understand the accounting of the numbers and wrong because they do not understand how interest rates and inflation and foresight not hindsight impact investment decisions.

1. The way S&P computes its PE is open to honest debate. Famous Finance Prof. Siegel (later joined by another Famous Finance Prof. Shiller) brought this up in February, creating a debate.

2. The often-quoted "earnings of the S&P 500" is a highly massaged number. There is no GAAP or annual audit process by an independent outside auditor. Not that an Accountant would understand Voodoo Math. It is not the actual total earnings (which are available on a separate page in the S&P spreadsheet, labeled "Issue Level Data"). S&P has to massage the numbers so that, when they replace a stock in the index, it doesn't create a discontinuity in the index's value. You know when comparing an apple to an orange you fell better if the orange is painted red.

3. S&P has replaced about 40 companies in the last 12 months. Most of the companies responsible for the biggest earnings losses have been removed from the index. e.g. GM, Fannie Mae, AIG. So when you replace companies with no earnings with other companies with earnings the smart money knows the future S&P EPS will be better than those who only follow trailing earnings expect. No fair you say...the accountants principle of consistency is broken. Your comparing an apple to an orange. L.O.L. You need to understand Wall Street is a jungle and without a guide you may get eaten alive.

4. Therefore, many of the companies presently in the index did not contribute to the TTM "earnings" that S&P uses in computing its own current PE. They do not go back and restate past earnings to reflect later changes in the index's companies. Once they close out a quarter's "earnings," that number is locked in forever. So if you getting the picture comparisons to the past are difficult at best and at worst worthless.

5. Wall Street analyst know that the current P/E in this chart is grossly distorted by the Q4 2008 banks that had to take massive write-offs against toxic loans. But two points: 1) many of those companies are no longer in the index. and 2) If you're smart enough to understand accounting, finance and math you know the financial sector was the largest sector in the index and at the market peak FAS 157 require banks use market-to-market models for mortgage valuations.

6. FAS 157s impact makes comparisons to periods prior to 2007 almost impossible without a team of CPAs and MBAs restating S&P EPS and P/Es back to 1938 when it was banded (you can guess why). Much has been debated about the role mark-to-market accounting rules played in driving down the values of financial services companies, including many large life insurers. Mark-to-market accounting was prohibited in 1938, but the Financial Accounting Standards Board reinstated and strengthened it through actions in 1993 and in 2007. Forbes magazine publisher Steve Forbes has been particularly outspoken about the 2007 action. Some analysts, even insiders, say banks like Citigroup and Lehman Brothers marked down some of their C.D.O. exposure by more than 50 percent when the underlying mortgages wrapped inside the C.D.O.’s may have only fallen 15 percent. Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup, said at a conference last month that the bank had “securities with little or no credit deterioration, and we’re being forced to mark these down to values that we think are unrealistically low. Who's right or wrong is not the point. The point is how it impacts the math going forward and makes comparisons to the past periods to difficult.

7. It is a philosophical or mathematical question what the PE of an index should be, anyway. Should it be the median PE of all companies in the index? The arithmetic average? Should it be weighted in the same way that S&P weights the companies in computing the index itself? Should it be equal-weighted? All of these could have arguments made for them.

8. In computing the P/E, S&P substitutes the value of the index for "P," price. So you have a derivative number, the index value, standing in for P, and another derivative number, the massaged "earnings," standing in for E, in the equation P/E. You see the simple becomes complex enough to require a math genius to figure if it has an value for comparing one period to another.

9. The P/E is based on TTM "earnings" and current "price." It is backwards-looking. Wall Street makes investment decisions for the future based upon forward-looking EPS estimates. When someone says the P/E is not sustainable, or has not dropped to the typical lows of 8 or 10 seen in the 70's and early 80's recessions, that's an uninformed statement (to be polite). They also forget the financial sector earnings

10. Using the logic the chart implies with its lines you should do what? Buy when market trailing P/Es average 7 or 10 ? Can you name me a time in the last 20 years when P/Es on the S&P averaged 7? No. 10? No. So, this person would be waiting 20 years for something that's not going to happen for a reason they do not understand. The problem with these charts is they don't come with a team of financial analyst to figure this out for you. www.chartoftheday.com is in the daily cranking out of charts and Internet hits not making or losing money on stock market investments business. And if you had used a P/E cut off of say 20 you would have sold Apple Shares at $25 instead of $150 or Google at $100 instead of $500.

11. Last one and most important point, if it were not for the preceding ten points: You can't compare a $1 of earnings in a 1975-82 environment of 10-15% annual inflation and 10-20% Paul Volcker induced prime rates to a $1 of earnings in an under 5% inflation environment of the 90's or under 1.5% with a discount rate of almost ZERO in 2009.

Now you know why your wait for average P/Es on the S&P 500 to hit 7 to 10 like they did in the 70's and 80's caused you to just miss the greatest Bull Market or Bear Market rally of our life time.

Three Point Bottom Line:

1. A mediocre investment plan consistently executed in good times and bad is worth more to you over 20 years than any chart you'll every use to make investment decisions. Combine this with a strategic asset allocation plan and semi-annual reviews and focus on your profession, not the market. People do not plan to fail they fail to plan.

2. Time in the market is better than timing the market if you lack experience and training.

3. Research constantly shows just a few months of the year account for the majority of the gains. Now I've never know a person smart enough to consistently be right on that prediction. GRRRRRrrrrrrrr will come to that conclusion too, in about 20 years.

Why It's Not 1982 Again

2009-09-21T19:15:00.000-07:00

Two Cases For A Continued Bull Market, Ronald Reagan style. Both cases made by two very qualified sane men based upon the 1982 Economy and Bull Market begining. But, as much as I wish it to be true, I'm afraid I must agree with other less optimistic Economist and Novelist Thomas Wolfe who concluded "You Can't Go Home Again". Still, the Perma-Bears need to face the trillion dollar fact. There is a trillion dollars inside money market mutual funds earning less than 1/2% looking to be invested on any little pull-back. Yes, it's possible we stay in Bull mode through year end on are way back to pre-Lehman Brother levels. Still, the 2001-2002 market is fresh in my memory and my worry.

Excerpts from James Grants Sept. 19th, 2009 article: From Bull to Bear. James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery. Even more amazing is the fact James Grant is a student of financial history and Perma-Bear who just been converted to a Bull believer.

"...Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

"Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten.
...
At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor under utilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.
...
Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%."

Excerpts from Economist Michael Mussa Sept. 20th, 2009 presentation: Ex-IMF Chief Economist Rosy View as viewed by Kevin Hall -

"The recession is over and a global recovery is under way," he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries – and are doing so again.

Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010.

All forecasts tend to under predict the recovery. … I think that's what we are seeing this time," said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.
...
Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today's deep downturn. ...

The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent."

Two excellent articles -with one common comparison flaw. They both use the 1982 Ronald Regan bull market beginning to make their case but ignore what happen in 2002 after a much smaller recession ended in 2001.

Both point to how Economist were too pessimistic in their growth forecast and correctly pointing out how the actual recovery starting in 1983 had six quarters of outstanding GDP growth (5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%).

They make an excellent point about Economist forecast but even rosy glasses Ex-Chief Economist Mussa is forecasting only 3.3% GDP for the USA next year.

This leads me to ask three questions:

1. How can 3.3% 2010 GDP led to six quarters of quarterly growth like the 1983 time period they reference?

2. Why do they ignore what happen in 2002 when the market declined for three straight quarters back to the 2001 lows, after the recession official ended in 2001?

3. Is America's 2009 economy similar to 1982-83?

Unfortunately (for me) 2009 is not like the 1973-83 stagflation economy. Back then Treasury Secretary Paul Volcker's needed to crush inflation with the highest interest rates in American history. ( I wishes this was 1982 so my savings would be earning 9-12% in my MMFs instead of 0.25%. I feel like I've been robbed by the 2001-2009 federal reserve policy ) .

If you are under 40 and think mortgage rates are a little high take a look at the 1979 to 1981 Bank Prime Rate in America. Notice how in 1981 the banks started lowing the Prime Rate (resulting from the Federal Reserve lowering the discount rates) from 20%to 11% in 1983. Yes, I said 20%.

This move alone allowed Stocks to rise as the value of each dollar of revenue or profit became more valuable in a lower inflation and interest rate environment. This phenomenon is call P/E expansion. You can see the proof from 1982 to 1999 as the average Standard & Poor Stock P/E rose from 7 to 32 as inflation and interest rates declined and the economy became more robust.

The decline from 20% in 1981 to 11% in 1983 also generated that fantastic six quarters of high GDP growth. I'd conclude that cannot be repeated in this environment.

Now just think about Car, Clothing and Appliance sales in 1982. The big three were all American. Imports were a much small percentage back in 1982. Today most appliances and clothing (just to give two examples) would be made outside America. In 1982 as those lower interest rates increased sales, American factories employed more American workers, who in turn had more money to buy more stuff (of which a much higher percent was made in America and nothing was made in communist China or Vietnam).

Now flash forward: Federal Reserve discount rates are already close to ZERO (no spending is being held back by high interest rates like 1981-82). Consumer debt is still at high levels and a recession like this causes even dual income employed families to want to spend less. Today when Americans do spend more money a much larger percentage goes to employing people outside America (than 1982-83).

Janet L. Yellen President of the Federal Reserve Bank of San Francisco (far more qualified then I) sees no comparison. And Nobel Prize Economist Paul Krugman explains why there is no comparison using the same logic.

"A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.

... Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. And that means that the Fed can't just cut interest rates and boost housing. This recession is very different than the early '80s".

The Bottom Line

NO, this is not the beginning of the 1982-87, Ronald Reagan, Bull Market style economy. No I'm no Bear, just a Bull (on tip toes) who remembers the 2001-2002 market. Yes, we can defy gravity and remain in Bull mode for the remainder of the year. Still, this decade will not be remembered for the great American Bull Run. This decade will be remembered as the decade for emerging market stocks.

1982 will be remember for many things like the Jackson Thriller album.

July 27, 1982 | GetBack Media

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Slow Economic Growth Ahead

2009-09-20T14:15:00.001-07:00

Recently I had the opportunity to listen to a presentation by Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco given to the local Society of Certified Financial Analysts(CFA) San Francisco, CA. on September 14th, 2009.

Now with the benefit of hindsight we know the market and economy did not fall off the cliff as many believed possible in March 2009. But now comes the guessing game over the next 12 month economic outlook. In my life time, I've learned that forecasting the economy over the next 12 months is always easier then predicting the stock markets next 12 month moves.

Below are my Cliffs Notes of her economic forecast, extracted from her presentation.

.....I believe that we succeeded in avoiding the second Great Depression that seemed to be a real possibility. Much of the recent economic data suggest that the economy has bottomed out and that the worst risks are behind us....

That’s the good news. But I regret to say that I expect the recovery to be tepid....In particular, the unemployment rate will remain elevated for a few more years.....Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial........gives us plenty of room to grow rapidly over the next few years.

.......At first glance, history suggests that a vigorous expansion could very well take place. Following previous deep recessions, the United States typically saw V-shaped recoveries. For example, the economy grew at an average rate of nearly 6 percent during the two years following the severe recession in 1981-82. This time though rapid growth does not seem to be in store. My own forecast envisions a far less robust recovery, one that would look more like the letter U than V. And I’m not alone. The Blue Chip consensus forecast, reflecting the views of nearly 50 professional forecasters, anticipates by far the weakest recovery of the postwar era over the next year and a half. A large body of evidence supports this guarded outlook. It is consistent with experiences around the world following recessions caused by financial crises.

For those interested in listening to a similar presentation Janet gave to The Commonwealth Club of California you may view the complete presentation broken down into small component video segments at Window To Wall Street Economics. Here is a complete PDF transcript of her speech on September 14th to San Francisco's Society of CFAs.

Historically Economist have been horrible at forecasting economic turning points and have a similar dismal record at forecasting stock market trends. Still after recently listening to seven economist speak most have mentioned a very important point regarding inventories and GDP trends that maybe a clue to the markets next big move.

Remember the stock market is a leading economic indicator. So, the door swings both ways. As I've pointed out it has an excellent track record at guessing where the economy will be 6 months from now but it doesn't have ESP to know where the economy will be in 12-18 months. If the collective wisdom of money starts believing a disappointment is coming it can turn downward even as the current good news the market was anticipating is coming true. One need only study the 1997 to 2003 American market moves for a quick lesson on this topic. And for those amazed by this markets 3,000 point DJIA climb one need only look back to the 2003 market or 1982 economy compared to the major market move.

Paul Krugman, a professor of Economics and International Affairs at Princeton University and recent Nobel Prize winning economist, published in his blog The Conscience of a Liberal, that he agrees with Janet's economic outlook. Everyone agrees with Janet's forecast which is nothing more than the current economic community consensus.

But it is Paul's chart of historical inventories and GDP changes that causes him to conclude there is good possibility of a double dip economy ahead. His basic chart was worth a thousand words to me for another reasons. It helps provide a missing link to explaining why the stock market fell for three quarters in 2002, after the recession had officially ended in 2001 and the market had advanced for three quarters. Given the much higher unemployment rate and more fragile economy today a 2002 Stock Market repeat in late 2009 to early 2010 is a very real possible.

If the economic outlook is improving but more problematic than after the 2001 or 2003 market advance it would be prudent to review your asset allocation now. Keep in mind more people than ever now see the market advancing to the pre-Lehman Brothers bankruptcy levels of 2008. Still, even the Bulls believe that would be the best one could hope for in 2009.

Those fortunate enough to have 70% to 100% gains in the China and India markets should most certainly consider downsizing your positions, if you believe the USA GDP bounce we are getting in the 3ed quarter will not be repeated (into the 4th quarter 2008 and 1st quarter 2009).

In the 60's, 70's and 80's the correlation of major foreign markets to the USA was only around .65 resulting in the notion international investing added an extra level of diversification protection. Today the correlation is closer to .90. Basically this means all major stock markets move more in tandem than they use to because of todays global trade dependences. You only need to examine the 1999 to 2003 market to see the USA and European markets and sectors moving in lock-step with each other.

Economic Indicators all Positive for the First Time Since November 2007

2009-09-18T19:56:00.000-07:00

Philadelphia Fed -- The region’s manufacturing sector is showing some signs of stabilizing, according to firms polled for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered slightly positive readings this month. For the first time since November 2007, all of the survey’s broad indicators were positive.

Although firms reported continued declines in employment and work hours this month, losses were not as widespread. Most of the survey’s broad indicators of future activity continued to suggest that the region’s manufacturing executives expect business activity to increase over the next six months.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‐7.5 in July to 4.2 this month. This is the highest reading of the index since November 2007 (see chart above). The percentage of firms reporting increases in activity (27%) was slightly higher than the percentage reporting decreases (23%). Other broad indicators also suggested improvement. The current new orders index edged six points higher, from ‐2.2 to 4.2, also its highest reading since November 2007. The current shipments index increased 10 points, to a slightly positive reading.

August 30th 2009 bloomberg report.

Black Monday Anniversary

2009-09-17T18:55:00.000-07:00

September 15th 2008 was another historic black monday for the USA market. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government just the week before and the worlds largest (market capitalization) insurance company, AIG needed billions to stay afloat.

September 15th is the one year anniversary of Lehman Brothers' demise. The bankruptcy filing represents the end of a 158-year-old company that survived world wars, the Asian financial crisis and the collapse of hedge fund Long-Term Capital Management, but not the global credit crunch.

Lehman was the 400 pound gorilla that broke our over leveraged financial camel's back. Lehman was the nuclear bomb that set off a world-wide financial winter. Fortunately that nuclear winter ended this spring. Now we've begun the long economy road to employment recovery.

Lehman Brothers was the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy amid a collapse in the junk bond market. Based on assets, Lehman also far surpasses WorldCom as the largest U.S. bankruptcy ever.

Lehman had assets of $639 billion at the end of May, while WorldCom had $107 billion when it filed for bankruptcy protection in 2002.

At the end of August 2008, Lehman had $600 billion of assets financed with just $30 billion of equity. Having so little capital meant that a 5 percent decline in assets would wipe out the value of the company, which investors saw as a real risk due to the company's billions of dollars of mortgage securities.

The Lehman failure was the straw that broke the fragile USA financial camel's back. In 2008, a series of bank and insurance company failures triggered a financial crisis that effectively halted global credit markets and required unprecedented government intervention. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government. Lehman Brothers declared bankruptcy on September 14th after failing to find a buyer. Bank of America agreed to purchase Merrill Lynch (MER), and American International Group (AIG) was saved by an $85 billion capital injection by the federal government.[1] Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history. In fact, by September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007. These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone.

The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential properties saw their values increase precipitously in a real estate boom that began in the 1990s and increased uninterrupted for nearly a decade. Increases in housing prices coincided with a period of government deregulation that not only allowed unqualified buyers to take out mortgages but also helped blend the lines between traditional investment banks and mortgage lenders. Real estate loans were spread throughout the financial system and world in the form of CDOs and other complex derivatives in order to disperse risk; however, when home values failed to rise and home owners failed to keep up with their payments, banks were forced to acknowledge huge write downs and write offs on these products. These write downs found several institutions at the brink of insolvency with many being forced to raise capital or go bankrupt. These firms had become so highly leveraged that just a small 5% to 10% decline in asset values required masses amounts of new capital to be raised or file for bankruptcy.

For those wishing a refresher course in the fall of 2008 financial crisis, CNBC has an excellent summary of the headline stories of that time. Wall Street in Crisis.

The World Wide Stock Market Recovery

2009-09-17T15:52:00.001-07:00

World stock markets rallied on Thursday, with London following Wall Street, striking its highest level so far this year, as investors grew more optimistic about the prospects for a global economic recovery.

Tokyo shares surged 1.68 percent on Thursday, tracking overnight gains on Wall Street where New York stocks climbed to the highest level in 11 months on upbeat factory data. Markets were also lifted by rising commodity prices which gave a shot in the arm to the energy and mining sectors.

Elsewhere in Asia on Thursday, Hong Kong jumped 1.71 percent, boosted by resource stocks on the back of rising commodity prices, dealers said.

Chinese shares closed up 2.02 percent on Thursday, also led by oil and metal stocks.

The USA economy and employment outlook may be an L shape or W shape recovery. But for now the world markets are clearly in a V shape recovery mode similiar to 2003. Lets hope it's not similiar to 2001 when we had a major market recovery after the 9/11 market colapse only to decline back down in 2002.

The MSCI World Stock Market Index reached a new 11-month high yesterday, rising to the highest level since early last October. From the March bottom, the index is up by 65% (see chart above).

The Bloomberg U.S. Financial Conditions Index reached a two-high yesterday, closing at the highest level since August 8, 2007 (see chart below).

Sales Up - TED Spread Down - New Market High

2009-09-16T20:56:00.000-07:00

CNBC's Larry Kudlow looks at indicators of an economic recovery, including the TED spread. Larry breaks down the details of the recent positive economy sales report.

The TED spread is the difference between the risk-free three-month T-bill interest rate and three-month LIBOR (includes a credit risk premium), and is considered to be a good indicator of the overall amount of perceived credit risk in the economy.

A year ago on September 15, 2009 the TED Spread jumped by 65.5 basis points (from 134.855 bps to 200.3588 bps) as Lehman Brothers filed for bankruptcy and fears about credit risk soared. Two days later on September 17 as fears about credit and financial risk intensified, the TED Spread jumped by another 82.6 basis points (bps) to more than 300 bps, setting a new record (back to at least 1990) for the largest one-day increase in the TED spread (that record still stands), and setting a new record for the highest TED Spread to date.

At the height of the financial crisis about a month later, the TED Spread hit 456.485basis points on October 13, 2008, an all-time record. As the credit and financial markets have gradually healed, the TED Spread has fallen by more than 450 bps to the current level of about 15.75 bps, the lowest level in more than 5 years, since June 8, 2004 (see chart above). One more sign that the recession has ended.

No doubt these positive economic signs were responsible for the VIX index ( a measure of fear in the stock market) hitting a new low and the USA stock market hitting a new high on Wednesday.

Yes - There Is Economic Life

2009-09-11T16:36:00.000-07:00

More signs of economic life seen.

This week in addition to the improving economic signs contained within the Federal Reserve Beige Book Report, two more measures of improving optimism were released. And Friday's news from FedEx and Cliffs Natural Resources was more proof of the existence of green shoots.

Now we often have to remind researchers that what consumers say and do can be two very different things. Still, in an economy driven 70% by consumer spending consumer and small business owner sentiment is important.

Consumer Sentiment Continues to Rise

1st - The Reuters/University of Michigan preliminary index of consumer sentiment increased to 70.2 this month from 65.7 in August. This increase exceeded expectations. The University of Michigan measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars and homes is part one of the survey. Part two - The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending also rose.

Small Business Owners Becoming Optimistic About Future

2nd -The National Federation of Independent Business, which surveys its members each month, said its index of business owner optimism rose 2.1 points to 88.6 in August, an increase that NFIB chief economist William Dunkelberg called "a big gain." The optimism, though, is about the future, as owners still have a dim view of current economic conditions. Dunkelberg noted that small businesses generally aren't planning big capital expenditures or to start hiring again. "First you have to feel better before you'll spend your money," Dunkelberg said

Sales Rose And Inventory Declined.

In a separate report, the Commerce Department said orders for durable goods — products that are meant to last a number of years — soared in July at the fastest pace in two years. Orders in the transportation sector had their biggest gain in nearly three years. No-doubt that was the result of cash-for-clunkers which is now over.

In yet another sign that future business should improve A Commerce Department report showed wholesalers’ inventories fell again in July, after a drop in June. Wholesale inventories have had the longest series of declines since records began in 1987. Given durable goods sales, have rose for three consecutive months, the belief is firms will need more workers to build inventories back up.

Friday's News from FedEx and Cliffs Resources showed two more positive signs

We closed the week with FedEx tacked on $4.66, or 6.4%, to 77.32, after the package delivery giant said its fiscal first-quarter earnings will exceed its previous expectations and projected a profit this quarter above analysts' estimates as the company benefits from international improvement.

And Cliffs Natural Resources rose $2.13, or 7.6%, to 30.23, after saying it expects its North American iron-ore and coal sales this year to be slightly better than it previously thought as customers increase steel production.

Beige Book Shows Green Shoots

2009-09-10T21:42:00.000-07:00

One important report institutional investors and economists monitor is called the "Beige Book". Why is it called the Beige Book? If you guessed because it's a Beige colored printed report -you are correct. The U.S. Federal Reserve reported Wednesday in its latest Beige Book survey of the region’s business executives.

On Wednesday, the Fed's Beige book was released for July and August. It summarizes reports from the 12 Federal Reserve Districts and pointed to economic activity that continues to stabilize.

Compared to the summary from the Fed's last Beige Book report, 11 out of 12 regions asserted that economic activity had either stabilized or improved. Even in the 12th region -- St. Louis -- their read-out pointed to a pace of decline that was moderating.

Almost all regions remarked that among business leader contacts in their territories, the economic activity outlook is now cautiously positive.

The reports underscore what we've been hearing, that clunkermania boosted auto showroom traffic and subsequent new car sales in all regions. Several regions confirmed that the program has also resulted in increases or planned increases in automobile-related production. Beyond the auto industry, most regions reported general improvements in manufacturing production. Next month's auto sales report will likely drop off without the government incentive. But others are betting it will be better than last September.

Most territories also reported improvement in the residential real-estate markets. It has been estimated that the $8,000 first-time home buyer credit accounted for up to 35% of sales.

It also came as no surprise that with labor markets on the mend, 8 of 12 regions report upticks in demand for temporary workers - usually a leading indicator of a return to job growth.

The report is prepared at the Federal Reserve Bank of Atlanta and based on information collected before August 31, 2009. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Formally known as the “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the Beige Book is published eight times a year

Worst Housing Decline Since Depression

2009-09-07T07:33:00.000-07:00

The worst U.S. housing market since the Great Depression appears over after prices rose in 18 of 20 U.S. cities in June, existing home sales hit a two-year high, and new home sales gained for a fourth consecutive month.

Lower home prices and government stimulus efforts have spurred demand and pared the supply of existing homes to the fewest in two years, while sending new-home inventory to a 16-year low.

While the American commercial construction and real-estate market is getting worse, there can be no denying the residential housing market has been improving. Many people along with myself still believe prices in some areas have more to fall. But that doesn't mean new housing sales and starts can't continue to grow. And new construction creates jobs more than falling prices.

Declining new home sales markets tend to bottom in January. And this seemingly endless 5-year continuous decline ended this January 2009 at new historic lows. This bust surpassed every other American real-estate decline since the 1960's. The magnitude of this decline is even more amazing when you consider America has more than double the number of house holds we had back in the 60's.

Sales of new homes rose for the fourth month in a row in July, increasing an estimated 9.6% (highest percentage increase in 4 years) to an annual rate of 433,000, the Commerce Department reported Wednesday. Economists had estimated new home sales would increase to a 390,000 rate, according to the median of 71 projections in a Bloomberg News survey. July’s sales pace was the highest in 10 months and exceeded all estimates. The seasonally adjusted sales rate was the highest since last September. The fourth consecutive increase in sales adds to the growing body of evidence that the residential housing market is finally expanding again after sinking to a record-low sales pace of 329,000 in January (see chart above).

Sales are being boosted by more affordable prices, low mortgage rates and government incentives to buy homes. Still, unemployment, rising foreclosures and falling prices are keeping some buyers on the sidelines.

With historic high unemployment there remains ample reason to doubt whether this increase in sales can be sustained in 2010, particularly given that the first-time buyer tax credit is set to expire Nov. 30th. It's believed to have accounted for around 35% of the sales increase this year. You can bet the real-estate industry has been lobbying for an extention.

This chart (above) plots the unemployment rate (inverted) againest new housing starts. It's no suprise there is a relationship. But note how unemployment usually continues rising even as new home sales begin rising. Just more proof New home sales are a leading economic indicator while unemployment is a lagging indicator.

Improvements in the unemployment rate lagged behind the start of a recovery by an average six months, according to Berson, the former chief economist of Washington-based Fannie Mae.

Existing home sales already have reached that marker, gaining for the last four months. Single-family housing starts improved for the last five months, two months short of the recovery average, and new-home sales jumped 9.6 percent in July, the most in four years, halfway toward the average eight months of consecutive gains before the onset of economic improvement.

The American housing sectors importance has grown

A review of the last 10 USA recessions since World War Two shows 80% (8) of them were preceded by substantial problems in housing and consumer durables. Except for the downturn after the Korean War and the 2000-01 internet and telecom collapse in business equipment and software investment, it has been a consumer cycle not a business cycle. And with 35 years of a declining American manufacturing sector the housing sectors importance to America's GDP and jobs has risen.

Economist Dr. Edward Leamer (UCLA Professor) published a report back in 2007 whose conclusion summation was the report title: Housing Is The Business Cycle

Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Home resales gained strength an average four months before the end of a recession, single-family housing starts improved for seven months, and new-home sales grew for eight months.

This chart (above) shows how New Home sales grew off the bottom of the last four biggest housing down markets and includes the current market. The above graph compares the current recovery with four previous housing recoveries. The recoveries are labeled with the month that single-family housing starts bottomed. Notice how we've now had four months increase but you can see how weak this looks realitive to the past. And if this chart were adjusted for the current number of households relative to the much lower number of the past the size of this historic bust is gigantic.

The second graph (below) shows the same data, normalized by setting the bottom for single-family housing starts to 100.

This graph shows that housing starts usually double in the two years following the bottom. Starts increased 80 percent over two years in the recovery following the Jan 1991 bottom, and 136 percent in the recovery following the Jan 1970 bottom.

Housing starts usually double in the two years following the bottom.

If starts doubled over the two years following the Jan 2009 bottom, single-family starts would recover to 715 thousand by Jan 2011. And looking at the first graph some people might think single-family starts might recover to a 1.1 million rate within 2 years. Bill McBride at CalculatedRisk.com who created these charts believes that's very unlikely.

Bill McBride does believe the bottom is in for housing but expects the recovery to be sluggish due to an excess in existing housing units, and decline in homeownership rate. His view does appear to represent the consensus view of everyone I've heard speak. I'd add a return to more historical higher down payments and tighter underwritng standards will hold demand down, along with high unemployment and underemployment.

Fresh "Green Shoots" can be found in multiply locations.

Exhibit A: Portland home sales jumped in July, marking the first year-over-year increase in sales for any month since early 2006. A total of 3,375 new and resale houses and condos closed escrow last month in the Portland metro area. That was up 9.3% from June and up 5.8% from a year earlier. The number of homes sold in July was the highest for any month since August 2007, when 4,242 sold.

Exhibit B: Seattle home sales rose above last year's level for the first time in more than three years last month amid relatively robust sales below $300,000. The median sale price fell, ending its three-month streak of month-to-month gains. A total of 4,221 new and resale houses and condos closed escrow last month in the Seattle area. Last month's sales rose 2.5% from the prior month and were 8.8% higher than a year earlier. July's sales total was the highest for any month since October 2007, when 4,434 homes sold. Last month's annual gain for total sales ended 37 consecutive months of year-over-year declines.

Exhibit C: Phoenix-area home sales climbed above a year ago for the seventh consecutive month in July but dipped below June as purchases of foreclosed properties continued to wane. The region’s decreasing reliance on sales of heavily discounted, lender-owned homes helped the median sale price inch higher for the third consecutive month. A total of 10,288 new and resale houses and condos closed escrow in the Phoenix metropolitan area in July, down 4.1% from June but up 27.7% from a year ago. Total home sales were the highest for the month of July since 2006.

Exhibit D: Las Vegas home sales rose above a year ago for the 11th consecutive month in July as investors and first-time buyers continued to target lower-cost, post-foreclosure properties. A total of 5,311 new and resale houses and condos closed escrow in the Las Vegas metro area last month, down 3.8% from June but up 28.5% from a year ago. It was the highest sales total for any July since 6,530 homes sold in July 2006. July marked the 16th consecutive month in which sales of existing single-family detached houses rose on a year-over-year basis. The 3,925 single-family house resales last month were the highest for any July since 4,555 sold in July 2005. Resale condos have seen an annual sales gain for 13 straight months and in July sales were the highest for that month since 2005.

Get the most current real-estate regional news from DQNews.com

Commercial Construction Hurting Banks

2009-09-06T10:01:00.000-07:00

Commercial Loans Now Nightmare for smaller Banks.

In my life time commercial real-estate markets have always been a lagging economic indicator not a leading indicator. When my younger brother who owns a Florida excavation company told me business was still booming in 2007 despite the tumbling housing market, I predicted he'd see a big fall off by 2008.

Now that it has come true, just how bad is it? The "experts" I listen to, including FDIC chairwomen Sheila Bair expect more defaults and bank losses on commercial loans. The FDIC agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses.

The New York Times (Sept. 4th) published an article which stated,
Even as the economy may be recovering, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.

There are no "green shoots" for commercial construction and real-estate.

Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.

Construction loans were a primary source of revenue for many banks, particularly smaller ones without a national presence. Other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.

So, while plenty of leading economic indicators show positive signs and that the American single family housing market has improved...commercial real estate construction seems likely to get worse.

Banks have been taking losses and cutting back their commitments for a couple of years on home construction. At the end of June, $173 billion in construction loans related to single-family homes was outstanding, barely more than half the peak level reached in the fall of 2006, when the housing market was booming. At the end of June, $291 billion in commercial real-estate loans was still outstanding, (down only a few billion from the peak reached earlier this year).

“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.” Foresight estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.

Now do not assume the American stock market must fall too, just because lagging indicators like commercial real-estate markets and unemployment are horrible. Yes, it can easly fall a 1,000 points, even if the worst is over. In fact, most bulls expect a 5-10% correction between September and October. But plenty of people perdicted in June when the DJIA was only at 8,200 it would fall back to 7,200 too. Those who listen to that advice lost another 10-15%.

The lesson to remember, is the stock market is a leading economic indicator. You'll recall it started falling in the fall of 2007 when few news reports foresaw any issues in commercial real-estate. In fact the usual Donald Trump disciples were touting real-estate investments while only a few outcast Economist like Nouriel Roubini were predicting doom. Even Ben Bernacke said he saw no real-estate bubble in 2007. If you are only investing when the news is great -you missed the boat along with 75% of the gains. Just one more reason I advise people to have a long term plan before they start worrying about what stocks to buy.

Last year, we learned the regulators, like the bankers, and Wall Street investment bankers did not comprehend the risks of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making. At the very time bankers should have been reducing commercial loans they were expanding, thus pushing the real-estate bubble into the stratosphere.

We're all hearing about empty malls due to over building which resulted in a glut of malls. Maybe we're just all shopped-out? Perhaps someone will do a research paper correlating our mountain of personal debt to our glut of malls.

Here just one example of a funeral being held in my area for what was to be the city's downtown area rebirth.

Columbus City Center was developed by the city as part of the Capitol South development, opening on August 18, 1989. It was pitched to investors and taxpayers as a "must have" to revitalize Columbus downtown. Now a building wholes economic life should be 50+ years is being torn down in less than 20 years (to make room for next big idea).

Ok, after writing this article and listening to these experts -I'm depressed.

If you're depressed over the economy and short on Prozac then go get a shot of inspiration at The Wright Inspiration Station TM or if you need an accounting or finance refresher course go to The Wright Education Station TM

Zimbabwe, Hyper-Inflation Are We Next ?

2009-09-04T08:55:00.000-07:00

Yes, it's real money. Or at least it was until just recently when the government of Zimbabwe declared its own paper money worthless

This recently printed One Hundred Trillion Dollar Zimbabwe note (above)use to buy only 300 America dollars. Now it's totally worthless. The 100 Billion Dollar Zimbabwe note (below) was said to have bought just three eggs.

Could this happen in America? Is this the destiny of the American dollar?Zimbabwe is a place where our poor American dollar is still King Dollar. Do your homework and read this article before you decide.

Had Americans sold their S&P index fund holdings in 1999 and just purchased gold bullion to bury in their back yard they would have tripled their money. No question the new 21st century has seen the decline of the American dollar and rise of emerging markets. Certain trends have been evolving for years. For this reason I posted a link to a free educational webcast hosted by U.S. Global Investors CEO Frank Holmes and world famous Dr. Marc Faber.

The Republic of Zimbabwe formerly known as Southern Rhodesia, and the Republic of Rhodesia like most African countries has a history that one must understand prior to making the usual economic shock jock comparisons to America. The shock jocks want to use "shock and awe" tactics to garner listeners while the gold bugs want to talk up the value of their gold and commodities investments.

Now I know predictions of total doom for America win 90 out of 100 times in the blogosphere. If you want to increase traffic talk smack and doom. One word of green shoots is political readership suicide. It's understandable. People are anger, many unemployed. The economies in the dumpster and real American unemployment rates are around 16.5%. You, can bet that I have no rosy story to tell. As former President Bill Clinton use to say, "I feel your pain".

Yes, the current financial crisis and our declining American dollar is a symptom of decades of mounting debt and economic decay. It's a major nightmare. And it's debatable if we're seeing the light of daylight at the end of a tunnel, or if that's the head light of a 28,000 pound, on-coming (debt burden) locomotive -roaring towards us.

I'm posting these stereotypical shock jock video's for four reasons: 1) Maybe we need "shock and Awe" to wake us up. 2) They contain some excellent education information. 3) In 1975 to complete my minor in Economics, I took a course in African Economics, so I've an understanding of histories impact and desire to stay abreast of African issues. 4) They show how Economist Greenspan and Bernacke had no understanding of how holding interest rates so low was like pouring gasoline on a real-estate forest fire bubble. Given their advance education and age, even I was shocked by boomer brother Ben's lack of real-estate knowledge. See my post on California Day Dreaming Homes.

But please, for your own education learn more about Africa and Zimbabwe's history. You'll gain an understanding of what led to its current social and financial debacle. These video's provide a glimps of the Zimabwe nightmare.

I'll give my followers more insight than those whose only goal is to pump up the value of their gold bullion bars. You may disagree with me. But in the process we may both learn something. And that's the value-added of this blog.

How bad is Hyper-inflation in Zimbabwe? Well, the words hyper and inflation were two separate words now made into one word in Zimbabwe's vocabulary. Hyperinflation in 2007 and 2008 made Zimbabwe's currency virtually worthless despite the introduction of bigger and bigger notes, including a 5, 10, and 100 trillion dollar bill !

Yes, I said Zimbabwe issued a 100 trillion dollar bill (top photo)

Zimbabwe recently announced the official suspension of the Zimbabwe dollar for at least one year. Can you image having earned a 100 trillion dollar bill that your government will no longer honor?

Extra Credit Education for advanced learners below:

Yes, excessive paper money creation combined with a our transition to a debtor nation is very problematic. Now the usual gold bugs and financial fear mongers are talking up their gold investments by comparing the USA dollar decline to the now worthless Zimbabwe dollar. We do need to learn from Zimbabwe's financial chaos. But their simplistic comparisons fail to discuss how the once wealthy nation (by Africa standards) with the highest literacy rate has been mismanaged and micro managed for decades by a dictator. Robert Mugabe ranks number one on the charts of The World's Worst Dictator.

The valuation of any currency has numerous variables which impact the currency’s value and exchange rate . The value of a currency is affected by exports, imports, foreign currency reserves, balance of payment position , economic activity and many other factors.

You don't need a Ph.D. in Economics to know if Zimbabwe has nothing to sell to the world and imports everything, that's a problem. If no wants to invest in Zimbabwe or put money in their banks, thats another problem. Yes, America has problems. But we still have things the world wants to buy and considered among the worlds stable governments. Although demand for the dollar is falling it's still the worlds most used currency. During the peak of the World Financial Crisis money from around the world sought safety by buying US Treasuries. The gold bugs perdiction of gold $2,000 was proven to be a folly as the fear of deflation cause it to lose value as fast as stocks. You can bet no one wanted to invest in Zimbabwe during the crisis, nor does anyone wish to keep money in a Zimbabwe bank.

Zimbabwe has had decades of social and economic problems. The recent confiscation of farmlands from white Zimbabwe citizens led to a sharp decline in agricultural exports, traditionally the country's leading export producing sector. No sane western country would want to invest in Zimbabwe with Robert Mugabe in charge. As a result, Zimbabwe is experiencing a severe hard-currency shortage, which has led to hyperinflation and chronic shortages in imported fuel and consumer goods. In 2002, Zimbabwe was suspended from the Commonwealth of Nations on charges of human rights abuses during the land redistribution and of election tampering.

The general health of the civilian population also began to significantly flounder and by 1997 - 25% of the population of Zimbabwe had been infected by HIV, the AIDS virus. Life expectancy at birth for males in Zimbabwe has dramatically declined since 1990 from 60 to 37, among the lowest in the world. Life expectancy for females is even lower at 34 years. All this under the leadership of Mugabe.

Warning these videos are not for those who want to walk in the park and smell the roses. Finding Gold for daily Bread. Here is what's left of a once propsperous country. This is how a dictator gets votes to proclaim he runs a democracy. Democratic Apocalypse - Zimbabwe

Namibia-based tribunal of the Southern African Development Community ruled in October 2008 that Zimbabwe’s land reform program was racist, discriminatory and illegal. This Robert Mugabe dictator policy dates back to 1999. And like most so called "Freedom Fighters" of the past e.g. Castro brothers (Cuba) and Idi Amin (Uganda)they use their nations initial admiration to leverage themselves into a lifetime Dictatorship in President's clothing.

Global Investing Webcast Sept. 9th

2009-09-03T20:29:00.000-07:00

What's the forecast for the global economy?

If you asked Dr. Marc Faber, he'd probably tell you "mostly gloomy with scattered signs of boom."

There is hope out there for global investors. Dr. Faber believes global markets are entering a new world where demand is driven by developing countries.

In addition to publishing a monthly newsletter, The GloomBoomDoom Report, Dr. Faber is the author of Tomorrow's Gold: Asia's Age of Discovery. He is a memeber of the Barron's Roundtable which is a collection of investment industry titans. Dr. Faber is also one of the most sought-after speakers at investment conferences around the world.

Tune in and listen to Dr. Faber and U.S. Global Investors' CEO and chief investment officer, Frank Holmes, discuss the possibility of hyperinflation, the new role for gold and silver in a portfolio and where investors can find the best value in the world.

Still time to sign up.

Most investors know Dr. Faber. Frank Holmes is a fantastic guy too. I had the opportunity to meet Frank and hang out with him in the early 90's, at Investment Company Institute (ICI)conferences. He's a Canadian who purchased U.S. Global Investors mutual funds and investment advisor, when it was one gold fund run by a famous 70's and 80's Texas gold bug. The man was famous for writting Warren Buffet style shareholder messages about owning gold.

At the time of Franks late 80's purchase the 70's gold rush fear was dying, as the value of the dollar was rising. We've now had ten years of the opposite trend. Dr. Faber and Frank will no-doubt talk about the world economic drivers and American economy. I'm sure gold and commodities trends will be on the agenda too.

Steve Forbes son of Malcolm Forbes and the editor-in-chief of Forbes magazine always said we need a strong dollar and when gold gets above $400 an ounce, thats a bad economic sign. With gold once again pushing new highs near $1,000, I'm sure Steve would say that's a really bad sign. Not so bad for those who own gold bullion.

If you believe in global markets and have inflation worries you'll want to listen in on the webcast. It's free-----Frank is picking up the tab. See you there.

Here is some excellent free education at Window to Wall Street's website on the value of the Dollar vs. Oil trends.

California Day Dreaming Homes For $750,000

2009-09-02T17:30:00.001-07:00

This "California Dreaming", foreclosed home, was purchased for $750,000 in December 2004 with what appears to have been only $25,000 down. You may find it in San Francisco at 126 Chester Avenue where the bank had to take it back in November of 2008, white picket fence and all. Back on the market and asking $447,000 in 2009. With a sale for $360,000 in March of 1999, a sale at asking would represent average annual appreciation (CAGR) of 2.1% over the past ten years, but a 40% drop in value over the past five.

The accountant in me looks at these two homes and says only a fool would pay $750,000 for these properties. And only another fool would loan $700,000 on a 40 to 60 year old home that would be lucky to sell for $125,000 in the Detroit Michigan area. Why not just tear the property down and build a new home, fools?

I bought a new SAAB Turbo CD sedan in 1992. Fantastick car. I kept my baby for 17 years, putting a new engine in it in 2001. I spend thousands over the years to maintain it in excellent running condition. Yet, at the end of the day it was still 17 years old. No auto dealer was willing to give more than a $1,000 trade in value for a Car who's replacement value would be $41,000 today. So, why is it buyers and bankers think a 60 year old home in a declining area should keep rising in value forever?

By my standards these old homes are still over-valued, given their 50-60 year old economic life. Putting expensive fixtures and remodeling into one of these old timers, doesn't change the 60 year old wiring and structure or location.

This "California Day Dreaming" foreclosed home was Purchased for $720,000 in September 2005, the bidding for 399 Leland Avenue in San Francisco opened at $306,000 and generated one bid. It sold for $306,000.01 which represents a 57% haircut from its previous sale price, but also average annual appreciation of 2.4% since its sale for $240,000 in 1999 for this single-family. Again to complete the 2005 $720,000 purchase it took two fools. A buyer and a banker, both fools, for paying such an outrageous price.Details for both homes and other area "deals".

Financial Charts and Graphs are often cold and lifeless. But a picture, as they say, is worth a thousand words.

Twenty five years ago during the 80's great American real-estate bust I drove down to the San Francisco Bay Area to bid on some Lake Tahoe time share properties. I had skied Lake Tahoe and fell in love with the area. So, after staying at a new resort that had been built on the side of a mountain I attended sales presentations. The offer sounded reasonable but hearing of some owner foreclosed property auctions in the Bay Area I decided to check it out while on vacation. I easily purchased a unit at the Tahoe resort for 60 cents on the dollar. I never thought the price was a steal, I thought it was a reasonable. Still own it, plus a few more. For business I had the good fortune of attending conferences in San Francisco Bay and LA areas during the 80's and 90's. Absolutely loved that area too.

So, I became familiar with California real-estate prices. But it wasn't until 2005 when I watch a news report on the CA real-estate boom, that I realized just how big the tulip blub mania had gotten. If you show me a new suburban CA home for $1.8 million I have no idea if that is or is not reasonable. I'd need an area real-estate advisor to know. And new commercial real-estate is another story. Even after a bust you still have a new building not a 100 year old home restoration money pit. But when I saw 1,100 sq. ft. two bed room, one bath room homes built just after WWII, which sold for maybe $25,000, now being sold for $750,000 in 2005, I knew the buying frenzy had reached the point of madness.

The finance guy inside me could understand the Wall Street financial engineering and the Treasuries low interest rate policy funding the speculation. But Wall Street and Greenspan was not mandating you had to buy a pig for the price of a triple-crown stallion horse price.

The accounting guy in me still cannot figure out why people want to take an old home built in the 1920's to 1940's for $10,000 to $25,000 and refurbish them with fixtures made for a million dollar home. Sure fixer-upper homes requiring limited expendentures make great values. But when you feel the need to put $150,000 into something that looks worth $100,000...stop. It's time to tear down the old and build new!

Why weren't more bankers and appraisers screaming this is economic madness?

Below is a $550,000 4 Bedroom 3.5 Bath 3,780 sq. ft. home in a more reasonable priced mid-western town. Listing

See New Home Sales Hit Historic Bottom In First QTR. 2009.

Below is an old refurbished Detroit Mansion for $149,000
NEW LOWER PRICE. Exquisite Boston Edison home. Beautifully maintained and featuring 3natural fireplaces, gleaming hardwood floors, and very large room sizes. Elegant foyer with graceful stairway leading up featuring stained glass stairwindow. Potential for 5th (12 x 18) bedroom attached to 4th. Completely finished 3rd floor with separate forced air heating and new windows. Newer Boiler. Pre-appl req'd. Alarm. Short Sale.

"California Dreaming" This my friends is the real deal.

Failure To Collect Leaves Taxpaper With More Bills

2009-09-02T04:54:00.000-07:00

The FDIC And Member Banks (Not Taxpayers) Are Responible For Insurance Fund Losses

The FDIC was created by Congress with the 1933 Banking Act to protect bank depositors after the severe financial crises of the early 1930s and officially opened for business Jan. 1, 1934. The agency now insures deposits up to $250,000. Legislation passed by the Congress on February 1, 2006, merged separate insurance funds for banks and thrifts into a single Deposit Insurance Fund.

The FDIC was put in place to protect the depositors, not the banks. FDIC is a insurance organization where member banks pay premiums for the right to wear the FDIC label. No one I know has an interest in putting money into a Non-FDIC insured bank. If you are a banker who wishes to grow your business and profits you need FDIC on your door.

In short the Banking industry should be responible for their decisions and the FDIC insurance reserves. Lots of bright minds have pointed this problem out over many years e.g. The Wharton Financial Institutions Center issued a whitepaper in 2002.

The Last Real-Estate and Banking Party Bar Tab Cost Taxpayers $125 Billion

The ultimate cost of the S &L crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the US government—that is, the US taxpayer, either directly or through charges on their savings and loan accounts. Why did the taxpayer get left holding the bag? Simple, not enough FDIC premiums were charged for the risk the S&L's were taking in leveraging up on a real-estate boom.

Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 to prevent taxpayers from getting stuck paying the bar tab for the banking and real-estate industries parties, again.

Congress Passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991.

This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls and Banks posing greater risk to the FDIC Insurance Fund. This historic piece of legislation empowered the FDIC to charge members premiums linked to risk.

A 1996 report by accomplished economist Frederic Mishkin a longtime friend and research partner of Fed Chairman Ben Bernanke reaffirms the need for the FDICIA stating the provisions were designed to serve two basic purposes: 1) to recapitalize the Bank Insurance Fund of the FDIC and 2) to reform the deposit insurance and bank regulatory system so that taxpayer losses would be minimized.

The United States General Accounting Office (GOA) issued a report in November 1996 entitled Bank and Thrift Regulation. The very first sentence of the executive summary states, "The thrift and banking crisis of the 1980s caused deposit insurance fund losses estimated at over $125 billion. One of the many factors contributing to the size of the federal losses was weakness in federal regulatory oversight".

As Austin Powers would say, "Deja Vu Two Baby!"

Now take a guess as to what the FDIC and Congress choose to do during the economic boom years of 1996-2006? The biggest reasons for our FDIC reserve shortage is because most banks paid no premiums from 1996 to 2006. Yes, it's a little reported fact that they paid no insurance premiums for 10 years.

Not one private insurance company would stop charging premiums on your auto, homeowners, health, or life insurance for 10 years -----simply because you had no losses. Does some one need to have a Ph.D. in Insurance and Risk to know that's not prudent?

Yet, James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse," he said. Anyone else wondering what value economist add? Can we export economist to china?

The rising bank losses mean that the FDIC's ratio of deposit insurance funds (DIF) to our bank deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%. Said another way, the goal was to only have about 1.5 cents in the rainy day fund and we have only zero cents.

Failure To Collect Premiums For 10 Years May Leave Taxpayers Paying Another Bill

The FDIC and congress concluded years ago that only 1.25% in FDIC reserves were needed to maintain the financial soundness of the fund. So, when the Deposit Insurance Fund (DIF) reached the magic number during the boom years, bankers (didn't want to pay) and regulators saw no advantage to having 2.5% in reserve. But between 1996 to 2006 bankers were jumping into the real-estate boom leveraging up their money lending practice. The S&L crisis became a distant memory.

I will not blame any President, Party or Federal Reserve Chairman for this crisis. They, like us, have a vested interest in America too. Still, I'd expect Greenspan and Bernacke, two Ph.D.s in economics, along with the over 100+ Ph.D.s working on the Federal Reserve staff, to be smart enough to connect-the-dots. Purhaps a few were two busy flipping homes to notice. No wonder Dean Baker, a fellow Ph.D. in economics, is endorsing the bill to audit the Federal Reserve policies, Baker wrote last week, "The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed's disastrous policies". Other economist and financial experts outside the Washington D.C. belt-way raised flags to congress ahead of the Freddie Mac and Fannie Mae debacle. All one needed to do was watch tv to know we were in a real-estate bubble.

Our FDIC Chairman Warned Congress in 2001...No Action

Now FDIC Chairwoman, Sheila Bair, has already testified that the agency's failure to collect premiums from most banks for years was surprising to her and a concern. As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of people within the banking industry. "That is five years of very healthy good times in banking that could have been used to build up the reserve," she said.

I'm hearing on average, each failure costs the FDIC nearly 30% of a bank's assets.

Now-Needy FDIC Collected Little Premiums for 10 years

The Coming Deposit Insurance Bailout

FDIC May Need Special Fees

FDIC, Banking & Real-Estate Deja Vu Two

2009-09-02T04:35:00.000-07:00

click on graphics to enlarge

It took eight years from the start of the Savings & Loan crisis in the 80's and 90's to reach a peak in bank failures from the last real-estate boom turned bust. Let's hope we are not in for 6 more years of large quantities of bank failures. Mr. Bill Isaac JD who headed the Federal Deposit Insurance Corporation during the banking crisis of the 1980s said he doubts we'll come close to the volume of failures of the S&L crisis. Still, history is repeating its self. It's like a domino effect. First it effects the largest financial institutions leveraged to real-estate sales through the mortgage securitization and derivatives markets. Next came large Insurance companies and regional banks with large investments in real-estate and related loans. Now it's smaller state banks effect by commercial real-estate construction loans.

One single common denominator jumps out...real-estate. Yes, REAL-ESTATE SPECULATION fueled by historic low interest rates, easy credit, little money down and excessive value appraisals.

Real-Estate Implodes, Banks Fall and FDIC Funds Nose Dive

At the tail end of the Savings & Loan (S&L) debacle L. William Seidman, former chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation, stated,"The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending".

In May of 1991 the Los Angeles Times reported, "The FDIC faces problems with the bank insurance fund expected to be insolvent by the end of the fiscal year. The House and Senate banking committees have passed separate bills providing $70 billion in temporary borrowing authority for the fund, with the money to be repaid by premiums from the banking industry. Seidman's replacement at the FDIC will run the fund at a time of great uncertainty for the banking industry, during a depression in commercial real estate that threatens the solvency of many banks".

For years after the 80's and 90's Savings & Loan financial crisis had ended hundreds to thousands of Articles, Whitepapers and Books were written on what created the problem and what was needed to prevent a future meltdown. To insure we learn from our past mistakes the FDIC has web pages listing FDIC reference books deticated to the S&L crisis memory.

Congress Passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991.

This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls and Banks posing greater risk to the FDIC Insurance Fund. This historic piece of legislation empowered the FDIC to charge members premiums linked to risk.

A 1996 report by accomplished economist Frederic Mishkin a longtime friend and research partner of Fed Chairman Ben Bernanke reaffirms the need for the FDICIA stating the provisions were designed to serve two basic purposes: 1) to recapitalize the Bank Insurance Fund of the FDIC and 2) to reform the deposit insurance and bank regulatory system so that taxpayer losses would be minimized.

The United States General Accounting Office (GOA) issued a report in November 1996 entitled Bank and Thrift Regulation. The very first sentence of the executive summary states, "The thrift and banking crisis of the 1980s caused deposit insurance fund losses estimated at over $125 billion. One of the many factors contributing to the size of the federal losses was weakness in federal regulatory oversight".

Bank Failures Will Continue As The Economy Improves

2009-08-28T21:15:00.000-07:00

The chart above shows the American S&L failures over 15 years. This puts into historical perspective our current financial crisis. The common denominator? If you guessed real-estate speculation...you're correct. Ageing has few benefits and you often find yourself in a state of deja vu.

Three more U.S. banks failed on Friday, bringing the total to 84 so far this year, as the industry continues to grapple with deteriorating loans on their books.

112 Banks have failed over the last three years

FDIC Chairman Sheila Bair said this week that bank failures will remain elevated as banks go through the painful process of recognizing loan losses and cleaning up balance sheets. The total of 84 failures this year marks a sharp rise over the 25 last year, and the three failures in all of 2007.

She noted that the banking industry's performance is a lagging indicator and will continue to suffer even as the economy begins to improve.

2,935 small Savings & Loans institutions failed between 1979-94, setting the stage for the rise of big national banks

The U.S. is no stranger to prolonged periods of bank failures, the Great Depression resulted in many more failures. America experienced the loss of the Savings and Loan industry between 1987-91. More than 2,300 financial institutions went under peaking with the failure of 534 banks in 1989. This became know as the S&L debacle or S&L crisis.

Now those perdicting impending doom, that everyone wants to hear in a crisis, point out how the prime loan and commercial real-estate crisis is just picking up loss momentum this year. Well, they are correct. Lenny Dykstra could be the poster child for both problems. Read the Lenny Dykstra Bubble Signal.

But this comes as no suprise to students of past real-estate cycles. At the dusk of day you can count on it getting darker outside. And just as dusk leds to the darkness of night...night leds to day. To us old-timers this is deja vu all over again. Like the stock market the roaing 20's witness a great real-estate boom. We saw it again after WWII from the 50's to the 70's and again from the early 90's throught 2006.

Now a harder forecast to make is estimating the impact of this crisis on the stock market. That will need to be the subject of another Article. Still, one doesn't need to be a financial wizard to recall that one of the greatest 20 year booms in the market began during the 80's financial crisis.

While the size of assets is greater, the cost to FDIC will be less

So, how does this crisis compare to the S&L failures. It's too early to compare total failures as history teaches more are coming. In terms of assets, bank failures for 2008 totaled approximately $370 billion. This compares to approximately $164 billion in 1989, which was the worst year for the savings & loan debacle. If we adjusted that total for inflation, it would be roughly $300 billion today. So, 2008 is the worst in terms of assets for bank failures compared to the worst single year of the S&L crisis.

However, during the S&L crisis, bank failures hit nearly $150 billion or more per year for three years running. Total assets of failed institutions back then was $519 billion. If we adjust for inflation, we get a total in today’s dollars of over $800 billion. But, based upon the current 2009 trends and 2010 estimates this crisis would clearly be much worse than the S&L crisis.

The S&L Crisis cost FDIC $125 billion

While totaling up the assets of the failed banks is interesting, a more important point for taxpayers is what is the likely cost to the FDIC of taking over these banks? An FDIC report cited $124 billion as the cost to taxpayers for the S&L debacle. This includes costs to the Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation (RTC).

The FDIC estimates this crisis will cost $70 billion

The FDIC estimate for the cost of taking over these banks is not $370 billion. The lastest estimate (Aug. 28th 2009) for the cost (projected through 2013) to the FDIC for these failures is $70 billion. That’s a lot of money, but still modest given the level of assets at the failed institutions. Still, given the FDIC has already doubled the size of forecasted losses in just 9 months it may be wise to assume 12 months from now the estimates could be even higher.

Even if we assume the FDIC is off by 50%, then the total cost will be $105 billion. That’s still a long way from $124 billion for the over 2.395 S&Ls that failed over 15years. And after adjusting for inflation the cost is far less catastrophic then the S&L debacle.

So, as little Orphan Annie sang in the hit movie musical during the 80's recession,"The Sun is Going To Come Out Tommorrow."

Failed Bank List

FDIC May Need Help

The Official FDIC Statement

New Home Sales Hit Historic Bottom

2009-08-27T18:50:00.000-07:00

The chart above shows the trendline of American new home sales back to the 1960's. The blue lines represent recessions and durations.

Declining new home sales markets tend to bottom in January. And this seemingly endless 5-year continuous decline ended this January 2009 at new historic lows. This bust surpassed every other American reale-state decline since the 1960's.

The magnitude of this decline is amplified by the fact the number of households in 2009 is around 112 million...more than double the 53 million during the 1960's.

Below are two real-estate news reports from the 1st quarter. Combine this depressing news with relentless negative news about Banks, stress-test...and it's no wonder we were a depressed Nation preparing for a Great Depression.

"New homes made another new record low, with sales down 10.2 percent to 309,000 units. Despite this reading, inventories relative to sales actually made a new high. The months' supply of unsold homes rose from 12.2 to 13.3, a new record high. This means that home prices will remain under downward pressure."

TERRIN GRIFFITHS, ECONOMIST, CALIFORNIA CREDIT UNION LEAGUE, RANCHO CUCAMONGA, CALIFORNIA:

"The drop in new home sales is not unexpected. Home buyers are remaining cautious as the current economic storm takes its toll on jobs and confidence and thus, home buying. Those forces against buying will remain strong so while there might be a slight boost ahead due to tax incentives, realistically things are going to remain weak for some time."

LAWRENCE J. WHITE, PROFESSOR OF ECONOMICS, NEW YORK UNIVERSITY'S STERN SCHOOL OF BUSINESS:

"This is of course yet another indicator that the housing market is in shambles and we are not out of the woods yet. There is a glut of supply on the market and more people want to sell than buy and that is driving prices down generally. A lot of people are seeing bargains, but are not ready to buy. Rates have fallen, but home prices continue to fall. People think they will fall more, so they are staying on the sidelines."

"Eventually we will get to a bottom and these people will kick themselves that they did not buy. At the very least, new home sales should continue to fall for the next few months."

Now with the benefit of hindsight and a chart we can see this was the bottom of a long and painful 5-year decline.

New home sales are now up over 30% from their lows, in yet another sign that the economy is improving. This, in combination with the more than doubling in the price of major homebuilders stocks from last year's low, constitutes strong evidence that we have seen the bottom in the housing market. All this activity also suggests that the combination of sharply lower prices and relatively low mortgage rates has created the conditions necessary to clear the housing market. Market forces are fixing the housing problem.

While the bottom in new home sales appears in more price declines are to be expected. And commerical real-estate trends tend to lag 1 to 2 years behind individual homes. Expect to hear more negative news in that sector.

Should you buy a major home builder stock now? By the looks of their stock prices you're already to late. Consider buying after the $8,000 first-time home buyer sugar high wears off or on any major market pull back. Still,the quality names were the first to rise. You might consider looking at two dogs (laggers) with fleas BZH and HOV.

Nationwide Home Sales and Prices Rise

2009-08-26T18:14:00.000-07:00

First the Good News

More green shoots. Sales of new homes surged 9.6% in July. This is the fourth-straight monthly increase. Home prices in major U.S. cities rose for the second straight month in June in the latest sign the housing market may be steadying after years of declines.

The S&P/Case-Shiller index for home prices in 20 major cities in the three months ended June 30th was up 1.4% from its level in the three months ended May 31st. It was the first time the index rose two months in a row since mid-2006. Prices gained in 18 of 20 markets, but were still down 31% from their July 2006 peak.

The additional good news for home builders and sellers buried deep in the news is the fact that there were 271,000 new homes for sale at the end of July, down more than 3 percent from May. At the current sales pace, that represents 7.5 months of supply — the lowest since April 2007. The decline means builders have scaled back construction to the point where supply and demand are coming into balance

"Momentum matters," said Robert Shiller, the Yale University economist who helped create the index. "This is a sudden break in momentum." Robert also said "The really important things [affecting home prices] are unemployment and momentum.” I agree. I've been through three real-estate booms and bust in my lifetime. And any person with experience will tell you the three biggest variables impacting home-buying is Jobs, demographics and interest rates.

Now the Not So Bad News

So, is housing heading for a new boom? No, at least not anytime soon. Recent home-price gains have been driven, largely, by competition between first-time buyers and investors offering to pay cash for distressed properties. Demand also has been boosted by government intervention that helped drive mortgage rates to half-century lows in the spring and a tax credit of up to $8,000 for first-time home buyers. So, my forecast along with other "experts" is this momentum is not sustainable until employers start hiring again.

Now if you have been considering buying your first home and you are one of the 90% employed...my advice is...you need to act by November month-end to get the $8,000 cash. Read my "First-Time Buyers Get Gifts" article.

Forget about thinking prices will now rise back to those 2006 levels, anytime soon. Remember the July 2006 prices were a bubble fueled by easy money, little money down, no-document loans, aggressive sales practices, and extra high appraisals. In a poor economy, with low new job creation, I would expect more price declines in those areas which had the largest increases.

Unlike stocks real-estate is impacted by local market economic conditions. So let us know how the real-estate conditions are in your area by making a post.

More Green Shoots & New Market Highs

2009-08-23T07:41:00.000-07:00

For the fourth straight month the leading economic indicators are pointing up. Now two regional manufacturing surveys show manufacturing activity is rising. And July home sales surged for the second consecutive month. All this positive news pushed the market to new highs last Friday August 21st, preventing the much expect market correction, for now.

Five More Positive Economic Indicators Denied Perm-Bears Satisfaction.

Since the March 9th market bottom, we have been witness to the greatest American stock market advance since the 1930's. Those brave investors who dared jump into the eye of the hurricane or stayed the course are to be congradulated for having faith in the long-run. But this is no time to party-hardy or dump a ton of new money into a market that has soared 52% in just 165 days. This is a time of thanksgiving and reflection. Now is also the time to question how likely is this good news to continue without some bad news and market pull-backs.

1. The Conference Board said its index of leading economic indicators rose for a fourth straight month in July. The index, intended to forecast economic activity over the next three to six months, suggests the recession has bottomed and the economy will soon start growing again. Six of the 10 indicators that make up the index rose in July.

2. A survey of manufacturers in the mid-Atlantic region on Thursday showed that factory activity rose in August for the first time in nearly a year. The report by the Federal Reserve Bank in Philadelphia followed a similar survey reported Monday by the New York Fed that also found an increase in manufacturing activity after months of negative results. The rise in both surveys indicates manufacturing is growing even in areas without significant auto-related production, economists said. The auto industry has enjoyed a big boost from the government's Cash for Clunkers programs.

3. July had the fewest job losses in almost a year. The government said companies cut 247,000 jobs in July, a large amount but still the smallest loss since last year. Yes, this is one of those less worse is good news. One can see the inverse correlation of declining new unemployment claims which peaked in February and have been falling for five months. Bears point out the last two weeks have seen claims rise.

4. The official unemployment rate drop unexpectedly to 9.4% in July its first drop in 15 months. Yes, many private economists and the Federal Reserve still think rates could top 10 percent by next year. Yet, this was a positive surprise as an increase was expected. And as any Economist will tell you unemployment rates are a lagging indicator.

5. Home sales in the Midwest surged 8.5 percent in July, the second straight annual increase, as new home buyers snapped up properties to take advantage of a temporary federal tax credit. Nationally, home resales rose 5.6 percent in July, the first annual increase since November 2005. Affordability is driving sales -- the median sale price fell 15 percent to $178,400.

"Looks like the recession ended in June," Tim Quinlan, economic analyst for Wells Fargo Securities, wrote in a research note. The National Bureau of Economic Research, which officially declares the start and end of economic cycles, has in the past set an end-date to recessions after two to three straight months of gains in the leading indicators, Quinlan said.

Now For The Bad News

The Mortgage Bankers Association, said more than 13 percent of American homeowners with a mortgage are either behind on their loan payments or in foreclosure — a record tally as the recession leaves more people unemployed. About a third of new foreclosures between April and June were prime fixed-rate loans, up from one in five a year earlier.

Markets are always forward looking. And it's ditto for this market too. Yet, this doesn't mean the market has ESP to foresee the 2010 economy. No, it just means it expects to see an improved second half of 2009. Remember the 2001 brief recession? It was declared officially started in March and ended around November 2001. The market after a climatic September sell-off after 9/11 turned and climbed into March 2002. The Market then tumbled all year long reaching new lows in anticipation of a disappointing weak recovery.

One of the real big economic worries is the need to create new jobs (not just maintain jobs). Scott A. Heintzelman, CPA, CMA, CFE a Partner with McKonly & Asbury, LLP has dug deep into the Bureau of Labor Statistics report to uncover their measure of labor underutilization a.k.a. Real Unemployment. The Real Unemployment Rate is 16.8%.

Market Results: The Biggest Advance Since The 30's - Thank you, I'm leaving the party early.

This has been the strongest market advance since the 1930's. The perm-bears have missed the greatest six month advance in their lifetime. Still, it's hard to image another 10% advance without more than a 5% pull back. But it's possible. In August 1981 the market rose for 12 straight months with only a few 5% pull-backs.

I'm thankfull for the last 1,000 point gift driven by so many green shoots. But I'm cashing in most of my general market chips (S&P Index Funds) before the party ends and the market disappointments arrive. I'll be happy to jump back onto the bandwagon after a pull-back.

What Would Jesse Livermore Do In This Market?

2009-08-18T20:19:00.000-07:00

Would Jesse Livermore Sell, Buy or Fold?
If you are a market trader you've know nothing goes straight up or straight down for six months. So rather then debate if the market is moving in a rational or irrational direction based upon economic indicators let's just get down to protecting our assets.

I wonder what Jesse Livermore would do? Stay the course in what's been working? Short the market? Rotate out of the cyclical stocks that got us to the party into the health care stocks that missed the party? Cash in your chips and avoid the notorious months of September and October?

The Traders Motto
The legendary early 20th century stock trader Jesse Livermore said, "They say there are two sides to everything. But there is only one side to the stock market; and it is not the Bull side or the Bear side, but the right side"

Jesse Livermore started his trading career at the age of fifteen. He ran away from home with his mother's blessing to escape a life of farming his father wished him to have. He then began his career by posting stock quotes at the Paine Webber brokerage in Boston. He went from these humble beginnings to owning a series of mansions around the world, each fully staffed with servants, a fleet of limousines, and a steel-hulled yacht for trips to Europe. He married his second wife Dorothy, a beautiful Ziegfeld Follies showgirl when he was about 40 years old. So, Jesse Livermore's rise to riches and persona matched the roaring 1920's.

Was It Skill, Luck Or Manipulation?
The legendary trader status of Mr. Livermore leaves new hopefuls with the notion Jesse became rich, famous and lived happily-ever-after. The critics claim that prior to the new regulations of the 30's and in the days when news took time to travel, it was easy for stock manipulators and traders to make fast money.

The facts show, during his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes and in 1940 committed suicide while married to his third wife. I found it interesting that his third wife had been married four prior times and all four husband committee suicide. I find no discussion of an investigation also interesting. Tragically his son and grandson also committed suicide.

So, much for living happily-ever-after Walt Disney style.

The Right Side Is The Only Side
Yes, knowing Jesse Livermore's whole life story gives new meaning to his famous quote, "...there is only one side to the market; and it's not the Bull side or the Bear side, but the right side".

Let, me know what Jesse Livermore would do now.

Details On Jesse Livermore Trading Advice

Modern Portfolio Theory MPT Fans

The Great Depression & Stock Market Facts

5 Reasons Bulls and Bears Disagree

2009-08-13T16:12:00.000-07:00

Can the S&P 500 make it back to Pre-Lehman Brothers bankruptcy levels before a major correction?

The last September 14 S&P levels of around 1,200 is where the bulls now argue is the market's fair value. That target is of particular interest and importance to bulls who note that was the level prior to the Lehman Brothers failure, which was the brick that broke the market's porcelain camel's back.

Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The news caused the DJIA to closed down just over 500 points in one day. This resulted in a financial nuclear chain reaction with Lehman's counterparties and financial markets. This was a bankruptcy with world-wide implications that lead to freezing credit markets; tumbling commercial real-estate values; panic in the junk bond markets; accelerated selling in commodities stocks; and increased financial service sector lay-offs in anticipation of a world-wide recession. Let's not forget to add - fear of the next great depression.

I must confess I was of the opinion the S&P would max-out at 1,000 (at best) before enduring a reasonable pullback of around 5% in August or September. But then a Bull gored me from behind and called to my attention the impact the Lehman Brothers bankruptcy had on the market. This logic had me reconsidering my positions but then, without warning, a Bear roars - get a grip on reality, bonehead. So I recorded their 5 best shots of logic.

The bulls' logic for a return to S&P 500 pre-Lehman Brothers bankruptcy levels:

1. The so-called Libor-OIS spread, a gauge of bank reluctance to lend, has narrowed to 28 basis points from 364 basis points on Oct. 10 2008. Greenspan said in June 2008 that he wouldn’t consider credit markets back to “normal” until the Libor-OIS spread narrowed to 25 basis points. Libor-OIS also became a barometer of fears of bank insolvency.

2. The VIX index, the volatility and nicknamed fear index has been trending downward for 8 months. Before the Lehman bankruptcy the VIX was around 22 and after the bankruptcy rose to a all-time high 80 level. Today, the bulls argue, it's holding around 26 only in anticipation of a quick correction after July's large run up. They rationalize it should fall to 22 given the credit crisis is at least as good as pre-Lehman bankruptcy levels.

3. The current bare bones inventory levels will force companies to resupply now and for upcoming Christmas season. Rising consumer confidence levels, $8,000 for new home buyers, $4,500 cash for clunkers, Government Stimulus package, stabilizing unemployment levels, ISM reports, world markets, all point to rising spending and restocking.

4. The weak dollar and healthy Asian and India economies will once again improve our exports while our recession has curtained our import spending thus reducing our balance of trade deficits.

5. GDP in the 3ed and 4th quarter will show a major improvement over the 1st quarter rising from a Negative 6% to a forecasted 2.5%. This would also be a major improvement over 2008 which had a less than 1/2% GDP (after revisions). See my prior post on World Green Shoots Economic Indicators.

The bears' scream that the current 50% rally is already built on a slope of hope and it's time for a correction:

1. Real Unemployment in the USA is near 16.8% when you consider the people working part-time who were full-time and those who are not counted simply because their eligibility for benefits ran out. The first wave of big reductions in eligibility will come in September 2009. And the USA is still an economy based upon consumer spending. One in three unemployed people, or five million people, have been jobless for 27 weeks or more.

2. No job growth, no spending improvement. So what if job losses were less than expected in July or bottoming out? If employers are not hiring back workers, there will be less consumer spending overall until the jobs return. And right now the market is higher than 2002 when significantly less workers were out of work and the housing sector was booming and the financial sector was considered on solid ground.

3. Banks must make loans to people who can repay. Gone are the 2001-2005 days of no-documentation loans and instant approval and fast money for everyone. The banker bubble economics that stimulated spending and GDP is gone.

4. Everyone is deleveraging. Unlike the 1999-2002 market decline, the consumer was still spending as half as many people were unemployed and easy money and job stability encouraged spending. This pulled us out of the hole and lead to a steady market advance back to the 1999 S&P 500 1550 levels by 2007. But this time around it's the reverse - both institutions and individuals are deleveraging and reducing their spending.

5. Insider Selling is at its highest level since October 2007 (the market top). Vickers Weekly Insider Report, published by Argus Research: In their latest issue, received Monday afternoon, Vickers reported that the ratio of insider selling to insider buying last week was 4.16-to-1, the highest the ratio has been since October 2007.

At this point even many bulls expect a 3-5% pullback before resuming the climb to S&P 1,200 before year-end. The bears say that's just the beginning of a major correction as we enter the market's notoriously bearish months of September and October.

The Bulls and Bears each gave me five good reasons. Now let us hear your reasons

World Economic Indicators Improving

2009-08-08T07:17:00.000-07:00

The Institute for Supply Management™ ISM Manufacturing & Non-Manufacturing Report On Business® is considered by many economists to be the most reliable near-term economic barometer available. Six of the 18 manufacturing industries reported growth in July. Seven of 17 non-manufacturing sectors reported growth.

These reports are far from rosy. But they are a major improvement over the 2008 4th quarter and 2009 1st quarter. The improving trends are showing up around the world. The sightings of Green Shoots is no fantasy.

Manufacturing industries in the world’s leading economies are in a much better state than at the end of last year, according to surveys of purchasing managers. In three of the countries, China, Britain and Japan, the purchasing managers’ indices compiled by Markit, a vendor of financial information, are above 50, indicating that manufacturing is growing again. And in the USA, France, Spain, Germany and Italy major improvements over December 2008 have been made as indices rise above 45.

In December 2008 only China’s index was even above 40; in January Japan’s dipped below 30. In America, the Institute for Supply Management’s index rose by more than four points in July to 48.9, the highest reading since last September. That still implies contraction, though at a less marked rate.

Many Countries leading economic indicators are rising

The Conference Board is the leading organization monitoring and measuring world economic indicators. The July report once again showed the USA leading economic indicators rising. Moreover the pattern is similar around the world. We knew China and India were showing early signs of improvement during the first quarter. Now the Conference Boards latest July and August reports shows the Leading Economic Indicators are rising in Japan, Korea, Mexico, Australia, France, Germany and the UK. Germany just announced today their exports rose 7%.

Green Shoots are sprouting around the world. Everyone still agrees the climb out of the worst recession in decades will be long and slow. But you'd be in denial to ignore the improvements and economic facts. Yet, the debate over our economic monetary and fiscal policy will continue indefinitely. Keynesians' Economist and Austrian Economist still debate the effectiveness of the Great Depression policies of Hoover and Roosevelt. As for me, I'm just glad to see the world in a state of improvement instead of a economic nuclear winter.

It's now clear the collective wisdom of the stock market proved once again to be more rational then irrational.

Market Up 50% -greatest advance since 1930's

2009-08-04T15:41:00.000-07:00

Will Newton's Law of Gravity apply in August?

After a 50% rise from the March 9th low any prudent investor would rationalize it's time for a 10% correction. Of course, in June after the DJIA had fallen 6% from a high of 8,600 everyone was talking..."head and shoulders"..."sell now were going back down to 7,500". Yet, the market denied many "experts" their prediction once again. It soared up over 1,100 points to reach 9,200.

The now 50 percent S&P rally from the March lows is the best move in stocks since the 1930s!!! The Nasdaq is up an astounding 59 percent. Stocks have recaptured the levels from early October.

What Now?

Ok, now what? Well, if you do not believe in little green shoots and assume this is a cyclical Bull in a secular Bear market like in 1929-34 then you're cashing in your chips or shorting any stock that's had a big run. But as I watch the daily market indicators I see mostly strength and little weakness. Why? How can this be? Is this rational?

Drawing Wisdom from past legends.

Let's draw wisdom from a man who needed his father to bail him out financial when he was nearly wiped out at the onset of the Great Depression in 1929...John Maynard Keynes said it best: "The market can remain irrational longer than you can remain solvent". And a more famous money manger legend, Sir John Templeton, said Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. I'd say were still in the "skepticism" phased based upon all the disbelief about "green shoots".

Adding in my insight.

Yet, is the market really irrational, rational or just plain emotional? Maybe it's all of the above. This I know...the market is always forward looking. The cumulative wisdom of the market is betting the economy will be better in the second half of 2009 then the first half.

And now investors in the market are being helped by two groups: FIRST -traders who believe the market must correct (so they short stocks) and SECOND -by the billions of Money in Money Market Funds where people are realizing their earning less than 1/2 of 1%. With 6 months of a positive market MMF people are now more emotional comfortable with moving money into the market which pushes prices higher and forces those short-traders to cover their bets. Thus, it's the inverse of last summer where selling begets more selling.

Historical facts about August

Since I'm not paid to make forecast for Finance Toolbox or selling investment news letter subscriptions let me just leave you with some additional education for you to consider. According to market research in an article written by Nick Godt of MarketWatch here are the facts:
The market, as measured by the broad S&P 500 index, has advanced in August 60% of the time in the 81 years since 1927, for an average gain of 4%, according to Standard & Poors. And since 1999, August has brought gains seven times out of 10.

Since World War II, August months have tended to bring gains but not by as much as in other months of the year, according to RDM Financial. Since 1945, August has returned 0.4%, placing it 10th among the 12 months of the year.

"However, when the economy is rebounding, then the market has tended to put in a much stronger performance [in August]," said Michael Sheldon, market strategist at RDM.

Many market observers believe that back in March, the market has hit its lows of the bear market that followed the financial crisis. And on the 14 occasions that have followed bear-market bottoms since 1932, the S&P 500 has risen 10 out of 14 times in August for an average gain of 1.2%.

"Past performance is never 100% guarantee of returns in the future," Sheldon said. "But the outlook for August continues to be more positive than some would think," he said . I'm with Michael the correction may have to wait until month end or September.

Life Lessons of Lasting Investment Value

2009-08-02T06:47:00.000-07:00

I'm not here to sell a product or service. I'm here to share the cumulative wisdom and mistakes I've learned over 38 years through Investment experience and education. No, I'm not going to get into my own stock picks. Yes, I'm going to provide advice of more lasting value with a much higher probable outcome of success. From time-to-time I do promise to provide readers with links to articles on specific stock recommendations and market forecast from people I regard as worth reading.

Here is five of my best investment advice...life lessons of lasting value:

Lesson #1: Invest in your education and a profession first. Yes, knowledge is power -not just in investing but in securing a job and career. It took me about 10 years to fully appreciate the wisdom of a fellow finance student at lunch in 1975. Five of us BBA's were discussing what stocks to buy and the market trends. I ask one older student, who was just listening and smiling, for his views. He replied, "Guys, the best investment you can make is not in a stock. The best investment we'll ever make is to finish our BBA degree's and secure job's that lead to a career. If you earn just $15.000 more per year and save that money in a simply no-risk FDIC insured bank account earning a measly 4.25% over your 40 year career you will have $1.5 million more money at age 65."

Lesson #2: Forget thinking you're going to turn coal into gold. I see many young people thinking they're going to take their $5,000 in life savings and turn it into $5 million by becoming a full-time day trader of stocks, options and foreign currency markets. Lots of things are possible but this is highly improbable. Anyone can claim anything on the wild-west internet with little fear of investigation or fines for false or unsubstantiated claims. Many people lose more than they make and if you have less than $100,000 my advice...forget it...read Lesson #1.

Lesson #3: Seek professional help. I've learned over the years that I'm worthless as a carpenter or mechanic. So I forget the do-it-yourself mentality and hire a professional to do it for me. If your business needs an accounting system interview your local CPA's (I'd pass on a bookkeeper). You need taxes done right? Interview your local H&R Block or CPA tax pros. Not happy with your current Insurance company or agent? Search on the internet for a local CLU and CPCU. You will not pay anymore for your insurance but you'll be assured of competence. Got a legal problem? Talk with a lawyer not your brother-in-law. So, when it comes to your investments seek a professional with experience. Talk with a locally Certified Financial Planner (CFP) or Charter Financial Consultant (ChFc) or A Certified Financial Analyst (CFA). Ask if they have a college degree with training in finance, accounting, Modern Porfolio Theory (MPT). Ask about the training and resources provided by their employer. Think about it folks, would you rather buy meat that is FDA inspected from a trusted name brand source or from a foreign vendor on a street corner?

Lesson #4: Get A Plan First...Choose Investments Second. First things first. You need to think beyond next month and next year. You need to think about what you want or need in your investment account values at age 65. Forget asking for a hot stock tip or about the best performing mutual funds of last year. You need a destination objective. You need a financial goal and a financial plan to reach that goal. No ideas? Then think, "how much can I or should I save monthly".

Lesson #5: Spend Less, save more and save now. Remember this simple rule. Achieving long-run financial health means saving as much as you can...as soon as you can. Saving just $350 more per month and earning an average return of just 4.5% (compounded monthly) over 25 years means you'll have an extra $194,275. Putting off saving for 5 years and you'll have $57,922 less in 25 years.

If you are investing you can earn much higher returns which could double the value of these dollars to you. But you need to understand markets often decline and no one can consistantly provide you with an early warning buy or sell system. So, you'll need to maintain a long term plan that forces you to invest more during market declines and purhaps less after major advances using a rebalancing system which a local CFP can explain in detail.

Extra Credit Reading Material

Financial Planner

BalanceTrack Free Financial Education Chapter 1-5

Financial Long-Run Planning. The process begins with assessing your current financial situation, determining what you want to achieve and building tailored made solutions to achieve your goals. Whatever goals you have set for yourself, your financial advisor can help you build a clear, concrete plan to help reach them. Your advisor will develop a personal financial plan based on your needs and careful analysis of your specific situation. Once completed, you and your financial advisor can work together to move forward on your plan.

“The best way to predict your future is to create it.”...Stephen Covey

WARNING: Many less experienced people tend to extrapolate out average returns of 9-10% claiming that's the average historical return. This has often been true but it's not always true -a big difference. No one considered the fact that the S&P 500 Index return could be a NEGATIVE 3.5% average annually return -as it has been over the last decade. After the 1929 Market Crash the market took about 20 years to return to that level again. Another major flaw in planning is using fixed high average annual returns compounded monthly over long periods to show how money invested can grow. Stock markets and stocks are not bank CD's that may compound returns daily or monthly. Stock markets fluxuate daily not compound daily. So, you'll need a professional with some college level finance training in probability and statistics analysis who can show you growth outcomes using "Monte Carlo Theory" and utilizing a historical data base of monthly market returns. This simulation analysis will show you a range of most probable outcomes over various time frames.