This Week in Barrons - 2-12-12

This Week in Barons: 2-12-12:
The Average American…

It wasn’t all that long ago that my view of the “Average American” was someone who: got up, went to work, earned money, maybe raised a family, saved for their old age, and potentially helped to take care of their parents. They were responsible for their actions. If they didn't work, they were not able to live well, which caused most people to get a job. The “Average American” was NOT: (a) One of the 46 million that are on food stamps. (b) One of the animals that trampled a Wal-Mart employee to death on Black Friday. Or (c) part of the 99%'rs that hate all things American because "He's got more than me."

I’m not sure you all caught this last week but the ‘Climate Catastrophe’ was called off! One of the fathers of Germany's modern green movement, Professor Dr. Fritz Vahrenholt (a social democrat and green activist) decided (along with geologist/paleontologist Dr. Sebastian Luning) to author a climate science skeptical book. Dr. Vahrenholt's skepticism started when he was asked to review an IPCC report on renewable energy. He found hundreds of errors, and when he pointed them out, IPCC officials simply brushed them aside. Stunned, he asked himself, "Is this the way they approached the climate assessment reports?" Dr. Vahrenholt decided to do some digging. His colleague Dr. Luning also gave him a copy of Andrew Montford's “The Hockey Stick Illusion.” He was horrified by the sloppiness and deception he found. In their book Dr. Vahrenholt and Dr. Luning cite over 800 sources (including over 80 charts and figures) and conclude: the climate catastrophe is called off. They conclude that the science was hyped, misinterpreted and in many instances invented. The book has started hitting the bookstores today and has already hit #1 on the Amazon.de list for environment books – and is continuing to climb on the overall bestseller chart. The reason I bring this up – is ‘climate change’ spawned literally thousands of new regulations. ‘Climate change’ created entire markets for "carbon credits". Companies couldn't expand because it would add to their carbon footprint. Companies spent hundreds of millions of dollars to update systems, and the ones that didn’t simply shut down and went to China. Do you think the ‘Average American’ will ever hear of this book?

My guess is that the ‘Average American’ thinks that the Greeks are just stupid, lazy, and dragging down the entire European Union. Factually, when the EU was drafted the Greeks couldn't get in. Greece didn't qualify because of their debt ratio. But Goldman Sachs came in and re-structured the financial ledgers in order to enable Greece to get in. Now that Greece is insolvent, who do you think is picking the bones off their dying corpse – absolutely – none other than the Goldman Sachs! Congratulations on ‘fudging’ the numbers to get Greece in, and being there to ‘fudge’ the numbers at the end.

The Market:
For some 12 years, that I’ve been involved in the market, there’s never been a period where you could sit back and say: 'This is easy". It's never easy. But that said, it was light years easier then, than it is now! The level of fraud and manipulation was simply much less. In previous years, you could invest via fundamentals: expansion, top and bottom lines, debt to equity ratios, and dividend paying abilities. (Remember: For stocks not paying dividends – you’re simply betting on someone buying it from you at a higher price.) Today, approximately 80% of all stocks traded are on this ‘Greater Fool Theory.’ (i.e. I'm going to buy XYZ because it's going to go up and I'll sell it to someone else. I am NOT buying it for the income stream – hold it for 10 years - and have the dividends end up ‘paying you’ for the stock.) Today it’s all about flipping – and that’s not bad – we just need to understand the game.

Today we don’t focus on the long-term stocks that much any more. Why? Two reasons are angst and volatility. I truly dislike being in a stock that's up $10 per share, and then having to sit through a pull down and a few months later you're up just $3. Sure, maybe the stock works its way back up and maybe even goes higher – but during that year (or more) you've done a lot of sitting and fretting. Another reason is volatility. Time frames have become compacted. Moves that used to take 2 years, now take 2 weeks. You once had to wait 6 months for your stock to move $4 – today we see $4 moves in 4 minutes. But the real problem of the long-term hold is that your entry point becomes very important. For example: If you started investing in 2007 – and you invested in index funds – allow me to remind you that in 2012 (5 years later) you still haven’t recovered your investment. So, when you're looking to hold for the long term: (a) look for a significant market "bottom", or (b) your investments need to have a lot of growth ahead of it. This market (currently) is far from a bottom!

We currently have a Federal Reserve that's placed over $25 Trillion in the global economy. We have Europe on the ropes, countries insolvent, we have a morbid housing market, and a horrible jobs picture. If the DOW was at 6000 right now – I’d be screaming BUY AND HOLD. But it’s at 12,800 and stinks like 5-day old fish. No thanks, getting long for the long haul way up here seems like suicide to me.

We've been doing a lot of short-term swings lately, meaning trades that last a few days to a couple weeks. But even that comes with risk because of something I can only consider "criminal" activity. For example: On Thursday, we heard from Mario Draghi (our man in Greece) that there was now a solid plan for Greece, they were getting funded, and for the first time things really looked great! Correspondingly, the market didn't go nuts but it held up nicely and we took on two new positions that were in breakout mode. Then Friday came, and we were told that there was NO Greek deal, and in fact they were sending the whole agreement back to the drawing board. Our positions quickly went from positive to negative "overnight" with no chance of backing out. Now Mario Draghi previously worked for Goldman Sachs – so do you think that he knew that things were ‘not good’ on Thursday? Of course he did. Do you think he got the word out to his Goldman Sachs buddies to get real short ahead of the news that he knew would come out on Friday? Please, this is the fraud and manipulation that we live with everyday.

If the market really reflected the economy, it would be at 7K right now, and looking lower. Instead we're trying to take out 13,000, and we just might! And if the S&P can hold over 1350 for a few days, and The Ben Bernanke resumes his daily operations, we could see the market rally like you've not seen in a long time to all new highs!

In a "real" world we'd all be short, and making a fortune as the market fell to 7K. Unfortunately, in this world, we could see QE3 announced and be at DOW 14K in 4 months. Here’s a headline from Saturday: “According to Bernanke: Housing may no longer be viewed as a Secure Investment!” Is that another push The Ben Bernanke is making to get investors to put money in the market instead of into housing? It sure could be! As Steve Forbes writes us: “Let’s think thru housing. To purchase a house you need at least 2 years on the same job, or longer if you’re self-employed. Now, as the workforce continues to contract (a 1.5M person contraction last month) – how many fewer people do you think will be buying homes in the next year?”

With the market at its present level, it could go either way very soon. The S&P is at 1343 and if it reclaims 1350+ and holds, my guess is there's more upside to come. But, if we can't reclaim 1350, it's my guess we're in for a 5 to 8 % pullback. So this coming week is indeed important.

Tips:
We continued to lean long into this week – and keep our stops tight – but the gap down caught us on Friday (as it did everyone outside of the brokerage houses!)

We’re currently holding:
- CREE – sold out at our stop,
- UYM – sold out at our stop,
- DOV - at 64.15 (currently 64.51) – stop at 64.25,
- SPY at 131.16 (currently 134.66) – stop at 133.50,
- ADBE at 30.00 (currently 32.21) – stop at 31.80,
- GLD at 159.49, (currently 167.30) – no stop, AND
- SLV at 28 (currently 32.57) – no stop.

To follow me on Twitter and get my daily thoughts and trades – my handle is: “taylorpamm”.

Please be safe out there!

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R.F. Culbertson