BEIJING—By lowering China's growth target to 7.5% this year, Premier Wen Jiabao has signaled that an era of supercharged expansion may be coming to an end, a shift with profound implications for countries like Australia and Brazil that have prospered from red-hot Chinese demand for commodities.

The NPC will set key economic priorities for 2012 but as the WSJ's Aaron Back tells Deborah Kan, it's often what goes on behind the scenes that's most telling.

China has announced it is lowering its target growth forecast to 7.5% from 8%. Not a big move but enough to send a few tremors through the world's financial markets. Andrew Peaple and Martin Essex discuss what this means for the global economy. Photo: AP

The adjustment suggests that China's leaders have reached a comfort level with slower growth, and that they don't intend to stimulate the economy through state-led investment, as they have in the past. Instead, they plan to let a long-touted shift away from export-led expansion take its course.

The consequences of this shift depend on how well Beijing manages the transition. China's trading partners are bound to be affected in different ways.

A reduced pace of investment in infrastructure, power generation and exports would likely mean slower growing imports of steel, concrete, oil and other commodities—potentially a blow to Brazil, the oil states of the Middle East, Australia and other commodity powerhouses.

"We think China's supercycle for commodities is behind us," said Credit Suisse analyst Dong Tao.

But with the shift will also come new opportunities, both at home and abroad.

A China that relies more on consumer spending may pollute less, easing global environmental worries, and produce more jobs. The shift could also lift imports of software, entertainment, tourism, and high-technology goods and services produced by the U.S., Europe and other wealthier nations.

"Accelerating the transformation of the pattern of economic development…is both a long-term task and our most pressing task at present," Chinese Premier Wen Jiabao on Monday told the opening session of the National People's Congress, China's version of a parliament, which meets once a year.

China's official growth target has been set at 8% since 2005. The target is largely symbolic: For the past seven years, the Chinese economy has grown at an average annual clip of 10.9%. However, analysts say the 7.5% GDP growth target for 2012 indicates the direction of the economy sought by the government's most senior officials. The International Monetary Fund forecasts Chinese growth of 8.2% this year, and analysts generally peg it at 8% to 8.5%.

Mr. Wen, in his last year in China's No. 2 position, argued that China had little choice but to change its growth mix, with export markets in Europe, U.S. and Japan either growing slowly or in recession.

"Domestically, it has become more urgent but also more difficult…to alleviate the problem of unbalanced, uncoordinated and unsustainable development," he said.

Mr. Wen has been making that argument in one form or another since at least 2007, but the share of consumption as a percentage of the economy has fallen during that time nonetheless. Analysts say opposition from state-owned industries and provincial governments, which benefit from the current system, has frustrated change. So did the global financial crisis of 2008 and 2009, when China fended off the downturn by a massive stimulus program that relied on infrastructure spending.

Stephen Green, an analyst at Standard Chartered, said there may be a renewed appetite for change, citing a recent opinion piece in People's Daily, the Communist Party's newspaper, which argued "imperfect reforms are to be preferred to a crisis caused by no reforms." A report by the World Bank and an influential Chinese think-tank, the Development Research Center, also argued for fundamental change in the Chinese economy.

Premier Wen Jiabao opens the National People's Congress in Beijing on Monday.

Mr. Wen listed a number of initiatives, including boosts in the minimum wage and government support for the expansion of consumer credit and for "new forms of consumption," including online shopping and energy-efficient vehicles. He said China would ease the registration requirements for rural migrants to cities, making it easier for them to get better paying jobs. He also said that China would boost its pension and health-care systems, which could encourage Chinese families to spend more of their savings.

Mr. Green said that demographics as much as government policy is driving changes. The number of workers in China's work force is expected to start to decline in the next few years, putting more pressure on employers to lift wages." People are getting paid more," he said. "That's the main driver of rebalancing the economy so it's consumption-led."

The National Development and Reform Commission—the old State Planning Commission, which is China's most powerful domestic economic agency, estimated that in 2011 per capita disposable income rose 8.4% in the cities, adjusted for inflation, and 11.4% in the countryside.

On a more political note, Mr. Wen highlighted the need to protect farmers' rights to the land on which they work and live, saying that "these rights must not be violated by anyone."

China has witnessed a spate of often violent protests in recent years over the seizure of farmland by local officials, who typically offer villagers token compensation, and then sell it on to property developers at market prices. The issue came to the fore last year when residents of the southern village of Wukan staged a revolt over an alleged land grab, forcing local authorities to sack village officials, freeze a property development, and hold fresh elections.

One of the leaders of the Wukan rebellion was elected as village head over the weekend in a democratic vote—a remarkable turnaround that some analysts believe represents a potential new approach to social unrest.

Mr. Wen also set the 2012 target for the consumer-price index at 4%. While that is the same target as last year, it appears to be an actual goal rather than symbolic. Last year, the consumer-price index grew by 5.4%, though it was slowing in the second half of the year. From 2001 to 2010, inflation averaged just 2.2%.

"Slower growth and slightly higher inflation is the new normal" for China, said Arthur Kroeber, managing director of GK Dragonomics, a Beijing economic consulting firm.

Mr. Wen listed areas where the government had made progress, including in taming inflation and rising housing prices. The premier said the government would continue to discourage "speculative" real-estate spending. It has done so by squelching lending to real-estate developers who build housing for the rich and requiring down payments of 50% or more to buy such apartments.

At the same time, to avoid a real-estate market crash, China has ramped up production of low-income housing, dubbed "social housing." Mr. Wen said the government would finish two million apartments in 2012 and start construction on another seven million—enough apartments to house everyone in Canada. Still, that's a slower pace of building than earlier proposed. It's unclear how much of that is new construction and how much is housing that would have been built anyway and just renamed social housing. A miscalculation on the part of the government could produce a severe downturn in the housing market and the many industries that rely on apartment construction.

The goal, Mr. Wen said is to "bring property prices down to a reasonable level."

From WSJ http://online.wsj.com/article/SB10001424052970204276304577262882415736796.html?mod=googlenews_wsj

Originally written by Ari Kuchinsky Ari Kuchinsky and posted at TheReformedBroker

What if Tim Tebow was a stock? Most importantly, Tebow would bring pride to the
ticker $TBOW. It has been hijacked by Trunkbow International ($TBOW) (a Chinese
IPO from February 2011 and down 61% YTD). The Chinese stole his ticker and he
should be pissed.

How would it have played out so far? Tebow would have started trading on April 23,
2010—the day after the 2010 NFL Draft. Most draft gurus projected Tebow as a mid-
round draft choice. The valuation of $TBOW would have been more polarizing than
the valuation of Apple. We’ve seen Apple fanboys. Imagine $TBOW disciples flooding
Twitter, Stocktwits and the blogosphere.

We learned it only took one buyer to set the value of $TBOW. The Broncos valued
Tebow at $9.7 million. In a thin market with only 32 franchises, valuation can be volatile.
It doesn’t matter if some franchises thought $TBOW had no value—the highest bidder
sets the price. Similarly, Groupon ($GRPN) showed that if you only sell a few shares, it
is easy to find a few buyers and support the stock at an ungodly valuation.

So while valuation is volatile and imprecise on the first sale, eventually performance
matters. Presumably, after riding the bench behind Kyle Orton in 2010, $TBOW would
have gone down in value. Meanwhile, Merril Hodge was announcing his thesis for
shorting $TBOW. Perhaps Hodge should have learned from Whitney Tilson. Tilson was
right about Netflix being doomed, but he was way too early and then gave up on his short
position at exactly the wrong time. Now Tilson is long $NFLX. Likewise, Hodge is now
backing off his $TBOW short. It sounds like Hodge may even be getting long $TBOW.

I’m thinking $TBOW would have bottomed on the news that he was the third string QB
behind Orton and Brady Quinn. Some might even have said that $TBOW was teetering
on bankruptcy. At this point, the expectations became really low. $TBOW might have
been held in a “left for dead” portfolio with $RIMM. The consensus was that the best
days (his college days) were behind $TBOW.

With super low expectations and Merril Hodge getting short squeezed, $TBOW was up
huge the day that Denver announced the replacement of Orton with Tebow. The $TBOW
shorts cried that $TBOW was being manipulated. Tebow looked terrible on the field
and was being outplayed by not only Orton, but also backup Brady Quinn. The $TBOW
shorts vowed that “the short term gaming of the $TBOW stock would not shake them out
of their short position.”

Through most of Tebow’s first game against Miami, it looked like the shorts would be
right. Hodge had a smirk on his face. Then out of nowhere, Tebow had a miraculous 4th
quarter comeback against the Dolphins. In the next day of trading, the “Miami miracle”
did not move the $TBOW stock much. The market discounted the win as being lucky and
against the lowly Dolphins.

The next week, $TBOW stock took a beating after Detroit beat the Broncos 45-10.
Players from Detroit mocked Tebow. It seemed that Hodge and his band of shorts were
right. Hodge became emboldened after seeing Denver squeak by a poor Miami team and
get pounded by an above average Detroit team. He added to his short position. After such
a poor performance, there was talk that Tebow might be benched again. $TBOW stock
plunged back to its prior low.

Just when it seemed like a sure thing to be short $TBOW, the market laughed. Tebow has
now won 6 games in a row. Hodge has had to cover his short. All of this occurred within
two months.

So where will $TBOW stock go? Hodge now believes “it's as if he's been touched by a
force that says bad things happen to those who go against him. ... The boy has clearly
been touched.” Market sentiment has completely changed. There is now a distinct
possibility that Tebow will make the Pro Bowl. The disciples believe that 7 games is a
track record and that he might be better than Brady and Manning. Most of the haters have
thrown in the towel. Rick Reilly even did a comparison of Tom Brady and Tim Tebow.

$TBOW is a dangerous stock to own right now. Expectations are now very high. Yet, the
combined record of Tebow’s opponents thus far are 47-57. Three of his wins are in OT.
The average margin of victory is just 5+ points. The comebacks have been entertaining
and show a lot about what Tebow is made of. But every week can’t be a comeback
victory. It isn’t sustainable. As an investor in $TBOW, I need to know that Tebow’s
game is sustainable. To win over the long term, he’ll have to start getting it done in the
first quarter and notching some signature victories. Today would be a great start.

Longer term, the more interesting bet may be whether $TBOW will stay around longer
than $RIMM.

This originally posted by Carl Swenlin from DecisionPoint via StockChart.com [see link below]

LONG-BOND YIELD: HOW LOW CAN IT GO?

Even the most bullish of bulls have finally seen the light.  From this weeks Stocktwits post.

A banking (currency) system is an act of faith: it survives only for as long as people believe it will” – Michael Lewis, Boomerang, 2011

Only 15 days ago, there were so many charts that looked ready to break out and participate in a year-end market rally. Fast forward two weeks of political inaction in the face of rising European sovereign debt yields and equity markets across the world look like Niagara Falls. A typical story of 2011 – the obvious rarely happens, the unexpected constantly occurs. Constant false breakouts and breakdowns that 2011 brought has gradually conditioned market participants to shrink their investing horizons. For better or for worse, we have all become traders.

There is an apparent crisis of confidence in capital markets. No one wants to own European bonds, which makes the cost of borrowing unattainable for countries like Italy and Spain. The lack of trust often leads to liquidity crisis and a liquidity crisis is the shortest way to solvency crisis. In such an environment, no one can blame investors for being defensive. People are just going to cash until the political mess in Europe is resolved in one way or another.

For the week, the St50 momentum index lost 5.7%. $QQQ and $SPY fell 4.6%. There is no point highlighting certain sectors or giving individual assessment to stocks at this phase of the market. Relative strength is a powerful stock picking criteria, but there are times when equity selection is a waste of time and stocks just move together in groups. This characteristic is typical for downtrends.

Market sentiment is at a point where the major indexes can either crash 10%+ or rally 5-10% on some unexpected news. Fundamentals play little role here, obvious levels of support and resistance are irrelevant, and stocks trade on headlines and pure emotions. This is certainly not a time to be aggressive and for many it is wiser to just sit it out on the sidelines.

Capital constantly flows somewhere. In times when the return of principle is considered more important than seeking higher return, capital goes to perceived safety – U.S. dollars, U.S. Treasuries, Japanese Yen. The return that those asset classes provide is minimal, so money will not stay there forever. Sooner or later, capital will find a higher yielding asset to flow into. It has always done it and this time won’t be any different. Price action will be a safe leading indicator. We just have to lay low until the market makes her next move.

The Three Stages of Primary Bull Markets and Primary Bear Markets

Primary Bull Market - Stage 1 - Accumulation
Hamilton noted that the first stage of a bull market was largely indistinguishable from the last reaction rally of a bear market. Pessimism, which was excessive at the end of the bear market, still reigns at the beginning of a bull market. It is a period when the public is out of stocks, the news from corporate America is bad and valuations are usually at historical lows. However, it is at this stage that the so-called "smart money" begins to accumulate stocks. This is the stage of the market when those with patience see value in owning stocks for the long haul. Stocks are cheap, but nobody seems to want them. This is the stage where Warren Buffet stated in the summer of 1974 that now was the time to buy stocks and become rich. Everyone else thought he was crazy.

In the first stage of a bull market, stocks begin to find a bottom and quietly firm up. When the market starts to rise, there is widespread disbelief that a bull market has begun. After the first leg peaks and starts to head back down, the bears come out proclaiming that the bear market is not over. It is at this stage that careful analysis is warranted to determine if the decline is a secondary movement (a correction of the first leg up). If it is a secondary move, then the low forms above the previous low, a quiet period will ensue as the market firms and then an advance will begin. When the previous peak is surpassed, the beginning of the second leg and a primary bull will be confirmed.

Primary Bull Market - Stage 2 - Big Move
The second stage of a primary bull market is usually the longest, and sees the largest advance in prices. It is a period marked by improving business conditions and increased valuations in stocks. Earnings begin to rise again and confidence starts to mend. This is considered the easiest stage to make money as participation is broad and the trend followers begin to participate.

Primary Bull Market - Stage 3 - Excess
The third stage of a primary bull market is marked by excessive speculation and the appearance of inflationary pressures. (Dow formed these theorems about 100 years ago, but this scenario is certainly familiar.) During the third and final stage, the public is fully involved in the market, valuations are excessive and confidence is extraordinarily high. This is the mirror image to the first stage of the bull market. A Wall Street axiom: When the taxi cab drivers begin to offer tips, the top cannot be far off.

Primary Bear Market - Stage 1 - Distribution
Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the "smart money" begins to realize that business conditions are not quite as good as once thought, they start to sell stocks. The public is still involved in the market at this stage and become willing buyers. There is little in the headlines to indicate a bear market is at hand and general business conditions remain good. However, stocks begin to lose a bit of their luster and the decline begins to take hold.

While the market declines, there is little belief that a bear market has started and most forecasters remain bullish. After a moderate decline, there is a reaction rally (secondary move) that retraces a portion of the decline. Hamilton noted that reaction rallies during bear markets were quite swift and sharp. As with his analysis of secondary moves in general, Hamilton noted that a large percentage of the losses would be recouped in a matter of days or perhaps weeks. This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However, the reaction high of the secondary move would form and be lower than the previous high. After making a lower high, a break below the previous low would confirm that this was the second stage of a bear market.

Primary Bear Market - Stage 2 - Big Move
As with the primary bull market, stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall. As business conditions worsen, the sell-off continues.

Primary Bear Market - Stage 3 - Despair
At the top of a primary bull market, hope springs eternal and excess is the order of the day. By the final stage of a bear market, all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook bleak and not a buyer is to be found. The market will continue to decline until all the bad news is fully priced into stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.

How Averages Confirm

This from one of my favorite bloggers who has been investing for over 40 years, StockChartist.

Even though it feels frustration looking at a chart that stretches years, I find it worthwhile to periodically update the "Regression to the Mean" graph because it helps keep our expectations in check. Whether today we are bearish or bullish about prospects for the market's near-term future, this "Regression to the Mean" will help moderate our views and help contain them within the realm of possibilities.

First, some background is necessary and warranted. I had accumulated monthly statistics on the S&P 500 Index going back to 1939 while working on my book, Run with the Herd, during the Financial Crisis Crash in 2007-08. What I had discovered was that when viewed within the broad sweep of history, the market had risen risen at a 7.5% rate, through bull market and bear, war and peace, economic boom and bust. In order to be able to make that statement, I added a boundary 44% on either side of that 7.5% average annual growth rate. Two, longer than 10-year secular bear markets during that 70 year history carried the Index from the upper boundary across the mean to the lower boundary.

After briefly crossing the upper boundary at the end of the Tech Bubble in 2000, the Index approached the bottom boundary in 2009 and lead me to conclude that the Financial Crisis Crash was approaching a bottom (click image to enlarge):

Today, the question to answer is what might be reasonably expected for the future? One model might be the exit from the previous 1969-1982 secular bear market. There are many similarities between that period and today: domestic economic, monetary and fiscal concerns, unpopular government leading possible change of administration. The major dissimilarity is the diametrically different interest rate environment.

If one superimposes the market's track from the 1974 low on to an extrapolation from the 2009 low, one gets the following picture of what might be reasonably expected in the future:

The market started to face some headwinds and retreated as the country faced an election in 1980. It wasn't until two years into the Reagan Administration that the market crossed above 1000 and began the long, 20-year bull market run.

As you can see, the market has been tracking fairly closely to the exit process back in the '70's so far. If that track continues for the near-term, we shouldn't expect the market to approach the all-time high of 1365 until 2015 and not successfully cross above it until 2017. Let your hearts not lose hope because if it continues following the track then it could reach 3000 by 2020.

This from Nouriel Roubini @ Project Syndicate "Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare"

NEW YORK – This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States.

While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.

Of course, the malaise that so many people feel cannot be reduced to one factor. For example, the rise in inequality has many causes: the addition of 2.3 billion Chinese and Indians to the global labor force, which is reducing the jobs and wages of unskilled blue-collar and off-shorable white-collar workers in advanced economies; skill-biased technological change; winner-take-all effects; early emergence of income and wealth disparities in rapidly growing, previously low-income economies; and less progressive taxation.

The increase in private- and public-sector leverage and the related asset and credit bubbles are partly the result of inequality. Mediocre income growth for everyone but the rich in the last few decades opened a gap between incomes and spending aspirations. In Anglo-Saxon countries, the response was to democratize credit – via financial liberalization – thereby fueling a rise in private debt as households borrowed to make up the difference. In Europe, the gap was filled by public services – free education, health care, etc. – that were not fully financed by taxes, fueling public deficits and debt. In both cases, debt levels eventually became unsustainable.

Firms in advanced economies are now cutting jobs, owing to inadequate final demand, which has led to excess capacity, and to uncertainty about future demand. But cutting jobs weakens final demand further, because it reduces labor income and increases inequality. Because a firm’s labor costs are someone else’s labor income and demand, what is individually rational for one firm is destructive in the aggregate.

The result is that free markets don’t generate enough final demand. In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP. With credit exhausted, the effects on aggregate demand of decades of redistribution of income and wealth – from labor to capital, from wages to profits, from poor to rich, and from households to corporate firms – have become severe, owing to the lower marginal propensity of firms/capital owners/rich households to spend.

The problem is not new. Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. As he argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption, and the recurrence of destructive financial crises, fueled by credit bubbles and asset-price booms and busts.

Even before the Great Depression, Europe’s enlightened “bourgeois” classes recognized that, to avoid revolution, workers’ rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression, when the state took on the responsibility for macroeconomic stabilization – a role that required the maintenance of a large middle class by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.

Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.

Some of the lessons about the need for prudential regulation of the financial system were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe’s social-welfare model. Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone’s sovereign-debt crisis now.

But the laissez-faire Anglo-Saxon model has also now failed miserably. To stabilize market-oriented economies requires a return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of unregulated markets and the continental European model of deficit-driven welfare states. Even an alternative “Asian” growth model – if there really is one – has not prevented a rise in inequality in China, India, and elsewhere.

Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.

Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics.

Originally posted @ http://www.ritholtz.com/blog/wp-content/uploads/2011/08/Bank-Gx62.pdf

Beaten-down small-cap stocks could be ready to rally, some say

among professional investors.

“If we’re not in an economic recession,

we could see a decent rally in small-cap

stocks,” said Steven DeSanctis, small-cap

strategist at Bank of America Merrill

Lynch inNew York.

Small-cap stocks have lost so much

value this year — about 25 percent since

their late-April peak, as measured by the

small-cap Russell 2000 index — that De-

Sanctis thinks “flat is the new up”: If they

simply end the year where they started,

investors will see about a 13 percent rally

from where they are now. Large-cap

stocks slid about 18 percent in the same

period.

Bank of America sees a 40 percent

chance of recession, he added.

“That’s really the question that people

have to answer for themselves — ‘Do we

think a recession will occur?’ ” said Matthew

Litfin, a portfolio manager at William

Blair who invests in small- and midsize

companies.

Economists have grappled with that

possibility in recent weeks. Inlate July, the

Commerce Department said the economy

grew at snail’s pace of 1.3 percent in the

second quarter and revised its first-quarter

estimates to 0.4 percent. A spate of

weak reports on manufacturing followed.

Thencamegloomyfiguresonhousingand

consumer spending. And Friday, Commerce

revised the second-quarter growth

number down to 1 percent.

Not surprisingly, many economists say

invest

in the past three months. But few

are ready to call it — and therein lies the

opportunity, experts say, for some diversification

into small-cap stocks, best accessed

through mutual funds.

Small firms tend to get hitmuchharder

than big ones during economic downturns

because they often have less diversified

businesses and less cash on hand.

That, inturn,givesbanks secondthoughts

about lending them money, which can

slow their growth even more.

“It’s very hard forthemto get creditand

capital,” said Chris Hanaway, portfolio

manager atWellsFargoAdvisors. “Ifwego

into another global recession, they will

suffer disproportionately.”

The opposite is true in good times.

Small companies tend to be at an earlier

stage of growth than their bigger counterparts.

“It’s the law of large numbers,” said

Gary Lenhoff, director of small- cap strategy

at Great Lakes Advisors. “It’s harder

forIBMorMicrosoft togrowas fast—they

already have revenues measured in the

billions.”

So when money’s pouring in, small

companies can plow it back into their

business by buying equipment, opening

stores or acquiring customers that move

the needle on their performance more

than similar actions by larger companies

can.

“That indeed is borne out by the data

over the last 83 years,” said Jay Ritter,

financeprofessor at theUniversityofFlorida.

From 1927 to 2010, small companies

beat large onesbyanaverage of about 0.36

percent a month when the economy was

expanding, Ritter said. In downturns,

they underperformed their larger peers

by about 0.2 percent a month.

The nuance, Ritter said, is that not all

small-cap stocks are created equal. Those

classified as “growth” investments—companies

that are rapidly expanding but

have yet to pay out steady dividends —

tend to be “a triumph of hope over experience”

because they ultimately deliver disappointing

returns, he said.

That isn’t commonly the message one

finds in newsletters dedicated to the

small-cap sector.

“Technological advancements periodically

come along that exert a profound

influence on not only the business world

but also society as a whole,” said a recent

issue of Cabot Small-Cap Confidential, a

Massachusetts-based newsletter, when it

recommended a “big opportunity” to buy

Digi International, a small-cap firm that

develops communication technology.

“Newsletters like to tout the next

Microsoft,”Ritter said, but “Microsoftwas

never a small-capstock,” andit is extremely

rare for small-capgrowthstocks togrow

into corporate behemoths. Far more common

is for small-cap “value” stocks —

those whose business models are proven

enough that they can consistently pay out

money to their shareholders — to deliver

solid returns.

Wetherell uses dividend initiations as

one proxy for differentiating between

growth and value plays. In January, after

Lincoln Educational Services, a for-profit

college, initiated a 25-cent dividend, his

fund swooped in to buy 8,000 shares.

With the recent meltdown, the company’s

shares tumbled 50 percent, to $9, meaning

it is now paying out an annual dividend

of more than 10 percent.The 10-year

Treasury bond is paying about 2 percent.

“We tend to like plays that are out of

favor,”Wetherell said, sohe’s holdingonto

the company.

Others find small-cap investment strategies,

well, laughable.

“They really got creamed!” said Timothy

Loughran, who teaches stock valuation

at the University of Notre Dame. He

chuckled when he looked at a stock chart

for Lincoln Educational Services. “I just

don’t think small firms are the way to go.”

Loughran thinks investors should set

aside the question about a recession and

focus more on which emotions will drive

the market in the near future.

“I think the market is more likely to

continue the flight to quality,” he said,

which means large-cap companies like

Apple and Google are likely to see more

demand for their shares than small-caps.

“They’re established, they have lots of

product lines, and—most importantly—

they have huge amounts of cash on hand.”

DeSanctis, the small-cap strategist at

Bank of AmericaMerrill Lynch, concedes

that large-cap companies are likely to beat

their small-cap counterparts next year

because slow economic growth is likely to

translate to weak earnings growth — recession

or not.

In January, Lori Calvasina, who researches

small-cap stocks at Credit Suisse,

warned clients to think twice about allocating

more money to the sector because

small-caps’ valuation relative to largecaps

was at a 30-year high. “I’ve basically

been the ‘negative Nellie’ all this year,

irritatingmy clients,” she said.

Now, “I’m getting more interested in

the sector,” she said, but “I’m not pounding

the table by any stretch.”

Why not?

“They’ve fallen, but they’re not cheap,

yet,” she said. “And that’s annoying.”

podkulc@washpost.com

From the learned Professors @ econbrowser.com http://t.co/Cns3qjD

In the excitement over the debt ceiling debate, the increasing extent of fiscal drag, and anxiety about an economic slowdown, I have neglected discussion of the dollar. I still think that continued dollar depreciation is necessary to effect global rebalancing. I’d prefer it to happen by way of expansionary monetary policy, but we might get dollar depreciation as intransigent policymakers work hard to destroy the safe-haven role of US Treasury securities. [0] So, while all eyes are on Jackson Hole, here’s a quick, stream of consciousness review of some dollar-related issues.

Competitiveness

In Figure 1, I present the long history of the real value of the dollar, to provide perspective. Notice that the dollar has been declining in value since early 2002.

Figure 1: Log real value of USD against a broad basket of currencies (blue), against a basket of major currencies (red), both March 1973=0. Source: Federal Reserve Board.

The dollar index against other major currencies in July (last observation plotted) is only 2.6% lower than it was three years earlier. The index against a broad basket of currency is 4.9%.

I’d say we need more depreciation of the broad index (which includes China, and the other East Asian economies), rather than less. I know there are some people who argue that the Fed shouldn’t be debasing the dollar (where were these people in 2002?); of course, if one believes in a neoclassical model (which is consistent with fiscal policy ineffectiveness), monetary policy can’t affect real magnitudes in systematic fashion, so why care what the Fed does?

For those of us operating in reality, I think it’s useful to recall that there are many real exchange rates.[pdf] The commonly cited one is the CPI-deflated real exchange rate, which approximates the rate at which bundles of US consumption goods trade off for other bundles of foreign consumption goods. As long as consumer prices approximate costs of production, the CPI deflated real rate is a good measure of "competitiveness" defined by macroeconomists. Figure 2 presents the diverging paths of the IMF’s CPI deflated and unit labor cost deflated real exchange rates.

Figure 2: Log value of USD against a broad basket of currencies, CPI deflated (dark blue), against a basket of industrial currencies, unit labor cost deflated (dark red), both 2005=0. Source: IMF, International Financial Statistics.

Figure 2 shows that once one takes into account the wage restraint exhibited in the US, along with fairly rapid labor productivity growth, US competiveness has increased substantially since 2002. There is a problem in making direct comparisons since the CPI deflated rate is computed against a broad set of trading partner countries, while the unit labor cost deflated series is computed against the other industrial countries the US trades with. Hence, an important omission is China. Presumably, if China were included, the downward trend would be less pronounced. How much less is difficult to say, given that it is hard to determine what unit labor costs are in China (for an example of the impact on the Chinese effective real exchange rate, see this post).

A Dollar Turning Point?

I’m a believer that continued low policy rates in the US, combined with macro weakness, will result in persistent dollar weakness. Dollar weakening is a view shared by the CBO, for this and other reasons, as related in its updated Budget and Economic Outlook (pp. 44-45), as well as Martin Feldstein. Currency market forecasters (here as surveyed by FX4casts.com) appear to have a different view (although there is considerable uncertainty), as shown in Figure 3.

Figure 3: Log nominal value of USD against a broad basket of currencies (dark blue), and geometric mean forecast from July 28 survey of currency forecasters (dark blue squares), and 95% confidence bands (gray +). Source: Federal Reserve Board and FX4casts.com.

In a recent paper, Catherine Mann at Brandeis University has outlined reasons why she believes the dollar is at turning point. From "Dollar Risk: Inflection Point or Continued Trend?"

...the double-digit depreciation of the dollar since February 2002 was narrowing the external deficit (even before the Great Trade Collapse and rebound). Thus, the need to sell dollar assets to finance external borrowing has been, on balance, smaller, putting less depreciation pressure on the dollar. Yet, at the same time as the external deficit has narrowed the fiscal budget deficit is much larger, implying a need to sell more US Treasury securities to some investor, domestic or global.

Thinking about these factors follows generally the relationships and framework (albeit in ‘reverse’ ) from the last time the issue of dollar risk arose. That is, in 2000 the dollar was still appreciating, but many thought that the trend was unsustainable because of the magnitude of the US current account deficit and stock of international obligations, and the narrowing budget deficit (into surplus) reducing the availability of US Treasury securities, among other factors.

Applying the framework and analysis from 2000 to current data suggest an inflection point for the dollar. First, based on an asset allocation view, there is plenty of head-room for adding dollar investments into the global investor’s portfolio. Second, key global players have not de-coupled, and in fact continue to depend on growth in US and Europe to support economic activity at home. This habit of export-led growth, which has been supported by the policy of under-valued exchange rates, remains entrenched, thus making it difficult for these important players to allow own-currency appreciation even in the face of potential further capital losses on their increasing holdings of dollar-based international reserves. Even countries that, on balance, do not heavily manage their exchange rates are finding that their currency appreciations to date exact a toll on the global competitiveness of their producers (witness the yen and Swiss franc interventions in August 2011). Finally, with regard to holdings of US Treasury securities in international reserves, despite some rhetoric toward diversification, purchases continue apace. The sum of these factors, as well as a long-run chartist view, suggest that the trend dollar depreciation has reached an end.

My take on what determines the value of floating exchange rates, from a primarily macro asset-based approach, here: [pdf], [1], [2], [3], [4]; and from a portfolio balance approach [5].

Personally, given the Chinese de facto crawling dollar peg, I think a lot hinges on China, and I have more hope that faster CNY appreciation will occur (where China leads, the rest-of-East Asia will, I believe, follow [6]). Figure 4 is a plot of the CNY/USD exchange rate over 2011.

Figure 4: CNY/USD exchange rate, daily (down is CNY appreciation). Source: St. Louis Fed FREDII.

China has moved from resumed CNY appreciation to accelerated appreciation of late. Martin Feldstein has argued that this move might be durable exactly because China needs to stifle inflation, and CNY appreciation is a key way to achieve that goal. So if the need for internal rebalancing (see today’s NYT for background) is not sufficient to induce Chinese policymakers to allow faster revaluation, the fear of inflation might be. (See a Mundell-Fleming interpretation here; you can see I've been recommending accelerated CNY appreciation for a long time).

Official Holdings of Dollar Assets

How have movements in the dollar’s value, and policy measures at home and abroad, affected dollar holdings by the official sector? Figure 5 presents data from the most recently released IMF Composition of Foreign Exchange Reserve (COFER) report.

Figure 5: Central bank holdings of foreign exchange reserves, in millions of US dollars. US is USD, UK is British pounds, GY is Deutschemark, FR is French francs, JP is Japanese yen, SW is Swiss francs, NE is Dutch guilder, EC is ECUs, EU is euros, OTH is other, and UNALLOC is unallocated. Source: IMF, COFER, June 30 release.

One can see that reserve accumulation has definitely resumed since the 2008-09 global recession. Of that, a large share is "unallocated", that is of unknown composition. It’s assumed that a large share is in US dollars. How is the dollar holding up as the key reserve currency? Figure 6 presents some estimates.

Figure 6: US dollar share of central bank holdings of foreign exchange reserves (blue), US dollar share from Chinn and Frankel (2008) (dark blue triangles), and US dollar share assuming 60% of unallocated reserves are in USD. Source: IMF, COFER, June 30 release, Chinn and Frankel (2008), and author’s calculations.

The dollar share appears to be declining rapidly if one looks at only reported dollar holdings. However, as is well known, most of the reserves that are not identified in terms of currency denomination are likely dollars. Assuming that 60% of those "unallocated" holdings are dollars yields a much less pronounced downward trend.

There are two important observations. These shares incorporate valuation changes, and so when the dollar loses value against other currencies, that shows up in the shares. Ted Truman at the Peterson Institute for International Economics has argued that one should also look at the constant value, or "quantity", shares. In a recent Real Time Economic Issues Watch post, Allie Bagnall has tabulated the quantity shares for the dollar and the euro at 2010Q4, and the respective shares are higher and lower than the shares calculated using COFER data (although the changes are actually larger using quantities).

Bagnall (2011) documents my second observation: some of the recent movements in shares are being noticeably driven by Swiss National Bank intervention.

Sovereign Wealth Funds

Accumulation of dollar assets is not only undertaken by central banks. Increasingly in East Asia, sovereign wealth funds have become important players.

Chart 9 from "Sovereign Wealth Funds: New Challenges from a Changing Landscape," Testimony of Brad Setser Before the Subcommittee on Domestic and International Monetary Policy, Trade and Technology of the Financial Services Committee U.S. House of Representatives (September 10, 2008).

Unfortunately, there isn’t much of an update on the time series estimates of sovereign wealth fund holdings; they now exceed $3.3 trillion [Truman, (2011)]. And we don’t know exactly what they’re up to. That point is documented by a recent Policy Brief by Bagnall and Truman at PIIE.

In short, even when the COFER data comes out at the end of the year, and we get data of the 3rd quarter on foreign exchange reserves, we still not know how much damage the display of political hostage taking Republican intransigence with respect to raising desperately needed tax revenue over the medium term horizon has inflicted on the dollar’s role as a reserve currency, and as an international currency. So, we might get that "dollar debasement" (against other currencies) -- just not through monetary policy but by other means.

Originally posted by Doug Noland @ http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10543 on how *extend and pretend* are the new normal and why Greece could very well be the tip of yet another Lehman Moment.

Isn’t it incredible that the failure of one firm, Lehman Brothers, almost brought down the global financial system?  It is equally incredible that, less than three years later, a small country of 11 million has the world teetering on the edge of another systemic crisis.  Today’s circumstance is a sad testament both to the instability of the international Credit “system” and to the lessons left unlearned from the previous crisis.

For about 15 months now my analysis has attempted to draw parallels between the initial subprime eruption and last year’s Greek debt crisis.  Both were the initial cracks in major Bubbles (“Mortgage/Wall Street Finance” and “Global Government Finance”).  These two weakest links – due to their role as the marginal borrower exploiting a period of system market excess – were extremely poor Credits.  On the one hand, the systemic vulnerabilities associated with a potential bursting of major Bubbles elicited aggressive policy responses to the initial subprime and Greek tumults.  On the other hand, policy had no constructive impact on the underlying quality of the debt – while significantly inciting market excesses (market price distortions, Credit and speculative excess, etc.) that exacerbated systemic fragilities.

There was heightened fear this week that the “Greek” crisis was evolving into Europe’s “Lehman Moment.”  Recalling back to 2008, the Lehman collapse was the catalyst for a crisis of confidence throughout the expansive universe of “Wall Street” risk intermediation.  Importantly, market confidence in the willingness and capacity for policymakers to backstop this multifarious system held steady virtually until the moment the Lehman bankruptcy was announced.  The marketplace had appreciated the enormous risks associated with a potential crisis of confidence throughout the securitization and derivative marketplaces, yet assumed that policymakers would simply not tolerate a failure by one of the major players in this financial daisy chain.  The global financial system almost imploded when this precarious “too big to fail” assumption was debunked.   

I have posited that the global policy response to the 2008 crisis only expanded and solidified the market’s notion of “too big to fail.”  Most in the marketplace believe that policymakers now recognize that allowing Lehman’s failure was a major policy blunder.  The expectation today is that the EU, ECB, IMF, Germany, China and the Fed will not tolerate a Greek debt default.  This faith had better not be misplaced.

While the Lehman failure proved the catalyst for the 2008 crisis, it was definitely not the root cause.  The problem was instead the Trillions of unsound debt underpinning Trillions of leverage, Credit insurance, and sophisticated risk intermediation that, through “Wall Street alchemy”, had transformed really bad loans into seemingly appealing (“money-like”) debt instruments.  As soon as the market began to back away from these structures (commencing with subprime concerns), the downside of a (Hyman Minsky) “Ponzi Finance” scheme was set in motion.  And as the Bubble began to falter, the market increasingly valued huge amounts of debt based on the perception of a system backstop rather than on the fundamentals of the underlying debt instruments (largely, increasingly vulnerable mortgages). 

If authorities had moved to save Lehman back in September of 2008, it would have bought some extra time – and would have changed little.  Trillions of unsound debt, distorted asset and securities markets, and a severely maladjusted economic structure ensured a major crisis.  It was only a matter of the timing and circumstances as to how the widening gulf between distorted market prices and the true underlying value of the debt was resolved.  As we are witnessing with Greek, Portuguese and Irish debt (and CDS) prices, market troubles often manifest when unanticipated policy uncertainties force the marketplace to take a clearer look at the fundamentals underpinning a debt structure – only to grimace.

The problem today is not really Greece.  A dysfunctional global Credit “system” has created tens of Trillions of unsound debt – and rapidly counting.  Aggressive “activist” policymaking has been at the heart of this unprecedented Credit inflation, and the markets today fully expect policymakers to ensure this Bubble’s perpetuation.  And, importantly, for better than two years now global fiscal and monetary policies have incited another huge round of global speculation and leveraging.  This latest Bubble gained considerable momentum with last year’s European Greek bailout and implementation of the Fed’s QE2 program.

Policymaking gave a new – and egregiously profitable – lease on life to the “global leveraged speculating community.”  Given up for dead in late-2008, hedge funds, proprietary trading desks and others have been able to exploit government-induced market distortions like never before.  With confidence that massive fiscal and monetary stimulus would ensure economic expansion, abundant marketplace liquidity, and strong inflationary biases for global securities and commodities markets, the global “risk on” trade proliferated near and far.  Re-risking and re-leveraging – through the creation of new market-based debt and attendant liquidity – fueled a self-reinforcing speculative boom.  QE2 (and other central bank liquidity operations) coupled with re-leveraging dynamics bolstered the perception that the markets had commenced a cycle that would prosper in liquidity abundance for an extended period.  Fragile underpinnings, especially in the U.S., seemed to ensure years of policy largess.

There is a big problem any time the leveraged speculating community begins to question core assumptions – certainly including the capacities of policymakers to sustain Credit booms, ensure liquid and continuous markets, and to contain Credit stress.  Think of it this way:  Enterprising market operators are incentivized into leveraged (“risk-on") trades when they discern that policymaking is providing both a trading edge (generally an inflationary bias or predictable spread) in the marketplace and a favorable liquidity backstop availing an easy exit when necessary.  I would argue that huge speculative positions have accumulated over the past two years on assumptions that are increasingly in doubt.  This has quickly become a major market issue, and largely explains recent market action.

The markets must now face the reality that policymakers don’t, by any stretch, have the Greek crisis contained.  Last year’s big “fix” is now appreciated as a mere little band-aid.  What appeared an incredible sum for the one-time bailout of an inconsequential economy is increasingly recognized as the tip of the iceberg for huge structural problems at Europe’s periphery and beyond.  The markets are beginning the process of recalibrating the potential costs – including financial, economic and social, along with myriad unknowable attendant risks - associated with festering Credit and market crises.  The results are frightening.     

My basic premise is that the sophisticated leveraged speculators have been operating as the marginal source of liquidity - fueling a highly speculative run throughout global risk markets.  These players now appreciate that assumptions underlying their bullish positioning in various markets are now in jeopardy.  No longer do the policymaking, liquidity and economic backdrops support their aggressive risk-taking posture.  This essentially ends the latest cycle of speculative excess, as prospects would appear to dictate more self-reinforcing pressure to de-risk and de-leverage. 

A speculative marketplace cannot easily accommodate a move by the marginal liquidity provider to unwind leveraged positions.  This challenge becomes only more formidable when a meaningful segment of the speculating community would prefer to reverse long exposure and go short various risk markets.  Others will move aggressively to hedge long exposures in the derivatives markets.  It is exactly these types of dynamics that transforms what seemed to be highly liquid markets quite abruptly into illiquid problems. 

It has been part of my bear thesis that the “moon and stars” have been lining up for a bout of de-risking and de-leveraging right as QE2 was wrapping up.  Market cracks have been forming for months now – emerging market equities, commodities and gold stocks, the banks and the depleting energy sector come to mind.  Hedge fund returns have been unimpressive, which equates to a lot of positions and leverage in potentially weak hands.  And, importantly, the U.S. economy has performed dismally in the face of massive stimulus.  Much of the marketplace has been caught poorly positioned.  Still, many of the bullish persuasion are comparing the current soft-patch to last year’s, missing the critical difference that recent weakness commenced in the midst of strong equities markets, booming debt issuance and $20bn or so of weekly quantitative easing. 

It is certainly not a clear line from Athens to the U.S. markets and economy.  And it’s not an easy task to explain how financial conditions in our system have come to a large degree to be dictated by global market forces.  But to appreciate the gravity of the situation one must first recognize the underlying fragility of our financial and economic systems. 

If this were a sound recovery – fueled by balanced growth, strong capital investment and financed largely by relatively stable bank finance - I’d be a lot less worried.  But we’re instead in a quite shaky recovery incited by massive fiscal and monetary stimulus – which spurred excessive risk-taking, speculation and general financial excess.  Real economic adjustment was put on hold; the system has been set up for disappointment.  And with bank lending stagnant, the vast majority of system credit creation is coming these days from the issuance of marketable debt.  The markets had already moved to impose austerity on the municipal bond arena, and it appears the booming corporate debt marketplace is now facing an abrupt shift in the liquidity backdrop. 

“Extend and pretend” and “kicking the can down the road” are now bandied about when discussing the policy approach to the Greek crisis.  Virtually everyone believes that policymakers will –heroically in the final hour – come together, end the brinksmanship and craft a policy response that avoids even a technical default.  German Chancellor Merkel peaked into the abyss and saw the light – just as the markets presume politicians and central bankers will do.  There will be no “significant” contribution (aka losses) to bondholders, with Ms. Merkel agreeing instead to a voluntary participation from private creditors. 

The problem is the market has no appetite for Greek debt – and it doesn’t want the debt of Ireland or Portugal either.  And it wouldn’t take all that much for the marketplace to take a cautious approach to debt altogether.  At this point, there’s little that can be done to make this problematic periphery debt appealing to the marketplace.  Meanwhile, the Greek populace has taken a lot of pain – and will be told to endure worse – without seeing any positive results.  The whole process has lost important credibility, which could mark an important inflection point for the markets.

Global markets have enjoyed a bountiful year of policy-induced gains.  Policymakers, once again, emboldened those believing that governments can solve debt problems and easily intervene to bolster financial markets.  This backdrop has, at the same time, provided quite an opportunity for market participants to hedge risk in Credit default swap (CDS) and myriad other derivatives markets.  At the end of the day, the flurry of hedging and speculating that arose when subprime heated up in ’07 embedded risk exposures that came back to haunt the system with Lehman’s collapse.  And, I’ll wager, many of the institutions at the heart of today’s booming global risk-intermediation and derivatives markets (including CDS) are heavily exposed to Greek and periphery debt. 

Expanding debt impairment is becoming a major problem; there’s no apparent default mechanism that wouldn’t imperil many of the world’s major financial institutions; and the tentacles of this potential crisis reach far out across the global system.  “Extend and pretend” is the new normal, as global markets become a politicians and policymaking confidence game.  Europe – and the world’s – new “Lehman Moment” commences when the markets question the soundness of the global derivatives marketplace

First Macro Cloud

As we all know, The bernanke's most cherished policy measure QE2 comes to a screeching halt at the end of this month. Assuming that the program ends as planned, the Fed will have bought about $600 billion of various Treasury securities since late 2010, in addition to whatever agency debt proceeds were “re-invested” into Treasurys. Once the cruthches are removed from the patient, will he stand on his own two feet? I should think not, afterall, his arms (unemployment) & his legs (Housing values) have not heeled at all. Ask SHJ what happens when crutches are removed prematurely;-)

"The Standard & Poor's 500, the US stock market's benchmark index, could fall roughly 10% from its current level, partly due to the upcoming end of the Federal Reserve's bond-buying program, Credit Suisse's US equity strategist said on Wednesday." Doug Cliggott, of Credit Suisse, told the Reuters 2011 Investment Outlook Summit in New York. "We are of the opinion it is still a big deal," Cliggott said. "We would think an index between 1,170 and 1,200 would be a realistic estimate of where we might be headed."

Although a third round of QE, namely QE3 has been heralded by the lame street media, as a possibility. We all know that inflationary price pressures created by QE1 & QE2 make a new round of QE very remote for now, and most politically controversial, as it is now perceived to have mainly helped the very same bankers whom are largely responsible for the mess we find ourselves in. Of course, the stealth QE of re-investing the interest earned on the hugh amount of crap currently held on the Fed's balance sheet will continue unabated. However, all in, this stealth QE only adds up to a little more than a third of the current monthly POMO. Hardly enough to keep grossly inflated asset prices from rapidly deflating.



Second Macro Cloud

The ever growing amount of discouraging economic data points released over the past month are alarming to say the least. The jobs report was a “disaster”, the housing numbers are dismal, manufacturing has slowed way down and consumer confidence is dropping like a rock. The bad economic news just keeps rolling in. It is almost as if someone has slammed on the economic brakes. The Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before. The reading missed economists’ expectations by a long shot!

Mike Riddell, a fund manager at M&G Investments in London, recently explained to CNBS why he is so alarmed right now….“Initially, we just had bad news from the weekly jobless claims data, but now we’re starting to see a broad-based economic slump. US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were very disappointing.”

Earlier this week it was announced that U.S. home prices have declined 5.1% from a year ago. Sadly, U.S. home prices have now fallen more than they did during the entire Great Depression.



Third Macro Cloud

Federal, State & local budgets are now squarely on the choping block. Only two choices before us, raise taxes or cut spending, both will adversely effect economic growth.

As Treasury Secretary Geithner warned, on May 16 a recent Treasury auction of U.S. debt will clear, putting the nation at its $14.294 trillion legal debt limit. With even the most aggressive plans taking years to balance the budget and end deficit spending, the U.S. will need to raise the legal debt ceiling to prevent economic calamity. Geithner has warned that he can only keep things running until July through “extraordinary measures” before the crisis reaches a state of overload.

The federal government today is taking in revenue equal to about 15 percent of the GDP. It hasn’t been that low since the 1950s, before programs like Medicaid and Medicare existed. To keep revenue that low as Baby Boomers retire is simply not realistic.

The housing market downturn, financial crisis and recession created a collapse in state and local revenues, which caused many states, cities and counties to raise taxes, slash spending and turn to the federal government for help. Almost all state and local governments must end their fiscal years with balanced budgets. As their costs rise in one area, they will have to cut spending in another or raise taxes to cover the new demands. Investors in the $2.9 trillion municipal bond market have been spooked by the budget crisis and have been pulling their money out of muni mutual funds for nearly five months.

China is certainly concerned about our fiscal woes, this from AFP Yesterday:

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order. "In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying. Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies -- eroding the wealth of creditors including China, Guan said



Forth Macro Cloud

China slow down becoming more & more pronounced.

China has been called the “savior” of the world’s economy as its massive $586 billion Government Stimulus and Easy Money policies sustained over 10% GDP growth in 2009 even as the world GDP was contracting for the first time in recent history. However China’s huge stimulus has created problems of inflation and asset bubbles which threaten to slow down the world’s “Growth Engine” .

Seven very compelling reasons outlined by noted economic journalist Abhishek Shah as to why China's growth is now in serious question:

1.Real Estate is a Bubble - The Chinese real estate is in a bubble with real estate prices growing far in excess of Chinese income levels. Though the real estate is not driven by a debt fueled boom like the US and other developed countries, nonetheless avg real estate prices / average income levels would suggest that the real estate prices are poised to come down sharply. Chinese authorities are using both monetary and non-monetary tools to bring sanity to this market
2.US and European Export markets are slowing down – China’s growth has been a export driven growth like those of other Asian Tigers. However its main export markets of Europe and US are going to see sub-par growth in the next few years due to a debt driven excess. Europe’s Austerity measures and a low Euro is not an ideal situation for China’s export industries .
3.Pressures on Yuan growing – China is facing an ever increasing chorus from countries around the world to appreciate the yuan which is artificially suppressed through currency controls. Some think tanks suggest that the yuan is 40% undervalued to its fair value against the dollar. With countries seeing their domestic markets shrink,everyone wants to export more and import less to repower their economies. An undervalued yuan is a trigger for trade wars.
4.Foreign MNCs feeling discriminated against – China’s protectionist policies has led to an alienation amongst the foreign companies doing business in the country. Rio Tinto’s much publicized China corruption case and the Google abandonment of China has brought this issue into the limelight. Foreign countries are reevaluating whether China’s huge market is worth the discrimination they face vis-a-vis domestic companies
5.Banks and Local Government have huge unaccounted liabilities - China’s corporate structure runs large based on patronage networks of government owned banks, state owned companies and provincial authorities. This frequently leads to misallocation in capital which shows up in the forms of NPAs. Local governments compete with each other for projects giving out huge subsidies and incentives which are funded mainly through local land sales. With real estate prices crashing and profits of export industries being pressurized, this is another bubble that may crack.
6.Chinese Stock Market is down the most among major markets in 2010 – The Chinese stock market has been the worst performer among major economies with the interest rate increases and real estate bubbles making investors wary. Note this by itself is a poor indicator of economic health as stock markets are generally poor predictors of economy in the short run
7.Chinese wages are going up – There has been a lot of social unrest and suicides in China as wages fail to keep in sync with the rising productivity. Recent suicides at Electronics Giant Foxconn and strikes at Honda are indicative of this trend. Low wages which are China’s biggest competitive advantages may no longer remain one for much longer.


Fifth Macro Cloud

European soverign debt / EU banking crisis is clearly coming to a rapid head, and about to take on a much more ominous direction. Should the Syntagma square Greeks in the street of Athens obtain the plebiscite / national referendum they are clamoring for...watch out below! The fuse is now lit, and this could well be the first domino to fall, causing the anticipated chain reaction setting off the $600 trillion in CDSs (you know....Warren Buffet's weapons of mass financial destruction), which would unravel the entire EU / Western World banking system as we know it.......

Prime Minister George Papandreou said Monday he would consider holding a referendum on the government's reform agenda, if necessary, to shore up popular support for the measures. Papou used the word referendum last week and again this week. Referendum is not a word that goes down easily in the corridors of power in Brussels.

From Israel news - Arutz Sheva:

Yet it is hard to see what other choice the Greek Prime Minister has. His popularity rating is hovering around 30%; he faces growing dissent within his own Greek Socialist PASOK party and Greece is ablaze with strikes as workers who see themselves victimized by privatization vent their anger. The economy has contracted more than expected. Further austerity is a hard sell to the Greek population because it appears to be all pain no gain. This is particularly true for the young who are living with 42% unemployment. The Greek politicians show no desire to emulate the Portuguese and therefore somebody must give in real soon – the European governments, the banks, the bondholders or all of them.

Here is how John Maudlin sums things up in the old world continent:

There are just so many risks in Europe that it is hard to make a list long enough. I think the risk to the world markets is higher than the subprime risk, at least from what I can see today. I know that the leaders of Europe think they can “contain” the risk. So did Bernanke in the summer of 2007. You cannot contain this until you actually admit the problem. Our credit institutions are so intertwined that a repeat of the 2008 credit crisis is entirely possible. Who plays the role of Lehman? Let me count the candidates. Greece. Ireland. Portugal. Spain.



Sixth Macro Cloud

Middle East mayhem shows no signs of abating....Stalemate in Libya, Upheaval in Syria, Yemen bedlum, Supression in Bahrain, Saudi Arabia paying off dissent, Iranian sponsored medling, Egypt turnover turmoil, Renewed Iraeli / Palestinian clashes, Hamas & Hesbullah brotherhood,.......the beat goes on.

The Arab Spring seems to have disolved into the Winter of discontent. Oh, and let's not forget the trillions spent keeping us safe from the boogeyman in the ongoing Iraq /Afghan / Pakistan clusterphuck.

Originally posted June 11, 2011 by BDI @ http://slopeofhope.com 

With the nuclear disaster in Japan and nuclear projects worldwide now being put on a shelf, many have looked to Coal to gain favor going forward when it comes to power generation.  Therefore when I came across this interview, I thought it prudent to post the transcripts here for future reference.  They discuss not only the two types of coal and their uses, but excavation and transportation costs.  To view the original video click HERE.  Readers should note that there are conflicting reports on coal lately.  One stating China recently *turned away* coal shipments here with other promoters saying it was merely b/c they have been accepting Japan's imports while their ports are expected to be down for at least six months.  Then another predicting U.S. coal exports could jump 70% in 2011 thanks to the cheap U.S. dollar here and Bloomberg paining a rosey demand picture here so perform your own due diligence before investing.  This is not a recommendation to buy or sell but informational purposes only.

Jason Stipp: I'm Jason Stipp for Morningstar.

Paul Larson, equity strategist and the editor of the Morningstar StockInvestor newsletter, recently made a purchase for his Hare Portfolio in that newsletter in the energy sector.

He's here to tell us a little bit about why he was attracted to that name. Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: So, before we get started, I think it's interesting to note that there aren't a lot of opportunities out there today. When we look across the market, things look, on average, fairly valued. Would you say that that's a pretty good assessment of the situation?

Larson: I would agree that when you roll up our price-to-value ratios across our coverage universe, the average stock is looking roughly fairly valued. Of course, there are individual opportunities out there that still look cheap, but they are much fewer in number than they were just a couple of months ago, especially when you look at the wide-moat universe, which is really where I do most of my hunting for ideas. Wide-moat, 5-star stocks--we had roughly three dozen of them as late as last August, and now we're down to less than 10, and frankly, I own just about all of them.

Stipp: So, this is not to say that the market hasn't hit a few bumps and turmoil recently. The most recent of which, of course, is the Japan crisis, and that's somewhat related to the stock pick that you have, which is in the coal industry. Can you talk about the crisis and how that affected what you see as the future for this pick?

Larson: Sure. Well, the company that I recently bought is certainly an enterprising pick, and it is only a narrow-moat stock, but I think that the catalysts here are real and the valuation is really attractive.

The company name is a Cloud Peak, ticker CLD. How this is being impacted by Japan: Cloud Peak is a coal miner. Their mines are in the Powder River Basin in Wyoming, and this is a low-cost area of mining coal.

But the way that Japan is impacting the coal industry is that with the situation at the nuclear plant in Japan, I think this is going to stop the so-called "nuclear renaissance" in its tracks, and that means that 10 years from now, nuclear power is going to be a much smaller portion of the worldwide energy supply than otherwise would have been had this nuclear renaissance continued.

So, with nuclear being a much smaller portion of the pie, that means that all other energy sources, including coal, are going to have to pick up the slack.

Stipp: So to follow-up on that, coal also, as far as environmental impact, it also faces some headwinds. How do you factor that into the extra share of the energy pie that coal might have in the future?

Close Full Transcript

"I've just completed a new research paper that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper's summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession."

The table above itemizes the particular postwar events that are reviewed in detail in my paper. The paper also provides the following summary discussion:

The first column indicates months in which there were contemporary accounts of consumer rationing of gasoline. Ramey and Vine have emphasized that non-price rationing can significantly amplify the economic dislocations associated with oil shocks. There were at least some such accounts for 5 of the 7 episodes prior to 1980, but none since then.

The third column indicates whether price controls on crude oil or gasoline were in place at the time. This is relevant for a number of reasons. First, price controls are of course a major explanation for why non-price rationing such as reported in column 1 would be observed. And although there were no explicit price controls in effect in 1947, the threat that they might be imposed at any time was quite significant (Goodwin and Herren, 1975), and this is presumably one reason why reports of rationing are also associated with this episode. No price controls were in effect in the United States in 1956, but they do appear to have been in use in Europe, where the rationing at the time was reported.

Second, price controls were sometimes an important factor contributing to the episode itself. Controls can inhibit markets from responding efficiently to the challenges and can be one cause of inadequate or misallocated supply. In addition, the lifting of price controls was often the explanation for the discrete jump eventually observed in prices, as was the case for example in June 1953 and February 1981. The gradual lifting of price ceilings was likewise a reason that events such as the exile of the Shah of Iran in January of 1979 showed up in oil prices only gradually over time.

Price controls also complicate what one means by the magnitude of the observed price change associated with a given episode. Particularly during the 1970s, there was a very involved set of regulations with elaborate rules for different categories of crude oil. Commonly used measures of oil prices look quite different from each other over this period. Hamilton (2010) found that the producer price index for crude petroleum has a better correlation over this period with the prices consumers actually paid for gasoline than do other popular measures such as the price of West Texas Intermediate or the refiner acquisition cost. I have for this reason used the crude petroleum PPI over the period 1973-1981 as the basis for calculating the magnitude of the price change reported in the second column of Table 1. For all other dates the reported price change is based on the monthly WTI.

The fourth column of Table 1 summarizes key contributing factors in each episode. Many of these episodes were associated with dramatic geopolitical developments arising out of conflicts in the Middle East. Strong demand confronting a limited supply response also contributed to many of these episodes. The table collects the price increases of 1973-74 together, though in many respects the shortages in the spring of 1973 and the winter of 1973-74 were distinct events with distinct causes. The modest price spikes of 1969 and 1970 have likewise been grouped together for purposes of the summary....

These historical episodes were often followed by economic recessions in the United States. The last column of Table 1 reports the starting date of U.S. recessions as determined by the National Bureau of Economic Research. All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.

The correlation between oil shocks and economic recessions appears to be too strong to be just a coincidence (Hamilton, 1983a, 1985). And although demand pressure associated with the later stages of a business cycle expansion seems to have been a contributing factor in a number of these episodes, statistically one cannot predict the oil price changes prior to 1973 on the basis of prior developments in the U.S. economy (Hamilton, 1983a). Moreover, supply disruptions arising from dramatic geopolitical events are prominent causes of a number of the most important episodes. Insofar as events such as the Suez Crisis and first Persian Gulf War were not caused by U.S. business cycle dynamics, a correlation between these events and subsequent economic downturns should be viewed as causal. This is not to claim that the oil price increases themselves were the sole cause of most postwar recessions. Instead the indicated conclusion is that oil shocks were a contributing factor in at least some postwar recessions.

Posted by James Hamilton at January 15, 2011 08:18 AM @ http://bit.ly/gJBiJo

The following from CalculatedRisk with my notes added as an afterthought:

Short answer: it is very unlikely that the Fed will increase the Fed funds rate this year. There are a series of steps the Fed will most likely take before raising rates¹: • First the Fed needs to complete the $600 billion “QE2” large-scale asset purchase program. This is currently scheduled to be completed at the end of June, however, to “promote a smooth transition in markets”, it is possible the Fed will decide to "gradually slow the pace" of the purchases like they did with QE1 (quoted text from QE1 related FOMC statements). If the program is extended and purchases tapered off (but the size remains at $600 billion), this will probably be announced at the conclusion of the two day FOMC meeting in late April and the program will probably then be completed in August. • Next the Fed will end the reinvestment of maturing MBS and Treasury Securities. This could be concurrent with the end of QE2, or the Fed might wait a few more months before halting reinvestment. • Then the Fed will need to remove or change the extended period FOMC statement:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

“There is time to go long, time to go short and time to go fishing”  -Jesse Livermore

"What happens after a fast, high-volume 2-3-day sell off. There are three major scenarios:

     - a stock move sideways on a low volume as it finally find bidders. Some will interpret this price action as the forming of bear flag. Others will look at it as the forming of a new base, which is an important prerequisite for higher prices in the future as it is likely to attract fresh money. Both groups could be right and that dispute will be solved only by price – in which direction is the stock going to break out from its new range.
     - a stock continues to fall down in an accelerating fashion, breaching all obvious support levels; such action often leads to a sharp V-shaped recovery at some point as shorts decide to cover and new longs enter, attracted by the new price levels;
     - a stock bounces sharply from one of its rising major moving averages, as the 50-day for example. Those that are today’s buyers of those dips are likely to be tomorrow’s sources of selling as time horizons tend to shrink during market corrections. 

It is always useful to watch how the market reacts as stocks correct. It makes a lot of sense not to buy blindly declines to major moving averages at this point, because you don’t know in advance if there will be an immediate bounce. It is better to wait for the stock to form a base. As I mentioned already, some of those bases will be bear flags; some will be a launching pad for another move up."

"While it is true that most momentum stocks are still above their rising 50-day MA or with other words, there is no technical evidence that their move is over, we have to be blind not to pay attention to the high-volume selloff last week. Is it the beginning of something bigger or just a temporary setback, designed to flush the weak hands out, no one knows for sure. The major market moving averages are in an uptrend too, by all definition of the concept. The truth is that they have always hidden more than they have revealed. Underneath the surface, small caps were ditched, trends in individual names were broken.

After a few days of high-volume decline, many stocks tend to move sideways. Some of these stocks will form bearish flag and continue their correction; other will build a new base, which will be a launching pad for future price appreciation.

We are in the midst of an earnings season, where every report has the potential to make or break a trend as new information changes perceptions of value and risk. The stock market is a forward looking mechanism that tries to discount proactively and this is one of the foundations of momentum moves. We mentioned on numerous occasions here that most stocks appreciated significantly before the earnings season began and the elevated expectations meant trouble for stocks that did not live to their reputation. We saw $FFIV losing 23% overnight, which essentially wiped out its price appreciation for the last three months.

In the financial market, as in life, reaction to news is far more important than the news itself. The selloff in $AAPL after reporting the most stellar quarter in its history just does not feel right. It is naïve to assume that option pinning has the power to stop $AAPL after such earnings report. The risk appetite on the long side seems gone, at least for a while. One of the major underlying conditions of bull markets is the positive market reaction to almost all type of news. This condition is nowhere to be found today."

The above excerpts from @Ivanhoff, Managing Director of Stocktwits50.  Original posts can be found here and here

eMagin (EMAN #4), which over the past few months has bounced on and off our rankings, sells high-resolution OLED (organic light emitting diode) microdisplays for military, industrial, medical and consumer applications. Click here to read our November 22 profile.



Onyx Pharma (ONXX #16) is a biopharmaceutical company with a focus on cancer therapies. It currently has one product approved by the FDA and on the market: Nexavar. This drug, which was co-developed with Bayer Pharma, is currently approved for the treatment of liver cancer and advanced kidney cancer. Nexavar is currently approved in more than 95 countries for the treatment of advanced kidney cancer and in more than 90 countries for the treatment of liver cancer. Additionally, Nexavar is being investigated in several ongoing trials in a variety of other types of tumors.

Beyond Nexavar, Onyx has a development pipeline of anti-cancer compounds at various stages of clinical testing, most notably carfilzomib, a next-generation proteasome inhibitor, that is currently being evaluated in multiple Phase 2 clinical trials for multiple myeloma, a cancer that targets bone marrow. Onyx acquired carfilzomib with its November 2009 purchase of Proteolix for $276 million. Besides Nexavar and carfilzomib, Onyx also has two other compounds in Phase 1 testing: ONX 0801, an alpha-folate receptor targeted inhibitor of the thymidylate synthase, and ONX 0912, an oral proteasome inhibitor.

The stock spiked in early December on positive clinical results for carfilzomib, which shrank the tumors of about one-third of patients with multiple myeloma. Onyx plans to submit a New Drug Application (NDA) filing for carfilzomib as early as mid-2011 for potential accelerated approval in the US. If approved, carfilzomib would compete with Celgene's Revlimid and Thalomid, which have combined annual sales above $2 billion and Johnson & Johnson's Velcade.

Onyx believes that Carfilzomib by itself, has the potential to be a cornerstone of care in the $4 billion multiple myeloma market across multiple lines of therapy. Carfilzomib, along with ONX 0912, has the potential to change the treatment landscape from myeloma and make Onyx the key player in this rapidly growing field. This is a large potential market as multiple myeloma is the second most common hematologic cancer. There are more than 180,000 people living with myeloma and 86,000 new cases diagnosed annually. Researchers have made treatment advances in the last decade and lives are being extended. However, myeloma remains a fatal disease. As such, the company is excited about the potential of its compounds believing that carfilzomib could become the standard care in this important market.

On November 3, Onyx reported strong Q3 results. EPS jumped 140% to $0.84 while revenue rose 78% YoY to $122.9 million. However, the big jump in revenue is a bit misleading as this includes an upfront license payment from Ono Pharmaceutical for $59.2 million. Actual revenue from Nexavar actually declined to $63.7 million in Q3, down 8% YoY. Onyx says the global recession has impacted Nexavar sales. In the US, there was some impact from health care reform and increased competitive pressure in the kidney cancer market affected US sales. Outside the US, and particularly in Europe, government pressure on pricing is slowing revenue growth and Nexavar sales growth in Japan has fallen short of internal expectations. Looking ahead, in the US, Onyx expects Nexavar sales to grow in the single digits. However, the company believes there is a significant untapped market opportunity in Japan and China, with its leading incidence of liver cancer worldwide. Overall, Onyx expects double-digit growth in the Asia-Pacific region.

In sum, if not for the upfront license payment in Q3, Onyx would not have qualified for our rankings because we require at least 10% revenue growth. However, investors have been bidding up the stock, not so much for its financial results, but based primarily on the potential for carfilzomib. While Nexavar is promising, it's good to see Onyx branch into other therapies and carfilzomib appears to have some real potential.



Nova Measuring (NVMI #19), which was also added to our Stocks Under $10 rankings last week, is a semiconductor equipment company that is a play on the burgeoning demand for smartphones and tablets. The company believes that 80-90% of all chips in the iPhone come from wafers that its tools have measured, yet most investors are unfamiliar with this name. Click here for the full profile.



Newport Corp. (NEWP #22), which was recently featured in our Reasonably-Valued Stocks for 2011 report, is an interesting turnaround story. It's a former internet high-flyer, trading above $180 during the technology heyday. The stock collapsed after the bubble burst but the company has since diversified its business and is starting to flourish. After trading below $4 as recently as March 2009, the stock has made a slow and steady rebound since then.

Newport sells lasers, photonics instrumentation, sub-micron positioning systems, optical components, and subsystems. During the tech bubble in the early 2000's, it was seen as a play on the then fast-growing fiber optic network build out. However, its subsequent focus on diversification has resulted in an expansive product offering with more than 15,000 products serving a wide variety of industries including scientific research, aerospace/defense, microelectronics, life sciences and industrial manufacturing. NEWP operates two business segments: Lasers Division and Photonics (accounts for 40% of sales) and Precision Technologies (PPT) (60%).

Following weak results last year, Newport has been posting much stronger results over the past few quarters as it benefits from the overall recovery in the industrial market. Most recently, on October 27, NEWP reported Q3 EPS of $0.34, 36% above the $0.25 consensus and well above the $0.06 earned in the year ago period. Revenue rose 42% YoY and 9% sequentially to $125.2 million, its highest total in more than two years. Also, following five quarters of YoY revenue declines, revenue has been accelerating over the past three: +20%, +31% and +42%. Gross margins expanded to 43% in Q3 (up 300 bps from the year ago quarter) on improved leverage in manufacturing costs. Backlog is also showing momentum with order growth of 40% YoY in Q3 (second highest level in the company's history) and a book-to-ratio above one. In particular, its microelectronics business is doing exceptionally well, growing 71% YoY, as the company is seeing robust order activity from tier one semiconductor equipment customers. While the US still accounts for the majority of sales, the company is seeing rapid growth in China where it is gaining market share.

Looking ahead, management expects margins to continue to climb in Q4. While NEWP is clearly benefitting from the rebound in the overall industrial market, its industrial business has grown at a much faster rate than the macro economic environment would suggest. Still, it's important to note that the company has benefitted from orders funded by the stimulus bill, which the company expects started to wind down at the end of 2010. A concern with NEWP is its high debt level, which stands at $120 million, stemming from a $175 million capital raise in 2007 to fund the purchase of Spectra-Physics (microelectronics laser maker) and to repurchase shares. However, NEWP's debt/capital ratio has declined over the past two quarters (currently at 29%) and cash flows have improved. NEWP has also posted four consecutive quarters of positive cash flow.

Bottom Line: Newport has now reported back-to-back huge beats the last two quarters, showing that its business momentum is really starting to materialize. With the company expected to earn $1.04 in FY10 and $1.24 in FY11, the stock trades at current and forward P/E's of just 17.1x and 14.3x even including the stock's 75% run the past few months. We would prefer to see less debt on the books, but overall, we view NEWP as a cheap play on the recovery in industrial market.



NetSuite (N #24) is a provider of online, hosted (cloud computing) customer relationship management (CRM) and enterprise resource planning (ERP) software designed to help companies manage their businesses and automate their processes. NetSuite's software handles such functions as sales, customer communications, order management, inventory management, finance, e-commerce, time and billing, and Web site management. NetSuite does not provide any sort of on-premise services, it's all online. NetSuite started out on the very small end of the spectrum, really head to head against QuickBooks. However, it has evolved and has become more full-featured and moved up squarely into the small and medium sized business market.

The company has been implementing twin strategies of moving up market and expanding into new verticals. A big part of NetSuite's success in moving up market has been its NetSuite's OneWorld offering. OneWorld is the first and only cloud-based system to deliver real-time global business management and financial consolidation services to mid-sized companies with multinational and multi-subsidiary operations. With OneWorld, customers can manage multiple subsidiaries, business units and legal entities all from a single NetSuite account. It seamlessly handles different currencies, taxation rules, and reporting requirements at a fraction of the cost of traditional on-premise ERP services.

Following about ten months of trading sideways, the stock has been in rally mode since early July, up about 120%. A big catalyst for the stock has been back-to-back strong quarterly reports. Most recently, on November 4, NetSuite reported EPS of $0.04 vs $0.01 a year ago while revenue rose 19% YoY to a record $49.7 million. While the top line growth was not eye-popping, it marked the strongest revenue growth quarter since 1Q09. Following three quarters of low-to-mid single digit growth, NetSuite has posted 17% growth in Q2 and 19% in Q3. Overall gross margin improved to 73% while operating margin was 5.9%, both of which were the highest since the company went public.

On its earnings call, the company said its NetSuite OneWorld offering for multi-national enterprises had another great quarter as new business bookings came in at the second highest percentage ever, trailing only Q2's record performance. Also, NetSuite sold OneWorld to the highest number of customers ever in Q3, adding approximately 285 customers with average selling prices growing nicely over the prior year. The company is also experiencing its best customer retention seen in at least eight years. The company noted that the worldwide move to the cloud by companies seeking to operate their businesses more efficiently has been driving results.

A potential concern is the valuation. NetSuite is set to earn just $0.13 in 2010 and $0.22 in 2011, which translates into current (FY10) and forward (FY11) P/E's of 216x and 128x, respectively. Even if the company dramatically outperforms current estimates, this would still be a pricey stock.

[From Briefing.com]

Hey technical analysis guys/gals, would love your comment or thoughts:

[Subscriber content from Barrons]

Wall Street derivative traders are wrestling today with how to value the new American International Group (ticker: AIG) warrants the insurer plans to issue later this month to its public shareholders.

Warrants are long-term call options. The value of the warrant is important to assessing the current value of AIG stock since shareholders will get just over 0.5 warrants for each share owned.

AIG stock has been strong lately, rising $1.40 to 61.85 today and up more than 40% since the start of December on hopes for the big insurer's revival and also thanks to the rising value of the AIG warrants.

AIG said today that it plans to issue 75 million of 10-year warrants with a strike price of $45 to its holders later this month, or 0.53 warrants, for each AIG share. When-issued warrant trading is expected to begin on Jan. 13 and the distribution is due on Jan. 19.

The current price of AIG stock reflects an assumption about the future share price of the shares after the warrant issuance and the value of the warrants themselves. AIG now appears to be discounting a stock price of around $48 and a warrant price of around $26 with holders getting almost $14 in warrant value per share.

A warrant price of $26 would be consistent with an implied volatility of AIG stock of around 35%, below recent volatility in the mid-to-high 40s, but way above the implied volatility of the options on insurers like Chubb that now trade with an implied volatility of around 20%.

Barron's has written that AIG was looking pricey trading in the high 50s ("AIG Shares Could Head Lower," Jan. 3), but the stock has continued to gain.

It's very complicated to analyze AIG now because it involves assumptions about the post-warrant value of the stock and the warrant value. We've argued that AIG stock looked rich because the shares, after the warrants are distributed, could be worth around 40, or about 80% of book value and roughly 10 times potential 2011 profits. That assumption could prove conservative, however. The market now is discounting a higher price.

One of the big issues in valuing the AIG warrants will be correct level of implied volatility, a critical input for analyzing and pricing options and warrants. JP Morgan has publicly traded seven-year warrants with a strike price of about 42 that trade around 14 with JP Morgan shares around 43. They have an implied volatility of around 30%. It's likely that AIG volatility will decline once the warrants are issued because the company will begin to resemble a regular insurer. That may weigh on the initial warrant price.

There is an enormous overhang of AIG stock that could weigh on the shares since the government owns 1.65 billion shares—92% of the total outstanding—and likely will begin to sell part of that stake during 2011.

Uncle Sam's stake in AIG could be worth $80 billion, dwarfing the value of its stake in either General Motors (GM) or Citigroup (C). Treasury has sold all of its Citi stock. The current float in AIG is worth just $8.5 billion, with $1.5 billion or more of that attributable to the warrants.

Adding up the value of these complex AIG instruments is proving to be tough even for Wall Street's quants, let alone the average investor.

This from Alan Abelson @ Barrons  *Tis' The Season To Be Wary* [subsrciption only]

The deep freeze. No, no, we're not about to do a reprise on the credit collapse back in 2008-2009. Hey, this is the season to be jolly. The freeze we're talking about is neither financial nor metaphorical but climatic—the real thing, that dumped who knows how much snow on Northern Europe, grounding thousands of flights, making life miserable for any poor souls who had to get out and about, and further constraining the populace's shopping impulse, already chilled by the cold winds of economic austerity.

Do you need any greater evidence of how desperate folks are than the dispatch from Berlin that told of how two men dressed as Santa Claus strolled into a supermarket, whipped out a pistol and robbed the joint? Although the report of the incident is lamentably shy of details on motive, one can only assume the faux Clauses were among the involuntarily idled, obviously short of means and unable to face the prospect of their little ones looking under the tree (recently purloined) on Christmas morn and finding—nothing.

One can only sympathize with the beset economic wise men of Europe for suspecting that somebody up there doesn't like them. Here they were frantically running around in circles, concocting all kinds of weird nostrums in an attempt to keep the weak sisters of the euro zone vertical, when the heavens open up and all but bury the Continent under a ton of snow. But if they leave off frowning and fretting and fulminating about the quirks of misfortune for a moment or two, they might realize the furious storm may prove a blessing, not a curse.

For inclement climate is just the ticket to get feckless governments and reckless bankers off the hook. A good chunk of the blame for their failure to fix the broken economies their machinations have left across a wide swath of Europe can now be cunningly shifted to the vagaries of nature. So, the great storm may come in right handy if, as seems likely, the quacky remedies they've proposed to ease the economic bind of countries like Ireland, Greece, Portugal and Spain aggravate rather than alleviate the pain.

The overwhelming consensus among the economic cognoscenti on this side of the Atlantic is that Europe is destined for further rough going in the year ahead and, indeed, there's lots of muttering of default by one or another of the debt-laden struggling members of the euro zone, even of a possible breakup of that somewhat ungainly entity. Since we have the unshakable conviction that the consensus is usually wrong, and when it's overwhelming it's inevitably wrong, we offer that as a token of holiday cheer to our shivering European cousins.

In striking contrast, optimism rules the roost among the seers when sizing up the prospects for our own economy. While we earnestly hope the optimists are right, we have some difficulty in envisioning woe in Europe failing to affect us. That would be decoupling on a rather grand scale, and we're frankly more than a tad skeptical that it'll happen. But we'll see.

Certainly, investors, who just a scant couple of weeks ago were acting pretty antsy when it looked as if one or another of the European invalids were about to sink from sight, have shrugged off such worries. But we guess they're just too busy these days buying stocks and watching them go up—and for sheer excitement, we admit, it beats pro football hands down—to spend precious time wrinkling their brows over the consequences of sovereign default and other such dull, arcane stuff.

FOR ALL ITS FLASH AND EXUBERANCE, routinely setting new highs for the cycle, this rambunctious bull market looks vulnerable to a fairly mean selloff once the end-of-the-year rally runs its course and the expected reinvestment surge early in 2011 exhausts itself. As we've noted more than once (to paraphrase a quip by George Bernard Shaw, we quote ourselves to spice our scribblings), sentiment is heavily weighted to the bullish side, typically a flashing yellow light signalling trouble ahead.

Moreover, at 20 times this fading year's earnings, stocks hardly stack up as outrageously cheap. On that score, the latest calculation by Andrew Smithers, the smart Brit who runs the eponymous London-based investment firm Smithers & Co., is that U.S. equities are more than 70% overpriced, according to q, his favorite yardstick and essentially a measure based on replacement value.

Just to put you at ease, we haven't quite lost our minds, nor Andrew his. The market, rest assured, isn't about to vanish into the void. And Andrew is quick to point out that by his reckoning, stocks are well below their valuation peaks of 1929 and 1999, but more or less even-steven with the highs of 1906, 1937 and 1968.

For all his wariness for the long pull, he doesn't see share prices suffering a steep fall so long as the Federal Reserve keeps pumping liquidity into the system and Washington stalls on meaningful deficit reduction.

Frankly, although we greatly esteem Andrew's perspicacity, we aren't so sure he's right. Not least because so many market mavens now share his view, which suggests to us, as the old Street cliché has it, it probably has already been discounted in the latest bump up in equities.

What we find especially disturbing, in any case, is the quickening of the speculative pulse, paced by wildly leveraging hedge funds.

As Zero Hedge observes, margin debt on the Big Board in October swelled to $269 billion, a leap of $13 billion over the September figure, and the highest since September 2008, just before Lehman gave up the ghost.

Any forced unwind, triggered by an unpleasant surprise (yes, Virginia, no matter what your daddy and mommy tell you, there are such things as unpleasant surprises in the stock market) could be very, very ugly.

THERE'S THIS, TOO: the economy is apt to prove less robust than either giddy investors or the Street's professional cheerleaders anticipate. We don't buy the notion that simply because a double dip is no longer a clear and present danger, everything's hunky-dory. It isn't. And, most particularly, the big double whammy of sick housing and a seriously anemic job market is still very much with us and shows few real signs of getting better.

Ex-seasonal adjustment and kindred mumbo-jumbo, housing is doing worse, not better. As we've seen these past few weeks, it doesn't take much in the way of a rise in interest rates to dry up what little demand existed for mortgages (applications have shrunk precipitously four weeks in a row). Jobs are still awfully hard to land, despite the celebratory response by chronic bulls to the occasional minuscule dips in weekly new claims for unemployment insurance.

Weary of playing tightwad and imbued with the holiday spirit, Jane and John Q. may have begged, borrowed or dug into their savings to step up their spending. But the cold, hard fact is that with paychecks not getting perceptibly bigger, they don't have much choice but to resume their new-found thriftiness.

The upward spiral in crude to $91 a barrel is on its way, predicts the commodity bunch at Barclays Capital, to $100, so Jane and John are obviously going to feel the pinch all the more. Dave Rosenberg, Gluskin Sheff's chief economist and strategist (but a fine fellow nonetheless), estimates the run-up in energy prices is costing American consumers something like $60 billion a year. Toss in the rising cost of food, which like energy is conveniently omitted from the official tally of so-called core inflation, and pinch morphs into squeeze.

Dave points out, incidentally, that "it's very dangerous to use the holidays as a guide to any fundamental shifts in consumer attitudes." In the good old days of free-flowing credit, he goes on, thanks to "the massive wealth buildup from double-digit home-price appreciation and sustainable strong employment…consumer spending in real terms surpassed a 2.5% annual rate no fewer than 13 quarters and 3% nine times. It has yet to happen so far."

A market historian of sorts, Dave relates that the dividend rate on the Standard & Poor's 500 (here we're hesitantly trespassing on the turf of the excellent Shirley Lazo, author of Barron's Speaking of Dividends), currently 2%, is "too low." It smacks, he says of a market top, where investors are willing to forgo yield because they feel they'll more than make up for it in capital gains. Ominously, the last time S&P yield was that low was in the summer of 2000, followed, you may recall, by the dot-com crash.

But, wait, don't go away unhappy. When said yield gets to its long-term average 4.35%, equities, Dave reckons, will be a great buy. Which gives you something to look forward to. Whew, now we can wish you a "Merry Christmas" with a clear conscience.

Hat tip to Stockchartist for lumping these all together in one handy place. The link to his blog at the bottom of the post. While he does leave out Presidential and mid-term election year theories as well as a few others, these are the basics you'll hear about as you learn to navigate the market.

For years I thought the key to investment success was good stock picking; find the right stocks and you're going to see your portfolio grow. Doesn't "you-know-who" continually say there's always a "bull market somewhere" and all you need to do is find it?

Actually, I, along many others, stopped drinking that cool-aide in 2003 after seeing retirement and savings investments shrink by about 40%. That's when I embraced another belief system. One based on the belief that the key to outstanding financial performance is successfully timing the market. "If you worry about the downturns, the uptrends will take care of themselves."

But there are all sorts of market timing techniques. Right now we're at the beginning of one called the "mid-term election year cycle". Over 80 years and 25 presidential elections, the stock market has followed a fairly definite course during the period surrounding the mid-term elections.

Since 1931, the 5-quarters surrounding that election (one quarter before through 4 quarters after) have always been up with an average return of 25.5% plus dividends. Had you invested $1,000 in the Dow Index only during these 4 quarters (31% of the time) it would have appreciated to $68,200 by the end of 2009. A $1,000 investment in the Dow only during all remaining trading days (69% of the time) since 1931 would have grown to just $1,800.

But there are other interesting calendar-based timing rules:

• January Effect: The hypothesis that stock market performance in January predicts its performance for the rest of the year. If the stock market rises in January, it is likely to continue to rise by the end of December. This rule of thumb has an outstanding record for predicting the general course of the market each year, with only five major errors since 1950, for a 91.5% accuracy ratio. Since 1950 this trend has been repeated 32 of a possible 39 times.
• Santa Claus Rally: a rise in stock prices in the month of December, generally over the final week of trading prior to New Year. The rally is generally attributed to anticipation of the January effect, an injection of additional funds into the market, and to additional trades which must, for accounting and tax reasons.
• Superbowl Effect: The Super Bowl Indicator says that the stock market's performance in a given year can be predicted based on the outcome of the Super Bowl of that year. If a team from the American Football Conference (AFC) wins, then it will be a bear market (or down market), but if a team from the National Football Conference (NFC) wins, then it will be a bull market (up market). The indicator has been correct 33 out of 41 times, as measured by the Dow Jones Industrial Average - a success rate of over 80%.
• Daily: On a typical market day, volume will often look U-shaped being heaviest in the first 90 minutes of the day, again in the last 60-90 minutes and usually light in between these periods, with the lightest volume occurring during the noon hour period (Eastern).
• Weekly: It’s been said that “amateurs” trade on Mondays and Fridays while pros trade mostly during the middle of the week.
• Years:
  • Years ending with the digit “0” have been the worst year in the decennial cycle for 127 years. For the last nine decades, the market ended up on only three occasions for the years ending in “0”.
  • Another annual cycle that comes close to being constant is the four-year-cycle with the Dow Jones Industrial Average making lows in 1950, 1954, 1958 and in 1962....there are bottoms in 1966, 1970, 1974, 1978, 1982 and 1987....the market reached bottoms in 1990, 1994, 1998 and again in 2002....It appears that [the market] wants to make a bottom every four to four-and-a-half years no matter what we think should happen. Not actually declines but there was a consolidation pause in 2006 preceding an up leg.....will 2010 follow suit?
• Options Expiration: Options expiration days can be and usually are extremely volatile with unpredictable results as to whether the market winds up or down.
• The Ordeal of September and October: While September is known to be the worst month of the year, most Crashes take their biggest tolls in October, with most Black Fridays or Black Mondays occurring during those two months. Between 1939 and 2009, the S&P 500 suffered an average loss of .33% in September... the only month when the average change was negative. Had it not been for the major crashes, October would have been no different than any other month.
• Summer Doldrums (aka "Sell in May ...."): Whether due to the fact that most Americans take vacations during the summer or because of the overlap with the September/October Ordeal, statistics bear out the fact that if investors were to take their money out of the market at the end of April and reinvest six months later at the beginning of November, performance would improve appreciably. Here are some of the facts:
  • Since 1950, the DJ 30 has produced an average gain of 7.4 percent from November through April vs. 0.4 percent from May through October.
  • Investing $10,000 in the DJ 30 during the "best" six-month period and switching to bonds during the "worst" six months every year since 1950 would have posted a $527,388 return. Doing the reverse would have cost the investor $474.
  • The same approach with the S&P 500 index all the way back to 1945 shows November=April returns beating the remaining months 71 percent of the time.
  • Adhering to the practice also would have reduced risk by avoiding the stock market crashes of 1929, 1987 and 2008.
• Lunar: Finally, many adherents believe that the periods around new moons are bullish as compared with periods around full moons (see "Lunar Cycle Update").

Just too much good research to let it disappear. Get a cup of coffee, take the phone off the receiver and snuggle up. Reprinted from one of my favs SlopeofHope

SEPTEMBER UPDATE

Overall, we are seeing divergent data coming through as usual, so we'll have to wait and see where we fall. In general, I tend to believe the longer term theme that I've laid out that our economic situation for consumers is slowly grinding to a halt while big business is taking full advantage of the globalization of the world economy and managing to keep busy. I think this is why some of this data remains stubbornly positive despite what the average guy is feeling here in the US. The fact that large multi-nationals are diverse enough to show gains abroad is great and is really beneficial to the US economy, if we didn't have that, I think we'd be in a much worse position.

TOTAL RAIL TRAFFIC - http://railfax.transmatch.com/

Rail traffic can reversed its season decline and all carriers have resumed their forward march. They still are 10%-20% less than the 2008 period, but they continue to improve. I need to find some truck shipping data because I have a feeling that trucking companies are opting to load their trucks on rails to save on transit costs. This obviously makes rail shipping look better.

Total Rail Traffic

MOTOR VEHICLES (RAIL TONNAGE)

Auto shipments rebounded. As I mentioned last month, it looked like a seasonal decline was causing a drop. I'm interested to see what happens here in the next quarter as the green line really ramped higher last year. Is there pent up demand or will this begin to flat line?

WASTE & SCRAP RAIL TONNAGE

Interesting, it looks as though scrap shipments are coming back in line with the 2008 and 2009 level which leaves me wonder what was happening over the last few quarters to fuel the spike. I believe we will see the same trend happen with those auto shipments. Despite the leveling off of scrap shipments, scrap prices do continue higher. See the chart below for those details.

FOOD STAMPS (SNAP DATA) - http://www.fns.usda.gov/pd/34SNAPmonthly.htm

Generally speaking, there is no change in the trend for government food stamp recipients. There is an ever increasing number of families on government assistance. I know things are rough and this is highlighting the divide between the haves and have nots. A person in the US does not need more tax write offs or rebates or enticements to buy more "green" energy stuff or other overpriced crap, they need jobs.

41.2 million people are taking food stamps which is a total of 19.1 million households. Benefit costs per year continue to edge up at $5.5 Billion. The average household is receiving $287.00 a month in assistance.

MONSTER EMPLOYMENT INDEX - http://about-monster.com/employment-index

We've commented on how the Monster Employment Index had been steadily improving as employers continued to buy advertising slots to fill their positions. Over the last two months we've seen a decline in the listings as June was the index high at 141. At the end of August we are at 136. This is still high end of the range for the last year, but clearly we've seen a softening.

HOUSING

I am purposely omitting a discussion on housing. I am attempting to obtain approval to use a few charts that I found from a great blogger on the topic. As soon as he grants permission to copy the charts I'll make a post in the next week. Chart or no chart, the housing market is terrible.

WLI DATA - http://www.businesscycle.com/resources/

WLI data continues to flounder in the low 120's area. If you've followed any of the recent debate about the usefulness of their data you'd be completely confused. The ECRI folks have submitted that their data is not an indicator of a recession, or should I say they are saying that their data does not suggest a double dip, however they have consistently advertised that their data can predict recessions. I think we are simply seeing that all data is completely fouled up due to government influences in the market. The Fed and Treasury have flooded the markets with excess liquidity that is doing nothing for the general economy, rather propping up asset values (and doing a poor job of it too). These liquidity streams are really wreaking havoc with the WLI and also the Bloomberg Financial Conditions Index in my opinion. While overall data is weak, the components that deal with easy money availability are signaling that the good times are here. The conflicting information is causing these metrics to fail.

MIT/MOODY'S COMMERCIAL PROPERTY INDEX - http://web.mit.edu/cre/research/credl/tbi.html

MIT and Moody's data shows that all is not so good on a national level for commercial real estate. Price moves up have been met with corresponding drops. Overall, stock market prices for commercial real estate (CRE) have been doing wonderful this year, as I'm sure that much of the improvement has been a relief that the complete meltdown that everyone expected has not come. Yet, these are the exact times when we should be examining these investments that have had their relief rallies and now are left with a dose of reality. Perhaps it is wise to review shorts of several real estate investments?

COSTAR - http://www.costar.com/about/article.aspx?id=7719

Costar is suggesting exactly the same. I like this chart because it breaks down the space by type of property. While there are regional improvements, especially in the Western US, the overall health of the CRE space is poor and declining.

SCRAP METALS COMPOSITE - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5

As we've covered several times, Alan Greenspan used scrap metal as a way to take the economic "temperature" of the economy. We continue to see prices rise here, but I'll be watching for a breakout above these levels to signal that some real recovery activity might be going on. All in all this may be a reflection of international demand and dollar weakness.

BALTIC DRY GOODS SHIPPING - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

Speaking of international demand, we are seeing continued improvement in the BDI. I'm still bullish on pricing for this index to go higher. If you are looking at this space as an investment, remember that few shippers are leveraged to this metric as they've contracted out their fleets for longer term deals. There are a couple of shippers that are tied more to the daily rate and you should do some homework on those names. The bottom line here is that most shippers are leveraged to an extreme and they are subject to dividend cuts (which is why many people own these types of firms). So, faced with a cut of dividend and high leverage, I tend to shy away from these firms. Although one can argue that with pricing as bad as it it now, there is only one way to go and it is up!

1 WEEK LIBOR - www.homefinance.nl

Despite rumors of poor banking lending in Europe and around the world, we continue to see 1 week Libor and all other dates come in. This would normally be an indicator of health in the system as bankers are "trusting" each other more and therefore demanding less of an interest rate for 1 week exposure. As mentioned above, government interference in this space causes me to question any rate or improvement I see, especially with the concerns that European banks may need more capital. While this is USD Libor, we are seeing the same rate reductions in all rate curves.

US FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

The USCI has edged above 0 again which would suggest that we are now in recovery mode and in an expansion! HA! As mentioned with WLI, I have to question it. The big move is a result of the rebound in the stock market over the last week. As we have covered, this is exactly the strategy of the Fed, if asset values move higher, people believe that the recovery is in. Once they believe the recovery is in, they spend like crazy adding to their debt and spending beyond their means for instant gratification! I'm not buying it and Mom and Pop are not buying it either. We'll continue to watch this one.

COPPOCK TURN INDICATOR

Since I posted the Coppock turn signal in June there has been no looking back. The signal continues to suggest that you should be out of the market rather than in. The thing has a decent track record, but won't get you in early on the turns because it is based on a 14 month average, however, on big swings it does give you decent signals.

S&P 500 15 DAY / 40 DAY EMA CROSSOVER

Last week's rally has put another bearish chart into question. We'll need to watch this set up as I type this today, the signal will go back to bearish. As many know, one of my favorite bloggers Chris Puplava suggests that a very long term signal for market declines is the 15/40 Crossover on a weekly chart confirmed with a sub-50 RSI. As I posted several weeks ago, we did get that signal in the S&P500. I wanted to post this here because you might get the sense that I'm bearish (and that would be correct), but I want to make sure that I'm not caught leaning one way when it really is a false signal. Of real importance is that the DOW has NOT crossed over and therefore is not confirming the action in the S&P500.

USD -http://www.bloomberg.com/apps/quote?ticker=DXY:IND

The US dollar has almost lost all of its gains made in that last several months. How easy it was for Fed President Bullard and Chairman Bernake to slash the value of the dollar! This is clearly much of the fuel for the launch in gold prices. So remember we now have two keys reasons why gold is favored. First, it is not the dollar and not the Euro, and second it possesses the characteristics that benefit from the Fed strategy of debasement.

TREASURIES (TLT)

Treasuries continue to remain above the levels that suggest stress in the financial system. While TLT trades higher we must acknowledge that much of the gap higher is related to the Fed's QE program where they buy treasuries. Of course this incited a stampede to get in front of the FED so we have traded down a bit once the rush abated. I have spoken with several people that want to short treasuries or buy TBT but I would caution against this trade unless it is very short term in nature. What we all need to understand is that this program is here for the long haul and we'll continue to see record setting low rates across the spectrum of the debt curve. We will see 3.25% or 3.5% 30 year mortgages and to have that come to fruition, we'll need to see TLT go higher.

TRADING UPDATE

As bearish as things are beginning to look, I am very concerned when it seems like the entire universe shares my pessimistic view. I was noting that last week and guess what, we got a big rally! Fortunately I continued to stay long in the emerging markets strategy I've advocated since July and have rebounded nicely. In fact, holdings in Singapore and Malaysia continue to outperform. As we enter September I am going to scale out of positions, or if I retain them, will marry them to a short position to have downside coverage. I still like corporate debt, but so does everyone else, so I haven't added any bonds to my portfolio in a long time and don't anticipate adding unless I see something come out that is being unloaded by a distressed seller.

For longer term trades, I still believe 100% in my anti-US strategy of going long emerging markets and gold. The Fed has put us on notice that they will monetize debt and drive the value of the dollar down in an attempt to stimulate, stimulate, stimulate!

I had an interesting conversation with a few professional oil and gas traders last week. They reflected that this has been one of the toughest trading years that they can recall. They were very concerned that top notch guys were getting blown up with the wild swings from day to day. They commented that several big firms were really in bad shape. It is these types of conversations that continue to keep me out of oil and gas because you can be directionally correct, but have someone blow up and move the entire market against you.

MONOPOLY AND THE BEAR MARKET OF 2010

This is dangerous work and it pays to be cautious, patient, and above all protect your capital. I played an online version of Monopoly with my kids the other day and we had an unusual experience that is an example of what will happen in real life in the coming years.

In our online game a computer player landed on an unowned space and he decided that he did not want to buy the property. In our example, when the buyer doesn't want the property, it is sent to auction where all of the other players can bid on it. (Perhaps the real game is like this too, but I never remembered that). In our game we really wanted this Boardwalk-like property and had lots of cash to purchase it since we'd had terrible luck with our rolls. All of the other players were really strapped for cash since they had bought other properties due to their good rolls. Since I'm teaching them "economics and game theory" we entered a clever bid in hopes of stealing this prime property on the cheap. What happened next was very unusual. As the time to enter bids expired we received a notice on the screen that we were the only bidder for the property and therefore bought it for almost nothing!

The message is simple and clear. In Monopoly and in real life bear markets, there will be opportunities, you need to have cash to be able to take advantage of them. Patience is a trade so protect your capital! Check out other posts in the next few days at www.goatmug.blogspot.com

Be careful!