Tuesday, January 4, 2011

Where Should You Put Your Money?

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The American Dream - Viva Las Vegas Style

With every New Year’s resolution, optimism and even the expectation that the future will get better has long been a staple within the popular culture. By nature, people want to believe in a better society. The American Dream means different things to diverse people, but it always had a vision for great achievements and daring exploits. America was great because she dared to forge an independent and freedom loving country.

Las Vegas is the kind of region that evokes strong and varied reactions. Many people see Vegas as freedom and a state of mind, while others curse it as a Sodom and Gomorrah, den of iniquity. Yet when you strip away the glitz, glamour and gambling, you get down to the real guts of the metropolis – MONEY. (more)

Buy or Sell: Silver and Treasuries?

There’s very little to report from the broad market this week because precisely nothing happened since we last spoke. Our sell call went out two weeks ago, and we stood 50 Dow points higher at the beginning of the day than we did then, with not a whole lot of movement achieved higher or lower along the way. Volume, of course, has been negligible during this same the period, a phenomenon that should come to an abrupt end now that the holidays are over. The coming week’s trade, including today’s bull run, should prove decisively which way we’re headed for the near term.

That said, there have been developments worth reporting, foremost among them a condition that persisted for the entire month of December. Believe it or not, the S&P 500 traded in overbought territory every day this last month. That is, price action on the index remained more than one standard deviation above the 50 day moving average for the entire period, a condition that most observers agree constitutes ‘overbought’.

What Does it Mean?

Possibly nothing. There’s not a lot of correlation between stocks, or even whole indices, trading in overbought territory for extended periods of time. That said, it’s certainly not prudent to be a buyer at this stage. If the market remains overbought for another week or two, maximum, there will very likely be some sort of retreat that brings both price and sentiment back to historical norms.

As far as shorting the market goes – as we recommended in our last missive, Short Bunny – the overbought data adds a few more pounds to an already weighty short-sell argument.

This might, too: (more)

Three Sectors Ready to Lead 2011 (IJR, XLK, FDN)

The predictions are in and today begins the 2011 market year. I have read everything from the markets crashing to a 50% gain in equities this year. As with every year only time will tell and the key is to take what the market gives and be disciplined enough to capture the move up or down. The one word that summarizes all the discussions is optimism. In fact, that is the one word I would use to describe the year, optimism. The outlook is optimistic the economy will improve, jobs will grow and the overall global economic picture will be healthy.

With that in mind there are three sectors to watch as we begin the new year. First, small cap stocks (IJR), the January effect revovles around small cap stocks. The statistics show January is the month that sets the tone for the sector. Thus, we should pay attention to the sector heading into the new year. Technically the small cap stocks have been performing nicely already. In December IJR was up 7% for the month. One would have to ask if the January effect came in December as the Santa rally came in early December versus the end of the month? I still like the outlook for the small cap stocks and for that matter mid-cap (IJH). The chart below shows the pullback to support last Friday and the solid uptrend in play as we begin the new year. (more)

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Watch CDS Prices

Vigilantes Sidelined as Growth Tops Deficit Among Treasury Swap Investors

The worst performance by Treasuries since the second quarter of 2009 reflects prospects for faster U.S. economic growth rather than concern that rising budget deficits will drive investors away from government debt.

While the average yield on Treasuries rose to 1.89 percent from 1.42 percent at the end of September, according to the Bank of America Merrill Lynch Treasury Master index, the price of credit-default swaps tied to U.S. debt declined to 41.5 basis points from 48.4 basis points at the end of September, Bloomberg data showed. The dollar rose 1.5 percent against an index of currencies of six major U.S. trading partners.

The drop in swap prices and the greenback’s strength shows bond vigilantes aren’t ready to punish the U.S. for its spending. Pacific Investment Management Co. and JPMorgan Chase & Co. raised their growth forecasts after President Barack Obama agreed to extend George W. Bush-era tax cuts as reports show gains in retail sales, manufacturing and consumer confidence.

“More than anything else, it’s a growth story,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “From the fiscal stimulus to the monetary stimulus to the tax extensions, it’s the belief that the U.S. government is all in.” (more)

DPZ: How to Net a 15% Gain From This Fast Food Trade

Domino's Pizza Group ((NYSE:DPZ)) is the world's largest pizza delivery chain by market cap.

The pizza company operates more than 9,700 franchised and company-owned stores across the globe and appears set to grow further.

Domino's is booming internationally, especially in India, where 70 new stores were built this year. As the country's number one restaurant chain, same-store sales were up 41% in the first half of 2010.

In the United States, same-store sales increased 11.7% in the third-quarter, and the company projects more than 19.2 million pizzas will be sold this year.

Around the world, cost-conscious consumers have been choosing Domino's. That's because, at many locations, customers can buy two medium, two-topping pizzas for just $5.99 each. These pizzas feature a reinvented recipe with sweeter sauce, higher quality cheese and garlic-seasoned crust. (more)

Is Barack Obama Intentionally Trying to Damage Our Economy and Security?

That may seem like an absurd question, but it’s hard to come to any other conclusion when you consider what is happening to our energy industry on the Gulf Coast. As the Wall Street Journal reports today, the Obama Administration may have lifted its ban on drilling in the deepwater Gulf of Mexico, but there are still long delays in getting other permits approved to drill for oil. Why? No one seems to know. We assume that politicians do what is in their own self-interest, but in this case Obama seems to be damaging himself because he is dragging down the economy. As the Journal puts it, “The Gulf coast economy has been hit hard by the slowdown in drilling activity.” And Obama doesn’t seem particularly eager to change that fact.

There are only a handful of possible explanations of why he is doing this. (1) He doesn’t care, and his radical environmental agenda comes first. (2) He hates oil companies so much that he’s willing to have his political fortunes damaged further by dragging down the economy. (3) He hates capitalism so much that he’s determined to “gut” a leading industry such as energy. (4) There is raging incompetence in Washington. (more)

What Rising Commodity Prices Mean for Investors

On the last trading day in 2010, gold prices traded up $15.50 to more than $1,421 an ounce and oil prices ended above $91 a barrel. Indeed, gasoline prices are back above $3 a gallon, up more than 44 cents from last year!

But these hard assets aren’t the only things climbing… look at the prices of these other commodities. Coffee futures have jumped more than 60% in 2010, and sugar has nearly doubled in the past six months alone.

Wheat prices are up more than 46% in the past six months despite seesawing through much of the third and fourth quarters. Corn’s up nearly 57%, and soybeans are up better than 51%.

I could go on and on…

What’s behind these moves in commodity prices, and what does this mean for your investment portfolio?

In past Smart Investing Daily issues, we’ve made the connection between the U.S. dollar’s performance against other currencies and the rise and fall of commodity prices.

This link is simple: Every commodity priced in dollars is subject to price fluctuations based on the value of that dollar. That’s why some commodities make great hedges against a falling dollar.

What’s Behind Commodity Price Gains?

But is the U.S. dollar behind these major commodity price gains? (more)

Six Financial Blunders and Their Fixes

This year will likely be remembered for its broad, unpredictable market swings.

As one might expect in a time of volatility, making all the right moves with your investment portfolio and retirement plan was a challenge. What didn't help matters were the mistakes and overreactions many investors made, moves that could hurt them both immediately and for years to come.

But there are also some easy steps to take to recover from the mistakes of 2010 for a better 2011:

Problem 1: Analysis Paralysis
When confronted with questions about what direction to go in with their financial plan, many decided to go... nowhere.

Mark Byelich, president of M.J. Byelich & Associates, a Pennsylvania-based financial services firm, says the problem is not just lacking the confidence to stick with an investment strategy, but even having a well-considered plan to start with.

"I talk to so many folks who say they held back from making any contributions to their 401(k) because they were unsure what to do with the market," he says. "There is this stagnation. Everyone is just sort of stuck in the mud, uncertain of what to do."

"You can dissect it down to, 'Maybe I didn't get out of bonds a month ago' or, 'I sold my commodity allocation because I thought we were at the top,' or 'I didn't buy gold,'" he adds. "But I think it comes down to a more fundamental thing: 'I didn't really have a real asset allocation plan, I didn't have a real financial plan and therefore I don't have the confidence to stay in the game.'" (more)

Marc Faber's January 2011 Outlook---Correction Imminent

Investor extraordinaire Marc Faber is out with his latest Gloom, Boom, and Doom report, which discusses his outlook for 2011. Here are a few highlights:

1. Equity Markets--Faber believes a correction is imminent for the stock market as bullish sentiment (AAII sentiment) nears record levels and mutual fund cash positions remain very low. Furthermore, the latest upward move in stocks has occurred on declining volume, which is usually bearish from a technical point of view. The correction should occur in January. That being said, you should be buying into the correction as it represents a good buying opportunity. Faber prefers energy companies and speculative stocks such as home builders and even AIG. He goes on to say that the third year of a Presidential cycle is very good for speculative stocks versus traditional blue chip value plays.

2. Gold and Silver--Reiterates his favorable opinion on gold and silver. Doubts they are currently in a bubble as some analysts postulate. Faber notes that investor exposure is very low when you look you compare it to the world's financial wealth, meaning that gold and silver are still under-owned and have room to run. (more)

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American Decline This time it's for real.

This time it's different. It's certainly true that America has been through cycles of declinism in the past. Campaigning for the presidency in 1960, John F. Kennedy complained, "American strength relative to that of the Soviet Union has been slipping, and communism has been advancing steadily in every area of the world." Ezra Vogel's Japan as Number One was published in 1979, heralding a decade of steadily rising paranoia about Japanese manufacturing techniques and trade policies.

In the end, of course, the Soviet and Japanese threats to American supremacy proved chimerical. So Americans can be forgiven if they greet talk of a new challenge from China as just another case of the boy who cried wolf. But a frequently overlooked fact about that fable is that the boy was eventually proved right. The wolf did arrive -- and China is the wolf.

The Chinese challenge to the United States is more serious for both economic and demographic reasons. The Soviet Union collapsed because its economic system was highly inefficient, a fatal flaw that was disguised for a long time because the USSR never attempted to compete on world markets. China, by contrast, has proved its economic prowess on the global stage. Its economy has been growing at 9 to 10 percent a year, on average, for roughly three decades. It is now the world's leading exporter and its biggest manufacturer, and it is sitting on more than $2.5 trillion of foreign reserves. Chinese goods compete all over the world. This is no Soviet-style economic basket case. (more)

Commodities: The bull that just won't die

(CNNMoney) -- Gold, oil and other commodities enjoyed a stellar run in 2010. The party may not be over just yet ... but investors have to be wary.

Several experts say that the main forces behind the bull run in commodities last year, namely strong economies in emerging markets coupled with worries about the health of the U.S. and Europe, are likely to remain in place this year.

Concerns about the sovereign debt crisis in Europe and the slow grind of a recovery in the U.S. could weaken both the euro and the dollar. A stagnant greenback in particular should bolster commodity prices since many commodities are priced in dollars.

David Beahm, vice president of economic research Blanchard & Company Inc, a New Orleans-based investing firm that specializes in tangible assets like gold and other precious metals, says gold could hit $1,650 an ounce in 2011. That's about 15% higher than current levels, which are already flirting with record highs (not adjusted for inflation.)

Beahm said that the Federal Reserve's quantitative easing program should lead to more weakness for the dollar as the central bank continues to purchase long-term bonds. He added that the Fed may need to do even more to jumpstart the economy, especially if the unemployment rate remains high. (more)