Big Themes of 2010

Big Themes of 2010

By Courtney Smith
The year 2010 is upon us. Time to look forward to scope out the Big Themes of the year. What is going to really affect the markets in 2010? How can we make money and protect ourselves from these mammoth moves?

Massive Global Tsunami of Money
The biggest factor affecting global financial markets in 2010 is the massive global easing of 2009. Central banks around the world, led by the US Federal Reserve Bank, China's Central Bank, the Bank of England, and even the European Central Bank pumped the most money into the global financial system in the last 100 years.

For example, the United States has not seen this kind of monetary expansion since the 1860's and interest rates this low since the 1930's.

This massive increase in money is having a major impact on the global financial and business world. However, the first impact is on the financial world.

Global Liquidity Washes Through Financial World
The biggest impact so far is on the financial economy. So far we are seeing tidal waves in gold, the dollar, real assets, and the stock market. The effects seen so far in 2009 will continue in 2010 with varying strengths.

It is important to remember that increasing the supply of money devalues that money. Increasing the supply of anything without a similar increase in demand reduces the value of that thing.

Central banks are effectively devaluing their money against real assets on purpose.

Gold and Real Assets
Gold and real assets such as agriculture and base metals have been booming. Yes, they retraced some of that booming late in the year but most remain in clear bull markets. In general, all real assets should do very well in the coming year as central banks degrade the value of their currencies through increased issuing of money.

The value of a loaf of bread is always the value of a loaf of bread. But the price of a loaf of break will change with the change in the value of the money it is traded in. For example, assume that there is only one loaf of break in existence and only one dollar. That would mean that the price of the loaf would be one dollar. But assume that the Fed doubled the amount of money in existence. Then the price of a loaf of bread would be two dollars. The value of the loaf has not changed but the price changed due to the increase in the number of dollars.

The government would like you to think that the price of bread increased to two dollars but actually the price of money was cut in half.

That is what is happening today with the price of real assets.

There is a glut of oil in the world but the value of the dollar is declining so the price of everything denominated in dollars is going up.

Stock Market
This is what is happening in the stock market. The stock market has been rallying for several reasons, mainly due to two factors: relief over the end of the End of the World and massive easing by the Fed.

We are through with the phase where people are relieved that the End of the World did not come. We are back to looking at the economy and earnings prospects in a more normal way.

But the easing of the Fed was the real catalyst for the massive rally from the March lows. However, the market is now realizing that the easing is not having as big an effect on the real economy as it normally would. The market is really going sideways as a result.

I look for the market to be highly volatile in 2010 due to very strong conflicting crosscurrents.

The good news is that we are back to being a stock pickers market so we can still make a lot of money in this market.

US Dollar
The background fundamentals are generally poor for the dollar. The massive easing by the Fed is increasing the supply of dollars at a time when there is no increase in demand. This is very bearish.

One big thing helping the dollar is that other central banks are also savaging their own currencies, such as the Bank of England. So, the dollar can hold up against select other currencies.

In addition, the US economy will likely become the strongest of the major Western economies and that will boost demand for the dollar relative to many major pairs. In other words, the US will have the least bad economy.

Look for a generally weaker dollar in the coming year.

Global Liquidity Not Into Real Economy Yet
So far, the tsunami of liquidity has little effect on the real economy. It remains weaker than normal. Usually, deep recessions have very strong rebounds. Not this time. I'll talk more about why below in the Big Government/Big Taxes section below.

China Runs Into Brick Wall
China is being held up as the paragon of economic growth. In fact, the growth this year shows how weak the economy is.

China put through a massive easing of monetary policy and a fiscal stimulus which was the equivalent of $4.5 trillion in the US. Yet the economy grew less than 8%. For years, 8% growth was considered a recession in China because they were used to double digit growth. Without any easing or stimulus.

What is happening is that the Chinese government is so deep in trouble on the economy that they are pushing on a string. It now takes one of the largest stimulus and easing programs in history to keep the economy barely afloat.

It has to also be noted that the banking system in China is the most bankrupt of all major countries. It is only a matter of time before it craters or the Chinese government bails it out. Both factors will rock the economy.

I therefore look for very volatile action in China in the coming year. They will still remain a major buyer of foreign goods and companies but there will come a time when they simply can't afford it any more. They will need to spend their huge reserves to support a bankrupt local economy.

Big Government/Big Taxes
The new Obama Administration is expanding the reach of the federal government even beyond the aggressive expansion of the Bush Administration.

Passing "healthcare reform" and "cap and trade" and other initiatives will expand the control of the government over private affairs dramatically.

Governments cannot create wealth, they can only consume it. That means that they must get the money to pay for these new initiatives through borrowing, taxes, and/or inflation. I believe all three will occur. All will reduce economic wealth in society and will retard the rebound in the economy.

War/Collapse of States
Right now, we are seeing a acceleration of the "war against terrorism" by the terrorists. In addition, we are seeing additional troops going into Afghanistan.

In the past, this war has not really affected the financial markets. However, I believe that the heating up of the war will start to form a background freezing of risk taking around the world. It will manifest itself in a lack of desire to take risk in things like the stock market and will boost the demand for "conservative" investments such as US treasury bills.

At the same time that war is starting to raise its ugly head, we are also seeing severe unrest in many centers around the world. Iran and Greece are burning as we speak. How long will the governments of the UK, Ireland, Afghanistan, and even the US will last? Some governments are flirting with collapse through violence and others through electoral means.

I look for a record setting number of governmental changes with many coming through violence. This will concern investors around the world.

The Bottom Line
The bottom line is that we are going to have a very volatile year. Fortunately, I believe that this will create massive profits for those who see what is happening and can position themselves for huge profits.

I know that a lot of the Big Themes look dire but that also means that we have great opportunities for profit!

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Why The Rise in Bond Yields Will Not Stop the Stock Market Rally

Why The Rise in Bond Yields Will Not Stop the Stock Market Rally

Bond yield have skyrocketed over the last couple of weeks sending fear that the rise in rates will stop the stock market rally.

Normally, stocks and bonds run in the same direction. But there are times in the business/credit cycle where they run away from each other. Now is one of those times.

The bond market is collapsing due to fear of massive inflation down the road caused by the Fed monetizing the huge burden of Federal debt being created right now. in addition, fears of a run on the dollar and fears of foreigners, particularly the Chinese, are also worrying the market. In fact, the bond market is wise to be worried about higher inflation from Fed monetizing the debt and should be somewhat worried about the other two fears.

The stock market, however, likes the early stages of Fed loosening of monetary pursestrings. It is not afraid of a little inflation. In fact, after the disaster of the last year, a little inflation would bring back some well needed pricing power.

I remain very bearish of bonds and am looking for a choppy stock market over the summer.

I am long select stocks in my stock portfolios and short ten year notes in my futures portfolio.
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Did You Know That Corporations Are Massively Profitable?

Few people know that American companies are incredibly profitable. The doomsayers have all been talking about how this was the worst economic situation since the Great Depression. Turns out that US corporations made profits of $1.307 trillion in the first quarter of this year. And that was an increase from the fourth quarter of last year! Yes, it is down from a year ago but it shows that this is not the end of the world.

Also note that rising profits are very supportive of the stock market!

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Silver Will Outperform Gold

I look for silver to outperform gold as it's industrial uses are now coming back to the fore. Gold will remain an excellent investment in the coming months as a hedge against the upcoming return of inflation (See Stagflation book in the ad below).

Silver just doesn't have the monetary uses that gold does so that will not be very supportive of silver. However, silver still has many industrial uses and this are the main reason why silver should outperform gold in the coming months.

I remain long gold ETF's in my stock portfolios and long silver in my futures portfolios.

Other commodities, such as oil and grains, should remain generally bullish.
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Choppy conditions ahead for stock market

I'm looking for choppy conditions ahead for the stock market. However, we are now in a mode where we can make money again. There are a number of sectors and stocks that are in clear bull markets!

Click here for more video information!

FDIC killing the recovery

One of the little known problems for the economy is the new policies of the FDIC. The FDIC is the organization that insures the deposits at commercial banks.

The FDIC funds itself through an "insurance" payment that all banks must pay to them. It has been 7 cents for each $100 in deposits. The FDIC is now increasing that to 16 cents and is proposing a one time payment of 20 cents in September.

Small and regional banks have not had many problems with this recession beyond the normal stress. The problems lay with the huge money center banks. I have highlighted the amazing fact that total bank loans and leases were making new all time highs until just a month or two ago. This was due to the continued strength of the small banks.

This increase in FDIC fees will essentially wipe out most if not all of the profits of the smaller banks. The net effect of this will be to contract lending in the areas where it has always worked! Now the smaller banks may fall prey to the economic slowdown to a level that will stop them from lending!

This will slow the rebound in the economy and thus slow the rebound in the stock market.

Stock Market Outlook for 2009

Excellent article on opening gaps in the S&P 500

Click here for article.

Rosenberg's Rules

Here are the rules according to David Rosenberg who is leaving Merrill Lynch today as North American economist:
1. In order for an economic forecast to be relevant, it must be combined with a market call.

2. Never be a slave to the data – they are no substitute for astute observation of the big picture.

3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.

4. Fall in love with your partner, not your forecast.

5. No two cycles are ever the same.

6. Never hide behind your model.

7. Always seek out corroborating evidence.

8. Have respect for what the markets are telling you.

9. Be constantly aware with your forecast horizon – many clients live in the short run.

10. Of all the market forecasters, Mr. Bond gets it right most often.

11. Highlight the risks to your forecasts.

12. Get the US consumer right and everything else will take care of itself.

13. Expansions are more fun than recessions
(straight from Bob Farrell’s quiver!).

Sell in May and go away

The old market saw is true. The market has gained only about .4% during the May to October period while earning an average of 7% during the November to April period.

The last year has not followed the normal pattern until earlier this year when the market started to rally.

I am a bull in this market but now believe that the market will struggle over the next several months. The strong rally over the last couple of months was the strongest rally since 1938. It is now time for a retracement of that rally. The fact that we are now in a seasonally neutral period is a nice coincidence.

We need to scare investors to make sure that we don't get overly bullish.

The bottom line is that the normal seasonal neutrality should work this year. We should see a very choppy market until fall.

Look for stronger Chinese economic growth then a major credit crisis

The Chinese economy had dipped recently due to the global economic slowdown. They were particularly hit hard as major developed countries shut down imports.

In response, the Chinese central bank has embarked on a massive easing policy. They have cut reserve requirements from about 17% down to about 15% and cut interest rates from 7% to 5%. More importantly, the central bank has instructed state owned banks to issue credit.

Chinese credit growth had been as high as 24% in 2003, dipped to 12% in 2005, rallied up to 18%, back down to 13%, but has now skyrocketed quickly to a new decade high growth of 25%.

The net result is that domestic demand will start to boom and support the Chinese economy while waiting for the West to rebound and boost imports.

I have been doing business in China since 1999 and have a small office there. One of the critical things to remember about China is that loans are not given out due to the credit quality or projected cash flow. That is capitalist. They are instead given largely due to political grounds or connections.

Guanxi is a Chinese concept that is close to our idea of connections. Because the Chinese economy is still not a free market and there has never been a democracy in China, it has been very important for Chinese business people to have guanxi to be successful. They need the connections to get the loan and get the permits to create their business.

I have visited Shanghai on numerous occasions and have seen high rise buildings that were called see-through buildings because the 30 stories of floors had been built but the floors were not finished so you could see through the buildings. These were buildings who were given loans not because of an economic need for the building but because someone had been able to get a loan.

Clearly, loaning money based on political or connections is a recipe for disaster. Look for a major credit crisis to develop in China in the future. (Note that this is what is happening in the US with some of the Obama Administration loans to failing companies.)

Look for higher stocks and higher bond yields

We are about to go into a period of time where both stocks and bond yields are going to climb. I have previously pointed out the key reasons behind both moves.

The key is the Fed. They are easing massively through lowering interest rates as wells as pumping out huge quantities of money. This will create conditions for a stronger economy. However, it will also raise fears of future inflation which will cause long term interest rates to climb.

However, the Fed will not allow short term interest rates to rise which means that the yield curve will move more positive. In other words, longer term rates will rise while shorter term rates will not.

This is important because the shape of the yield curve is one of the most powerful predictors of the stock market and the economy. I won't go into the theory behind it here but it deeply affects all human behavior. It leads by at least six months and often longer.

Take a look at this great chart. Be sure to click the animate button and then watch the changes in the yield curve on the left and the stock market on the right. Note that the market top was called by the yield curve going flat.
http://stockcharts.com/charts/YieldCurve.html

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Gold supported by China

One of the key factors that is fueling the current gold upleg is the news that China had increased their holdings of gold far more than expected. They announced last week that they had lifted their gold reserves to 1054 tonnes, against 600 tonnes when they last reported in 2003.

This comes on the heels of additional calls today by high Chinese officials that there must be an alternative to the US dollar as a reserve currency. We already knew that they were slowly diversifying away from the dollar to other currencies but this news shows that they are actually also diversifying away from fiat currencies to hard money.

They have also been monster buyers of copper recently in an effort to rebuild their inventories. Were the copper purchases also a monetary purchase as well as industrial? Do the Chinese see inflation coming back and want to hedge against that?

Let's bail out of DBB and CME

We'll come back to them later!

New trades

Buy VPRT on a 32.80 stop wrp at 29.15.
Buy NFLX on a 50.34 stop wrp at 41.98.
Buy SYNA at market wrp at 28.40.

wrp means "with risk protection". Place a protective stop at that level!

Updated positions

Long AVK. Move stop up to 10.40. Remember this is in the portfolio mainly for the very high dividend of 10.2%
Long IAU. Move stop to 84.90.
Long FXI. Move stop to 30.50.
Exit FCX at market if you are not out yet.