Friday, July 29, 2011

The Most Important Chart Right Now

“If the U.S. defaults, there would be massive consequences,” El-Erian said yesterday from Pimco’s headquarters in Newport Beach, California. “People are concerned, but they sort of think it’s a very, very low probability, and we would agree.”

Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default unless the $14.3 trillion borrowing limit is increased by Aug. 2. Standard & Poor’s, which has given the U.S. a top ranking since 1941, reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and may cut the nation as soon as August if there isn’t a “credible” plan to reduce the nation’s deficit

I woke up with a bad head cold, which means that this post will have to be on the abbreviated side. The first thing I saw as I examined my quote board was September gold squirting to a record high of 1629.30. But a few hours later gold had settled to 1619.40, up just 1.90 to 1628.70, still a new record if it can close here. The news out of Washington and the political and emotional swings are coming through so rapidly and so violently, that the market actionis acting like one of the "jitter-bug" dancers of the 1950s.

If there's any hint of the trend, my PTI is heading down and bullish by only 16 points as of yesterday. But Lowry's, with a 78-year history of daily statistics sticks to their opinion that no market top has been seen with their Selling Pressure Index probing new lows for the move. Furthermore, they are impressed by the new highs in various advance-decline metrics.

In desperation, I ask the question, can charts tell us where we are and what may be coming up?

The daily chart below of the Wilshire 5000 has carved out a discernible potential head-and-shoulders top. The horizontal blue line shows where the support is. I suggest that this is the most important chart we are now dealing with. If the right shoulder can avoid breaking support it will have bullish implications. But if the pattern is completed and the right shoulder of this head-and-shoulders pattern breaks down, then the market will have delivered its sternest warning.

wilshire 5000 composite index

Is Social Security Obama's secret piggy bank?

Zero Hedge is reporting that Treasury has determine it will prioritize debt payments over other obligations in the event no deal is reached. That probably is the right thing to do. It does raise the question of what is going to happen to all of the other obligations the government has.

I thought it was interesting that this afternoon Social Security updated their web site and provided the details of the payments due in August.

Note the amount due is $60.7 billion. This amount is comprised of Old Age ($49.5b) and Disability ($11b). The President has mentioned a few times that the $49b of retirement payments may not be made. I have to assume that he was excluding the DI number. It’s possible that someone thinks that DI has a preference over OAI. But I doubt that. This an all or nothing deal.

So the question is, “Where’s $61b coming from?”. SS has no cash at all. They do receive cash every day. Tons of it. In the month of July they will take in ~$53b. All cash receipts at SS are immediately returned to Treasury. Treasury, in turn, issues SS a Special Issue Note.

At the beginning of the month payments to beneficiaries are made. Checks are issued and electronic banking transfers are sent out. SS must have cash in the bank(s) to honor this. They get the cash from Treasury. To accomplish that they redeem the Special Issue Notes. This happens every month.

This chart shows the components of the debt. Note how big SS (and other Trust Funds) are – Blue)

The following slide is the debt as of today. The two components, Debt to Public + Government Series Equal the Debt Subject to Limit. We can’t exceed the limit. But there is nothing in the laws that would prohibit the NORMAL monthly operations between Treasury and SS.


Where would Treasury get the cash? Easy! They would sell securities to the public. Just like they always do. Who would buy these short-term government notes? Easy! The big banks would do it. They would take the same paper back to the Fed who would Repo it with a 0% haircut. Just like they always do. Could this be done for $500b? Easy! Just like it's always done.

I am absolutely convinced that Geithner has called the Fed and the big shots at the money center banks. Everyone will play ball. I’m willing to bet that Obama has called Dimon over at JPM and put it on the line.

O: “Jamie, I may need you to sign up for $200b of low yielding paper, are you in?

J: “Count on me. I’m good for up to 500 large if you need it. And put me on the short list for the T Sec.”

O: “Okay, thanks. You’re on the top of the list.”




Add some more info:

-Treasury has being doing exactly this pattern of transaction with another Trust Fund for the past two months. They have been playing with the debt ceiling by running down the balance of FERS (Federal Employee Retirement – a clone of SS)

-It is not at all unusual for the SSTF to dip into its holdings of Treasury IOU’s. They do it nine months each year. The monthly shortfall ranges from 3 to 15 billion. There is absolutely no reason why this number could not be raised to 50 to 70 billion on a monthly basis.

What does this mean?

It means Obama misled us on the technical issue of whether SS checks can be sent in the event of default. He never said that they would not be made. He said they “might” not be made. So he was using the fear factor to sway opinion in his direction. In my view he had the money “in his pocket”when he said it was not available. (Didn't we once go to war over that fear factor thing? Are we doing this again?)

The entire FICA receipts ($52 billion a month) could be used by Treasury to make debt service and other payments. This would dramatically improve the liquidity picture. It could buy some time.

As of tonight we have a standoff. The House plan will be defeated in the Senate. The Senate plan will be defeated in the house. Obama has said that he would veto Boehner’s plan. To me, the possibility of a 'no deal' and a blown deadline is staring us in the face.

I’m just wondering if this is not the Obama script. Let the situation blowup. But have the consequences contained.

There would be tons of fallout. The markets would take it on the chin and the rating agencies would threaten action. My guess is that 500 federal parks might close, but the roof will not fall in.

In that scenario the White House would "look" good. They would be able to say that they were creative and avoided a crisis. They could blame the Republicans for the failure. It would strengthen Obama’s hand in the post August 2 debate. The end result would be that Obama gets a deal that takes him past the election. Which he wins.

A story like this is what gets people (re) elected to office. But if this is being orchestrated to that end, then it is a very sad story indeed. We’re being used.

Buy CNH on a Pullback

CNH Global (NYSE:CNH) –This global manufacturer of agricultural and construction equipment is expected to earn $3.50 in 2011 versus $1.89 in 2010, and over $4 in 2012. The company is majority-owned by Fiat Industrial. Its brands include Case IH, New Holland, and Steyr. It also provides financial products and services, including retail loans, to global customers. It could substantially benefit from sales to Third-World countries in need of agricultural products since it has an established system of parts and service worldwide.

This company is on the “Buy List” of many institutional firms, and S&P recently increased its annual target from $55 to $63. And Moody’s recently increased its debt rating.

Despite the general market decline, CNH gapped above its 50-day moving average on Monday, and its stochastic issued a strong buy signal. Investors should buy CNH on pullbacks as a “cornerstone global investment.”

Technically, it could pull back and cover the recent gap at $37.29, but the trading target is $45, and the longer-term target is $55.

Trade of the Day  - CNH Global (NYSE: CNH)

Equities Are Hit With Panic Selling, What Does It Mean?

It was an exciting trading session Wednesday to say the least… With all the uncertainty floating around it is causing the stock market to be more volatile than normal. It seems like every other day there is some big headline news causing either strong buying of stocks or strong selling to take place. It’s this type of price action which spooks the average investor causing them to panic out of positions at key support areas just before a continued move higher.

I like to focus on the market when I see extreme buying or selling taking place. During times of extreme buying or selling in equities, investors are reacting on emotions rather than logic and that’s when I benefit from everyone rushing to the door trying to get rid of their positions at any price they can get.

Let’s take a look at what the market is telling us right now…

SPY – SP500 Index Exchange Traded Fund – Daily Chart
In this chart you can see my custom green indicator at the bottom. I use this to measure fear in the market. When this indicator is trading above 5 I know the masses are unloading stocks as quick as they can in pure fear that a market collapse is about to take place. But the biggest thing I learned trading over the past 12 years is that when everyone is doing something its best to skip the trade or start looking for technical setups which will get you in against the masses because the move is generally almost over.

What I get from this chart below is:
1. The trend is still up
2. We have not broken the previous pivot low from last week
3. The market is showing extreme panic selling and I anticipate some type of bounce or bottom shortly.

VIX – Volatility Index – Daily Chart
The volatility index measures fear in the market. So with the vix spiking up into a key resistance level, I would not be surprised to see it go a little higher then sharply reverse back down.

Trading off fear and greed can be very profitable but you must understand the two. Greed is a slow driving force in the financial market. As prices rise day after day the greedy continue to buy more and if they see any sharp dip they just look at it as an opportunity to buy even more (even though its a sign of smart money distribution selling) until eventually there is a huge collapse from the big money players unloading their positions and the greedy are left holding the back with a higher cost average price. This is the reason market tops tend to take 3-7 times longer to form than market bottoms.

Fear on the other hand is very quick. Think of it as if you were walking through your house at night down a dark hallway. When all of a sudden your friend jumps out and screams catching you completely off guard. What do you do? You jump, most likely yell and drop everything you were doing, then 30 seconds later you are back to normal. Well this is what happens in the stocks market also…

Traders hold their positions until a piece of news hits the wires or there is a strong selling day and their investments start falling quickly. This sudden news or price movement which they were not anticipating causes traders to panic and sell everything before the investment collapses. Typically a couple days later the price rebounds and after a strong bounce these traders decide to buy back their position and ride the price to new highs. So what if you were to get in near the bottom then let all the traders bought back after you? It generally means big money for you. This is what I look for and what I consider panic selling to be.

Stocks Showing Signs of Being Oversold
This chart below shows the percentage of stocks trading above the 20 day moving average. Over time I have found that when 75% or more of stocks are trading above their 20MA then the market is getting overbought and one should be looking to tighten stops, take partial profits and or look for short setups.

On the flip side when only 25% stocks are trading above the 20 day moving average I find the market usually puts in a bounce or rally which lasts several weeks.

As you can see in this chart after Wednesday’s sharp move lower we are now entering into an oversold market condition. I expect volatile prices for a few days as the market stabilizes then a move to the upside.

Mid-Week Trend Conclusion:
In short, I feel we are in for some choppy price action over the next 2-10 sessions. With the current market trends I do feel that the odds are pointing to higher prices for both stocks and commodities.

Investing in Silver Equities—The Opportunity of a Decade


In a special silver roundtable, Jim Puplava is joined by Jason Burack and Mo Dawoud to discuss their research report, "Treasure Hunting for Precious Metals Stocks."

Jason Burack is an investor (who looks for both undervalued companies with good growth potential) and he does top down then bottom up macroeconomic analysis. He likes Austrian School economics. He co-founded the startup investor education and financial education company, Wall St for Main St, LLC to help people through these difficult times.

Mo Dawoud graduated from James Madison University with a BA in Finance. He is the Co-Founder of Wall St for Main St, which is a financial education company focusing on educating, consulting and providing information on the economy and the market to contemporary Main Street investors. Mo believes in Austrian economic and free market economy. He is an expert in technical analysis and fundamental analysis. His technical analysis work can be found at The Daily Gold web site and he has contributed to Kerr's Trading.

Croc’s (CROX) Rocks! – Blowout Quarter Showing Breakout Potential

If you have been a longtime reader, you will remember that there was a time that we were adamant about the inevitable fall of Croc’s (CROX). That was back in 2007-2008. At that time, Croc’s was a “fashion” trend and it seemed that everyone was wearing those bright colored clunker rubber shoes. We looked at the data, studies the trend and found the stock to be just as unappealing as the shoes were.

Here are a few examples:

Fast forward a few years, after the stock went from a high of close to $70, to a low of just above $1. Since the near-death experience of the company, there has been a significant change to their product line. Management has taken the various companies that they bought with an overinflated stock price and rolled it into the product line.

If you have not seen the depth and breadth of shoe styles that are now available, you are missing something. From boots to topsiders, all are made with the special rubberized material that made Crocs famous. The main difference is that now they are doing it with style.(See Products HERE)

Crocs still relies on fad-like styles to really make a hit. Recently they introduced the Chameleons™ Translucent shoe that changes color depending on the light.

Color Change Details

  • Oyster (white) clog changes to pink lemonade in the sun.
  • Yellow clog changes to lime green in the sun.
  • Celery clog changes to sea blue in the sun.

These have been reported to be flying off of the shelves. With the new additions and the overall

We have the stock since the initial break last month and have added to the position over the past weeks. The earnings report was very uplifting:

Crocs reports Q2 (Jun) results, beats on revs; guides Q3 EPS above consensus, revs above consensus

Crocs reports Q2 (Jun) earnings of $0.61 per share, compared to consensus estimates of $0.44. The company says it benefited from modifications in tax treaties in its international businesses which together with other tax planning resulted in an effective tax rate below 15% for the quarter. Revenues rose 29.6% year/year to $295.6 mln vs the $281.7 mln consensus.

The company also issued upside guidance for Q3, sees EPS of $0.40 vs. $0.32 estimate; it also sees Q3 revs of $280 mln vs. $262.06 mln consensus estimate. Shares moved higher after-hours and continue to see a bid of 9% above the close into the open. The shares continued to remain strong and volume is heavy with the price up 10%. It appears that Croc’s may have some running room from here.

Below is the Horowitz & Company OneSheet on the company that provides a detail of the data points that we believe are most important in the researching of a position.

CROX 20110728

How to Play the Collapse of the Euro: DRR

by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, July 28, 2011: Issue #1566

The Eurozone is a sight to behold.

Economic growth is anemic. Greece is careening toward default on its sovereign debt. Ireland, Italy, Portugal and Spain may not be far behind. The break-up of the currency block can’t be ruled out.

And yet … the currency is up seven percent against the dollar this year, to over $1.40. How long can this gravity-defying feat continue?

Not indefinitely. Understand that the rise in the euro against the dollar is, in part, a reflection of our own economic and political woes here at home. The Swiss franc, for instance, is up 16 percent against the dollar year to date and more than 30 percent over the past year. (And Switzerland, a landlocked nation with a smaller population than New York City, is hardly an economic powerhouse.)

Yet economic and political problems in the Eurozone are much more severe than they are here. Debt as a percentage of GDP is higher in many countries. There are no good political solutions. In the months ahead, boatloads of money will be made betting against the euro…

The Eurozone’s Debt-Disaster Continues

Richer Eurozone countries like Germany and France are tired of bailing out their more profligate brethren. The citizens of weaker countries are angry that monetary policy has been outsourced to Frankfurt and their governments are being forced to adopt harsh austerity measures.

In Spain, for instance, unemployment is 21 percent. The typical Spaniard would love to see the local currency devalued to increase the attractiveness of its exports and seaside resorts. But the peseta is long gone – and so are any opportunities to manipulate fiscal and monetary measures to kick-start the Spanish economy.

Even more ominous, there’s no mechanism in place for any of these weaker countries to leave the Eurozone. Even if Greece could drop out, for instance, it would be a disaster for that country. Its debts would have to be re-denominated in a new currency, causing interest rates to skyrocket, deficits to worsen and economic growth to crumble. And since European banks own huge amounts of Greek debt, the chaos would only spread.

This is what it means to be stuck between a rock and a hard place.

Greek citizens are angry that other countries are dictating their domestic policies. This is equally true for the other weak sisters in the Eurozone. Many of them chafe at the idea of staying and yet can’t imagine leaving, either.

Given this structural problem, the likelihood is that the euro will fall substantially in the weeks and months ahead and perhaps trade at parity with the dollar, as it did in the 90s.

How Do You Play the Collapse of the Euro?

Personally, I think it’s far too risky to bet against the euro with futures and options. Far superior, in my view, is an exchange-traded fund (ETF) that bets against the euro: Market Vectors Double Short Euro ETN (NYSE: DRR).

This fund is double short the euro. That means if the euro falls 15 percent, the fund will appreciate approximately 30 percent. The reverse is also true, of course. But the problems in the Eurozone are not going away any time soon. It’s tough to imagine the euro staging much of a rally from here.

Far more likely is that the euro will slide as problems in this part of the world worsen. And that will be good news for holders of this double-short ETF.

5 Unforeseen Expenses That Can Ruin Retirement

Wise retirement planning begins long before you give your boss two weeks' notice about your last day on the job. It involves analyzing current expenses, anticipating future outlays and making sure you will have enough income to cover them all. But beware of certain expenses that may thwart your best-laid plans

On a typical retirement budget work sheet, you'll see lines for "miscellaneous" or "other" items, probably somewhere near the bottom. It's easy to gloss over this section once you've assessed your income needs for such basics as housing and health care. But when you get down to the details of filling in the blanks, these add-ons can account for a significant portion of your retirement spending.

Consider these five situations that might put a strain on your retirement budget if you're not prepared.

Taking up an expensive hobby

Say your retirement dream includes racing yachts, collecting antique dolls or starting a goat farm to make artisan cheese. Even if your only real passion is playing golf, your retirement plan should include a way to pay for it.

Harriet Veenker, a Certified Financial Planner in Aitkin, Minn., says it's especially easy for spending on hobbies and recreation to get out of hand during the early retirement years.

"Most new retirees tend to overspend in their first year or two because there is so much out there to do," Veenker says. "Some of the pension plans aren't helpful, because they'll let you take more out in the first five years — because that's when you're really busy."

Veenker's neighbor, a teacher in the Elk River, Minn., teachers' pension program, elected to take bigger payouts at the onset of retirement. "It is a decision that she has regretted, since the income was cut back after five years," says Veenker.

Make sure you have a spending plan that will fit your lifestyle and allow your retirement income to last for the long haul.

Upgrading your home

Consider how much room you'll need in your retirement budget for home improvements — whether it's renovating your kitchen or bath with universal-design features, putting a master suite on the first floor or replacing an old roof.

Melissa Motz, a Certified Financial Planner in Harleysville, Pa., finds that her clients often underestimate what they will spend on home improvements during retirement. But while they may insist they're done with renovating, their plans often change later on.

"Just because you're retired doesn't mean you're all of a sudden going to stop wanting things," Motz says.

The one thing you shouldn't count on, says Veenker, is taking on a major debt — like a home equity line of credit or second mortgage — to finance the upgrade. She says it's better to think ahead about what needs are likely to come up and start saving for them now.

"If you've got a roof that's going to last 25 years, you divide the cost of the roof by 25 and that tells you what amount you have to save per year to be ready for the next roof," Veenker says.

Bailing out an adult child

Maybe your college kid has picked a major with dubious earning prospects, or you have an adult child who is already in financial trouble. If you know you could never resist a request for a helping hand, you'd better plan to have enough cash on hand to cover your generosity.

Motz says helping their adult children financially is probably the biggest budget squeeze on her clients who have entered retirement. Some who are still saving for retirement have put their future income at risk by helping their child purchase a home or pay for other expenses, she says.

"When I'm helping them plan, I ask them to look at their life now," Motz says. "Who's in their life? Who are they responsible for? Who do they feel they would want to help if something came up?"

Caring for a parent

If you expect to be involved in caring for a parent or in-law after you stop working, factor these potential costs into your retirement plan.

A serious illness might have the parent moving in with you or needing help to pay medical bills or for nursing home care. Or you might be pitching in to pay bills, buy groceries and take care of household maintenance for a parent who is struggling financially but wants to stay in their own home.

"Talk about things ahead of time," Veenker says. "Make sure there is an overall awareness of what each person can do, and see if that matches up with what the parents think might work for them."

This is also a good time to discuss with elderly parents what Veenker calls "the cornerstones of estate planning " — a will or trust, a power of attorney and a living will — so that you know what their wishes are while they are still able to tell you.

Supporting a special needs child

If you have a special needs child who will depend on you after you retire, making provisions for that child should be a major priority in your retirement plan.

Some potential financial relief comes when a disabled child turns 18, at which point his or her eligibility for Social Security income is no longer restricted by how much his or her parents earn. Adults with a disability diagnosed before age 22 also are eligible for Social Security Disability Insurance benefits, based on the retired parent's Social Security earnings. The adult child is not required to have worked to receive those benefits.

One of your priorities will be to ensure that your special needs child will be taken care of after your death. Motz says the options include setting up a trust or purchasing a permanent life insurance policy whose proceeds can be used for the child's needs. But beware of leaving any such assets in the child's name.

"You can disqualify a child for Social Security and Medicare if they have too much in the way of assets, so it's really important to work with an attorney who has a specialty in special needs planning," Motz says.

Philip Morris (PM): Smokin' good quarter

Strong volume growth out of Asia along with higher prices enabled Recommended List selection Philip Morris International (PM) to top the consensus Wall Street analyst estimate.

This was an exceptionally strong quarter from Philip Morris. The company also raised its full-year guidance above the current Street estimate.

The international tobacco seller reported that its Q2 net income grew by 21.5% to $2.41 billion, or $1.35 per share.

Net revenues excluding excise taxes grew by 17% to $8.3 billion on an as-reported basis. Sales grew by 10% excluding the impact of foreign exchange.

Wall Street was expecting the company to report $1.22 in net income on sales net of excise taxes of $7.8 billion.

The company's sales performance out of Asia was exceptional. Net revenue from that region grew by nearly 28% on a currency-neutral basis to $2.94 billion.

Asian segment operating income grew to $1.4 billion from $845 million, up 65.4% as reported and 48.3% ex-currencies. Overall operating income increased by 27% to $3.78 billion from $2.97 billion (up 16.5% ex-currencies).

Say what you will about the business, PMI is a model of consistent execution. It uses its pricing power to grow revenue in spite of modest volume growth (or in some cases decline) and regularly grows its bottom line.

The company also allocates capital in a shareholder-friendly manner by buying back stock and regularly boosting its dividend.

As the quarter's results show, PMI is also a great play on the weak dollar. And overall dollar weakness, rather than strength, still seems like a prevailing longer-term theme.

We continue to rate Philip Morris International a "Buy." We're going to boost our price target to $79, which is about a 15.5x multiple on the 2012 consensus of $5.12 (but we also think that estimates will continue to move up).

The company also yields a healthy 3.6%, and we're expecting a nice dividend increase this fall.

Politicians May Give Us an Enormous Buying Opportunity

The S&P 500 fell 2% yesterday, and the Nasdaq lost 2.6% as a broad sell-off engulfed the stock market. Uncertainty over the inability of politicians to put together a deal on the debt ceiling before the Aug. 2 deadline was blamed for the decline. But a weak June durable goods report and increased risk inEuropecontributed, too. Selling accelerated sharply after CNBC reported that someone at the Treasury Department said there was were no funds to payU.S.debt interest beyond the deadline despite an earlier report that funds existed, and the White House appeared confused as to when an agreement had to be reached.

S&P 500 Chart

Trade of the Day Chart Key

The Treasury’s story was later denied, but by that time, the S&P 500 had violated its 50-day moving average, and MACD issued a sell signal spreading fear among traders that a broad breakdown was about to occur. Decliners exceeded advancers on the NYSE by 7-to-1, and volume picked up to over 1 billion shares extending a trend of increased volume

VIX Chart

Fear has finally entered the market as measured by the CBOE Volatility Index (VIX) and two recent gaps up. But gaps up often occur during periods of high emotional stress and usually precede a market bottom. The spike in the VIX in March was preceded by several days of gaps culminating in a sharp spike in the index to over 31. This washout resulted from irrational fear but provided investors with the best buying opportunity of the year.

As noted in yesterday’s Daily Market Outlook, the president and the Republicans will eventually sign a deal, since no one wants to be blamed for the potential losses that could occur if an agreement is not reached. But if the politicians monkey around with the debt-ceiling issue until the final hours of Aug. 2, the world’s fear factor could exceed all expectations. And the S&P 500 could test not only its 200-day moving average at 1,282, but might even dip below the support line at 1,260 giving us the greatest buying opportunity since March.

If you are a nimble day trader, you should be shorting the hourly rallies. But as mentioned yesterday, earnings are strong, and so investors should work up a list of quality stocks along with prices that they would be willing to pay on an extreme but short-lived sell-off. Keep your powder dry. The best bargains are yet to come.