Saturday, January 15, 2011

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How to Fix Mortgage Mess in Three Steps: Laurence Kotlikoff

Fannie Mae and Freddie Mac. What cute-sounding names. They suggest adorable siblings, not twin financial disasters that may cost $1 trillion when we get the final bill.

According to Edward Pinto, Fannie Mae’s former chief credit officer, in 2008 the two government-supported mortgage finance companies, along with the Federal Housing Administration and other U.S. agencies, were holding or guaranteeing some 19 million subprime home loans, or about 70 percent of all such debt.

Much of these toxic assets, as well as many of Fannie and Freddie’s prime mortgages, aren’t performing or will likely default. Nationwide, 8 million mortgages -- or one in 10 -- are under water, with the property’s value at least 25 percent below what’s owed.

The Federal Housing Financing Agency puts Fannie and Freddie’s losses at about $300 billion. But industry experts, like Janet Tavakoli, suggest the real number is closer to $700 billion. And if home prices fall another 20 percent to return to their long-term trend, the tab might climb to $1 trillion. (more)

JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them)

Gold and silver are now down hard over the past two days, and the reason may have something to do with the fact that the CFTC utterly caved to JPM in their long-awaited decision on position limits in a 4-1 vote.

While position limits will eventually be set, maybe, someday, the course of action taken by the CFTC grandfathers in JPM's (and HSBC, et al.) current outlandish positions.

Here's the background (emphasis mine):

On July 21, 2010, the Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Dodd-Frank Act amended the Commodity Exchange Act to:

  • Require the Commission, as appropriate, to limit the amount of positions, other than bona fide hedge positions, that may be held by any person with respect to commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM).
  • Require the Commission to establish position limits, including aggregate position limits, for swaps that are economically equivalent to DCM contracts in exempt and agricultural commodities (collectively, economically equivalent swaps). Such limits must be imposed simultaneously with limits on DCM contracts. (more)

Bloomberg Businessweek - 17 January-23 January 2011

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When This Stock Market Signal Flashes, It's Time to Get Short

Periods of low volatility in the stock market are always followed by periods of high volatility. Always.

It's as certain as spring following winter.

Of course, when you're suffering through temperatures that would make an Eskimo shiver, it's hard to remember spring is on its way. And when stocks are a one-way bet, when the market moves higher day after day in unending bullishness, it's hard to imagine it moving in the other direction.

But it always does. You can bet on it.

By the look of the Volatility Index (VIX), the market may be about to change temperature...

The blue lines on the chart are the Bollinger Bands. They indicate the range of volatility on a chart. When the Bollinger Bands squeeze closer together, as they're doing right now, it indicates a period of contracting volatility. When they expand, as they did back in May, it indicates a period of high volatility. One always follows the other.

The bottom graph charts the width of the Bollinger Bands. The width is now as narrow as it was last April – just before the "flash crash" and the start of a 20% correction in the S&P 500. There are many other similarities between today's market environment and that of last April. Investor sentiment is wildly bullish. And there are multiple technical divergences.

The biggest warning sign, however, is coming from the VIX and the contracting Bollinger Bands. This condition existed for several weeks last spring before stocks finally got hit. So the bullish party may continue for a little while longer.

Now is definitely not the time to get complacent. Keep an eye on the VIX. When the Bollinger Bands start to expand, we'll know the long awaited correction has finally arrived. Long-term investors should head for the sidelines. Short-term traders can speculate with short sales and put options.

Those Calling for a Market Correction Make Me Laugh

After stocks ended 2010 making new highs, many experts have been calling for a healthy correction before putting more money into equities. And if you had listened to those folks you would have missed out on even more gains in the opening days of the New Year.

There are 2 main camps of folks that are calling (nay, praying) for this correction. Let me share with you their sad stories and why you should continue to pass on their faulty strategies.

Correction Camp #1: Missed the Party All Along

In 2008 it was easy (and 100% sane) to be a bearish investor as most signs looked like we were headed towards a second Great Depression. Even through most of 2009, when stocks rebounded, it was hard to fully embrace the turnaround story while economic booby traps seemed around every corner.

However, by the latter half of 2010 the clarity of the economic rebound story should have been obvious to all. But not all embraced this notion because their egos were so fully invested in being members of the bearish camp.

These double-dippers and doomsayers have already missed out on the lion’s share of the easy gains to be made from this rebound. So they need to invent reasons to get back in that allow them to save some face. And that reason is the “great correction.” Unfortunately for them, that correction keeps not coming. And they continue to miss out. (more)

HES Radio: World Financial Report

The World Financial Report brings you timely information on the worlds most exciting markets like oil, precious metals, currencies, commodities and hard money markets like very rare color diamonds and collectibles. The World Financial Report makes predictions and gives investment advice and has been very successful in identifying trends in the marketplace.

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9 Biotech Stocks for 2011

I wanted to share some thoughts about high risk, high reward biotechs in 2011. Eighteen months ago at – on July 8, 2009 – I recommended five stocks, ostensibly involved in biotech but essentially cutting edge medical products companies.

Here is how they have done:

Cepheid (CPHD): Up 168% from $8.83 to $23.65

Cerus (CERS): Up 261% from $.86 to $3.11

Curis (CRIS): Up 127% from $1.33 to $3.02

Illumina (ILMN): Up 122% from $31.10 to $69.04

Questcor (QCOR): Up 202% from $5.06 to $15.29

Do I have your attention? All five of these stocks have legs but the run has been so great and grand for some of them I have modified the list for 2011. And, since the market has been kind to you the past twenty seven months, these are all very high risk, stop your heart stocks facing major binary events that could make or break the stock

Cerus (CERS): Cerus developed and markets the INTERCEPT system. It's a blood pathogen inactivation system to purify blood platelets. It is the only game in town and approved in most large European countries, it has been held up in the U.S. by an incredibly ridiculous FDA staff person even though it hit the primary end points in its pivotal phase III trial and gets grants from the U.S. military. INTERCEPT kills HIV, XMRV and a zillion other pathogens in the blood, making the blood platelet supply donor independent.

Cerus is working on developing an INTERCEPT system for whole blood and the program is on schedule and funded with a recent stock offering. Management has bumbled working with the FDA – they don’t fight back - but this will be fixed over time. There is no scientific or product risk in the stock and it is the number one medical products company pick for 2011 by Stephens & Company. The target price in 1-3 years is $14. Downside risk is market risk. I own the stock. (more)

This Simple Indicator Could Spell Disaster in the Stock Market

n the 15 years I have been trading the financial markets, I have utilized a plethora of indicators, everything from drawing simple moving averages on charts to finding the correlation between two or more assets, to find an early warning for a rally or sell-off.

The truth is that there is no one magic bullet for timing the market, but at the same time, one simple indicator can be an excellent gauge for market sentiment and short-term changes in financial market direction.

Stock Volume

A good majority of the "tools" used by many technical analysts are based on stock volume or a combination of price and volume together. If you didn't know, a "technical analyst" is one who looks at the price charts of stocks (along with volume and other indicators) to find levels of support and resistance and find trends in a stock's price.

You can take stock volume data and crunch it, combine it with price, look at upticks and downticks and come up with some really complex formulas. Now, I am not going to say that I am not a believer in some of the more complex volume-related indicators, but just like we do at Smart Investing Daily, I will focus on a simple, overlooked indicator that's giving us a strong signal in the S&P 500. More on that in a minute.

We often fail to notice what is staring us right in the face because deep down, we think it can't be that easy.

A friend of mine used to say, "Volume is the cause, and price is the effect." He couldn't have said it better. Until someone actually steps in and buys or sells a share of stock, a trade can't be made and price will NOT really change. (more)

U.S. stocks gain as J.P. Morgan lifts banks

U.S. stocks reached their highest closing levels in two and a half years Friday, driven by a rally in the financial sector following stronger-than-expected earnings from J.P. Morgan Chase & Co.

The Dow Jones Industrial Average (DOW:DJIA) rose 55.48 points, or 0.47%, to 11,787.28, its highest close since June 28, 2008. The gain put the Dow industrials up 0.96% for the five-day period, extending the measure’s winning streak to a seventh week.

The Dow’s financial components led its climb after J.P. Morgan (NYSE:JPM) posted a 47% jump in fourth-quarter profit, beating analysts’ expectations as revenue increased and loan-loss reserves were sharply reduced. Read more on J.P. Morgan’s earnings.

Shares of J.P. Morgan’s rose 1%, while shares of rival Bank of America Corp. (NYSE:BAC) jumped 3.3% ahead of its earnings results due next week.

However, Intel Corp. (NASDAQ:INTC) limited the advance, falling 1% even as its fourth-quarter earnings rose 48%, topping analysts’ views. Investors said they were unsure how much longer Intel will be able to post such strong numbers. Also, the chip maker’s shares had climbed earlier in the week ahead of the report, and it still ended the week 2% higher. Read more on Intel earnings.

The Nasdaq Composite Index (NASDAQ:COMP) was up 20.01 points, or 0.7%, at 2,755.30, its highest close since Nov. 6, 2007. The S&P 500 Index (CME:INDEX:SPX) rose 9.48 points, or 0.7%, to 1,293.24, its highest close since August 2008. (more)

The Economist - 15 January 2011

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20 Shocking New Economic Records That Were Set In 2010

2010 was quite a year, wasn't it? 2010 will be remembered for a lot of things, but for those living in the United States, one of the main things that last year will be remembered for is economic decline. The number of foreclosure filings set a new record, the number of home repossessions set a new record, the number of bankruptcies went up again, the number of Americans that became so discouraged that they simply quit looking for work reached a new all-time high and the number of Americans on food stamps kept setting a brand new record every single month. Meanwhile, U.S. government debt reached record highs, state government debt reached record highs and local government debt reached record highs. What a mess! In fact, even many of the "good" economic records that were set during 2010 were indications of underlying economic weakness. For example, the price of gold set an all-time record during 2010, but one of the primary reasons for the increase in the price of gold was that the U.S. dollar was rapidly losing value. Most Americans had been hoping that 2010 would be the beginning of better times, but unfortunately economic conditions just kept getting worse.

So will things improve in 2011? That would be nice, but at this point there are not a whole lot of reasons to be optimistic about the economy. The truth is that we are trapped in a period of long-term economic decline and we are now paying the price for decades of horrible decisions.

Amazingly, many of our politicians and many in the mainstream media have declared that "the recession is over" and that the U.S. economy is steadily improving now.

Well, if anyone tries to tell you that the economy got better in 2010, just show them the statistics below. That should shut them up for a while.

The following are 20 new economic records that were set during 2010.... (more)