A Dash of Insight

Parsing the President

In a state of economic crisis, it is natural for investors to pay attention to any public statement by President Obama.

There is a natural sequence of timing to the moves of the new administration.  Some policies can be changed by the stroke of a pen, through Executive Orders.  These are Presidential directives that have the force of law.  They state how the government will implement existing law.

Today's News and Market Action

The President issued some widely-expected executive orders today.  These involved some changes in signs at workplaces and relatively minor rules on how union informational costs were allocated.  For example, one of the rules has bounced back and forth -- from the first President Bush, to Clinton, to the next Bush, and now to Obama.  It is a natural partisan shift.

The announcement, symbolically important to organized labor, was made to an audience including labor representatives.  The President was speaking to the audience in front of him, including core supporters, and not to the market.  In a typical over-reaction, the market commentators flipped out as President Obama talked about the importance of organized labor.

Separating Rhetoric from Substance

The real market test of the Obama Presidency will come on the key issues of taxation of dividends, capital gains, and free trade.  We believe that the course will be a moderate one.  Our conclusion is based upon the Cabinet appointments and the strong overtures to Republicans.  We shall see.

Those with a bias, perhaps anti-union, are hard-wired to see the worst in any statements, no matter what the significance.  There were many such commentaries today.

The Bad Bank Plan

A similar scenario is playing out on the so-called "Bad Bank" plan.  We are encouraged that the Obama Administration is looking to a root cause -- the hard-to-value assets held by many financial institutions.  There are several ways of addressing this problem.  Regular readers of "A Dash" know our priorities:

1. Best -- a suspension of mark-to-market accounting.  Provide plenty of footnotes.  Heaven knows there will be plenty of attacks on the footnoting firms, so investors will be informed.  The key is that there will not be the destruction of regulatory capital, so "sensible lending" can resume.
2. Second Best -- a method of price discovery.  Since the securities on the balance sheets are complex, we need a good method of finding a true market price,  one which reflects the value if held to maturity.  This is not reflected in existing markets.
3. Third Best -- the "good bank, bad bank" idea.  If this concept is to get traction, the participants must quit thinking of the taxpayer as an investor, trying to make an astute buy.  The only justification for taxpayer involvement is the systemic effect.

Conclusion

There is a valuation for troubled assets that is both fair for the taxpayer and also acceptable to banks.  There is no more important problem for restoring economic strength.  There are many wise people on the Obama team, and they are consulting with key players.

We expect a favorable conclusion, but it will face a skeptical audience.  This helps to explain why we continue a generally bearish short-term market stance, while believing that the entire year will be quite positive.  The heavily biased Wall Street audience will remain skeptical.

Fear Sells

My company is getting an advertising appeal from a firm that will help us get new business.

Here is the pitch:

There is no recession - - we’re in a depression - - created by Alan Greenscam and his privately owned “Fed”!

And…the public response to it is overwhelming.

Good Marketing

The email goes on to explain how the subjects will respond with specific times to call, etc.

It is no surprise.  It is a theme of the highest-rated market blogs.  The top political blogs are also filled with criticism of every idea.  The critics are from both the left and the right.  The mainstream media write the same type of articles, and for good reason.

If you spark controversy, you get comments.  You also get readers returning to the page to see what others say in response.  The wise advice is to be opinionated and controversial.  It builds page views and your value to your company.

Take Rush Limbaugh for example, a topic we covered at ElectionStocks.  Whether President Obama succeeds in bi-partisan leadership is crucial to the country and our economic success.  If you are an investor, it is a subject you should be following with care.

Meanwhile, the Limbaugh approach is one of self-importance.  His approval ratings are a bit higher than Bush or Blagojevich, but few would get excited about 33%.

Already the leading conservative voice with 14 million or so listeners, he has made himself a part of the national policy debate.  He starts with an outrageous statement wishing the President to fail.  Then he gets a response from Obama.  Then he gets an op-ed piece.  And finally he gets even more TV time.  It is a good business model.

Financial media imitate this approach.  Guests on financial TV are routinely advised to be aggressive and opinionated.  It is part of the reason that everything seems to have many sides and no answer.

A Small Test

Yesterday we tried a small test, providing some factual information that no one else writes about -- even the leading economists.  It was not bullish nor bearish and it involved no opinion.  Despite this, many readers thought that "we were seeing the glass as half full" or that "government data could not be believed."

This is what we have come to.  There is a natural audience of those who have pre-conceived notions about government.  Those willing to consider data constitute a much smaller group.  It is somewhat like comparing Rush Limbaugh to the Newshour with Jim Lehrer.

Conclusion

Each writer, each investment manager, each company, must find the right market.  Many choose to profit from investor fear, exploiting the events of the past year.  It is probably a poor business decision, but we reject this approach.

We are left with the traditional idea.  As so often happens, it is best expressed by Warren Buffett.

Be fearful when others are greedy and greedy when others are fearful.

[Full disclosure.  Our TCA-ETF clients were 50% short today and also had winning gold positions, so this is not talking our book.  As usual, we write about events while actual positions vary.]

The Bias in Reporting Job Losses

Each day's news brings more stories about layoffs at major companies. The stories get a big play in mainstream media. The leading bloggers also cite the stories and encourage readers to keep a summation of job losses.

This is quite misleading. Job losses occur in highly visible chunks, as we can readily see. New jobs are created a few at a time, both in existing businesses and in new businesses. Even sophisticated observers do not recognize the ongoing job creation from the invisible hand of the market.

Try This Headline

Suppose that the New York Times or the Wall Street Journal had a headline:

100,000 New Jobs Created Today.

Actually, they could run that headline every business day, even during the recession, and it would be accurate.

How do we know? As usual, we start with data. The best illustration available is from the last recession, so let us look back to 2001.

The 2001 Example

The data presented here are drawn from the Business Dynamics series from the BLS. The data are not from surveys. The evidence is from state employment data. Since no one reports employment, and pays taxes, on phantom jobs, these are data that we should believe. Here is the evidence.

Source: Bureau of Labor Statistics seasonally adjusted data. (Unadjusted data show the same result for the year).

As one can readily see, over 35 million jobs were lost during the year. That is what you would get if you added up all of the layoff announcements and also included job cuts that did not make the newspaper. What most people do not realize is that over 32 million jobs were added. This development is not publicized.

By focusing on gross job losses we get a false impression of the problem. The net losses are bad enough; there is no reason to exaggerate.

Conclusion

There are three important conclusions:

1. About 90% of announced job losses were offset during the same month by job gains. We should be taking a 90% haircut to those newspaper articles.
   
2. There was substantial creation of new jobs in opening establishments, a total of over 7 million for the year. That is something to remember the next time someone scoffs at the idea of business births during a recession.
   
3. President Obama dropped the tax credit for new jobs, and that is a good thing. There is no way to separate the new jobs from the credit from those that would have occurred anyway. If the credit were paid for gross new jobs, the money would be gone in a couple of months.
   

Most importantly, this shows that we should remember that net job change is the key economic concept. That should also be our policy target.

A Turning Point

There has been an important development.  Let us try to state it as simply as possible.

There is a fundamental question about assets held by financial institutions.  Some observers have concluded that these assets are worthless--overvalued on existing balance sheets.

Most of these pundits have no mode of analysis -- - they have only their own opinions.  The pundits do share something else.  They are all critics of modeling, and none of them have any experience in developing or testing models.

A New Era

Tonight's reports suggest that the Obama Administration will propose a "bad bank" plan.  Under this proposal the government would buy troubled assets from financial institutions.  What would this accomplish?

1. The most important impact would be an end to the death spiral, where every asset sale caused a decline in the holdings of other financial institutions.  This could have been accomplished better and faster by a suspension of mark-to-market accounting.  It could also have been accomplished by a price discovery mechanism for troubled assets.  The proposal is inferior, but it reflects what might be politically palatable.
2. It enables normal lending activity by financial institutions.  They no longer must worry about artificial reductions in regulatory capital.  It means "back to business."

What Price Will be Paid

We expect tomorrow's pundits to pounce on the prices paid and the methodology selected.  The rumor is that the Administration will use a modeling technique to determine what assets might be worth.  This technique would look at factors like how many of the underlying loans are performing, and what interest rate cost is required to carry the asset.

We expect the many loud pundits who have never created a model and know absolutely nothing about modeling to insist that this is the wrong approach.  Who is right will be determined in a few years, as the assets pay out.  Meanwhile, the thundering pundits will be shouting from the sidelines.  This gives the intelligent investor some time to react.

This is big news.  If implemented, it will get at the heart of the housing and lending issues -- both crucial to economic improvement.

While it might not be our favorite method of addressing this problem, it is a plan that can work.

We expect a significant rally in financial stocks.  That is just the first salvo.  As market participants realize the effect on lending, the market impact will be broader.

ETF Update: How to Play Short by Going Long

The Obama honeymoon did not last as long as it took him and Chief Justice Roberts to stumble through the Oath of Office, requiring them to take a "mulligan."  There is a lot of hope among average citizens and high approval ratings for the new President, but plenty of skepticism from the Wall Street pundits.

Trading Obama

The market is waiting for specifics on TARP, housing, and the stimulus package.  A large portion of the punditry is prepared to criticize any plan as one or more of the following:

• Too large or too small;
• Adding excessively to debt or crushing revenues;
• Laden with pork or not aimed at real projects;
• Emphasizing tax cuts (where people will not spend) or emphasizing government, where public spending crowds out private expenditures;
• Restoring normal lending versus doing more of "what got us here."

Viewed from this perspective, it is pretty clear that no policy choice would gain popular acclaim.  As we noted in our 2009 preview, it will take some specific economic evidence  before most are convinced.

We track market developments by evaluating a universe of 57 ETF's.  For each fund, representing many different sectors, our model evaluates the Trend, Cyclical characteristics, and introduces a touch of Anticipation.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Inverse ETF's

With markets in decline there is widespread interest in making money when stocks move lower.  Even retirement investors who have legal restrictions on short selling can profit from delining markets by investing in inverse ETF's.  This is a "long" investment, since one owns the fund.  The fund, however, purchases securities that profit in a market decline.

Since this strategy has been a big winner in recent months, it is attracting a lot of interest.  We have included three of the inverse ETF's as part of our universe.  These represent shorts in the Nasdadq 100 (PSQ), the S&P 500 (SH), and the Dow Jones Industrial Average (DOG).

There are many other short and ultra-short ETF's.  Investors should study the characteristics and potential pitfalls carefully before adopting the more aggressive shorting strategies.  My colleague Scott Rothbort has an excellent introduction to the topic.  Eric Oberg, slso writing at TheStreet.com, explains how the leveraged inverse ETF's can provide extremely disappointing results in the long run, even when the investor has guessed right on the market.

These are mostly short-term trading vehicles.  The one-month time frame for our TCA-ETF model works just fine for the regular inverse funds, but we avoid the leveraged choices.

As our current ratings show, there is little to like about the current market.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, January 22nd. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. The market had another week of decline.  During last weekend's three days we saw nearly all of our sector ETF's join our "penalty box."  This means that the trading has violated specific technical criteria, our equivalent of a "sell stop."  During Tuesday and Wednesday's volatile trading we shifted into the inverse ETF's.

This shift included our sector highlight from last week, the networking stocks (IGN).  While we try to find the key themes from our ratings each week, we cannot predict how the model will shift.  Sometimes, as was the case last week, we see rapid changes.  There should be no expectation that we will make public updates of each change, in advance of the weekly series.

We provide the ratings as interesting news information.  Readers may like to compare our rankings with other sources or their own analysis.  The weekly report is always delayed by at least one day.  As we note in our disclaimers, it is not intended as specific trading advice.  We are happy to talk with investors interested in an actively managed program based upon the model.

Because of the current ratings, we moved to a bearish stance in the Ticker Sense Blogger Sentiment poll. Only four of our fifty-seven sectors are in the "buy" range, and three of these are inverse ETF's.

 

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Obama Policy on Mark-to-Market: A Hint?

There is a lot of interest in policy initiatives from the Obama Administration.  Circumstances have changed the prospects for many of the ideas mentioned in the campaign.  Investors should be watching what policies can be changed very quickly.  We are monitoring the first 100 days at ElectionStocks.com, where we focus on how politics and public policy affect stocks.

Various observers have labeled a change in the mark-to-market accounting rules as the biggest immediate action affecting stocks.  My RealMoney colleague Jason Schwarz thinks that a change is imminent.  New rules could preserve visibility for investors in the individual stocks, while providing relief in the calculation of required regulatory capital.  Regular readers know that we share this viewpoint.

We believe that neither the TARP method of adding capital, nor the quest for private investment, can work until and unless we stop the death spiral.  The marks are exacerbating and continuing the problem in a pro-cyclical fashion.

Whether or not an investor agrees with the correctness of the current policy, it is wise to have a healthy interest in the prospects for change.  We have been looking for hints on this subject from anyone in the Obama administration.  Since the SEC has authority over FASB in setting accounting rules, the confirmation hearings for Obama's nominee as SEC chair, Mary Schapiro, promised to be a useful source.  Some of the questions and responses were in written form.  Below is her response to a question from Sen. Carl Levin (D, Mich).

10. The SEC recently issued a report supporting the existing mark-to-market valuation rules, but recommending some improvements. What is your view of the current mark-to-market valuation rules?

Response: We know that certain banks were not presenting investors with the full picture of their financial health, utilizing off-balance sheet vehicles and other accounting methods. This was a disservice to investors as the integrity of the numbers is critical to their making smart investment decisions and to the smooth functioning of our markets. While there are a lot of different views on whether mark-to-market accounting contributed to this crisis, my personal view is that it was not a significant factor. As Chair, I will read the recent SEC report on this matter fully, talk with other regulators, and get their views as we move forward.

Conclusion

She promises to consider the evidence with an open mind.  There is no suggestion that this has been an important topic for the transition team or that change is imminent.  Readers can get the full text of the written questions and responses from both Schapiro and Tim Geithner at Sen. Levin's site.

Did President Obama's Speech Cause the Market Decline?

Two things happened at the same time:  President Obama delivered his inaugural address and the stock market declined.

Two things happened at the same time:  The rooster crowed and the sun rose in the East.

This is an enduring logical fallacy.  It endures because of the insatiable human appetite to  impute causality, even when data are lacking.

The Worst of CNBC

Here at "A Dash" we have often endorsed the end-of-day CNBC show hosted by Larry Kudlow.  It generally has a diverse group of guests, and Kudlow acts as the point guard on an NBA team, dishing the ball for effectiveness.

We are therefore disappointed at the shallow analysis of today's trading.  The stock market was weak from the outset because of another around of concerns related to banks, and more pounding by bank analysts.  The decline seemed to be "on hold" during the inauguration, but resumed in late trading.

Larry Kudlow was disappointed that President Obama did not reaffirm his commitment to markets and tax cuts, the Kudlow theme.  His guests agreed that the market had rendered a verdict.  Here is the video, with the key discussion at about 1:15.

Too bad that Kudlow did not make these expectations clear in advance.  Any expert in political science would know that an inaugural address is not going to take on specific policy matters like a State of the Union speech might have.

The point of the speech is to inspire, draw people together, and look ahead.  The Obama speech did all of these things.  We doubt that stock trading had much to do with it.  If it did, it was because of the lack of knowledge of the market pundits.  Sophisticated observers should have known what to expect.

The Obama plan will emerge in good time, and much more rapidly than is the typical case.  If big shots like Kudlow do not understand, that is a better chance for the average investor.

The Best of CNBC

The Maria Bartiromo program's interviews once again reflected the best of CNBC.  She asked some challenging and deft questions to her guests.  In her interview with Richard DeKaser, the award-winning economic forecaster from National City Corp., her expert guest did the two things that we all should emulate:

1. He looked at current data, and noted the grim prospects;
2. He looked ahead to the massive government programs in the pipeline.

Regular readers of "A Dash" will note the familiarity of this theme, described at about 40 seconds into the video.  Please watch it all, to see the best CNBC moment out of a long day.  The interview is remarkable both because of the very sensible conclusion -- that forecasters are not, and cannot include the impact of policies in the pipeline -- but also because he was courageous enough to do take his principled position on a day when the market declined.

Our Take

Once again, the Wall Street pundits and journalists are a bit full of themselves.  This was not a day about the stock market.  Choosing a President involves issues of war and peace, social justice, Supreme Court nominees (and other judges), dealing with crises, allocating resources.  Most importantly it means exercising leadership.

This does not mean following the dictates of any particular interest group.  It means analyzing problems to discover solutions -- answers that will work, and will be acceptable to the people.

President Obama was elected because an overwhelming majority of people believe that he can do this.  The punditry makes money -- from page views, subscription sales, TV ratings -- by selling fear.

Shouldn't we all give the new guy a chance?  At least for a few weeks?

ETF Update: Can Networking Stocks Bounce Back?

At "A Dash" we discuss a combination of fundamental analysis and system-based trading.  Both are affected by events, but in different ways.

Our fundamental viewpoint, presented in our 2009 Outlook article, is relatively bullish.  Many stocks are priced for a depression.  We believe that economic policies, both those in the pipeline and those on the verge of passage, will have a significant impact.  When the data convince people that there will not be another Great Depression, the DJIA can bounce back to 11,000.  How long will this take?  It depends upon two things:

1. The variable and uncertain lags of economic policy, and
2. The recognition lag and skepticism of investors and traders.

We expect this to play out in a matter of months.  Most investors risk missing the major part of the gains by trying to guess a bottom.  For our new clients we have been deploying assets gradually, looking for good entry points for individual stocks.

Our system-based viewpoint changes with the regular output form our model.  This is a way of looking at individual sectors by considering ETF's.  Our modeling expert, Vince Castelli, created a combination of Trend, Cycle, and a touch of Anticipation.  This TCA-ETF approach provides a daily forecast for each ETF in our 57- member universe.  Following the changes in this universe helps us look at both the trees and the forest.  Perhaps it can do the same for you.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

The system output shows a dramatic change from last week.  This is a normal response to two weeks of heavy selling pressure.  Only 13 of our 57 ETF's remain in the "buy" range.  We provide the Thursday output each week; our Friday readings are even more negative.

Reconciling the Two Approaches

Helpful readers often provide the results of their own trading approaches.  Like our TCA-ETF method they are all pretty negative for the short term.  Recognition of the current trend is an established and successful trading approach.

One correspondent asked why we were "leading the sheep to slaughter" in our 2009 Outlook.  His chief reason was that his market indicators suggested more selling to come in the next few weeks.

The resolution is straightforward, a matter of time frames.  Our TCA-ETF method is geared to a one month forecast.  Circumstances change, and change rapidly.

Networking Stocks in the Spotlight

Each week we feature an ETF that has special interest, often making a big move up in our rankings.  For several weeks the sectors have reflected an expectation that the Obama Administration would help certain stocks through the expected stimulus package.  At our sister site, ElectionStocks.com we have a strong body of information on the transition initiatives, including the networking sector.  This is part of the broadband initiative.

Our networking ETF is the iShares entry, the S&P North American Technology-Multimedia Networking Index Fund (IGN). The fund has a P/E ratio of 21.4 and a beta over 1.5.  This is a trading vehicle, unless one has strong, long-term conclusions about the stocks.  The big networking names are included:  Research in Motion (RIMM), Qualcomm, Inc. (QCOM), Cisco Systems, Inc. (CSCO), Corning, Inc. (GLW), and Motorola, Inc. (MOT).  These five holdings make up about 40% of the fund.

It is an aggressive choice in a difficult time.  Here is a look at the chart:

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, January 15th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. It was another tough week for the market, and we were about even against our benchmark S&P 500.  Our methods work best when catching big down moves, or in sustained rallies.

Based upon the current ratings, we moved to a neutral stance in the Ticker Sense Blogger Sentiment poll. Only thirteen of our fifty-seven sectors are in the "buy" range.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Investing in 2009

There is a special challenge for investors planning for 2009. It is easy to get caught up in emotion, especially when so much is going wrong. This causes people to look backward. Investors can meet the challenge by using a sound analytical framework and by looking ahead. For those nearing retirement, this is particularly crucial.

My advice to our investors emphasizes two major points:

1. The news flow is incessantly negative — fraud, corruption, mismanagement, greed, and every proposed solution called a bailout. When this message is repeated in every news source, it is also reflected in current market prices.

2. The market has a gift for us. Our initial rebound target is Dow 11,000. Let us see why.

Basic Rationale

We will not have another Great Depression, and the prices of many stocks are at depression levels. The collapse came in mid-September when the Lehman Brothers failure led to a credit market freeze. Take a look at the chart.

The Lehman failure, permitted by government inaction, made every lender suspicious of every borrower. Normal lending came to a halt, throttling regular business activity. Equity and credit markets had been priced for a moderate recession. Now many expected something much worse, a depression.

Meanwhile, the effect of the government policy has been underestimated. None of us expects the Federal Government to solve all of our problems. We have joined the criticism of the many mistakes.

Enough is enough.

The counter-reaction has been too extreme. People have expected immediate policy impacts. This is naïve. There are lags in implementation and in effect. The modern news cycle has become extremely short. Any new policy has scores of critics – all wanting to get on TV – within hours of the announcement. The reaction gets a pitch in blogs and in the press. The hot-button traders join in.

When the market reacts negatively, as it has for months, it seems to validate the pundit reaction. People are not looking at the actual policy effects, but rather at stock prices. Everything becomes a story of fraud, corruption, and bailouts. This is a trap.

Stories of corruption are easy to understand. Economic impacts are complicated. Successful investing means finding things that others do not see. The wise investor will see that current government policy is exactly the opposite of depression-era actions.

Data will triumph over speculation.

There are already many signs of improvement. Each is important and the cumulative effect is very important.

· No more dominoes falling. A few months ago we faced the risk of failure in many banks and major financial institutions. Whatever one thinks of TARP, it stopped that.

· Credit markets have improved. LIBOR rates are down and bank lending is improving.

· The stimulus package. Whatever the exact size, it will serve to add demand for services and employment.

· Lower gasoline prices. Consumers focus on what is in front of them. This is a boost to everyone’s weekly budget.

· The Fed on mortgage rates. Massive intervention by the Fed has driven mortgage rates much lower and they are still declining. Some homeowners are refinancing and it also helps affordability for new buyers.

· A housing bill. A major housing package will be Job #1 of a new Congress. There will be assistance for new home buyers.

No economic model – even the best – has any ability to forecast these effects. Why not? Models require relevant historic data. This is a collection of policies beyond any precedent. The economic predictions you read in the paper are more speculative than usual.

How to React

Our basic advice is to buy something. If you have been out of the market, Congratulations! It is now time to act.

If you have been invested, it is time to consider your asset allocation. Nearly everyone we talk with is over-invested in real estate, cash (CDs) and bonds. Stocks now offer a better opportunity.

Do not view the market, or the newspaper, or pundits as your investment advisor. Instead, look to the fundamental value of the companies and the stock prices that are offered.

Most investors are fighting the psychological tug that causes them to sell at market bottoms and buy at market tops. Great indicators, including our Gong Model and our Sector Rotation System, are in line with the fundamental analysis.

Are you a skeptic? Take a partial position. If you are out of stocks, buy a 1/3 position. If you are in stocks and thinking of selling everything, move to corporate bonds with a yield of 8-10% with half of your position.

You can make a big return even without an economic boom. Stocks will start to react when it becomes clear that a depression is “off the table.” That gets us to the initial target of Dow 11,000. That is over 20% for the market, and even more in our basket of stocks. It may take a few months, but we can then reassess the economic prognosis.

Some Examples

There are several great themes. We love energy plays in the drilling space. The majors need to replenish depleted holdings. The market has treated these stocks like oil futures. Our favorite is Transocean Energy (RIG), which has locked-in contracts with cancellation penalties. The valuation is so low that a double is easily possible with a more positive economic prognosis.

We also like construction and infrastructure stocks such as Caterpillar (CAT). Investors can wait a lifetime to see companies like this offered at single-digit P/E multiples on normalized earnings.

There are great growth stocks such as Apple (AAPL). The company has a broad range of products, and a low P/E relative to growth if one allows for the cash holdings. Too many people trade on rumors about Steve Jobs, ignoring the company fundamentals.

You can also find some unfairly punished stocks, those that declined with the general selling. We like ResMed (RMD) which works in the sleep disorder field. This is a growth industry where insurance pays the tab. They have an approved home testing kit, avoiding the mega-buck price tag from the past. It is not sensitive to the economy, but has sold off by 1/3.

There are many “Obama opportunities” where one can pounce when the time is right.

Conclusion

Rarely has there been such a great opportunity for investors. With it comes the challenge of putting aside emotions and looking forward. There are many stock ideas that will put some octane in your portfolio. Some investors can find these on their own. For others, this is the perfect time to get some professional help, leaving the worry to someone else.

[We own all of the stocks mentioned in both personal and client accounts.  This article is one of our regular reports to investors.  We have not edited it to reflect changed prices and events.  It originally appeared as part of Seeking Alpha's series where ten managers were invited to provide their thoughts about 2009.  Readers will find many good ideas in the series, which is refreshingly different from the MSM approaches.]

Who is in Charge?

Bob McTeer suggests that we have turned all authority over to the highly-principled accountants.

Accountants take pride in their professionalism, and it just wouldn't look right for them to modify an accounting rule just to save the financial sector and the economy

In Bob's nightmare, his assets all go to zero and his house is sold, even though he has done nothing.  Here is his assessment:

"Speaking of that, I read on the plane that the Federal Reserve, probably the most conservative institution in America, if not the world, has been pulling out all the stops-taking unprecedented steps-to get the country through this national emergency. And I understand the Treasury has also taken extraordinary, unprecedented steps to save the economy. Am I right?"

"You are right."

"And I believe there is a provision in the Emergency Powers Act, or some such law, that gives the President the right to suspend even the Bill of Rights in a national emergency. Am I right about that too?

"I believe so."

"So the Bill of Rights may be suspended in a national emergency, but not mark to market accounting?"

"It would appear so."

If only those in the Obama Administration would pay some attention, we might end the death spiral and get on the road to recovery.

When we get around to analyzing lines of authority and oversight, eventually someone will ask why we allowed the accountants to rule the world.  FASB is not an elected body, and has highly indirect oversight.  This should be a prominent feature of hearings on SEC appointments -- more important than Madoff.

The accounting  mission - informing people about the holdings of public corporations -- could be accomplished without destroying the regulatory capital of every financial institution..

Or else we could commit trillions of TARP funds in a never-ending quest.  Those looking for a market catalyst need merely to watch for a sign that any public official in power gets this message.