What about now though?

There’s no doubt the previous six weeks are actually fairly remarkable. This rally resembles the 1 we noticed previously this yr, from the lows in early February towards the 2010 highs in April.

Using the S&P 500 Index closing yesterday at 1178 (breaking yet again another key resistance level at 1171) the marketplace rally which was sparked on September 1 has now booked an incredible 12% gain.

To say that we’re overbought is an understatement, but “overbought” doesn’t mean “over”.

The question for investors who are still riding the rally — or for those investors who are considering putting fresh money to work now — is “should we ?”

Here are 3 warning indicators that this rally might be in danger of peaking:

WARNING SIGN #1:

THIS RALLY HAS BEEN EXTENDED BY MORE SIZZLE THAN SUBSTANCE

Unemployment rate going down? Nope.

Housing marketplace turning around? Not fairly yet.

Credit expansion and consumption rates increasing? I think not.

Fed Reserve Bank to buy another half a billion to a trillion dollars of US Treasuries? Now we’re talking.

That’s right, using the economy threatened with deflationary pressures — excuse me, disinflationary pressures — and a double dip recession as a real possibility on the horizon, the markets are rallying on good old fashioned pump priming.

Increasing the money supply, sinking the dollar, and lowering interest rates are actually fuel towards the fire for equities and commodities.

I commend the Fed‘s bold actions to try to stave off another recession and jolt the fledgling recovery.

The Fed all but gave us a tour of the printing press room when the minutes from the FOMC meeting were released on Tuesday. Here are a few quotes from the text:

“Accommodation might be appropriate before long”

“Ready to move unless economy strengthens”

“Want to consider the framework for calibrating and communicating policy”

The markets are directly feeding off of these intentions and have fully discounted the injection of liquidity. The problem is that the time frame and quantities are unknown, and any type of let down in the marketplace place could trigger a selloff.

If the Fed does not over-deliver on marketplace expectations, we could be in for a traditional “buy the rumor, sell the news” scenario. In any case, the focus now to turns towards the Fed’s next policy statement on November 3rd, the day after the mid-term elections.

WARNING SIGN #2:

THE FINANCIALS ARE BEING LEFT BEHIND

Below is a chart of the S&P 500 Index since the rally began on September 1. Against the back drop will be the performance of the Thomson-Reuters Commodities Index (CRB) and the Financial Select Sector SPDR ETF, XLF which will be the product that includes the major financial banks.

The blue line shows the relative strength commodities have shown during this rally (the sizzle factor directly attributed towards the expectation that the Fed will ease) and the gold line shows the lag of the financials (the substance factor of real stability and economic health).

In fact, JP Morgan (SYM: JPM) released earnings Wednesday morning with an .11 beat above analyst estimates. The problem: JPM missed by half a billion on Revenue, and they goosed their bottom line with accounting shenanigans by lowering loan loss reserves by an arbitrary $1.50 Billion. Credit and default risk remain a viable concern, a fact conceded by the CEO, Jamie Diamond. Without the loan loss reduction, they would have missed on the bottom line as well.

The marketplace noticed right through this, and JPM finished down 1.5% on the day. Bank of America, Wells Fargo, and Citigroup are next to report, and will probably report similar if not worse results.

Without the financials improving, and using the problems that will continue to plague the banking system through at least the end of the yr, it’s going to be hard for the marketplace rally to continue to ignore this reality.

Continue to monitor the banks as they report — the other 3 report early next week.

WARNING SIGN #3:

SHOW ME THE VOLUME

Trading volume is of utmost importance in technical action. Although price action will be the most transparent and critical factor in technical analysis, volume tells us the conviction of the marketplace place.

The volume tells the story behind the scenes, and this rally has seen trading volume off by roughly 30%.

Below is a year-to-date chart on the SPY’s, the largest ETF that tracks the S&P 500 index, and a very good proxy for trading activity …

The lack of volume (conviction) in the current rally is similar to what we noticed leading up towards the April highs. (The red lines in the price chart and volume chart show the divergences.)

SO,  is the RALLY ABOUT TO FIZZLE?

When you couple all 3 of these warning indicators together with an overbought technical rally, caution lights begin to flash.

If you still believe in this rally, use some of your profits and buy some protection in the options marketplace with premiums at very low levels. If you’re right or wrong, it will be money well spent.

If you want to put fresh money to work at these levels, again use options to play the long side. Premiums are cheap and your risk will be limited.

Trade carefully

stimulus backfire

The

Stimulus Backfire !

* The Fed can print it, but can’t manage it: States hoard cash intended to save teacher careers

* Sign from the times: Top-performing worldwide indexes belong to socialist nations

* Rich Lee on the sudden resurgence from the eurozone crisis

* Plus, Alan Knuckman about the current stock selloff… beginning of the downtrend or an isolated event?

You need to be particularly heartless to lay off a teacher, says the political will off the moment. That was the sentiment behind the $26 billion state stimulus bill passed last week, $10 billion of which was supposed to conserve 160,000 teaching careers at danger of elimination due to spending budget shortfalls.

Do it for the children, correct? Perhaps not…

“We’re a little wary about hiring people if we only have money for any yr,” Clark County Las Vegas CFO Jeff Weiler told The New York Occasions this morning. Heh, what do you imply, Jeff? It goes against your fiduciary instincts to invest “free” cash these days knowing you will require much more of it tomorrow?

“You’ve obtained this herculean job to deal with next year’s deficit,” said Lydia L. Ramos from the Los Angeles Unified School District, which may just take its “stimulus” cash right towards the bank in hopes of getting an early start about the college district’s $280 million 2011 spending budget gap. “So if there’s a way that you could lessen the blow for subsequent year, we feel like it would be accountable to try to do that.”

The Times is covering this story as you’d expect, tugging on heartstrings with first-hand profiles of teachers on the brink and a common air of resentment… “Some of the nation’s greatest college districts are balking at using their share from the cash to employ instructors correct away,” they report.

stimulus backfireBut haven’t we been through this already? Recall 2008, when a $160 billion stimulus gave each and every middle-class American a verify for $300… and what did they do with it? Several months later, banks get $700 billion… and didn’t lend a penny of it. GM got $57 billion, then went bankrupt. AIG… we don’t even keep track anymore.

We really feel for instructors and their students as a lot as the next guy. But can they be “saved” with more easy money?

The stimulus debate du jour is how the federal government will conserve Fannie Mae and Freddie Mac. Much more federal government assistance is essential, said Treasury Secretary Timothy Geithner, the maestro of yesterday’s White Home housing summit, “to make certain that Americans can borrow at sensible interest rates to buy a house even inside a downturn.” It’s, after all, your God-given right.

To be clear, the Treasury “will make sure the GSEs possess the resources to meet their financial commitments,” Geithner added. Whatever the fate of Fannie and Freddie, it will be financed with tax dollars and controlled by federal government. Both businesses, in spite of being in the really heart from the monetary crisis, had been left out from the current Monetary Reform Bill.

stimulus backfire“Government is component of our future,” Expenses Gross responded. “We need a federal government balance sheet. To suggest that the private marketplace come back in is merely impractical. It will not operate.”

Scary stuff, eh?

As menacing as this all ought to sound, here’s an interesting twist: A few of the best-performing stock markets on the planet this yr are in socialist-leaning nations. Denmark’s OMX 20 (like our Dow) is up 22% so far this year, the best-performing index in the created globe. Extremely, Hugo Chavez’s IBVC index of Venezuelan’s stocks is close behind.

In comparison towards the S&P 500, it’s no contest… 2010 is the year of the socialist investor.

There’s much more going on here than just form of government. Denmark, for example, is in the catbird seat of the euro crisis — part of the EU but not a euro nation, very low debt along with a conservative banking system.

But still, it’s worth noting… inside a world that’s terrified of excess federal government involvement, two countries with massive state presences are giving investors top-rate returns.

For investment advice on this matter, you should listen to Jim Nelson’s latest online presentation. Our fixed-income man has found a nifty way to tap into this trend.

“Market sentiment has turned about the rest of Europe,” The Richebacher Society’s Rich Lee wrote to subscribers late final week. “Worries are growing that current strategies and aid packages will not be enough to curtail further regional economic losses.

“Problems that have always been there are getting noticed once again. This time they are centered on Ireland and Spain. Of course, these two countries have been in the mix all along, but their negative contributions had been mainly overshadowed by Greece’s problems. Now the two are casting shadows of their own. Fears are mounting over the two rising bailout aid and sovereign debt costs. This has sparked fear that further external obstacles lie ahead in bringing the EU monetary crisis to a halt — slowing down the possibility of the quick recovery.

“It’s not like Spain and Ireland aren’t trying. Ireland’s federal government has cut spending, raised taxes and made drastic public worker wage cuts, yet budget deficit problems remain relatively the same. The country’s deficit is still approximately 14% of gross domestic product. The only real economic change within the final couple of months has been unwelcomed — unemployment has risen to about 14%. But what is most disconcerting is the fact the current austerity plan is set to cost more than originally planned.

“Anglo Irish Bank, one of Ireland’s major banks that almost failed, is in need of an additional 10 billion euros. That’s on top of the currently pledged aid of 14.3 billion euros issued by the European Central Bank to maintain the bank afloat. The number is staggering. It’s even worse considering the fact that the full bailout of 24.3 billion euros would constitute almost 12% of Ireland’s overall gross domestic product.

stimulus backfire“The sky-high expenses for recapitalization has foreign investors worried and clamoring for higher rates of return when it comes to bonds. Although Spain conducted relatively successful bond issuances in the last couple of months, the interbank market still remains relatively closed towards the country — as well as Ireland. This means that the two countries are unable to obtain favorable market-level lending rates.”

Back in the States, traders are a tad more optimistic. BHP Billiton’s attempted takeover of Potash Corp. helped bump the S&P 500 up over 1% yesterday. You are able to spin this story into common market optimism in much more ways than one…

* The mere fact that BHP made a bid shows a huge, multinational company willing to make a big bet on at least one industry.

* BHP’s offer was all cash. In other words, it might think its own stock is too cheap to be offered as currency.

* Potash rejected, even though the offer priced the company 16% higher than marketplace value. They clearly think they are not only worth more now, but also will be worth much more down the road.

“As it stands, “ says our resource trader Alan Knuckman, “the bullish trend for stocks is still intact. Final week’s selloff was not a change in trend but rather a standard pullback to assistance levels. The 1,070/1,065 level for the S&P 500 held strong, and most importantly for a bullish strategic mindset, new lows had been not made after the gap Thursday. This can be interpreted as a positive. When the marketplace was on its heels, additional selling did not emerge and it was able to stabilize.

“Another positive indicator: The VIX, which measures investor fear, was also unable to reach above 28. It bounced about the selloff but did not rally with subdued concerns of more selling. Combined with the S&P assistance holding at that 50% retracement from the 1,130 high, this tells me that last week may have been an isolated event.

“All signs are positive if the stock market can get some catalyst to begin the climb again with the majority of earnings behind us. Remember, second quarter numbers are what drove the market on its final run.”

Perhaps that catalyst will be a BHP/POT offer. Even though Potash rejected the offer, BHP announced today it would continue making hostile bids in hopes of the shareholder mutiny.

stimulus backfire

Only one shred of data today, and it ain’t pretty: Bankruptcies within the U.S. rose 9% last quarter towards the highest level since 2005. According to the Administrative Office of the U.S. Courts, 422,061 parties filed for bankruptcy between April and June. That’s up 9% from the previous quarter and 11% yr over yr.

And that “most since 2005” statistic really doesn’t do the situation justice. Remember that’s the yr Congress overhauled American bankruptcy laws, making it notably harder for businesses and individuals to file.

Nevada has the worst rate (surprise, surprise).<br> Much more than 1 in 100 people living there have filed within the final year.

Following rallying through most of this month, gold is sticking to a tight range. The spot price has been bouncing between $1,215-$1,230 all week.

The dollar index, however, has been in steady decline this week as stocks move higher. Opening at a high of 83 Monday, the index dipped below 82 this morning.

“Getting our history a bit more accurate,” a reader writes, refining yesterday’s issue. “No, it was primarily Lenin and Trotsky who engineered the overthrow from the Tsar in 1917. Stalin did not rise significantly within the power struggle until Lenin’s illness began in 1922. Nor was the assassination of intellectuals the initial thing done [what with Lenin and Trotsky among the most prominent examples[[]|]|[]|]. It took the consolidation under Stalin to get this going. What seemed like common sense once the Bolsheviks were in power [with new Hope[[]|]|[]|] was to argue bitterly among themselves, breaking into numerous factions, squandering their gains, until totalitarian strong-man Stalin took over. Now does that seem to be obtaining a bit closer to home?”

stimulus backfire

“Do you think that possibly,” another reader speculates, “the whole reason for amnesty for 12 million illegals (20 million is more likely) may have some connection to the Social Security shortfall? Hmmm, 12-20 million (mostly young) illegals now with potential citizenship paying into Social Security, which I presume will be part of the offer. My self-employed gardener might not even apply under those terms when he sees a 15% self-employed tax facing him in addition to IRS tax filings. Just a thought.”

“I have been paying Social Security taxes since I graduated from high college in 1971,” our last reader writes. “Whether that cash went to pay my parents’ benefits or into the common revenue fund since the surplus was used to purchase Treasuries, makes no difference. That money has been spent. If I and everyone else in my generation [I'm almost 57[[]|]|[]|] are to collect any SS benefits, that cash will come out from the paychecks of our children, and has anyone else noticed that good careers for our young individuals are not real simple to find these days? I’m still hoping for them to become fully self-supporting. To ask them to assistance me as well seems a bit much. I have been promised SS benefits, along with all other wage-earning Americans, but I’m making plans to get along without them. I don’t like the idea, but yammering about how “they better not fail to pay up” is pointless. Whether people march on Washington, or begin a revolution, or what ever, that’s not going to bring back the cash they really feel they are owed. It does, however, waste time and energy that could be spent preparing to get along without it.”

The 5: There are exceptions to every rule, but we’re hard pressed to think of many situations where having a backup plan is a bad idea. Saving for retirement certainly doesn’t seem like one of ‘em. Good for you, and good luck surviving the stimulus backfire.

china overtakes japan

China overtakes Japan…

Once again, I`m going to rant at the government idea of putting the economy back on its feet… I know it`s getting old but I just can`t get over this huge scheme they`re setting up. Here let me warn you that I`m not saying the markets won`t continue to go up but I want to make sure you understand that the fundamentals don`t support it one bit! So trade carefully…

The paradox of stimulating growth with government spending or, if you prefer: Let`s use our credit cards to get out of debt and stimulate the economy!

Here we are at the end of the beginning of another week. What have we learned?

Not much. Last week, the markets went nowhere.

So, we’ll think a bit more about Tim Geithner and the other men who rule us. Geithner wrote an article for The New York Times, “Welcome to the Economy Recovery.”

Let it happen. Let it be. Let the chips fall where they may…so that others can pick them up and get to work again and REALLY get the economy going.

This week, CNBC carried a story that the private sector created 42,000 jobs in July, and that layoff activity slowed as well, creating a “slightly more optimistic picture” of the national employment trend.

Sorry, I’m not jumping on that bandwagon!

How does that fit with the fact that planned future layoffs rose 6% to 41,676 in July, from the previous month?  Going forward, this effectively wipes out whatever jobs were recently created.

Now today (I’m writing this on Thursday), we see that there was an unexpected rise above expectations in new claims for unemployment benefits last week, along with the four week average of claims as well.

Here’s another s–t–r–e–t–c–h from your “everything is rosy” financial media:

Planned layoffs are lower than a year ago.

Even if that’s true, it’s only because the workforce is that much smaller these days.

As soon as you pare down to a skeleton staff and also the employees who remain are doing double the usual workload, you can’t cut much much more of your payroll without severe productivity declines, losing market share to your competitors, and perhaps even heading out of the door!

A nation with a bad unemployment rate of 9.5% continues to search for answers, although the government’s only solution is to extend unemployment benefits once again and then some more!

Furthermore, last month there were an additional 2.6 million individuals who were not counted in the unemployed totals because “they had not searched for work within the four weeks preceding the latest survey” (Bureau of Labor Statistics).<br>

Add those individuals into the soup and the “true” unemployment number is well into double digits. Some have estimated it to become as high as 17% nationwide!

Incidentally, what happened to all of the “green” jobs?

One of the most afected groups among the 17% is the Baby Boomers  (born 1946-1964). Faced with plummeting home values, ever shrinking 401k and IRA accounts, massive layoffs and hourly cutbacks, that’s a group that won’t be retiring anytime soon.

Five million new jobs had been expected to be created for younger workers by 2018, when Infant Boomers reach normal retirement age, but the way things look now, younger workers should not anticipate that these jobs will be there for them.

Older Baby Boomers who lose their jobs are also unable to get new jobs as rapidly as the younger workers.

What company wants to hire a 60 yr old who formerly earned $100,000, when there is an eager 30 or 40 year old who will do the exact same job for $60,000 a yr?

Furthermore, investing (or especially short phrase trading with their savings) can be risky for individuals about to enter their “golden” years, because if they suffer significant losses, they lack the time required to earn the cash back.

Yet what sort of work await the older Infant Boomers who do find work? In their senior years, will they be forced to stand on their feet all day to make nine bucks an hour?

I’m sorry to paint such a bleak picture, folks. I know some of you are thinking, “there has to be a way out of this cunumdrum, and also the creation of some thing more appealing!”

And YES, there is.  It’s called entrepreneurship.

By definition, an entrepreneur is one who owns or manages a business enterprise, and who, by some risk and initiative, attempts to create a profit for themselves.

Unable to find work in their field, or forced to operate for a fraction of previous earnings, I predict that we will see a huge mass of Infant Boomers striking out on their own in small companies, pc related enterprises (ebay, craigslist, blogging, etc), inventing, as well as performing consulting work.

Additionally, former hobbies, abilities, and crafts that were once put about the back burner for lack of time, will awaken to bloom in new self-employed ventures, like tulips in April.

Woodworking, catering, clown parties, pet sitting, handyman, music lessons, and interior decorating will rule the day in a tsunami of new careers begun on low risk, low money shoestrings by this group.

The generation that came of age during the 1960′s and 70′s will find that they can no longer depend on an incompetent Congress for solutions, or American corporations that have either downsized or shipped thousands of decent work overseas.

Self-reliance and abject creativity will rule the day, because the spirit to be their own boss and to produce something of value nevertheless lives in the hearts of most Americans

And what of Generation X (born 1964-1981)?

Generation X, the subsequent generation in line, may discover employment a little easier to acquire than the Boomers more than the subsequent decade, but it will be no picnic for them either.

If you’re among individuals within Generation X, you can no longer depend on having a pension, nor social security, to become there for you in retirement.

Even if social security nevertheless exists, the minimum age to receive it is likely to increase to 70 or older by the time you retire.

For this generation, the best answer is to invest heavily NOW, both in your self (e.g. education, work abilities), and in numerous assets, such as ETFs and real estate.

For example, Jimmy Rogers, one of the world’s leading investors, continues to advise individuals with a long term horizon to go long on commodities, and even to think about taking up farming!

Rogers feels that food costs are going to rise dramatically in long term many years, and that individuals who invest in farm land, or commodity ETFs, will clearly benefit from that rise.

He says that the sharp rise in the price of wheat in July, with prices in Europe hitting two year highs, indicates that shortages are most likely on the horizon.

So farm, people, farm!

A brand new generation of farmers might prosper in America…

And that leads me to my other favorite investment, long term real estate investing.

It is time to stop crying over 2006, and the speculators who bought at the peak of prices and interest rates, only to go belly up, unable to cash flow even on 30 year mortgages.

That was your Father’s real estate!

This really is the dawning of a new era, 1 in which individuals who are now suffering post traumatic stress disorder from their bad investments, and those unscathed but now paralyzed with fear, have created the ultimate perfect storm of opportunity for the subsequent generation of astute investors.

An article in Barron’s this past week, called “Renter Nation”, outlines the exact same scenario that I’ve been documenting here for that past number of months.

“Renter Nation” says that a decrease in house ownership within the 35-49 population will continue for many years, having a simultaneous increase in the number of renters  under 35.

Actually, by 2015, the % of individuals who own a house will have lost at least 5% from the peak in 2004.

A five percent reduction might not seem like a lot, but that amounts to 6.5 million people going from owning to renting. Yes, I know, some will temporarily live together or move back in with mom and dad, but for how long?

Folks, this will lead to a real boom in demand for the rental market.

Couple that with historically low interest rates, and foreclosures that can be bought at 1995 prices, and you’ve got a formula for money flowing properties on 15 yr mortgages.

That means that even a 40 yr old who invests in real estate now may have paid off properties generating a monthly stream of income from age 55, throughout the rest of their life.

Even better, I am personally mentoring investors in their mid 20′s right now who may have paid off actual estate by age 40!

Now those are the kind of American entrepreneurs that we have to lead this country back to economic greatness.

So forget the Pollyanna spin on work reports, and the government’s green jobs that aren’t coming. Pull your self up by the bootstraps and start a business, grow some corn, or purchase a handful of rental properties.

If you don’t take control of your own future, who will?!

With all of the uncertainties in our economy, there is still 1  certainty you can bank on …

Fifteen years from now, you will be Fifteen years older.

When that day arrives, will you have attained real wealth, or just be dependent upon the kindness of Uncle Sam?!

They have been provided with an opportunity to cut through the misogynistic absurdity and move around one fundamental purpose — to protect the US Taxpayer from ever again being the unwilling recipient of a financial raping of the magnitude that we experienced at the hands of America’s bankers in 2008.

In the 1930′s, in the wake of the 1929 crash as well as in the deep dark shadow of the Great Depression, other political figures were confronted with an equivalent option: Bow under the financial might of the big money crowd, or answer our nation’s call for safeguards against the rapacious predation of the American Banking elite.

What they did was answer that call by having an uncompromising finality that changed the face of banking permanently. They made the unpopular choice of forever (or so they believed) isolating commercial banking from investment banking.

Despite the fact that the bankers of the day howled that their earnings would take a hit and that credit could well be stymied, the politicians rose above the normal back room dealing so established within their world and said no more! Never again will you mercilessly plunder the public bank account!

And you know what? It did the trick!

Sure, there were booms and busts in the process, and banks got in trouble every now and then, but for 70 years we definitely avoided the kind of all encompassing wide spread breakdown that brought the United States to its knees in the 1930′s.

Those government bodies and political figures of the 1930′s weren’t hayseed apprentices. These were the men who took America through the agrarian age fully in to the industrial age. These were realistic, hard nosed business people who had looked deep and long into the abyss of the Great Depression and knew that it was in their own personal long-term best interest to cut the banks off from ever again using publicly insured money to finance their wild risk taking in the wall street game.

Utilizing that historical display of political will as our standard, we can clearly note that our generation’s chosen authorities have gone down far, far short of the mark.

I have read 100s of pages of paperwork concerning the brand new banking reform bill on the verge of being introduced into law, and I will tell you right this moment that it’s filled with more than enough ambiguities to generate loopholes large enough to drive a Mack truck through. Much of the enforcement of this new law, in reality, is discretionary and driven by a small number of people.

We’re left to rely upon the decryption of those policies by what amounts to a tiny cadre of financial bureaucrats. So we’ve gone from weakening the old 1930′s laws with the eradication of the up-tick rule as well as the repeal of the Glass-Steagall Act, to what might turn out to be a little gang of tight knit government bodies with Enormous DISCRETIONARY POWER.

What we will be looking at is the making of numerous so called “star chambers” that can potentially be converted into extremely powerful political weapons. All I see here is a group of hurdles set up to help keep things as they are. The large banking institutions have effectively caused it to be a lot more challenging for other finance institutions to realize the size essential to contend with all of them.

The banking power houses have effectively created a series of “pressure points” where they are able to apply their particular influence over a really small group of people to ensure that their particular challengers are kept at bay while their very own actions are kept off the radar. My friends, not a darn thing has evolved, and don’t let anybody tell you otherwise.

Volcker Rule

The so called Volcker Rule, which may have reinstated the most crucial provision of Glass-Steagall (namely, the separation of investment and commercial banking) was gutted. The thing that was left was a loophole-ridden joke. The headline legislation declares that only 3% of a bank’s capital can go to hedge funds and private equity, but in the small print they open the door to modifications after a study is produced by the Financial Stability Oversight Council.

Mmm, I wonder which way that review will go?

Derivatives

Here once again, the brand new guidelines on derivatives are blurry. The SEC and the CFTC will take over policing this area, and a central clearing house is going to be created to clear derivative trades. However, not all banks will be subject to the newest central clearing guidelines.

To the regulators’ credit, they’re making it mandatory that banks that don’t utilize the derivative clearing house need to enforce higher levels of margin, which is a good concept — but regarding just how much that margin is, who knows? I cannot obtain the number anywhere … if you already know it make sure you post it in the comment section, as I’d like to learn how much the banks will be required to put up.

Mortgage Companies

For a long time, mortgage companies underwrote bad loans, secure within the knowledge that they could get rid of them in to the mortgage backed security market. This, above all else, led to a glut of cheap money that fueled the real estate boom and drove housing prices up to unsustainable levels.

So how can we resolve that?

Well, the politicians are making it mandatory that the mortgage providers are only able to sell 95% of their loans, rather than 100%!! I have to admit, I chuckled when I read this! Do you really believe that 5% ownership can seriously be recognized as having “skin in the game”?

Nevertheless that’s the precise terminology the government is employing.

If you want to make certain that a mortgage company is going to underwrite good paper, wouldn’t you need to make sure they are holding a minimum of 30% of the mortgages that they underwrite with a mechanism in place that could offer them the cabability to loan more money on a sliding scale based on the delinquency rate of their loan portfolio?

The depressing news is the fact that it will likely be a long time before we know without a doubt whether or not these new rules are going to be successful or not.

But think about it: Do you believe that the authorities “watched your back” with these new rules, or did they “stab you in the back” instead?

I know how I feel, and I hope you’ll tell me what you think.

Eric LeRiche

http://www.InvestorRules.com

The American Association of Individual Investors sentiment poll just returned its highest bearish percentage (57.07%) and lowest bullish percentage (20.94%) since March 5, 2009. That date should sound familiar to regular market watchers, as it marked a major bottom and the end of a months-long bear market.

Trade carefully

Eric$

I know it’s a bit saddle-worn, but old Chas. Dickens was 1 heck of a student of humanity, and his opening to A Tale of Two Cities, what with its dichotomous wisdom, foolishness, belief and incredulity, just seemed too apropos to pass on today.

If you’ve been watching the newswires at all lately, then I imagine you’re a tad cross-eyed correct about now. The Service sector is intended to become our biggest economic driver, providing some 80% of the action here within the States. And Retail is supposed to become the single biggest slice of the Service pie.

So one can only imagine the tension this week as we await a number of reports which are intended to reveal how nicely or poorly Service and Retail are doing, particularly when 1 considers the lousy employment news the markets had to swallow last week.

So how are these “engines of the economy” doing?

Dueling Experts

They’re up – that is great! Unless of course they’re not, which would be bad.

Should you were to ask a intended expert such as Federal Reserve Bank of Richmond President Jeffrey Lacker, he would tell you that consumer spending is “moderately strong,” and might be expected to sustain the economic recovery.

But should you were to ask Lacker’s compadré the same question (and an enterprising Nikkei reporter did just that), Dallas Federal Reserve Bank President Richard Fisher would cavil that “cautious households” could be expected to “cool” growth for the rest of this year.

Confused? You ought to be.

The Numbers Breakdown

On my desk in front of me are two wire service reports. One claims “U.S. Retailers Revenue Rise at Fastest Pace in 4 Years.” The other speaks towards the “U.S Service Sector Slipping in June.”

As usual, one has to dig a bit deeper to find the nuggets of truth that lie buried in the all the blather. Let’s begin with the second from the two, which addresses the numbers coming out of the Institute for Supply Management, a trade group composed primarily of Purchasers.

In May, the ISM’s index tracking service-oriented businesses hit its post-recession peak of 55.4. (Fifty is the index’s break point, with any reading above indicating growth, whilst results below that benchmark read as recessionary.)

Now ISM is reporting that its June Support index figure has slid back to 53.8. Whilst this is still barely holding on in positive territory, it does reveal a marked misstep in this index’s post-recession forward march.

Dig even deeper into ISM’s latest information dump, and you will find that its Employment Index did dip below the break line, dropping from 50.1 in Might to 49.7 in June. Looking forward, ISM tells us that many of its pollees report that they’re cutting future hiring plans.

Which End Is Up?

So how can Retail be performing so nicely, and yet not support its overall category? For that, we should investigate just how well Retail is performing.

You will find a number of major reports on this topic due over transom in the next five or six days, including revenue figures from Nordstrom (JWN:NYSE) and Kohl’s (KSS:NYSE), as well as the Census Bureau’s June Retail Trade report.

The “information” that was delivered under that oh-so-optimistic headline wasn’t really fresh news at all. Rather, it was yet another trade group, the “International Council of Shopping Centers,” reiterating its rosy numbers from the first five months of 2010, wherein, they note, revenue “probably expanded at a monthly average rate of 4%.”

Alarming Dark Spaces

As I sat to write to you today, the wire services had yet to disgorge actual June revenue figures. So I thought I might ramble about the “Retail Space” and find it on my own. What I discovered instead was anything but heartening.

Over the next few days, you’ll probably hear a great bit about sales at existing stores – that’s to say, the joints that have managed to survive the first leg of the “Great Recession.” But those figures do not necessarily paint a true picture.

According to actual estate information firm Reis Inc., vacancies at retail shopping centers are proliferating at an alarming rate. Reis’ Q2 2010 figure rose to 10.9%, higher than Q2 2009’s 10%, and approaching par with the all-time record of 11.1% back in 1990.

In other words, same store revenue may very nicely report up. But the rise could simply be the result of consumers having markedly fewer places to shop.

Capitalizing the Next Leg

Now I should be fair and confess  I already advised members of the VIP portfolio to short Kohl’s (KSS:NYSE) shares, among other retailers, to the tune of some 137% gains as I sit to write. And just last week, I suggested put choice contracts against the hardware chain Home Depot (HD:NYSE), which is doubly exposed to both retail and actual estate headwinds.

So to be honest, I am banking much more than a bit on the idea that retail is indeed leading us into the next leg from the “Great Recession.”

If you haven’t taken advantage of the free trial just go there now and sign up today. You have nothing to lose and everything to gain.

http://www.InvestorRules.com/VIP-Portfolio.html

Eric Leriche

To generate cash investing, you need to be ahead of the crowd… or at least seeking the story no one is telling.

That is a challenging endeavor today. All of a sudden, talking about the unspeakable — a double-dip recession and a retest of the March 2009 lows — is in style. Even readers are fed up with the end of the world as we have known it “stories”…

With valid reason, I believe. Stocks recorded their worst quarter since the whole thing hit the fan in Q4 2008. After cautious trading most of Wednesday, the major indexes went over a cliff in the final half-hour the moment the S&P hit 1,040… closing the day lower 1%.

As I suggested yesterday in my blog, technical analysts think this 1,040 figure is definitely a crucial line in the sand.

“If the S&P falls below 1,040,” writes Dan Amoss, “then we’re likely to revisit the lows below 700″. Who knows if this broadly reported ‘if, then’ conditional likelihood is legitimate? We might find out quickly enough. Whenever globally recognized technical support levels are breached, we have a tendency to see heavy rounds of ‘self-fulfilling prophecy’-based selling.

“Regardless of the way the technical conditions play out, there’s still a big difference between current stock values and the prices that many value investors are prepared to pay to assume the risks of owning stocks. The term ‘risk’ is key. In times of increased economic and political risk, investors demand higher risk premiums to hold on to stocks.

“A simpler way of saying ‘higher risk premiums’ is ‘lower stock prices.’”

My oh my, those annoying fundamentals.

The growth of manufacturing in the United States is slowing down — significantly. The ISM manufacturing index registered 56.2 for June. At first glance, that’s good, since anything above 50 indicates growth. But it’s merely one of these “unexpected” numbers that keep turning up nowadays — well below even the gloomiest guesses of 57.6.

Remember last month our friend Barry Ritholtz found a solid relationship between the ISM and jobs — which isn’t good. ISM topped out in April at 60.4, thus it “seems to be flashing late stage prior to employment has had any chance to clamber out of its ditch,” he said.

Sure enough, the jobs numbers we’re seeing this morning are still in the ditch — and on their roofs, wheels spinning.

With jobs and the manufacturing looking weak, all the major U.S. stock indexes were down 1% in the first 45 minutes of trading yesterday. The Dow has breached 9,700. The S&P is now down 15% from its April 23 high. That means there’s a 4-in-5 chance it’ll reach the 20% bear-market threshold.

The following things aren’t helping matters…

Manufacturing in China is also exhibiting a slowdown. Indicators from both the Chinese government and HSBC fell last month, and HSBC’s number is becoming precariously in close proximity to the expansion-contraction threshold, at 50.4.

For some reason, we have a feeling Beijing is in even less of a hurry to revalue the yuan now than it was earlier.

“You will notice,” wrote the Richebacher Society’s Rob Parenteau recently, “we have had nothing to say about the spellbinding, earth-shattering Chinese currency announcement… because it is a nonevent in our mind.”

All you had to do was study the declaration released by Chinese officials to realize they were just blowing smoke ahead of the G-20 summit in Toronto. But noone reads anymore, and few investors know how to think for themselves anymore, present company excepted.

“Having pegged to the dollar, which means the RMB has currently revalued as much against the euro in recent months as the dollar, the last weird idea the Chinese officials want to do is revalue the RMB even higher in the face of a sputtering trade surplus — in an economy that has been operating an export-led rapid growth approach, no less… with a labor force asking for salary hikes or committing suicide due to the fact conditions are a little bit too difficult to deal with on the 24/7 assembly line.

“How can all of this not be totally obvious? Simply because very few individuals know how to think for themselves any longer, and thinking on their own about macrofinancial dynamics is practically an extinct capability.”

As many have been forecasting, the expiration of the homebuyer tax credit sent pending home sales plummeting in May that blew away what the experts anticipated. The National Association of Realtors (NAR) index of existing homes under contract fell 30%, double the consensus.

This occurs on top of some other detrimental markers we got this week on the housing front…

* Foreclosures accounted for 31% of all home sales during the first quarter. Prices on those homes were 27% lower than homes that were not distressed sales. “The lower price will probably stay between 25-30% percent as lenders cautiously manage the number of new foreclosure actions in order to avoid flooding the market,” according to RealtyTrac, which crunched these numbers

* The taxpayer rescue of Fannie Mae and Freddie Mac — already costing $145 billion — could reach $400 billion, according to the Congressional Budget Office. And that is if housing prices hold. If they drop, that may rise to $1 trillion.

In yet another desperate effort to prop up the housing market, Congress decided this week to provide homebuyers under contract another 2 months to get to closing and still claim the homebuyer tax credit.

Without that extension, it would have expired yesterday.

Well, it seems European banks will roll over 442 billion euros in 12-month loans from the European Central Bank (ECB) with relatively little trouble.

The ECB is lending about a quarter of that figure — 111 billion euros — to tide some of the banks over for an additional week. But they’re not the largest banks, so traders aren’t bothered and are holding the euro steady this morning at $1.23.Russia grew its gold stash by 22.5 tons in May, according to the International Monetary Fund. That’s four consecutive months in which Russia has added to its gold holdings, which now total 703.1 tons — the ninth-largest in the world.

All of that being said, it does look obvious that we will be be going lower before going significantly higher but I want to remind everyone that there is a strong contrarian movement and given the volatility of the world’s economy you ever know what’s going to move the markets next so don’t bet the farm on any direction and use pay special attention to your money management strategy.

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Enjoy

Eric LeRiche
InvestorRules