January 2011 Newsletter

The Market:

For December 2010 the overall market sort of crept up to a modest positive 4.2%. The S&P opened December at 1206, and ended at 1257. That's not a lot, but we like up better than down.

The recent stock market moves upward have happened in little volume and December was no exception. I'm certainly not sure about this, but there are also those who believe that one factor in the market steadily creeping up for no apparent reason-on good news or bad-is that the market is being propped up by the recent spate of the Federal Reserve printing money like mad with QE1 and QE2. Whatever their reasons, institutional investors still see fit to sit out the rally.

In regard to what's happening with mutual funds, world wide stock funds had an inflow of money to the tune of 6.95 billion dollars. However, stock funds invested primarily in America had an outflow of 6.46 billion which is about half that of last October.

Bonds experienced an outflow of 1.75 million for November versus an inflow of 24 billion in October which makes it seem that investors are looking at bonds with a hard squint and hooded eyes.

Municipal bonds showed an outflow of 7.69 billion for November against an inflow of 1.94 billion in October. Maybe a lot of investors were influenced by the Meredith Whitney "60 Minutes" interview when she speculated that as many as fifty to one hundred cities may default on their bonds in the next year.

Seven and a half billion outflow is not an "iffy" kind of thing, it's an investor statement about their view of bonds.

PWA

The PWA 500 Timer S&P Index chart was in the dark red sell zone all month in a range of 1206 to 1259, which represents a selling opportunity that was more extended than most.

For the default Online Analyzer S&P chart the price line entered a sell band on 12/10 at 1240, dipped into neutral for one day on 12/15 and spent the rest of the month in a sell band. The MACD gave a sell indication by flattening on 12/31 with the price at 1257. This represents the 4.2% gain mentioned above.

Stars and Dogs:

OK. Let's take a look at the Stars and Dogs of December, 2010.

Stars:

Of the stars there were a few that with a nice warms-the-heart glow.

• MGM Mirage (MGM) hotels and casinos, glowed brightest with a positive 24.2 percent gain.
• Jacobs Engineering Group (JEC) construction and construction support, finished with an unexpected 19.3 percent.
• Freeport Copper & Gold (FCX) completes our list with a nice 13.8 percent positive for the one month period.

 

Dogs:

As we all know, some dogs are cute, some are handsome, and a few are beautiful. Those descriptors fit none of the dogs below.

• The ugliest canine of all was Direxion Daily FB 3x (FAZ) a 3x inverse fund, producing a snarling negative 24.8%. But maybe we ought not be too tough on this guy because he was just doing his job of going opposite the pack as intended.
• Akamai Tech (AKAM) high speed internet for business, has no such excuse but took a dive anyway coming in with a wimpy minus 11.8%.
• Our final puppy was Short Small Cap ProShares (SBB) a 1x inverse fund. This one crossed the finish line, wagging its tail as if expecting a pat on the head and a doggy treat while dragging along a negative 10.5%.

 

While we're on the subject, let's check out the stars and dogs for the whole of 2010, and there are some spectacular ones in each category.

Stars of 2010:

• Get a load of this jewel! Silver Wheaton (SLW) ended the year with a 141.8% positive return.
• Silvercorp Metals (SVM) was very good too with an 82.2% gain.
• Akamai Tech (AKAM) which I was just hammering a second ago, returned plus 75.6, and that tells me it's not a great idea to make disparaging remarks about dogs because they can become stars too. Witness Lassie of old. I rest my case.

 

Dogs of 2010:

• Suntech Power Holdings (STP) was the top dog for 2010 returning a miserable negative 56.3%.
• Direxion Daily FB 3x (FAZ) bled 48.6%, but we would expect that for a 3x inverse fund.
• US Natural Gas (UNG) was close behind with a minus 41.8% drop.

 

So for 2010 metals, especially silver, did a super job for investors and natural gas created paupers.........well I hope not actually paupers, but thinner wallets for sure.

Recession Watch:

Some positive markers continued in December. Truck and rail shipping continue moving even if not as strong as one might hope, and the stock market keeps bubbling along in an upward trend but still with little volume. And, as the chart below shows, jobless claims are down since mid October.

On the other hand, there are some less than sparkling trends too. Housing prices are down across the country except for a few cities in California and in Washington DC (go figure) and some experts see a "double dip" coming in housing prices. Good if you're in the market to buy one. Not so hot if you're a seller.

This along with the large inventory of unsold houses tells us it will be a considerable time before the housing market carries the economy again as it did in the early part of this century.

There's also a storm cloud building in the government issued bonds market as buyers at auction have been hard to find.

• The recent auction of 5 year treasuries in the US was a bust.
• China had a second failed auction in the last month.
• Similarly, the European Central Banks were unable to auction government issues from Ireland, Greece, and other countries and were left holding billions in these toxic assets.

 

I don't know what the impact of this nearly world wide fleeing of government issues will be. But there will be one. Maybe it will encourage government officials 'round the world to understand they can't easily pass poison to investors and therefore must be more fiscally responsible in the future. A lesson worth learning for them? Yes. Will their decision making change as a consequence? One can but hope.

Opinion

Well, the new Congress is now in session and recently elected GOP members are seated.

My hope is that they will actually take steps to reduce the spending of our federal government. I watched a video of British economist Niall Ferguson addressing an audience in Australia the title of which lecture was, "Empires on the Edge of Chaos." The main take away message was that when governments spend to the point where the interest on their debt is 100% of GDP, they fail. He predicted that if nothing changes in America, by 2020 our debt will be 100% of GDP and by 2050 the interest on that debt will be 100% of GDP.

That isn't a very appealing prospect as it stands now, but some clever people can find humor in even America's current fiscal straits.

This projected disaster, of course, is not a foregone conclusion because there's still time to right the ship, but we do have to reduce spending. If the new Congress can make strides in that direction it will be wonderful and very unique. No Administration and no Congress since Calvin Coolidge has managed to reduce spending.

The federal government can't continue to spend fifty percent more than the revenues they receive as has been true in recent years.

Other PWA News:

PWA Charts on PDAs:

There are some changes for our PDA chart you need to know about just in case you're sitting at Starbucks some morning and you want to check a chart on your iPhone or Blackberry.

To access the charts from you mobile device, go to itspage.mobi. That will take you to the charts which are the three month version. The charts will show, but the items listed below when you access from your computer will not.

We have just made some changes so you can also access the PDA charts from your computer whether desk top or laptop. However, if you use an iPad, the crosshair cursor won't show so you'll probably have to use a stylus to select data points. Fingers-at least mine-are too fat to select specific data points accurately.

When you log on, "Online Analyzer PDA" will appear on the menu in the left hand column of the Welcome page. Some of you may find you like this chart because of the features it presents.

• On these charts the cursor is a set of crosshairs.
• When you put the crosshairs on a data point the following items of information will appear in a table below the chart:

• Date
• Closing price
• Average = the level of the dotted line.
• MACD = the numeric difference between the short and long averages that comprise the MACD.
• Sell Out = the level of the outer sell band line.
• Sell In = the level of the inner sell band line.
• Buy in = the level of the inner buy band line.
• Buy out = the level of the outer buy band line.

 

So go ahead. Go to Starbucks, or any other of your favorite coffee shops to commune with your buddies in complete confidence that you can check your PWA charts at will.

Final Word:

HAPPY NEW YEAR

May your stock and fund trading be stunningly successful.
May all your days be filled with joy and challenge.
May your golf score always be one stroke more than mine.

Wishing you well,

Arley Loeffler, CEO
Investment Timing Software, LLC
arley@itspage.com