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…

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

“Fool me once shame on you, fool me twice shame on me!”?

Unless you were already a sophisticated investor, I’m sure you suffered
some significant losses last year and I’m sure you’ve asked yourself: “what
could have I done and what can I do to avoid such a disaster if it happens
again?” Like most people you find yourself dependent on your financial
adviser who himself is dependent on the mutual funds he promotes.

Let me tell you what I think of mutual funds:

With more than 9,000 stocks to pick from, just how much is just too much?

I talk to so many investors/traders each day that tell me about their
particular “10 positions,” “20 positions,” “50 positions,” and even “100
positions.”

I get so irritated!

Come on, man, think it over!

Mutual funds have hundreds of positions. Their hope is to be diversified.

If the market rises then they might make 2-3%.
If the market goes up big then they can make 5-6%.
If the market decreases then the funds is going to be down 2-3%.
If the market crashes  then the funds will probably be down 5-6%.
If they break even then you just paid 1000s of dollars to have your
money do nothing at all.

This scenario used to seem sensible simply because, in the past, the market
has
constantly increased.

However, the stock market has evolved.

Computer trading currently makes up a tremendously large part of the
average daily trades.

2008 demonstrated that a decade could be wiped out in months.

The “fat finger” of 2010 demonstrated that many years may very well be
wiped out in minutes.

“Safe” became the new “Not really Safe.”

So, what do I think of mutual funds?

I do think they make sense for less than 20% of your savings and only if
you
can give them at the very least 10 years to run their course.

I think you may then take some risk capital and look to make a good
years % return for a mutual fund in a single trade.

You heard right, when you learn how to trade for yourself, it’s attainable
to
make 5-6% or more on a single trade.

Hype?

No.

As an example, last year my VIP portfolio members returned an average of
5,8% per trade and the average time to reach this yield was less than 2
months. So you see, I’m not saying you can make 5-6 % per year here. I’m,
saying you can make 5-6% per trade, in average since some will actually
lose money.

(if anybody tells you he/she doesn’t have any losing trades, run the other
way!)

Find out how I do it now.

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

The key to it all…

A Strong  Focus On Individual Stocks.

By channeling 2-3 stocks properly you can trade in your own world where
you
really rely on the individual stocks instead of the market as a whole.

Find out more now.

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

The more stocks you trade, the more you are trying to play the market as a
whole.

The less stocks you play, the more control you possess.

I observed a savvy student begin with $5,000 and turn it into $55K in
months by trading stocks in one sector.

Oftentimes, less really is more.

If I had to own 100 stocks for 10 years – I would just as soon have
somebody else take care of my money. At least then I would have somebody to
yell at!

But I don’t have to own one hundred stocks so I rely on myself personally.

I want to teach you how to rely on yourself now.

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

It begins by creating a good workable stocks to watch list, moves through
entry points and exit points and ends with you coming out on the other
side – in control.

To Your Success,

Eric LeRiche

P.S. This Is Not Your Average Stock Market Experience.

Double Ouch!

The existing homes sales report for May was released on Tuesday, and in a word, it was disappointing.  May closed sales were unexpectedly down 2.2% from April (though still up 2.7% from May, 2009).  And while inventory numbers fell 3.4%, we continue to have an 8.3 month supply, which is up from a year ago.

Some of that increased inventory was due to sellers trying to take advantage of the first time home buyer tax credit, by putting their homes on the market, and could decline in future months.  Some of it may be due to increasing numbers of foreclosures, as banks try to resolve short sales and modifications more quickly.

Only 46% of the homes sold went to first time buyers, which was also less than expected.  About 31% of all the sales were distress sales (foreclosures or short sales), which is similar to the numbers we have been seeing for quite awhile.

But overall, the number of sales was lower than expected, and most of the real estate related stocks sold off on the news.

The National Association of Realtors (NAR) retreated into their usual “CYA” mode, and blamed it on delays in processing mortgage applications, which hampered the closing of contracts prior to the end of the home buyer tax credit.

If that’s true, then the June numbers could get a boost from the eventual closings.  But I will remain skeptical until we see the next reports.

From Bad to Worse

On Wednesday, the new home sales (contracts, not closings) came out, and the results were even worse.  New home sales in May were down 32.7% from the previous month, and the annual sales pace total of 300,000 was far below the ridiculously overblown market expectations of 430,000.

The drop reversed two months of solid gains that were largely comprised of first time home buyers, who were trying to beat the April 30 contract deadline to receive the $8000 tax credit.

Following these reports, some economists are saying there’s at least a 20% chance of a double dip in housing prices.  Before we share that conclusion, I think we have to remember that most people who wanted to buy a home this spring tried to go to contract before the April 30 deadline.

Therefore, it is not surprising to have a fall off in the number of new construction contracts.  However, it is surprising to have a decline in the number of existing home closings.

So how do we profit from this mess?

This week I was asked to recommend a plan by which investors could profit from the housing numbers.  Let me tell you, that’s not an easy task!

It would be a no brainer to suggest that you short the builder stocks, or the various real estate indexes.  But these stocks have been beaten down so much in the last few years, the risk factor is beginning to outweigh the potential rewards for shorting that group.

And as I told you the other day, the real estate stocks have actually been one of the stronger sectors recently.

So you don’t want to be the last guy trying to squeeze into the pool when the water starts flowing the other way!

Watch out for that real estate “short squeeze”…

But one stock that I’m watching very carefully right now is PMI group, Inc. (NYSE: PMI), a holding company whose primary subsidy is the PMI Mortgage Insurance Company.

This is one of two listed companies (Radian, symbol: RDN, is the other) that insure conventional mortgages against loan default.  Of these two companies, PMI has the superior relative strength, so let’s focus on that one.

In 2006, at the peak of the real estate market, PMI was a $50 stock.  Today, following three years of real estate declines, and this week’s housing reports, it languishes around $3.35.  As recently as April, when the market peaked, it was up near $7.

However, what intrigues me about PMI as a LONG TERM PLAY is that they have recently begun to insure homes in high risk states, such as California, Nevada, Arizona, and Florida.  As I wrote in last week’s article, even the 5% down conventional loans with PMI are now back in fashion.

This means that going forward, with any kind of decent housing numbers, PMI should begin to insure more loans than they have in recent years, and that the PMI group is finally convinced that home values are NOT heading substantially lower.

Let me say that again.  A company, whose financial future depends on home values securing a bottom, has decided to start insuring loans in the four riskiest states.

Can you see the light bulb going on over that paradoxical idea?

Wow, I have seen the light!

On the chart below, notice that with the bad housing numbers, PMI has now dipped slightly below support at the 200 day moving average around $3.50.  It’s also fallen below the recent lows that have held support twice.

If PMI fails to hold at the 200 day M.A., the next long term support level is down around 3.00.  So this is a crucial time for the stock.

So while I am recommending PMI as a long term play, I am NOT recommending that you buy it just yet.  I believe that you will be able to buy it for a good deal lower than the current price within a short period of time.

We really need to see a solid improvement in the employment numbers, and in turn the future housing numbers, before PMI can be expected to reverse its downtrend and become a winner.

I would also like to see it hold its ground against the 200 day moving average.

One thing is for certain — with all of the weakness in the economy, the current mortgage interest rates are now absolutely fantastic.  As I have stated repeatedly in recent weeks, investors seeking long term wealth will benefit enormously from buying inexpensive, distressed properties, with today’s cheap financing.

The confluence of already crushed prices, incredibly low interest rates, and an increasing population of renters (comprised of foreclosed home owners and those who cannot qualify for tougher loan standards) over the next 5-10 years, will produce a golden era for long term real estate investors, regardless of what prices do over the coming decade.

Look at these interest rates!

Strike one was on Monday… when the Treasury released its latest numbers on the Home Affordable Modification Program. The background: 1.24 M borrowers enrolled in the program — which was launched with the hope of helping 4 M.

Of those 1.24 million, more than one-third have now failed their “trial modifications.” In fact, more people have blown their trial modifications than have succeeded in converting to a permanent one.

This really is simply because “until lately, loan servicers weren’t needed to verify borrowers’ eligibility prior to beginning them on trials,” according towards the Wall Street Journal, In other words, when the federal government launched the plan final 12 months, it had been all about “juking the stats,” crowing about how numerous individuals had been becoming “helped.” Now comes the whirlwind.

And also the individuals who are “success tales,” who possess a permanent modification? On typical, their monthly debt payments, such as mortgage, credit rating cards, car loan, and so on. are 64% of pretax earnings. Oy.

Strike two was yesterday – one more 1 of individuals “unexpected” quantities that maintain whacking the stock marketplace of late. In this situation, current house revenue fell two.2% in Might.

Yes, the homebuyer tax credit rating expired in the finish of April, but that merely meant the buyer experienced to possess a house below contract. Presumably, that is lots of houses that haven’t gotten to closing yet… and closings are what the National Association of Realtors utilizes to arrive up using the quantities. So a lot for presumption.

Dig deeper to the quantities and also the picture is even uglier. For that 2nd month inside a row, inventory is really greater than it had been a 12 months ago. Not great when there is nevertheless a historically higher 8.three months of supply about the marketplace.

Strike 3 occured a half-hour right after the opening bell these days, with new house revenue. They plunged 33% from April to Might. Actually, revenue had been the lowest because record maintaining started in 1963.

In fairness, even the “experts” had been expecting a large decline right here. In contrast to current house revenue, new house revenue count as quickly like a contract is signed. (Is it as well a lot to ask the NAR for any small consistency?) So any glow in the tax credit rating has currently worn off.

Nevertheless, the consensus anticipated a decline of perhaps 20%. 33% is really a gut punch.

So exactly where from right here? It is now inescapable: The tax credit rating experienced the impact of getting a entire bunch of house revenue that had been heading to take location anyway throughout 2010 and pulling them to the very first 4 months.

Even mainstream economists polled through the firm MacroMarkets are conceding this. Final month, 40% of them anticipated house costs to fall this 12 months. Now, it is 56%.

And what ever recovery they see will probably be a slow one…

Through the finish of 2014, they reckon house costs will probably be back to late-2008 amounts. Which, through the way, are also mid-2004 amounts.

For yet one more sign of the moribund actual estate marketplace, witness this — a rental house raffle for charity. $20 buys you a opportunity at this…

Television viewers right here in Baltimore are becoming treated this week to commercials for any drawing on this multifamily house within the happenin’ Bolton Hill neighborhood. 3 tales, 4 units, renovated in 2006, assessed at $550,000. “Winner will acquire the creating free of charge and obvious of mortgages and liens,” declares the raffle’s web site, “and he or she won’t be needed to pay closing expenses.”

Precisely who holds the title now and how this individual or persons arrived into possession the web site does not say. Presumably, there is much more within the way of disclosure that requires location should you win the auction.

Using the release from the new house revenue, U.S. stock indexes that treaded water about the open promptly slipped much more than 0.5%. That is on best of losses of roughly 1.5% yesterday, driven in component by current house revenue.

And you know what?  They are absolutely correct!  Sort of …

The majority of today’s retirement investors will have a lower standard of living than the previous generation of retirement investors.  The reason for this has less to do with the market and much more to do with a dangerous set of investment ideas that the investment public at large refuses to relinquish.

I am referring to the “buy and hold” mentality that worked so wonderfully from 1982 through 1999, then blew up so spectacularly from 2000 to present day.  In a secular bull market, such as we saw from ’82-’99, the best strategy to employ was to buy on the dips, and that is exactly what millions of investors did.

And it worked!  Never had so many made so much from any previous bull market.

So the real issue once again isn’t so much the market, because hundreds of billions in profits have been pulled out of the market over the last 10 years.  No, the problem has been the strategy bias of the average retirement investor.

The average retirement investor has been applying the incorrect investment strategy to the market that we are in.

So what kind of market are we in, and why does it require a different approach?

We are in what’s known as a secular bear market.  In a secular bear market, prices trend downward and are punctuated by brief rallies.  The opposite is true for secular bull markets.  In a secular bull market, prices trend upwards and the uptrend is punctuated by brief sell offs.

Secular bear markets can last a very long time.  The DOW was in a bear market from 1929-1949.  During that period there were huge rallies — in fact, by 1937 the DOW had regained 50% of its losses.  But from 1937-1942 the DOW was cut in half yet again.  The last major secular bear market lasted from 1966 to 1982.

You want to see how ugly the buy and hold returns are during a secular bear market?  Check this out:

Secular bear markets require a different approach to make money in because the overall trend is down, not up.  Most retirement investors don’t have the ability to go short, so they are automatically locked into a directional bias.  So how do you make money in a bear market when you can only go long?

That’s a good question.

You must employ strategies that accept the new reality of the market we are in rather than the market you wish we were in. The key is to put the volatility that is inherent within a secular bear market to work for you.  A great investment vehicle to use to do this, specifically for retirement investors, are Exchange Traded Funds — also known as ETFs.

Unlike Mutual Funds, ETFs offer immediate same day liquidity at a quoted bid price, have very low transaction costs, and allow you to assume hyper specific sector exposure.  But my number one reason for choosing an ETF over a Mutual Fund is to avoid what I call “personality” risk.

Mutual Funds are totally dependent upon their managers for their success.  Who knows what’s going on in that manager’s life?  That’s a risk I don’t want to have to take.  The beauty of sector and index ETFs is that they are completely free of fund manager “personality” risk and the fund manager’s attendant investment bias.  Sector and index ETFs are a pure play vehicle on the sector or index in question.

To survive a secular bear market, you have to adopt a more hands-on, dynamic approach.  You have to be willing to go long as well as short.

“But hold on, I thought we couldn’t short in a retirement account?”

That is correct, most American retirement account types expressly prohibit margin trading.  This automatically removes the possibility of selling stocks short because all short trades must take place in a margin account, however …

For the newer investors reading this, a short trade involves selling a stock in the open market that you do not own (your brokerage firms borrows it from another firm) in the hopes of buying it back at a price below what you sold it for.  You make money by catching the spread or difference between what you sold it for and what you bought it back for.

Shorting is an integral part of a fully functioning stock market, and there is absolutely nothing un-American or wrong with selling short.  So don’t let other peoples’ narrow minded views of shorting cloud your own.

Over the last few years we’ve the seen the proliferation of inverse ETFs.  An inverse ETF actually goes up in value as the index or sector it tracks go down in value.  Inverse ETFs are a tremendous gift to active investors locked into restrictive retirement accounts.  For the first time, retirement investors now have a tool that lets them go long and short.

Not only can you trade inverse ETFs, but you can also trade inverse ETFs that offer greater leverage . These leveraged ETFs are typically known as Ultra ETFs.  However, I only suggest trading leveraged ETFs under very specific circumstances that are beyond the scope of this article.

Having the ability to unlock the other half of the market (the bear half) should be more than enough for you to put the market’s down side volatility to work for you instead of against you.

Here are a list of some inverse ETFs that you can use the next time you see the market tanking:

Remember, there are two sides to market direction, up and down.

By unlocking access to the other half of the market action, you put yourself in a position to dramatically improve your market returns.

Don’t use the bear market as an excuse to give up on your retirement dreams.  Be open to some new ideas, because the only person who can save your retirement is you.

Eric$

(as seen on the Tycoon Report)

Is the recession truly over?

It may seem somewhat late to be asking that question. After all, haven’t Washington and Wall Street already bragged as to how we have had an adequate number of consecutive months of GDP growth to sound the death knell for “The Great Recession of 2007-2010”? Heck, we’ve even been regaled by the Federal Reserve itself as to how American’s “wealth” has increased for four straight quarters now.

As usual, the actual answer to that question is somewhat more complex – and substantially more disturbing – than our little propaganda makers would have you think.

If you were to consult the folks at the National Bureau of Economic Research, considered by many to be the ultimate arbiter of business cycles, they would tell you that they are not yet satisfied that we are well and truly clear of the downturn that began in December of 2007.

Apparently, they wish to be quite sure that the double dip worried fellows like Professor Nouriel Roubini and our own Justice Litle have warned us of does not come to pass before they will sign off on these new “days of milk and honey.”

But that is not actually what I was referring to when I asked whether the recession was truly over.

What Happens When We All Act Like PIIGS?

What I am concerned about today is the fact that we have not actually solved the problems that brought us so low. Rather, we have attempted to forestall them by borrowing trillions of dollars against future productivity.

I’m sure you’ve already heard many, many arguments as to the theoretical overhang from our national debt, which is now rapidly approaching par with our annual GDP. (When these things happen in Europe, we make noises as to how those “irresponsible PIIGS” will bankrupt the European Union and break the euro. But when that happens here, we read that this is “how a robust economy does business.”)

And I’m sure that you have had your ear bent till it is sore as to how unfunded and underfunded mandates like Social Security, healthcare and mortgage guaranties will destroy our children and grandchildren’s potential prosperity. Please understand that I am not saying that these things aren’t very serious threats.

Unfortunately, these are long-term problems with manifold variables, and so it seems that most any cogent argument about these issues breaks down when opposing sides can’t even agree on a basic data set.

But today, I have a rock-solid example for you that demonstrates quite clearly what happens when you borrow from Peter to pay Paul.

A Sensitive Barometer

One of the companies I like to keep a close eye on is FedEx (FDX:NYSE), as it is a reasonably sensitive barometer of the economy in general. Unlike other transports, FedEx is relatively quick to confirm or deny other signals.

First off, there is FedEx’s obvious ties to retail. The stores often claim that all is rosy for months at a time. But express shippers always know immediately when sales volume and urgency is off.

Beyond that, FDX also carries for both business and industrial clientele. And unlike ships and rail, FDX’s services are not booked weeks or even months in advance.

Finally, FDX is especially vulnerable to labor and energy costs. Because basically all they do is pay guys to drive fuel-sucking planes and trucks about.

When Good Companies End Up in Bad Places

I considered recommending this week that my VIP Portfolio readers go short against FDX. And what do you know? The very next morning, FDX warned that they would most probably come up short, profit-wise, come the next quarterly report. ( I ended up suggesting two other stocks which I still think are better plays)

But their particular reasons for this shortfall are well worth noting. It seems that all through the recession, FDX has been neglecting to fund such contractual obligations as their pension and health funds. And now they are behind the eight ball by more than a bit. This unfunded corporate mandate seems to have blindsided analysts, and now FedEx looks like it will miss their rosy estimates, possibly by as much as 13%.

Keep in mind that even those estimates were based (on company advice!) on a rising economy – and flat energy and labor costs. Problem is, either the economy isn’t rising after all, like more than a few of the folks around here think. Or it is, and both fuel and labor costs will rise with it. It’s awfully hard to have this sort of thing both ways, folks!

Two Ugly Questions

So what do we have here when you tot it all up? A series of unfunded obligations coming due in a teetering economy, just as borrowing and operating costs are threatening to rise.

Now I have two questions for you. The first is philosophical: “Can the recession truly be over if we are still paying through the nose for it?” The second is more practical: “Does anyone out there remember what finally tipped GM into bankruptcy?”

Yeah, that’s right: a recession – and pensions.

Yours truly,

Eric LeRiche

InvestorRules

At this point, one can only guess, because so much is still up in the air. One of the biggest unknowns surrounds the U.S. government’s moratorium on new deep-water drilling in the Gulf. In won’t consider new permits, and some wells in progress will have to stop work. There are some murky areas in how the government will enforce the ban and some existential questions about what a new deep-water well is, but we won’t get into those details at the moment.

The other big part of this is that we don’t know how long a drilling ban will last. A long-term drilling ban would kill the Gulf and probably lead to a depressed market for offshore rigs as the world absorbs the excess rigs. About 20% of the global fleet works in the Gulf.

Of course, deep-water oil production in the Gulf may die anyway. One thing is for sure: Offshore drilling is going to be a lot more expensive — both because of new regulations and/or taxes and also because drillers can expect insurance costs to go way up. If the liability cap is raised to $10 billion — as seems to be the case — then the Gulf is effectively uninsurable and the basin will die. Even if it does survive, the Gulf of Mexico will likely emerge a ghost of its former self.

Suffice it say, this affects a bunch of companies operating in the Gulf — in particular the offshore drillers. They won’t die, because there is a vibrant global market for their services overseas, in places like West Africa, Brazil and Australasia. But business won’t be as good as it was, at least for a while as the market adjusts.