Stock Market and Political Commentary

Buy This Exchange Traded Fund (ETF) at $71.31?

This Exchange Traded Fund (ETF) appears ready for a rapid rise in price based on technical and fundamental reasons.  More importantly the risk/reward ratio appears to be in the buyers favor at this time and price.

Buying a stock or ETF at a price more than 5% above the price shown would be considered “chasing” the equity and can often be a mistake; it is not recommended. Disclaimers

 

Action: BUY

Stock:  ProShares Ultr Short Dow 30 (DXD)

Current Price: $71.31

Graph

This Exchange Traded Fund (ETF) appears ready for a rapid rise in price based on technical and fundamental reasons.  More importantly the risk/reward ratio appears to be in the buyers favor at this time and price.

Buying a stock or ETF at a price more than 5% above the price shown would be considered “chasing” the equity and can often be a mistake; it is not recommended. Disclaimers

 

Action: BUY

Stock:  ProShares Ultr Short Dow 30 (DXD)

Current Price: $71.31

Graph

Market Action During the Depression

Just what did the stock market do during the Great Depression in the 1930s?  Were there any rallies or was it just all down, down, down for 10 years? And what were prominent people saying as the market was falling?

Most people would be surprised to learn there were actually many strong rallies during the 1930s.  Some of them occurred as the market was falling from just under 300 to a low of 41.22 in 1932.  Those who were suckered into the rallies soon were wiped out when the next leg of the bear took the market to much lower levels.

"Most investors know that the Dow Jones Industrial Average did miserably during the Depression of the 1930s. It began the decade at 248.48, down from a high of 381.17 before the crash of 1929. By July 1932, the depths of the Depression, the industrial average was crawling at 41.22. It ended 1939 at 150.24."

"What many investors don't know is that the 1930s were also the most volatile decade on record for stock prices. Investors, their nerves rubbed raw by the Depression, were prone to fits of euphoria and despair."

See Chart

The volatility we have seen recently in the market correlates with what was seen during the Great Depression years.  Keep in mind that huge volatility indicates financial and economic turmoil, not financial and economic stability.

Are we at the bottom in this market today?  Nobody knows for sure, but we seriously doubt it.  Think about this.  The market in 1929 was at 381.17 and the bottom in 1932 was at 41.22.  This is almost a 90% drop.

In 2007 the market topped at just over 14,110 for the Dow.  A similar drop to that experienced in the great depression would take us to around 1,525 on the Dow.  Currently we are at around 8,800.

So as you can see, if we experienced the same type of drop now this bear market is only getting started.  It is our sincere hope this is not the case, but we do believe there is more pain to come before this bear is through.

And just what were people saying as the market was crashing?  Did they all recognize it was a bear market that would bring financial ruin to America for a period of time?  Hardly.

Examples:

"We will not have any more crashes in our time."
- John Maynard Keynes in 1927

"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
- R. W. McNeal, financial analyst in October 1929

"... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
- HES, November 10, 1929  

"In most of the cities and towns of this country, this Wall Street panic will have no effect."
- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

See More of What They Said

If you think history cannot repeat itself, think again!  Only time will tell whether it will or not at this juncture, but odds are looking like it may do just that so be aware of what happened before and be very cautious with going long the market at this time.

J. Cogburn

Billionaire Club Files for Bankruptcy

A friend writes.....

Poor old Bill(The Yellowstone Club, which includes Bill Gates as a member) they are closing his club

http://ca.finance.yahoo.com/personal-finance/article/forbes/901/billionaire-club-files-for-bankruptcy

Our market went up 500+ pts. today, our market has been up all week, have we passed the point of no return, The 8k markets are they a thing of the past? One of the hockey guys today said "5 up days indicates a turn around". Never heard this before, have you?

Your Dow went from 8057 on Friday last week to 8829 today. The Dow was no slouch either. Monday ??? Down or Up? If last week close and this week open are any indication Monday should be up. WOW!!!!
  Your feed Jim.

My response......

Yes I really feel sorry for these guys.... my keyboard is so wet with my tears I'm afraid it may not function much longer... I think the Buffet's Berkshire fund is down about 50% too and some of the rich guys have been completely wiped out.

 

It's a tough world out there when financial chaos begins.... hard to make money.  As you will see from my closed trades on the Quick Profit Stock Tips site in the last few weeks I only hold them for a few days at most for a quick profit.... take it while you can, especially in a vicious bear market.

 

Some of the tips I released earlier in the year have been crushed.  This is especially true of the shipping stocks.  It's my fault we didn't close these when they were down at least 20% in order to keep them from becoming disasters.  But for now it's dead money in a few of those while we peck away with profits on short trades, as you can see from the  closed tips log, and wait for the losers to hopefully rise again someday.

 

Lots of people have been hit hard by this bear and in my estimation it is not done yet.  See my post on the blog from this evening for more detail.

 

There is nothing magical about 5 up days in a row except it shows we have had  a very sharp rally.... most up in 5 days since 1933.  But so what?  We were down the most since the 30s as well over the last few weeks.

 

Bear market rallies are almost always very violent for a few days.  The problem is that you don't know for sure when the rally will end and the bear will once again come to life.  It can happen at any time.

 

While you are riding the bull you had better keep an eye out for the return of the bear!

 

RWG

 

 

Is the Bear Market Dead or Still Alive?

In the last 7 trading days the market first dropped about 900 points in 2 days and slid off the 800 ledge as measured by the S&P 500 index.  This took all the major averages to new lows during the bear market  of 2008.  Then it rallied to slightly above these levels where the drop began in the next 5 days.

Some would say this is simply a continuation of the bear market that actually began in March of 2000.  Looking at it that way we would see a steep drop for a couple of years followed by a 4 1/2 year rally that took the Dow Jones Industrial Average to new highs but left the NASDAQ still 50% below its old high even after a multi year rally from its low after the initial selloff.

After this huge rally over the last 5 days where are we now?  Still below 900 on the S&P 500 index which is at least a couple of hundred points below where the average was in September of this year and over 600 points from its all time high in October of 2007. 

See the commentary written on October 3rd, Long Term Stock Market Chart - Ominous Double Top Pattern.  In this article I thought the first bounce would be in the 800 area which was correct as there were a few rally attempts from this area lasting for 5 weeks and now extending a couple of weeks more as of today with this latest rally.

So now after dipping its toe in the 700s on the S&P the market decided to climb back up to the 800 ledge for now.  But where does it go from here?

Although it broke through some downtrend lines and may have a bit of steam left we still believe at this point this is simply a typical sharp rally in an ongoing bear market.  Of course nobody knows for sure so only time will tell.

But we don't think a drop of this magnitude and intensity will end overnight.  The best scenario we see would be one in which the market continued to move back and forth for at least several weeks in this area to build a base before moving higher.

As long as the major moving averages are headed down sharply we remain bearish and see lots of resistance above the 925 level on the S&P 500 index.  Lots of investors are just waiting for their chance to get out even should the market go high enough in this rally.

At the same time we realize many stocks have been crushed to almost nothing even though they still have decent earnings.  This is what makes bear markets so volatile as true bargains for quick short term trades can be picked up and sold in a few days for a nice profit so fear quickly turns to greed. 

But unless the bear market is over you must be very quick and nimble to take advantage of these situations as stocks that are low now can sometimes go even lower on the next round of selling. See some of our recent trades at Quick Profit Stock Tips.

In the final analysis at this time we still believe the bear is alive and will ultimately take the S&P 500 down to the 450 area sometime in 2009.  If we are right then the question is how long it plays around on the 800 ledge before the next true down leg occurs.  We shall see said the blind man.

S&P 500 Chart

RWG

Medical Care for Prisoners at Guantanamo

The democrats sadly reported over and over during the campaign that 47 million Americans were without health insurance. But instead of buying some insurance for law abiding citizens our government decided to provide expensive procedures for terrorists who were caught trying to kill our soldiers.

The recent Ann Coulter article says in part....

"After being captured fighting with Taliban forces against Americans in 2001, Abdullah Massoud was sent to Guantanamo, where the one-legged terrorist was fitted with a special prosthetic leg, at a cost of $50,000-$75,000 to the U.S. taxpayer. Under the Americans With Disabilities Act, Massoud would now be able to park his car bomb in a handicapped parking space!"
   
"No, you didn't read that wrong, because the VA won't pay for your new glasses. I said $75,000. I would have gone with hanging at sunrise, but what do I know? "

"Upon his release in March 2004, Massoud hippity-hopped back to Afghanistan and quickly resumed his war against the U.S. Aided by his new artificial leg, just months later, in October 2004, Massoud masterminded the kidnapping of two Chinese engineers in Pakistan working on the Gomal Zam Dam project."

See complete article

So I guess we need to make sure all the medical needs and expensive medical procedures are provided for the remaining 250 hard core enemies remaining at the resort before releasing them if they haven't been taken care of at this point.  Really folks, do you think with what we do to make these people comfortable and provide them with good food and medical care that torture is what everyone should be concerned about?  I don't think so.

RWG 

Will Stocks Follow Oil Prices?

How low will the stock market averages go if they follow the percentage losses of oil  and many other commodities over the last few months?

Crude Oil topped out at just under 150 dollars a barrel on July 11, 2008.  Recently it has been trading around 50 dollars per barrel.  This is a loss of about 66 percent in about 4 months time.

The stock market hit its closing high on October 9, 2007 at just over 14,000.

Record highs

Closing:	14,164.53	Tuesday, October 9, 2007
Intra-day Actual:	14,198.10	Thursday, October 11, 2007
Intra-day Theoretical:	14,279.96	Thursday, October 11, 2007

More details

So if the stock market drops in similar percentage terms to where the oil market has dropped to date we would have a Dow Jones Industrial Average of around 4,815.  This would be in line with the 450 level on the S&P 500 which I have said will be the next downside target if the market falls off the 800 ledge.  It has dipped below it, but is still struggling to hang on for now.

Of course we don't know that the oil price has hit bottom yet.  The key will be how deep this recession turns out to be and whether the dollar stays strong or in fact collapses as some believe it will after this recent rally.  If that happens it would put upward pressure on the oil prices this commodity is priced in dollars and as the dollar goes down the oil price tends to go up.

Bottom Line:  We have already seen many commodities lose over 60% of their value in a few months time.  If the stock market follows this percentage loss we will be looking at a Dow of 5,000 or less before this bear market ends.

RWG

Can Obama's Team Save the Economy?

Barack Obama ran on the idea of change.  He promised to rid Washington of the old guard because you cannot change Washington with the same old people he said.

So who is he choosing for his economic and foreign policy teams?  The same old people.  And when I say old, I mean old!  Paul Volker is in his 80s and was the Federal Reserve Chairman under Jimmy Carter and Ronald Reagan.  He was the man who was credited with killing the inflation monster that got out of control during the Carter years even though he drove interest rates through the roof to do it.

This is not necessarily a bad thing as a man like Paul Volker might actually give him some good advice.  But it is certainly different than what he promised during the campaign.

This is the thing with a guy like this who has never been an executive in private enterprise or in government.  You don't know for sure what he is going to do.  He might fill his cabinet with all young radicals or he might pick guys and gals who have been around Washington forever.  So far it looks like he is mostly opting for the latter.

He has also said they will throw as much money at this problem as needed to keep the economy from going into a deep recession or depression.  And the government so far has added trillions to the system in the last few months, but so far the economy is still sliding south.

Will guys like Paul Volker and unlimited amounts of money be able to keep the economy from tanking or will all this be for naught in the end with unintended consequences to boot down the road?

I tend to believe it will be the latter, but we shall just see if they are willing to do the things needed to truly spur the economy, such as reduce tax rates on corporations and capital gains, or whether they will do just the opposite and raise taxes instead.

Having Paul Volker on the economic team gives me some hope, but only time will tell whether Obama will a) get some good advice, and b) recognize and act on good advice when he hears it.  Since he is so inexperienced maybe he will or maybe he won't, but at this point it's too early to tell.  Maybe we will get lucky, but don't bet the farm just yet.

RWG

Home Prices Plunge - Family Wealth Gone

"NEW YORK (Reuters) - Prices of single-family homes in September plunged a record 17.4 percent from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indices issued on Tuesday."

For most families this puts a major dent in their net worth and for many it means they now owe more than their assets are worth.  On a 200,000 dollar home, a 17.4% drop means a loss of over 34,000 dollars.  This represents nearly a year's salary for many Americans.

But for those who are looking to buy a home this drop represents a chance to get in at more affordable prices.  The question for them is whether this real estate plunge is near the bottom or whether they too will be looking at losing money because of falling house prices even though they bought well below the peak which occurred over a year ago.

Trillions of dollars of family wealth have been lost in the last year due to falling stock and real estate prices.  This will have an effect on consumers as they simply will not have the money to buy many of the luxuries as they did in the past.  And now they can no longer use their homes as an ATM machine through home equity loans because of tight credit and falling real estate prices.

So look for discount stores to be more crowded and auto showroom floors to be near empty in the coming months as the consumer is forced to curb spending for a while.  The drop in consumption will likely result in higher unemployment for a while as well.

http://biz.yahoo.com/rb/081125/business_us_usa_economy.html

RWG

Stock Market Rally or Bear Trap Ahead?

The market rallied late on Friday due to the new Treasury Secretary announcement for the Obama administration. It is encouraging that Obama and his team have made this announcement now given the economic situation.  Further delays would not have been good as it would simply have added more uncertainty into this already uncertain situation.

This gives hope to the bulls that a year end rally is ahead and stocks should be bought now at bargain basement prices.  But is this instead just another bear market trap?

As we have said in recent commentaries this is a very tricky time to trade stocks as the market is threatning to drop sharply in a second leg down off the 800 level of the S&P 500 index while at the same time it is very oversold and subject to sharp rallies on news events.  This is especially true when announcements are made which would make investors feel that the Obama team is going to improve the economy or at least make announcements that cause the shorts to cover their positions.

For example, suppose he suddenly announced he was no longer interested in raising rates on capital gains and was no longer interested in raising taxes at all for at least a couple of years.  Or maybe they go back to the uptick rule on short selling... or eliminate the "mark to market" accounting rule.

Any of these type announcements could cause a huge rally in the market at least for the short term.  But sharp rallies are normal in bear markets.  This is why they are hard to trade because short sellers can be whipsawed out on these rallies while longs can be crushed by bear market traps.

Bottom Line:  The market is still in a strong downtrend.  There will be some rallies along the way, but be very careful because until the bear market ends rallies will be short in duration and strength.  The moving average lines are all headed south and until that changes the market will likely, at a minimum, retest old lows before a sustained rally with real strength can begin.

We still believe that over the next few months this market is headed to much lower levels from where it is now.  If we are correct, however, It is still unclear whether the market is going to hang around this 800 level for a while longer or simply drop on off in the near future never to return for several years.

Only time will tell how all this plays out, but in the meantime we again urge you to be very cautious on trading stocks at this juncture.

S&P 500 Chart

RWG

Down the Path to Depression

A friend writes....

The talking heads in Canada said "the problems the US markets are having, in Canada, they will be milder".  Yesterday when the TSX dropped below the 8500 bottom set on Oct 27 I knew there would be big problems today sure enough we were down over 765 pts.. to 7,724.76. I do not see a bottom for quite awhile.
  I fear a lot of people reacted to the lowering of the TSX yesterday as  sell signal. The scenario of a much lower market applies to the US as you mentioned in your blog. Friday is always a strange day in the market let us hope it is really strange and it goes up.
  Obama or McCain there is no difference we need someone who can perform miracles. Where is Mork(from Orkan)?
  I fear the Lord is going to let us suffer for our greed.

My response.....

Yes things are going to get wild I'm afraid as if they haven't been already.  You could see very wild swings up and down in the market, but when the dust settles down the road I'm afraid we are going to be much lower than where we are now.

 

I just don't see how you can wipe out the capital of these once great companies in a matter of months without serious consequences to the economy.... which I'm afraid is the next shoe to drop.  It has already started, but I know it can get a lot worse.

 

None of the world markets will be spared as we are all too interconnected now to escape the carnage especially if the US is taking a major hit.

 

Speaking of miracles, they called Obama the Messiah during the campaign as he said we would look back and realize this was the moment the planet began to heal and the oceans would obey his commands too.

 

Forget all that... I would be happy if he would just give us full employment, decent wages, and a rising stock market.  But I'm afraid he will be able to do neither.  We got through the Great Depression in the past, but there was a lot of pain and suffering with WWII finally pulling the economy out of the mud.  That came at the cost of 55 million lives.

 

Hopefully it won't be as bad or as long this time if in fact this economy follows the market in a downward spiral..... I said hopefully.

 

What could be done?  Immediate elimination of capital gains taxes to spur investment along with a reduction of income tax rates to the 12 to 15 percent area for everyone above that today.  This might just jump start the economy before it totally stalls out.

 

However, if Obama follows through on his promises I think he will do the opposite of what I would recommend as shown above.  Raising taxes, reducing trade, etc., is the wrong approach I think, but we shall just have to see how it all plays out.

 

RWG