This morning after the homes sales data was released, the Dow Jones once again went below that magical 10,000 number.  Yes, the same number we first talked about in 1999.  Here we are over 10 years later and we’re still talking about Dow 10,000.

According to my calculations, the Dow Jones has crossed above or below 10,000 18 times in 2010.  That’s just in 2010.  When I talk to the average Joe on the street about the market, they constantly discuss the Dow Jones and is it above or below 10,000.  They also make comments about the fact that if the Dow Jones is above 10,000, it is a good market.  This is one of the least reliable indicators you can use.  It’s similar to buying or selling stocks based on one moving average.  The fact that the Dow has crossed the 10,000 mark so many times just this year reiterates the need for income and shows that despite the emotional swings, the market has really gone nowhere in 2010.  I think what we’ve experienced in 2010 is in microcosm what we’ll experience on a bigger scale for the next several years.  The bands may be bigger but I believe the results will show that it was a grind it out, essentially flat market, with a lot of bumps and a market that saw 10,000 come and go many times on the Dow Jones Industrial Average.

Use periods of excessive optimism to sell and excessive pessimism to buy and continue to generate income any way you can.  For the short-term, I think we’re very oversold and due for a bounce.  We may not be done correcting overall but I think the stock market will work its way higher into the mid-term elections.  For now, there is neither excessive optimism or pessimism but the pessimism is certainly winning out which makes me a net buyer of stocks, not a net seller.

The market was off to a reasonable start this morning after great earnings by Apple last night. But, for most of the day, the major indices were basically flat. Then, Ben Bernanke began to speak to Congress giving his semiannual monetary policy report. The more he spoke, the more equity prices fell. I immediately flashed back two years ago when I used to see some politician on television and down we’d go. I’d look on my Bloomberg machine and see that a speech was scheduled later in the day and you’d watch the put options. The speech would start, the market would fall, and S&P 500 put options would fly. Maybe that trade is back on. It sure was today.

I was able to listen to most of the speech and watch the reaction tick by tick in the markets. And what I heard was Ben Bernanke (who I do like) give ALL his various options if the economy gets worse. This wasn’t in his statement but rather in response to a question. Remember, the complaint has been that the Fed is out of bullets. “Helicopter Ben” confidently said there are plenty of tools in his belt. First, he said he can change the language to let people know that the Fed will be more accommodating for a longer period of time. This will give the market more confidence that higher rates aren’t in the cards. Second, he said he could lower interest rates. Third, he said he could buy more bonds to keep rates down and inject more into the system.

Let’s analyze each of these options. First, he can change the language. So, basically that means do nothing. It’s jawboning and cheerleading with no real action. Second, he said he can lower interest rates. ALL the way down from .25% to 0%. Really? Remember when the Fed had rates at 5% or 6% back in the day? We would all wait to see if they were going to drop rates by .5% or .75%. Now, does he really think dropping rates from .25% (basically nothing) to 0% (literally nothing) will do any good? Last, he talked about buying bonds. That’s legitimate and certainly gives us a green light to buy more bonds. But, these different tools don’t sound like tools to me. They sound like the Fed is running out of bullets. I first thought to myself no wonder the stock market is falling. But, then I thought wait a second. This is the problem. We’re still relying on the government to fix everything. Hasn’t the Fed done enough? They’ve done their job. They’re finished. They’ve injected more capital in the last two years than we’ve ever seen. They’ve lowered rates to practically nothing to encourage activity. They’ve purchased bonds to keep rates low for longer than we had originally anticipated. And, they purchased all the “junk” that bank couldn’t sell. What more should we want? But, we saw the market sell off because the Fed wasn’t giving us any new information and inventing any new tools they could whip out of their belt that would surprise us and get the economy back on track any faster.

All those smug politicians asking questions to Ben Bernanke as if they have a clue about finance always cracks me up. I wish he would have asked them “What are you guys (& gals) going to do to get the economy back on track?” How about lowering taxes to stimulate small business growth which in turn creates jobs? But, no. What I saw was Congress cutting Ben Bernanke off in mid sentence so they could look smart and act like bullies.

This evening, I heard a politician say in an interview the Fed has a lot of options because they have so much on reserve. However, it’s not about the reserves. That’s like buying a stock because the company has a lot of cash. When a company has a lot of cash, that’s great but it’s what they do with that cash that’s important. We’re relying on the management to earn a return on that cash, not just sit on it. If the Fed has reserves, that doesn’t help anybody.

Again, I’ll reiterate. The Fed has done their job and it’s time for Congress & the President to step up to the plate and figure out how to grow our economy. All I see right now is other countries growing and the U.S. is about to embark on massive tax hikes which will drive capital offshore to these faster growing countries. America has a tremendous opportunity in front of it. We can capitalize on emerging market growth if we choose helping those unemployed find work and grow our economy. Instead, I think we’re wasting that opportunity.
Today’s drop wasn’t Ben Bernanke. It was a reminder that the Fed isn’t going to really do anything else. It’s up to someone else to take over. Ultimately, that’s not good in the long run.

A few years ago, a book was written called The Black Swan by Nassim Taleb.  The story goes that everyone always thought the only color swan in existence was a white one.  One day, out of nowhere, a black swan comes swimming in the pond.  Where did it come from?  We never knew there was such a thing.  Taleb goes on to tell various stories about chance and randomness and how we prepare for various things we think we know about.  But, what about those things we don’t know about?  There are so many things we can’t prepare for because they are unknown.  They are the “black swans”.

I live just outside San Antonio, Texas.  I bought a new home in the fall of 1998 and a month after I moved in, San Antonio had a 100 year flood.  In 2002, we had another 100 year flood.  So much for the 100 years.  Here was a perfect example of the “black swan”.

In 2000, the stock market crashed.  Granted it took awhile but it collapsed.  A once in a generation sell off… Not.  In just 8 years, it happened again.  Except this time, there was no place to hide.  Hedge funds closed down, advisors went out of business. Bonds went down, stocks went down, real estate went down.  Diversification didn’t work.  Only cash did.

Let’s go back to September 11th, 2001 for a minute.  That was a classic “black swan” event.  A plane hitting a building affected your retirement portfolio.  Who would have thought that would ever happen?  We plan on interest rates going up or down, the economy speeding up and slowing down, inflation, and deflation.  But, a plane hitting a building?  Prior to 9/11, I never met with an individual and listed out the various risks and said “don’t forget about planes hitting buildings”.  Back in the 80′s, terrorism was basically guys in the streets of some countries throwing rocks at each other.  Now, it’s a different game.

Greece…another “black swan”.  It’s spreading now and it’s affecting all the PIIGS (Portugal, Ireland, Italy, Greece, & Spain).

An oil spill,  financial reform…  Where does it end?

Because there is so much we don’t know compared to what we do know, diversification matters.  Real diversification is essential.  You’ve heard me a thousand times beat down portfolios that are just a basket of essentially the same thing.  Plenty of investors think they are diversified by owning baskets of mutual funds.  But, they found out in 2008 they weren’t really diversified.  I’ve always been a proponent of diversifying with income, some principal protection, and some investments that can give me some capital gains.

Yesterday was another one of those “black swan” events.  Out of nowhere, the market drops 1000 points in 15 minutes.  How do you prepare for that with a mutual fund portfolio?  The answer is you don’t.  For those of you who have individual bonds that were up yesterday, who owned some gold, who had a lot of cash, and some stocks, you slept well.

These “black swans” are happening a little too frequently for my blood.  Perhaps all these “black swans” are really white after all since they are now occurring with such frequency.  Investors may need to get used to the fact that it will always be something.  What will be the next crisis?  I have no idea and neither do you.  That’s why it’s so important to have an overall strategy that goes outside the stock market.

Click here to listen to Through A Trader’s Eyes Podcast #15 – March 23, 2010

As we approach the holiday season, it reminds us that the end of the year is coming as well.  With only one month to go, it’s a natural time for investors to start to tally how they’ve fared in this difficult environment.  Some were spooked out of the market in late 2008 (with good reason) and have missed out on the entire rally.  Some, have just hung in there.  They rode it down and have ridden it back up.  While others have navigated pretty well.

But, with the new year on the horizon, fund managers, hedge fund managers, & individual investors have begun making adjustments to their portfolios.  As they do this, it’s important that we follow the money.  Over the past 10 days, the S&P 500 has struggled to go and stay above the 1110 level.  Why is this?  Isn’t the economy continuing to improve.  As you recall, the stock market is highly correlated to how fast the economy is recovering.  Up to this point, the economy was recovering at a faster and faster rate each month.  That may be behind us.  It’s not to say the economy won’t keep improving, but it may not be fast enough to sustain higher equity prices (Flag #1).

Bull markets go through many stages as they mature as I’ve discussed in previous blog posts.  I believe we are firmly in stage #2 which means much more selectivity on the part of investors.  There is profit taking, less enthusiasm for stocks, and more scrutiny.  This explains why some of the leaders of the rally since March (i.e. Goldman Sachs) have begun to lag and companies with excellent balance sheets that have lagged (i.e. Disney, Wal-Mart, & Coca-Cola) are now leading.  Having the mega large cap stocks lead a rally isn’t the worst thing in the world but it definitely tells me the character of the market has changed (Flag #2).

Let’s move to some of the technicals.  A healthy bull market is one where more and more sectors and stocks are participating.  That was the case up until about a month ago.  Now, what you are seeing is the complete opposite.  Less and less stocks are participating in the rally and the big caps are doing the heavy lifting.  Remember that most of the indices are cap weighted meaning the bigger the company, the more points they are awarded in the index.  That’s why when big caps go up, the indices go up (Flag #3).  Another healthy sign in a bull market is when there are more and more companies making new highs.  That has peaked as well.  So, the number of companies blasting through their old highs is dwindling (Flag #4).

I’m also noticing that there just isn’t the demand for stocks there was a few months ago.  Most of the up days are because sellers are pausing or resting waiting to sell at higher prices.  The demand is not there right now (Flag #5).

These flags don’t mean we have peaked.  In fact, the indices could keep making new highs for several more months.  But, when there are this many red flags and we’ve advanced as much as we have since March, you better start thinking of exit strategies.  This could simply be a major pause in a longer-term bull market.  But, given the headwinds in front of us (deficits, rising taxes, potentially rising interest rates, etc.), my bet is that 2010 will be a much different year than 2009 and this is the time to start preparing.

Happy Thanksgiving everyone!  Thanks for your support.

On this 20th anniversary of the falling of the Berlin Wall, I thought it’d be appropriate to post what would Ronald Reagan think of socialized medicine given the passing in the House on Saturday.

[youtube=http://www.youtube.com/watch?v=fRdLpem-AAs]

Many of the indicators I watch are getting to the point where we should (key word should) have a rally over the next few days.  We’ve now had almost a 10% correction and the bulls will come in and start buying some “bargains”.  This rally could take us to Dow 8500 or so before we start heading back down.  You’re hearing a lot about earnings season around the corner and how that will impact the market.  I’m sure it’ll be a mixed bag.  Should companies get rewarded if their earnings were $5.00 per share last year and then last quarter they fell to $2.00 per share but are back to $2.30?  The headline will read earnings are up 15% when really they are down almost 50% from a year ago.  So, comparisons will be good from last quarter for a lot of companies.  But, we’ll really have to dig deep into the books to see how business is really doing for a lot of these companies.  Given the earnings though, that may be the excuse we need to rally a bit.  But, I think that will be the place to sell positions if you haven’t already done so.  Breaking 8000 on the Dow looks to be in the cards. 

The more we fall and the more scared investors get and the more people doubt the economic recovery, the bigger the snapback rally will be late summer into the fall.  Because I’m positioned for a pullback, I welcome it and you should too.  Markets don’t go straight up and if you play your cards right, you can take advantage of these big swings.  Tons of investors are flat on the year because they rode it down in January and February and rode it back up in March & April.  For those of us that were light on stocks in early 2009 and heavier in the 2nd quarter, we’re still enjoying double digit gains. 

Many people keep asking me to give them levels on the indices.  How far can we fall from here?  As I mentioned on my radio show yesterday, I simply lighten up on stocks when the risks rise and I increase my allocation to stocks when the risks fall.  Right now, the demand for stocks has fallen while supply has picked up and the risks are rising to hold stocks.  That certainly doesn’t mean we can’t rally from here.  It simply means I won’t participate until the risks go down.  It’s that simple.

Indonesia

Indonesia’s President, Susilo Bambang Yudhoyono, was re-elected yesterday for a 2nd 5-year term andI’m thrilled he was.  This is a former army general who has turned Indonesia around.  It’s a fast growing economy with a lot of natural resources like palm oil, coal, & nickel.  They have a population very similar in size to the United States but about 10% of them live off of $.70 per day.  So, there are huge opportunities to get these people living a better life similar to what China is going through right now.  Yudhoyono’s VP is a Wharton graduate who is an economist.  This is very different from our politicians who are lifetime politicians.  In addition, Indonesia has seen its fastest growth in over a decade by fighting corruption, reducing regulatory hurdles, & cutting debt.  Sounds like how we’re doing things here doesn’t it?  Oh wait, it’s the complete opposite.  If these trends continue, money will continue to shift away from countries where it’s hard to do business and end up where it’s easy to do business.  Indonesia is one of those countries that is moving in the right direction and I think more and more capital will move there.  I remain bullish. 

Biz Radio Power Trading Strategy Session & Workshop

Just a reminder that I’ll be in San Antonio tonight along with Vince Rowe at the Westin on the Riverwalk going over a lot of the indicators I look at to navigate the markets.  In addition, we’re going to be giving out some various investments we think can double over the next year.  I hope you can make it.  It’s free but you must register at www.bizradio.com

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What do the letters U,V,W, & L mean to you?  Probably nothing.  But, they are constantly talked about in the media because this is how economic recoveries are described.  These are how analysts describe the shape of the recovery.  Many believe it’ll look like an “L”.  That’s to say we were plummeting facing Armageddon and now that it’s over, we’ll just go sideways for several quarters and possibly years.  Some (few) say it will look like a “V”.  We were falling off a cliff and just like that we’re headed back up.  Everything is hunky dory.  I think it will look like some shape that’s not a letter.  We’ll have a recovery and eventually that recovery will stall.  Maybe the shape should be a backwards check mark that eventually goes sideways.  Is that some hieroglyphics letter?

We can debate how the economy will look like for days and days and I could write about it for days and days.  But, I’m not going to.  I know you care about how to make money whatever letter it resembles.  That’s my goal also.  So, let’s look at the stock market.

The first half of 2009 looked like a “V”.  The Dow Jones started the year around 8750.  We fell all the way to around 6500 and finished around  8500.  That’s a lot of fear and pain to go nowhere.  If you traded around in the first half of the year, then hopefully you severely outperformed the market.  But, the buy and hold crowd is flat.  What the economic recovery looks like is debatable.  But, the stock market price action was shaped like a “V”.  That we know.  So, what will the 2nd half of the year look like?  I think it’ll look very similar to the first half of the year, not in magnitude, but in shape.  I think we’re setting up for a sell off that could put the rally in jeopardy and have the doubters pile on.  Then, I think that sell off will be an excellent buying opportunity.  It could be a choppy rough summer but I believe we’ll have a pretty nice fall rally.  That’s how it’s shaping up right now.

Many people ask me how far down this market could go and that’s a really tough question to answer and one I don’t think we need to know the answer to.  When you start setting targets, etc., you may get distracted and end up losing money.  What I do is monitor what the prices of stocks are doing vs. the risk of owning those stocks.  And right now, the risks are very high for multiple reasons.  First, the technicals have been deteriorating and really look awful.  Secondly, earnings season is coming up and we just don’t know how investors are going to react to those earnings.  So, whether or not the market retraces 1/3 or 1/2, I know the risks are rising to own stocks.  If the market moves up and the risk falls at the same time, then it’ll be safe to re-enter, even at higher prices.  Unless you’re a quick trader though, I’d be patient and keep my powder dry.

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My mantra the last few weeks has basically been if the government gives us incentives to put our capital to work, the stock market will move higher.  On the other hand, when the government comes in and changes the rules and puts in more regulation, down we go.  Over the past few weeks, we’ve seen many banks come in and say “take your stinkin TARP money, we don’t want it.”  Various companies were rewarded because this showed how strong they were.  Last week though, Goldman Sachs did a stock offering which would be used to repay their TARP.  That kind of let the air out of my room at least.  I want companies to pay it back because they can afford to.  Goldman Sachs is simply dilluting their stock to do it.  Not the same. 

Today, we find out the government is telling the banks if you pay the TARP back, you can’t just pay it back.  You have to go through some tests.  This is exactly the type of government action that investors to run from stocks.  Changing the rules during the middle of the game.  Now, we are quite extended.  So, a pullback or sell off isn’t a big shocker.  But, it doesn’t help having the government imposing their will.  The market went down on the GM CEO replacement a few weeks ago.  On the other hand, it went up when the PPIP was announced because this was actually the government giving capital a reason to go to work.  Private money comes in and the government takes a lot of risk.  That’s the formula.  They don’t seem to get it.

So, we’re left to move to more cash today and potentially see the end of the rally we’ve enjoyed for over a month.  I’ve been pounding the table to not take anything for granted and that means sometimes selling when you don’t want to.  We never know what the government is going to do.  They obviously don’t mind changing the rules whenever they feel like it.  They have that prerogitave but that doesn’t mean stocks have to stay at these levels if they do.

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Since the stock market was pretty boring today, I thought I’d dedicate my blog post to taxes.  Don’t close your browser just yet.  It won’t be that boring.

There has been a ton of debate about what to do regarding the struggling economy and getting it back on track.  Some believe we should be spending our way out of this.  On the other hand, some believe we need to cut spending.  Some believe we need to cut taxes.  I’m actually a proponent of all of them depending on when and where and how much.  One thing I’m not in favor though is raising taxes.  Not only am I not in favor of raising taxes most of the time, but certainly not when we have one of the weakest economies in decades.  Yet, that’s seems to be what Washington thinks the solution is to help the weak economy.  Tax you to help someone without a job.  Can you say “redistribution”?  Taking from someone productive and giving it to someone that’s not productive is not what great economies are made of.  My definition of a great economy is moderate growth, some inflation, low taxes, controlled spending, and plenty of incentives.

There should definitely be some spending to help the economy get going.  It worked in 2003 when the war started.  Is it productive to drop bombs from planes?  No.  But, it does help with the multiplier effect.  A defense company gets a contract, hires more employees, who in turn buy more goods, which helps a retailer, which hires more employees, etc.  You get the idea.  I believe President Bush’s mistake was the spending was out of control.  I am happy about every penny spent on protecting us.  But, there was too much spending in other areas.  So, there has to be a control on spending.  The new administration is not heading in a direction of reduced spending.  If they have their way, they will make the spending by Bush look like pennies by the time they get done.  That’s not what we need.  The economy needs a shot in the arm but not uncontrolled spending.  That will someday lead to runaway inflation.  Let’s be clear though that we are facing deflation right now so all of the spending and stimulus isn’t having an impact on current inflation.  It’s the future that concerns me.  There has been a lot of discussion about a recent study that shows that for every dollar in government spending, the government brings in $1.04 in revenue but for ever dollar in tax cuts, the government brings in over $3.00 in revenue.   

With regards to taxation by the government, it sounds logical that if the government taxes more, then the government gets more revenue.  Technically that is correct.  The government does get more revenue but what if it could get even more revenue doing something else, like lowering taxes?  Sounds counter intuitive but the study above shows the impact.  

Now, let’s look at some facts about capital gains rates.  I’ve been pushing for more incentive based plans by the government.  How about tax cuts or credits for buying up empty homes by investors?  How about no capital gains on any stocks or investment properties for anything purchased over the next 12-24 months?  Look at the chart below.  You’ll see the result of lowering capital gains rates and the effect it has on realized capital gains as a percentage of GDP since 1978.  As I’ve said before, give people a reason to risk their capital and you’ll see the economy turn around.

Happy Tax Day!

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