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Friday, January 30, 2009

VIX Indicating We Are Testing November 2008 Bottom

Check out this chart of VIX and the S&P500 (more charts) from 2002 through today.

Click chart from stockcharts.com to see full size image

Note how VIX peaked while making the two bottoms in 2002 then made a lower peak when the S&P tested those lows at a higher level in March 2003.

Now look at the chart for today. VIX peaked twice last year as the market made two bottoms in 2008 with the major bottom on November 21, 2008 similar to the October 9, 2002 major bottom.

Click chart from stockcharts.com to see full size image

VIX is spiking now at a lower high very similar to how it spiked in March 2003 when the S&P500 tested its October 2002 low while making a higher low.

The market fell faster in the 2007-2008 bear market than it did for the 2000-2002 bear market so it would make sense that the bottoming process would be faster (time more compressed) too.

IF you are trading the markets and buying bounces off potential bottoms, then you will want to use stops just below the November 2008 lows, if not higher until we have a higher low. Until then, it COULD be premature to assume the bear market is over.

Watch the VIX. If it makes a lower low for 2009, this would be bullish.

I currently follow six sentiment indicators in my newsletter. These indicators are:More important charts to follow:


Thursday, January 29, 2009

George Soros Reflections on 2008

Markets are usually efficient for large amounts of money over very long periods of time except for when they break. "The game changer," George Soros explains how the markets broke in 2008. I recommend reading the full article while I comment on some key points Soros makes below.

With my personal investing and with "Kirk's Lindstrom's Investment Letter Explore Portfolio" I try to take advantage of market inefficiencies. My critics say the market is efficient and small investors can not beat the efficient market. I usually cite Warren Buffett to show they are wrong:
“If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
Warren Buffett in June 23, 1999 to Business Week
Now I have the Soros article to add to my response list. Soros explains what I call the "Long-Short Asymmetry" and how this broke in 2008:
First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market. (Being long means owning a stock, being short means selling a stock one does not own.) Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks.

The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks.

The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract.

No arbitrage can correct the mispricing. That can be clearly seen in US and UK government bonds, whose actual price is much higher than that implied by CDS. These asymmetries are difficult to reconcile with the efficient market hypothesis, the notion that securities prices accurately reflect all known information.

The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self-validating. That is in direct contradiction to the efficient market hypothesis.

Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination.

On short selling in general, Soros says:
What is the proper role of short-selling? Undoubtedly it gives markets greater depth and continuity, making them more resilient, but it is not without dangers. As bear raids can be self-validating, they ought to be kept under control. If the efficient market hypothesis were valid, there would be an a priori reason for imposing no constraints. As it is, both the uptick rule and allowing short-selling only when it is covered by borrowed stock are useful pragmatic measures that seem to work well without any clear-cut theoretical justification.
On credit default swaps, CDS:
I believe they are toxic and should be used only by prescription. They could be used to insure actual bonds but – in light of their asymmetric character – not to speculate against countries or companies.
Warren Buffett has called synthetic financial instruments "weapons of financial destruction." Soros says this:
CDS are not, however, the only synthetic financial instruments that have proved toxic. The same applies to the slicing and dicing of collateralised debt obligations and to the portfolio insurance contracts that caused the stock market crash of 1987, to mention only two that have done a lot of damage. The issuance of stock is closely regulated by authorities such as the Securities and Exchange Commission; why not the issuance of derivatives and other synthetic instruments? The role of reflexivity and the asymmetries identified earlier ought to prompt a rejection of the efficient market hypothesis and a thorough reconsideration of the regulatory regime.
xxx: More comments coming later.

The "The Retirement Advisor Conservative Capital Preservation Portfolio 3" gained 3.73% in 2008

FREE=> 2009 SAMPLE Issue <== FREE

Post or Read Comments on This Article


Tuesday, January 20, 2009

S&P Trying to Fill Open Gap

You can see the open gap in the S&P 500 futures at 792:

A good number of traders will sit on that gap and wait for it to fill before going long while others will wait to see if the prior low is tested successfully first.

You can also see the gap in SPY, the S&P500 Spider (more SPY Charts) ETF :





State Street Investor Confidence Index Rebounds in January

Today State Street Global Markets, the investment research and trading arm of State Street Corporation (NYSE:STT), released the results of the State Street Investor Confidence Index for January 2009. Global Investor Confidence increased by 12.1 points to 60.3, from December’s revised level of 48.2. The move higher was led by North American institutional investors, whose confidence climbed 21.2 points from December’s record low of 30.6 to 51.8.



“The move up in Global Investor Confidence this month is the largest we have seen since August 2007,” commented Froot. “This is perhaps not surprising, with the Index having registered a record low in December. While institutions looked more favorably on risky assets this month than they did at any time in the fourth quarter of 2008, it remains to be seen whether these reallocations represent changes in long-term convictions about the value of those assets.”

“The rebound in confidence among North American investors is the most striking thing about this month’s results,” added O’Connell. “The increase represents a substantial improvement in outlook. While some of the increase is attributable to risk reallocations going into the New Year, it may also be true that institutional investors perceive that the risk of systemic collapse has abated somewhat in the wake of recent policy actions."

According to State Street, their “State Street Investor Confidence Index® measures the attitude of investors to risk. Developed by Harvard Professor Ken Froot and State Street Associates Director Paul O'Connell, the Index uses the principles of modern financial theory to model the underlying behavior of global investors. Unlike other survey-based confidence measures that focus on expectations for future prices and returns, the Index provides a quantitative measure of the actual and changing levels of risk contained in investment portfolios representing about 15% of the world's tradable assets.

I currently follow six sentiment indicators in my newsletter. These indicators are:

CNBC Week 10 Trivia Answer: Jobless Claims Are Reported?

Weekly Question for week 10:
  • Jobless claims are reported:

Weekly Answer for week #10:

  • Weekly
==> Daily CNBC Bonus Bucks Trivia Answers

Thanks for your support!

Friday, January 16, 2009

Was Barney Frank Responsible For Financial Collapse?

This must watch video shows that president Bush, his Treasury secretary John Snow and former Federal Reserve chairman Allan Greenspan all warned the government sponsored enterprises (GSEs) were getting too big and needed better regulation. I remember this well and how congressman Barney Frank led the effort to block regulation.

In September 2003, Frank, then the ranking Democrat on the Republican-led Financial Services Committee, opposed Bush administration proposals for transferring oversight of Fannie Mae and Freddie Mac by creating an independent agency to supervise the GSEs. His reasons were more regulations would make it harder to buy homes for those who could not afford to pay back the loans, the poor.

Wikipedia writes:
"The administration's proposal, which was endorsed in large part ... by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies ... [it] does not alter the implicit guarantee that Washington will bail the companies out ... Nor would it remove the companies' exemptions from taxes and antifraud provisions of federal securities laws." The proposal would have moved oversight from Congress and the Department of Housing and Urban Development to the new agency. Frank stated in 2003, "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."[36] Frank stated that the bill would potentially "[weaken] the bargaining power of poorer families and their ability to get affordable housing".[36]
After the Democrats took control of the house, in 2007 Frank was rewarded with the chairman of the House Financial Services Committee which oversees housing and banking industries. Talk about letting the fox oversee the hen house. Less than a year later, the banking industry was in a shambles.

[36]Sephen Labaton (Published: September 11, 2003). "New Agency Proposed to Oversee Freddie Mac and Fannie Mae - New York Times". Query.nytimes.com.
September 11, 2003: "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
Who do you blame for the financial collapse? At the heart of the mess, greedy for fees loan agents made loans to people who lied about their ability to repay the loans. This did not have to happen.

Wednesday, January 14, 2009

Text of Steve Jobs’s Medical Leave Letter to Apple Employees

Last week Apple’s (AAPL Charts) co-founder and chief executive Steve Jobs told the media that he was being treated for a hormone problem which was responsible for his sudden weight loss. Today he admitted the problem was much worse than he thought and told his employees in a letter that he would take a leave of absence through June in order to focus on his health. Here is the text of his letter as released by Apple.
Team,

I am sure all of you saw my letter last week sharing something very personal with the Apple community. Unfortunately, the curiosity over my personal health continues to be a distraction not only for me and my family, but everyone else at Apple as well. In addition, during the past week I have learned that my health-related issues are more complex than I originally thought.

In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June.

I have asked Tim Cook to be responsible for Apple’s day to day operations, and I know he and the rest of the executive management team will do a great job. As CEO, I plan to remain involved in major strategic decisions while I am out. Our board of directors fully supports this plan.

I look forward to seeing all of you this summer.

Steve
Some "unnamed Apple Insiders" had reported that Steve Jobs was in complete denial about the severity of his condition so this is a good thing for him to take time to deal with his health. Hopefully, his cancer does not return and he can return as planned in the summer.

AAPL Charts

Intraday Chart for Apple Inc (NASDAQ)


In after hours trading, Apple was down $6.03 to $79.30 after closing the day at $85.33.

Day's Range:$84.72 - $87.25
52wk Range:$79.14 - $192.24

Projected Earnings (E) as of:
Cash/ share Current
PE
5 Yr
PEG
FY (Sept) 2009 Low Earnings (E) = $3.70 $27.55 23.1 1.2
FY (Sept) 2009 Avg. Earnings (E) = $5.05 $27.55 16.9 0.9
FY (Sept) 2009 High Earnings (E) = $5.67 $27.55 15.0 0.8
FY (Sept) 2010 Low Earnings (E) = $4.66 $27.55 18.3 0.9
FY (Sept) 2010 Avg. Earnings (E) = $6.05 $27.55 14.1 0.7
FY (Sept) 2010 High Earnings (E) = $7.93 $27.55 10.8 0.6
Next Earnings Date 01/21/09



More AAPL Charts



NT Nortel Networks Files for Bankruptcy

Telecom giant Nortel Networks (NT) filed for Chapter 11 bankruptcy protection in Delaware today.


This is sad for me. NT was one of our major customers for fiber optics products designed and manufactured by my group at Hewlett-Packard (HPQ - charts) before I left HP in 1998 to write about investing and build web sites while living off my investments to fund my work.

At NTs peak during the tech bubble of 2000, Nortel reported about $30 billion of annual revenue and employed nearly 93,000 employees. Since then, Nortel lost out to Cisco and Juniper Networks Inc., whose products enabled telephone companies to transmit phone signals over Internet lines.

Here is a short history of NT from Reuters:
  • Sept 1998 -- Company changes name to Nortel Networks from Northern Telecom underlining its shift toward data and multimedia networking from telecommunications
  • May 1, 2000 -- BCE Inc (BCE.TO), Canada's biggest telecommunications group, completes spinoff to shareholders of 35 percent stake in Nortel, worth about C$88.5 billion ($75.6 billion)
  • July, 2000 -- Nortel shares reach a high of C$124.50, or more than C$1,100 each if adjusted for a stock consolidation that took place in late 2006, giving it a market cap of more than $250 billion.
  • Oct. 24, 2000: Stock drops about 20 percent after company misses revenue target.
  • Feb. 15, 2001 - Nortel cuts 2001 earnings and sales forecast in half, blaming severe erosion in U.S. economic conditions. The warning triggers a 33 percent drop in its stock and brings class-action lawsuits.
  • May 29, 2002 - Nortel plans to cut 3,500 jobs and sell more assets as it pares its revenue forecast.
  • June 4 - Nortel shares collapse to decade-long lows on concerns a new financing will further dilute its stock. Cash-hungry Nortel raises $1.49 billion June 7.
  • Oct. 23, 2003 - Nortel reports a quarterly profit, but says it will restate results going back to 2000.
  • March 15, 2004 - Nortel says it will likely restate results for a second time and delay filing its annual report.
  • April 5 - The U.S. Securities and Exchange Commission launches a formal investigation into Nortel's accounting
  • June 29 - Nortel exits manufacturing business, sells plants to Flextronics International, transfers 2,500 staff.
  • Sept. 30 - Nortel cuts almost 10 percent of its staff, 3,250 jobs, and vacates offices worldwide.
  • Jan. 11, 2005 - Nortel restates its results and says 12 senior executives will repay $8.6 million of bonuses.
  • Oct. 17 - Motorola's No. 2 executive, Mike Zafirovski, is appointed CEO, promising renewed growth and focus.
  • Feb. 8, 2006 - Nortel says it will pay $2.47 billion to settle two class-action suits from its accounting scandal.
  • Feb. 7, 2007 - Nortel slashes 3,900 jobs and shifts 1,000 positions to lower-cost locations such as China and India.
  • Oct. 15 - Nortel pays $35 million to settle civil charges filed by the SEC related to its accounting scandal.
  • Feb. 27, 2008 - Nortel says it will cut 2,100 jobs as it faces persistently slow demand for its products.
  • Sept. 17, 2008 - Nortel cuts revenue forecast, plans another round of restructuring and the sale of its Metro Ethernet Networks business. It says it may also look for a partner to develop fourth-generation wireless technology.
  • Nov. 10 - Nortel announces 1,300 layoffs, a freeze on salary increases and a review of its real-estate portfolio after posting a $3.4 billion quarterly loss.
  • Jan. 14, 2009 - Nortel files for Chapter 11 bankruptcy protection in the United States

Nortel follows Lucent as a major failure. The combined company, Alcatel/Lucent (ALU) has a stock prices that looks to be in poor shape also.


Will Alcatel-Lucent survive?




Current US Treasury Rates


Currently, the 30-year US Treasury rate is back under 3.0%.

More at US Treasury Rates at a Glance

The U.S. Treasuries Rates for Today are:

TERMCOUPONMATURITY
DATE
CURRENT
YIELD
3-Month0.00004/16/20090.10%
6-Month0.00007/16/20090.28%
12-Month0.00001/14/20100.43%
2-Year0.87512/31/20100 .73%
3-Year1.12501/15/20121.03%
5-Year1.50012/31/20131.36%
10-Year3.75011/15/20182.20%
30-Year4.50005/15/2038 2.91%

Monday, January 12, 2009

SDS Warning: UltraShort S&P500 ProShares Not For Long Term Positions

The UltraShort S&P500 ProShares Fund (Ticker SDS) may strive for daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the S&P 500 index, but the expense drag to create the leverage may make the fund unsuitable for a long term "investment."

According to ETF Connect, in 2008, SDS gained 69.72% and SPY lost 37.70%. Twice the SPY losses would be 75.4%. The 5-day charts below show tight two to one inverse tracking over 5 days but over a year, it appears about 6% are lost to fund and transaction costs. 6% per year is a large fence to jump for an investment.

Chart of the S&P500 Index (^GSPC) vs SDS
Click Current Chart Courtesy of Yahoo! for more info

Click Current Chart Courtesy of Yahoo! for more info

As the historical chart below shows, the S&P500 was down a couple of percent over the three month period ending January 9, 2009 while SDS was down over 30%!

This doesn't make sense given Yahoo! charts are supposed to include the distributions. This table shows SDS paid a hefty dividend:
DateOpenHighLowCloseVolumeAdj Close*
31-Dec-0872.6572.9169.5770.9421,322,20070.94
30-Dec-0875.3376.0472.5872.7123,975,60072.71
29-Dec-0875.9178.6175.6476.1318,977,50076.13
26-Dec-0875.6977.0075.6076.119,761,70076.11
24-Dec-0877.1077.9676.3676.838,619,40076.83
23-Dec-0875.4078.2674.6077.4331,689,80077.43
23-Dec-08 $ 11.49 Dividend
22-Dec-0884.5890.5084.4387.4435,138,40075.95

I would not be happy trading SDS to scalp a few percent then learn I got a 14% dividend to pay taxes on!

As the next historical chart shows, SDS seems to work well on a daily basis for day traders who enter and exit many times during a day.

FUND OPERATIONS

SDSCategory Avg.
Total Expense Ratio0.91%N/A
Total Net Assets2.90B170.28M


Contact Info: ProShares client Services at 866-PRO-5125 or email them at info@proshares.com
Webstite with fund list: http://www.proshares.com/funds


CNBC Weekly Trivia: UltraShort S&P500 ProShares (SDS)

Warning: UltraShort S&P500 ProShares Not For Long Term Positions
The UltraShort S&P500 ProShares Fund (Ticker SDS) may strive for daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the S&P 500 index, but the expense drag to create the leverage makes the fund unsuitable for a long term "investment." The article shows why.

CNBC Weekly Trivia Question for week 9:
  • If the S&P 500 goes down 1%, how much does SDS go up?

Weekly Answer for week #9:

  • 2%

  • Warning! Expense drag can be a real problem with SDS as this article explains:

==>
Daily CNBC Bonus Bucks Trivia Answers

Thanks for your support!

Sunday, January 11, 2009

SOX - Semiconductor Index Trading Channel & Weekly Valuation Numbers

Until the dashed green support line is broken, this is the trading channel for the SOX, also known as the Philadelphia Semiconductor Index.

Click stockcharts.com graph for full size image

The 18 companies in the SOX are Altera Corporation (ALTR) (charts), Applied Materials (AMAT) (charts), Advanced Micro Devices Inc. (AMD), Broadcom Corporation, (BRCM) Infineon Technologies AG (IFX), Intel Corporation (INTC) (charts), KLA-Tencor Corporation, (KLAC) Linear Technology Corporation (LLTC), Marvell Technology Group, (MRVL) Micron Technology, Inc. (MU), National Semiconductor Corporation (NSM), Novellus Systems, Inc. (NVLS), SanDisk Corporation (SNDK) , STMicroelectronics N.V. (STM), Teradyne, Inc. (TER), Taiwan Semiconductor Manufacturing Company, (TSM) Texas Instruments Incorporated (TXM) and Xilinx (XLNX).

This table shows their recent closing price and percent weighting in the SOX index.

Name
Ticker
Price
% of Index
Altera Corporation (charts)
ALTR 15.800000 7.8102
Applied Materials, Inc. (charts)
AMAT 10.370000 5.1261
Advanced Micro Devices, Inc. AMD 2.690000 1.3297
Broadcom Corporation BRCM 16.940000 8.3737
Infineon Technologies AG IFX 1.250000 0.6179
Intel Corporation (charts)
INTC 14.150000 6.9946
KLA-Tencor Corporation KLAC 22.050000 10.8997
Linear Technology Corporation LLTC 22.200000 10.9738
Marvell Technology Group
MRVL 6.860000 3.3910
Micron Technology, Inc. MU 3.290000 1.6263
National Semiconductor Corporation NSM 10.090000 4.9876
Novellus Systems, Inc. NVLS 13.770000 6.8067
SanDisk Corporation SNDK 12.300000 6.0801
STMicroelectronics N.V. STM 6.540000 3.2328
Teradyne, Inc. TER 5.240000 2.5902
Taiwan Semiconductor Manufacturing Company
TSM 7.490000 3.7024
Texas Instruments Incorporated TXN 14.960000 7.3950
Xilinx, Inc. XLNX 16.310000 8.0623

Here are the weekly valuation numbers from Donald Wennerstrom for the SOX.

PEG is the Price to Earnings ratio (PE) divided by First Call's estimated long term growth rate. For example, Intel closed 1/9/09 at $14.15 and is expected to earn $0.71 per share so its PE ratio is $14.15/$0.71=19.93 (rounded to 20) . Divide 20 by an estimated 12% growth rate and it has a PEG of 1.62.

In my newsletter and with my personal money, I like to trade Lam Research (Ticker LRCX - more LRCX charts) around a very low cost core position. Key attributes for LRCX are its greater volatility and better business model compared to most of the better known and more widely followed stocks in the SOX.

I'd love to see LRCX break-out....

Disclaimer: I currently own and trade ALTR, AMAT, INTC and LRCX in my personal portfolio and "Kirk Lindstrom's Investment Newsletter." I may buy or sell shares at any time, often at "Auto Buy" and "Auto Sell" levels set ahead of time in the newsletter. I will not be announcing decisions to buy or sell here ahead of time.

18 SOX Ticker symbols: ALTR, AMAT, AMD, BRCM, IFX, INTC, KLAC, LLTC, MRVL, MU, NSM, NVLS, SNDK, STM, TER, TSM, TXN, XLNX

Friday, January 09, 2009

ECRI's FIG Shows Inflation Pressure at a 50-Year Low

The Economic Cycle Research Institute, a New York-based independent forecasting group known as ECRI, said inflation pressure is at a 50-year low. (More about ECRI.)

Underlying inflationary pressures dropped further in December, according to ECRI's U.S. Future Inflation Gauge (USFIG). The value of the USFIG lies in its ability to measure underlying inflationary pressures and thereby predict turning points in the U.S. inflation cycle.

The USFIG declined to 85.5 (1992=100) in December from 86.7 in November, though its smoothed annualized growth rate (charted below) ticked up to -36.5% from -37.7%. The gauge was pulled down in December by disinflationary moves in measures of commodity prices, vendor performance, unemployment and job growth, partly offset by inflationary moves in measures of loans and interest rates. A spokesperson for ECRI said:
"It is notable that the USFIG was in a clear cyclical downswing in mid-2008, when financial markets and monetary policy makers alike were mistakenly concerned about the threat of inflation. With the USFIG now sliding to a half-century low, U.S. inflation pressures are in full retreat."

Click to see larger FIG Growth Rate chart

The very low US-FIG means means the Federal Reserve can keep the Fed Funds rate low since inflation pressure is still in a cyclical decline.

The Fed Funds target rate is currently a range between zero and 0.25%.

More Information:

Tuesday, January 06, 2009

DOW Annual Performance Following A 15% or More Annual Decline

Last year's 33.8% decline in the DOW tied for third with 1930 for the worst annual declines in the DJIA. Can we draw any conclusions about the future from the past?

This chart from Schaeffer Research shows the annual return of the DJIA following the largest annual declines that range from -15.4% in 1941 to -52.7% in 1931.

The table shows that following annual declines of over 30% the market in the following year gained anywhere between a loss of 52.7% and a gain of 81.7%.

After an annual decline of 15% or more, four times the losses were 20% or more and four times the next year saw gains of at least 40%.

Only a monkey with a dart can make a prediction for next year based on that data!

Monday, January 05, 2009

High Cash Stockpile Available to Buy Stocks to Fuel a Rally

Americans have an estimated $8.85 trillion in cash, bank deposits (CDs and savings accounts) and money market funds. [ A trillion dollars is one thousand times one billion dollars or one million times a million dollars! ] This is roughly equal to 74% of the market cap of the US stock market.

[Chart posted on SiliconInvestor and cites the Federal Reserve Bank of St. Louis and Bloomberg for the statistics.]

Americans have not had so much free cash available as a percentage of stock market value to buy stocks , houses or iPods and big screen TVs since the 1980s, over 20 years ago.


Some think this could signal a rebound for the stock market. The Bloomberg article states:
So-called money of zero maturity, the central bank’s measure of U.S. assets available for immediate spending, is mostly held by households, according to Richard G. Anderson, an economist at the Federal Reserve Bank of St. Louis.

‘Dry Powder’

“What the cash pile on the sidelines represents is dry powder,” said Fritz Meyer, the Denver-based senior market strategist at Invesco Aim, which manages about $358 billion. The firm’s $1.17 billion Aim Diversified Dividend Fund beat 96 percent of its competitors this year, and the $3.95 billion Aim Charter Fund topped 93 percent of similar mutual funds.

Recovery in the second half of the year will probably play out,” Meyer added.

Any recovery will depend on a rebound in corporate profits and the economy after $30 trillion was wiped out from world equities this year, according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

‘Biggest Cannon’

...Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg survey of economists.

The fuel supply is there, but people have to have a reason to use it,” said Dickson, who helps oversee about $19 billion. “The Fed fired the shot out of the biggest cannon they know. Now the question is, will it hit the right mark?”

A close look at the chart shows the cash stockpile was even higher when the great bull market began in 1982. The stock market could drop significantly from here to push the line in the second chart to its record level of just over 120% so I am NOT suggesting this is signaling a buy.

What the chart does show is there is a ton of money on the sidelines now compared to January 2000 when the great bull market ended and the secular bear market priced in gold began.

See DJIA Priced in Ounces of GOLD: The Secular Bear Market Continues

Click chart courtesy of stockcharts.com for full size image

At the very least, this large amount of highly liquid money is available to fund a significant rally at any time and it may have started already. I added shares to my "newsletter explore portfolio" last year near the lows and will look to take significant profits if this rally comes to be. I will also be watching the chart of the DJIA priced in Gold and many of my other sentiment indicators to get an idea when the rally is long in the tooth so I can sell at the best prices.

If you want to know what I have been buying in this period of weakness with my profit taking dollars from selling when the market was higher, Subscribe to Kirk's Investment Newsletter TODAY and get the January 2009 Issue for FREE!

DJIA Priced in Ounces of GOLD: The Secular Bear Market Continues

When measured in ounces of Gold, the DOW has been in a secular bear market since peaking in late 1999.
Click chart courtesy of stockcharts.com for full size image

A chart of the DOW Jones Industrial Average (DJIA Charts) priced in gold shows the markets are not as healthy as one might think due to the decline of the US dollar.
  • Back in 1999, it took 45 ounces of gold to buy the DJIA.

  • Today it only takes 10.31 ounces of gold to buy the DOW!
The good news is the chart shows the DOW:Gold ratio is very over sold.

Cutting the Fed Funds target rate from 6.50% in January 2001 to 1.0% in June 2003 may have inflated the US stock market out of its March 2000 to October 2002 bear market when priced in dollars but it had consequences. These consequences include causing the housing bubble whose collapse has made things worse today as major US banks have failed in the past year. Skyrocketing commodity prices may have pushed us into a global recession also.

Now the Fed has cut the Fed Funds rate to a rage of zero to 0.25%. This could cause another inflationary bubble somewhere if the Fed succeeds in preventing a deflationary depression by its actions. I added significantly to my favorite TIPS (Treasury Inflation Protected Security) fund (Charts of VIPSX TIPS Fund) recently when the base rates were over 3.0%:
Date 5 yr 10 yr 20 yr 30 yr

TIPS TIPS TIPS TIPS
10/4/08 1.60 2.16 2.45 2.42
10/11/08 2.46 2.96 2.97 2.94
10/18/08 2.52 2.86 2.88 2.83
10/25/08 2.92 2.98 3.02 2.98
11/1/08 2.80 3.13 3.34 3.31
11/8/08 2.18 2.71 2.97 3.17
11/15/08 2.42 2.86 2.8 2.79
11/22/08 2.50 3.01 3.03 3.05
CDs have been a "safe haven" for those wishing to preserve assets and get a small inflation adjusted return. See "Very Best CD Rates with FDIC" for a list of the best rates and terms.

US Treasury rates are so low, that they are paying less than long term inflation. See:

More on "Symetrical Triangle" chart patterns: The Bible for technical analysis, Technical Analysis of Stock Trends, by Robert Edwards and John Magee, says about 75% of symmetrical triangles are continuation patterns and the rest mark reversals. This book makes a great Gift!

The "return to the apex" of the Gold/DOW ratio in late 2001, early 2002 confirmed the technical breakdown of this chart pattern.

For more information, read chapter eight "Important Reversal Patterns - The Triangles."

Click the flag pictures to see



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Friday, January 02, 2009

2009 Dogs of the DOW

The "Dogs of the DOW" are the ten highest yielding stocks in the Dow Jones Industrial Average at the end of the year.

The Dogs of the DOW for 2009 are
Symbol Company Price Yield




BAC Bank of America 14.08 9.09%
GE General Electric 16.20 7.65%
PFE Pfizer 17.71 7.23%
DD DuPont 25.30 6.48%
AA Alcoa 11.26 6.04%
T AT&T 28.50 5.75%
VZ Verizon 33.90 5.43%
MRK Merck 30.40 5.00%
JPM JP Morgan Chase 31.53 4.82%
KFT Kraft 26.85 4.32%
Prices and yields shown are the 12/31/08 close.

2008 Dogs of the DOW

The 10-year US Treasury ended 2008 with a 2.24% yield and the 30-year was at 2.691%.


COUPONMATURITY
DATE
CURRENT
YIELD %
3-Month0.00004/02/2009 0.08
6-Month0.00007/02/20090 .27
12-Month0.00012/17/20090 .37
2-Year0.87512/31/20100 .87
3-Year1.12512/15/20111.11
5-Year1.50012/31/20131.71
10-Year3.75011/15/20182.41
30-Year4.50005/15/2038 2.81

Beware! Sometimes stocks are in the "Dogs of the Dow" list in anticipation of dividend cuts and/or poor stock performance in the year ahead. The 2008 Dogs of the DOW were real dogs. They under performed the market as two of the top three high yield stocks, Citigroup and GM, were crushed by poor business execution.

In 2008, the DOG of the Dow were down 41.6% versus the Dow Jones Index performance of -36.9%.

See U.S. Treasuries Rates at a Glance for more rates and yields vs. time.

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Since 9/30/98 inception, "Kirk's Newsletter Explore Portfolio" is UP 390%
vs. the S&P500 UP only 51% vs. NASDAQ UP only 57% (All through 12/31/11)
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Q1 2012 Update: Up 11.3% YTD as of 3/31/12
(remember this 2012 performance is with 1/3 in fixed income!)



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