Making Money Alert
Punching a Hole in the Ceiling
11/18/2009
The key metric in the market since last week has been the breaching of the psychologically and technically significant 1,100 mark on the S&P 500 Index. The index managed to punch a hole in this ceiling on its way to a new, 52-week high.
As you can see by the chart below of SPX, this broad market index has been on a tear ever since March. That tear has been nearly uninterrupted since the index bounced off of its 200-day moving average (red line) in early July.
The S&P 500 now trades firmly above that long-term moving average, but it also now trades well above its short-term, 50-day moving average (blue line). This is clearly a bullish sign for SPX and, because of this, I do think it’s safe to put money to work in this market. But if you are going to do so, be certain you have a tight stop loss in place to protect your gains if the market comes rolling back.
Now, one sector that hasn’t quite punched through that upper end of technical resistance is financials. If we look at the chart below of the Financial Select Sector SPDR (XLF), we see this fund is now trading right at its 50-day moving average.
This failure to trade at new highs along with the SPX is significant, because financial stocks were the ones that led this rally back from the March brink. Bargain buying in the severely battered sector helped the wider markets recover and, if we see this sector start to lag, it could be an indication that the remarkable 2009 bull run finally is losing steam.
We aren’t there yet, but if we start to see financial stocks wane, it could be the harbinger of things to come for the rest of the market.
The President on the Debt
I find it both a welcome relief and an ironic twist of fate that President Obama now feels compelled to address the issue of our national debt. In an interview with Fox News, (another ironic twist given Mr. Obama’s hitherto reluctance to speak with Fox reporters), the president said that if government debt were to pile up too much, it could lead to a double-dip recession.
The interview came out of Beijing, China, where the president is wrapping up a meeting with Chinese leaders. In the interview, the president said that his administration faces a delicate balance of trying to boost the economy and spur job creation, while putting the economy on a path toward long-term deficit reduction.
“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” President Obama said.
Hey, Mr. President, I am glad you finally realize this, because it’s something fiscally responsible folks out there have known for a long, long time. The question now is what are you going to do about it? I guess we’ll have to wait for solutions later, but until then, I have to admit that admitting you have a problem is the first step toward recovery.
The Professor on the Dollar
“Has America’s Federal Reserve become the single greatest obstacle to global economic recovery? Central bankers around the world increasingly are asking this question as the American greenback continues its Fed-inspired decline and damages the export-driven growth of countries from Latin America and Asia to Europe.”
The preceding quote comes to us courtesy of my friend and colleague, the very bright and fiery Peter Navarro. Navarro, a business professor at the University of California-Irvine, and frequent CNBC contributor, wrote these words in a must-read editorial that appears in today’s Christian Science Monitor.
Navarro’s thesis is that the Fed is fanning the flames of a declining dollar by continuing to throw monetary stimulus at the troubled U.S. economy. “After years of promoting the easy money and loose credit that fueled asset bubbles, it has responded with even easier money and even looser credit. It's like fighting fire with gasoline,” wrote Navarro.
The professor says that, “In a desperate effort to break the back of the credit crisis, the Fed also has engineered the most massive increase in the money supply in U.S. history. Since 2007, the Fed roughly has doubled the monetary base.” But this, he says, is only part of the story.
“The other half of the tale involves the willingness of the Bernanke Fed to help accommodate the rapidly rising, and historically unprecedented, U.S. budget deficits. Such accommodation involves the Fed’s willingness to print new money to purchase many of the government bonds being issued by the Treasury Department to finance the budget deficit.”
This analysis is, in my view, spot on, and it makes President Obama’s sudden concern with the debt quite suspect.
Navarro concludes his piece with a warning on the possible pernicious effects of a “tactical retaliation” from central banks around the globe via large-scale currency interventions aimed at stemming the dollar’s decline relative to their own currencies.
And what’s Navarro’s solution? “To avoid this destructive cycle, it is critical that the Fed and the Obama administration find the courage to end easy money and the accommodation of ever-larger budget deficits.”
Let’s hope for all our sakes that the powers that be will heed Professor Navarro’s profound proclamations.
ETF Talk: Striking Black Gold
The continued weakening of the U.S. dollar could spur a mini-gusher for investors looking to profit from oil. Also known as black gold, oil is among the commodities that tend to be inversely related to the strength of the U.S. dollar. As the dollar dips, the price of oil rises. Indeed, the exploding U.S. debt is putting downward pressure on the dollar with no change of direction in sight.
Oil recently made big news when crude soared higher than $80 per barrel. The question now for investors is whether this trend will continue. No matter if you think that oil will soar in the future or if you believe that the dollar soon will recover and send the price of oil falling, an exchange-traded fund (ETF) is available to meet your needs. Specifically, ProShares offers both leveraged long and short oil ETFs.
ProShares Ultra Oil & Gas (DIG) seeks daily investment results, before fees and expenses, which correspond to twice (200%) the daily performance of the Dow Jones U.S. Oil & Gas Index.
Below, you will find a table of the top ten companies and weightings for DIG:
|
Several indicators point toward oil prices continuing to rise in the foreseeable future. First, the futures market is signaling higher prices for oil and gas stocks during the coming months. Second, the dollar keeps falling and putting upward pressure on the price of oil. Since oil is priced in dollars, foreigners can buy oil much more cheaply as the dollar drops. Third, as the U.S. government takes on more debt, investors expect further depreciation of the dollar.
Also notable is the world’s increase in energy consumption and demand. For example, China and India this year are expected to produce 11 million and 2.5 million cars, respectively, while auto sales in Brazil are estimated to have surged 20% in September alone. This increased production and consumption push oil prices higher, along with rising economic activity as the recession ends. In addition, oil, like all commodities, is a finite resource. Some oil bulls argue that global oil production may soon peak.
On the other hand, ProShares UltraShort Oil & Gas (DUG) seeks daily investment results, before fees and expenses, which correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index.
If the dollar starts to rise, investors may not need to use commodities such as oil as a hedge any longer, and that likely would push down the price of oil. This fund also might appeal to investors who believe that the worst of the recession may not be over, and that further economic problems lie ahead.
Also important for the prospects of this bearish fund is that oil is a scarce commodity. If oil production peaks, and a global climate deal is reached, alternative energy could serve as a substitute in the future. A global climate agreement could cut global crude demand by about four million barrels per day, forecasters estimate.
If you want my advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. Please keep in mind that I am happy to answer your questions about ETFs. To send me a question, simply click here. You may see your question covered in a future ETF Talk.
The Obama Impact on Your Money -- Part III
Last Saturday, I conducted my third installment of the five-part series titled, The Obama Impact on Your Money. In my presentation, I share three simple strategies you can use to grow and protect your wealth using exchange-traded funds. The world of ETFs keeps getting better and better. We now can invest in almost any asset class, currency or country in the world with just a few clicks of a mouse. But in order to use ETFs properly, you have to learn a few key concepts.
Here are three important concepts you'll learn in this audio presentation:
- How to get defensive with your stocks and mutual funds
- How to prepare for rising interest rates and how to profit from them
- Which commodity ETF deserves your attention right now
During the past several months, I have been sharing my views on how to manage your portfolio in these unprecedented economic times via this teleconference series . If you missed our recent "live" call, or if you haven't yet had a chance to listen to this FREE presentation, then you're in luck.
To listen to all three installments of The Obama Impact on Your Money series, simply click here.
I guarantee you'll come away with a solid grasp of how ETFs can play an integral role in your future financial success.
'Paine'-ful Wisdom
“Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one.”
--Thomas Paine
I think the great Thomas Paine said it all with this famous quote, so I’ll refrain from any further elaboration other than to say that if you haven’t read any of this incredible thinker’s work, then you need to do so immediately. I guarantee you’ll find his thought-provoking wisdom both challenging and inspiring.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else at askdoug@dougfabian.com.