Mr Short Missed BP !?

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.

Mother-of-all-V Recoveries Continues

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?

Is Another Breakout Possible?

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 Future Of : Made In The USA

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.

Buy Doom Sell Boom

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

The 80's vs 2009 Economy

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.

Slow Economic Growth Ahead

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.

Beige Book Shows Green Shoots

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

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

5 Reasons Bulls and Bears Disagree

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

Market Up 50% -greatest advance since 1930's

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.

Lenny Dykstra Bubble Signal

What clues are there you may be in a bubble, ready to pop? In every market be it Stocks, Real-estate, Artwork or Tulip Bulbs there are always clues. Clues that you are nearing a turning point. A Moment in time where the trend begins to change. Those moments are often very hard to identify because the overwhelming majority believe, the trend up or down will continue. Thus you have your first clue your near the market peak when everyone wants to be involved. You need to start thinking about selling, when everyone else is buying. The second clue is when people with no prior background within that market become instant overnight gurus on the subject and seek to help you invest -for a fee of course.

Now, normally trends last for years...so do not assume it's over after just 1 or 2 years. Often, trends last for multiply years, even a decade. In the beginning few believe the trend will continue but by the end...everyone believes the trend will never end. So, what are your leading economic indicators that the trend maybe ending?

Well, it's that moment in time when a 25 year old computer programmer making $43,000 gets approved to buy 5 over inflated real-estate properties valued at over $2 million -to flip. It's that moment when your little sister has a Wall Street investment banker who wants to securitize her Lemon Aid stand revenue into an IPO.

And it's that moment in time, when a former tobacco chewing...street brawler...baseball great..with steroids in question tells you he's become a financial stock wizard -after just one year of study!

This my friends is called the Lenny Dykstra Bubble Signal. The first video is kind to Lenny. He's been coached by his lawyer to clean up his speech after other interviews captured Lenny as he really is on video. Just one year earlier he and his promoters, including CNBC Jim Cramer, had made a short movie (below) to pitch him as a former Baseball Star turned Financial Wizard. The goal was to attract investment money from other rich sports figures for his "Players Club Magazine". business and expensive investment advice subscriptions. The video was a masterful sales pitch for Lenny. Had Lenny been required to speak I doubt he could live up to the legend. I can understand why people would have invested with Madoff...but Lenny?



While Lenny's critics accuse him of being a con-man. I think that's to harsh. I'd bet he even had some good intentions. But he surely became overly confident he would become the next Donald Trump. Today, he and his lawyer want to portray Lenny as a "victim" of mortgage fraud. A "victim"?! Just one year earlier they wanted you to believe Lenny was a "Financial Wizard"!!

Lenny is emblematic of America's financial crisis and the American economic system built upon excessive debt spending. Lenny is no victim. Lenny is guilty. Lenny is guilty of living beyond even his wealthy means!



Warning: This video contains Lenny as is, unedited.

Just in the past two years, Dykstra has been the subject of at least 24 legal actions, including 18 since November. He's been sued by publishers and print companies, by three different groups of pilots and by a Maryland-based financial and litigation consulting firm that offered expert testimony on his behalf in an earlier lawsuit. The list of Lenny's carnage gets even more bizarre and must be read to be believed.

Look for the Lenny Dykstra Bubble Signal, years from now, to know if you are in the next market bubble or at the market peak.