10/25/11…ETF this!

Bloomberg Top Stories:

*Home Prices in U.S. Cities Fall More than Forecast 3.8% in August, Case-Schiller Says

*Deutsche Bank Joins UBS Signaling More Jobs at Risk as Crisis Persists – good reason to rally?

*Commodities Rise Before Europe Debt Summit; Stocks, U.S. Futures Fluctuate – fluctuate?

*Bigger Bailout Fund for Europe Needs Work as Germany Faces Parliament Vote – hmmmm

*Inflation Peaking in U.S. With Prices Tumbling in Bear Market in Commodities (we worried about the raw materials in PPI…this has happened before and is no problem for lack of pricing power!)

*Cohen’s SAC Capital Garnered $14 Million in Trading Flagged by Regulator…capitalism???

*Obama Refinancing Wave Signaled in Mortgage-Bond Decline (the GOP will love this one except their idea of letting the market fall to equilibrium would bankrupt most Americans!)

*3M Cuts 2011 Forecast After Quarterly Profit Misses Estimates; Shares Fall

(Read TB’s lips: corporate profits have PEAKED…so do stocks represent value???)

*Caterpillar Earnings Reinforce Forecasts Exports Will Propel U.S. Recovery

(Read the previous headline again…TB shaking his head in awe of the stupidity)

*China Boom-to-Bust concerns Revealed in Agricultural Bank Slide Since IPO

*Obama’s Re-Election Prospects Hinge on voters Turning Anger to Absolution

*Overworked Charter Pilots Put U.S. Troops at Risk as Carriers Fight Rules

(see what happens with outside contractors? Never overworked if you are in military, just do it!)

*Occupying Wall Street Knows Not What It Does Devastating Jobs of Merchants

(Stuff happens…but wait…didn’t Wall Street devastate jobs of Main Street? Without reprisal?)
Volume dipped slightly to a still average 4.28B shares from 4.35B shares on a big up day led by the Russell 2000 and the Nasdaq. NYSE stocks executed on the Big Board however, slumped to 927 from 1.2B shares making just three 1B plus share days in the last 11 sessions, none of them back-to-back! The significance is that prior to that we had 13 straight 1B+ shared days, all but one above 1.1B. Five were down days and five were the bounce from the selloff lows. Are we overdone? Before you answer consider the weakness in corporate earnings. CAT was the only big positive surprise, gapping up on the open on strong earnings…it also had a slight positive gap on Friday in anticipation. Note however that the close of $91.77 is still below the 200 day at $97.88 and it is still off 2% ytd. Advance/Declines were strong for a second straight session: +5:1 vs +6.5:1 vs +2:1 vs -2.6:1 vs +5:1 vs -4.5:1 vs +5:1 on NYSE and +5:1 vs +3.5:1 vs -1.1:1 vs -3.2:1 vs +2.3:1 vs -4.5:1 vs +3:1 on Nasdaq. Breadth was not quite as good: +6.5x vs .+5x vs +2x vs -5x vs +13.5x!!! vs -7x vs +6x on NYSE BUT +1.5x vs +4x vs -1.1x vs -3.5x vs +5.3x vs -5.3x vs +3.2x on Nasdaq! New 52 week highs rose sharply again to 148 from 111, while new lows were slumped to 29 from 42. The ratio is the first solid positive at +5:1, in the black for a second straight session and only the fifth positive ratio in months, all in the last eight trading days. Don’t bet against the rally while this ratio holds VIX plunged for a second day to 29.26 -2.06 – the second lowest close since 8/3. 30 is again resistance and support followed by the 200 day, 23.34.

Here are the results for the past seven days. Dow  +0.9% vs +2.3% vs +0.3% vs -0.6% vs +1.6% vs -2.1% vs +1.5%; Transports +1.8% vs +2.2% vs +1.6% -1.3% vs +3.1% vs -2.8% vs +2.2% vs -0.6%; S&P 500 +1.3% vs +1.9% vs +0.5% vs -1.3% vs +2% vs -1.9% vs +1.7%; Nasdaq Composite +2.4% vs +1.5% vs +-0.2% vs -2%! vs +1.6% vs -2% vs +1.8%; Nasdaq 100 +2.1% vs +1.3% vs -0.5% vs -2%! vs +1.3% vs -1.6% vs +1.9%; Russell 2000 +3.3%!!! vs +2.3% vs +0.3% vs -2.1%! vs +3.0% vs -3.4%!!! vs +2%; NYSE Financials +2.1% vs +2.3% vs +0.9% vs +1.7% vs 3.6% vs -2.9% vs +1.2%. The key remains the Nasdaq indices and the Russell…as well as the financials.


Global stock markets weak, except Germany, Hong Kong and India: FTSE -0.2% vs +0.3% vs +1.1%; CAC 40 -0.7% vs -0.2% vs +1.5%; DAX +0.9% vs -0.1% vs +2.1%; Nikkei +1.9% vs flat vs -1% vs -1.6% vs +1.5% vs -0.9% vs +1%Hang Seng +4.1%!!! vs +0.2% vs -1.8% va -4.2% vs +2% vs -1.4% vs +2.3% vs +1.0% vs +2.4%; Korean KOSPI -0.5% vs +3.3%!!! vs +1.8% vs -2.7%!!! vs -1.4% vs +1.6%; Indian Sensex +1.9%!!! vs +0.9% vs +0.9% vs -0.9% vs -1.6% vs -0.3% vs +1.2%; US futures weaker: DOW -22; SPX -1.10; NDQ +0.75. This is not doing a thing for bonds which tanked again yesterday: 10 yr now 2.24% -3/16, off a RECORD low 9/23 of 1.6855%; 30 yr 3.27% +1/32; Long TIP rallying further 0.99% +3/8.

Gold is still climbing in a continuation of Friday’s rally, closing Monday at $1652.30.10 +$16.20, following 9/26’s low of $1534, lowest since 7/6!), and is $1660.80 +$5.50 overnight!  9/23’s low was nearly to the 200 day, $1536.60, now critical support. The record high is $1923.70, a buying climax on 9/6. Res is $1700, then the 40 day: $1724, then the 50 day: 1741. First support $1600! Crude also up following a strong session closing at $91.27 +$3.87, and is up solidly again overnight to $94.45 +$3.14. Overnight high is $94.65, just below the 200 day which is now major resistance, $94.75/6. Support is the convergence of the 40 and 50 day m/a’s at $85.50.

…lots of talk about ETF’s…most of it bad. But you have to ask two questions:

  1. is it ALL ETF’s that are bad?
  2. who is bad-mouthing them?


No, all ETF’s are not bad, but like with the mortgage-backed derivatives, there are ETF’s based on solid indices and others that are on shaky thin ones or on excessive leverage, particularly the short-index ETF’s. The bond ones are good, as are several REIT ETF’s. Some have suggested changing the name of the 2x, 3x, and more times, leveraged ETF’s to something else. Also, the commodities ETF’s particularly, VIX, and crude, have performed miserably. The check should be how has the ETF performed relative to the index…heck, even you can do that! But this is where the SEC should be going after the fund sponsors…which do not include iShares or SPYDERS, but some of the boutique players who want to collect high fees.


But what is so good about ETF’s. Let TB tell you as he told the management of the investment advisor he worked for and it cost him his job. First, tax efficiency! Mutual funds are the least efficient as anyone who has seen the funds fall in price and then have to pay a capital gain. Well run ETF’s are tax efficient. On all but a very few ETF’s there have been ZERO capital gains or losses in iShares ETF’s (don’t know about SPYDERS but assume it to be similar), except when YOU sell them. Second, diversification. It is a great way to cheaply get in the market especially in an era where buy-and-hold punishes you dearly. Third, if you sell a stock for instance because you want to lock in a gain (or loss), it allows you to track the broad market (or sector), when you don’t want to risk buying a specific stock. This is a great tool for tax losses (30 day rule), and SHOULD be for money managers who get an account and immediately sell everything the other manager held in fear they won’t get credit for the performance. Instead of blindly matching the holdings in their own portfolios, why not buy the stocks that look attractive and buy and index ETF with the rest, selling it off as opportunities occur. Isn’t that what managers are paid to do? Obtain performance? Not what TB was told: he was told that would be delegating securities selection. HUH? His response: No! we are paid to generate POSITIVE returns! This brings us to another advantage of ETF’s: transparency! Don’t buy an ETF unless on its website you can see what it owns on a daily basis…near real time!


This brings us to the answer to the second question: mutual funds. They have too much at risk and are seeing it slip away largely due to their overly high fees…and high fees are the surest way to destroy YOUR performance. Mutual funds have a big lobby and will not go down quietly. Every argument against ETF’s can be applied equally to mutual funds. Studies have shown that there is as much chance of a top mutual fund in one year ending worst the next year. This is due partly to the fact that performance draws in more money which has to be invested thus drawing down the returns on the fund. This does not happen with ETF’s. Note that if the market looks like it is going to rise of fall you can trade an ETF during the day and save yourself losses, or generate additional gains…this is important since most of the gains occur in the first four days or so of rally.


Hope that clarifies some issues on ETF’s. One caveat: with an ETF OR any security in this computer driven market, you HAVE to set limits on trades or you can be killed on spreads. Most of the top traded ETF’s have narrow spreads, like big cap stocks, but to put in a market order on any security in this market is insane! If you have any questions, let TB know, he will be glad to attempt to answer them.


. . .   – – –  . . .

What is the difference between the GOP and the Democrats? Aside from basic philosophy they both love to spend YOUR money as all politicians do because cutting costs doesn’t buy votes, projects buy votes. That is why we should reduce ALL top government salaries including Congress, even though we are powerless to do so without a 28th Amendment, AND eliminate retirements. If they want to stay, sobeit, but the arrogance they have that only they can solve the problems is absurd, especially when you see what they have done in the past.


No, the major difference is the Dems are ‘tax and spend’ while the GOP is ‘cut taxes and spend.’

We have only to look to George W. Bush’s term of office when the GOP cut taxes twice (sure the Dems went along but had no power to cut them where they wanted), yet without argument raised the debt ceiling, ran huge budget deficits from which the sharp drop in revenues, along with two wars, and passing but not funding Medicare Part D, caused the deficits to surge. Then along came the crisis, passage of TARP and TALF etc. and Obama (not defending him), inherited a can of worms…and then due to poor advice…if only he had listened to Volcker but the Wall Street controlled Geithner and Summers would not allow that, nor would his ramrod Rahm Emanuel. He had a chance to make change and failed miserably, but ask yourself this: would McCain/Palin done a better job? Not on your life! In fact, the GOP didn’t like McCain for being a renegade.


On taxes, the Dems want to tax the superwealthy (Obama erred badly with his definition of the Buffett Rule which would have raised taxes on ALL wealthy Americans, including those who are paying their fair share of taxes per the IRS rules, not the silly argument that the pay 65% of the taxes when they own nearly 905 of the wealth…perhaps more with the decline in housing). They say they want a flat tax…but how can you make it revenue neutral without driving even more people into poverty, and revenue-neutral will not solve the budget problem.


As for the GOP, thanks to Arthur Laffer and his famous cocktail napkin, the myth of supply-side economics persists. Trickle down? Well if it works, how come the wealth gap has widened so much in the thirty years since he convinced The Gipper? No, to the the perfect tax rate is ZERO. Despite this Reagan didn’t cut taxes he raised them…several times and ran huge deficits to boot. On his watch, despite his desire to cut government, it grew both in number and cost. (TB does agree however with Nobel laureate Franco Modigliani that the corporate tax rate should be zero but dividends should be taxed as ordinary income…sounds fair to TB as it removes the argument against paying dividends on grounds of double taxation. Thus it would give shareholders more control over the companies.)


So you can listen to the GOP, especially Cain, Bachmann and Perry, all you want but their plans are flawed and will never get off the ground. Bachmann must have been a pretty poor tax attorney if she believes otherwise. One last thing: who fathered Cain’s 9-9-9 plan? A Wells Fargo financial advisor named Rich Lowries from Cleveland, Ohio. This man with no economic training is the economic advisor to Herman Cain…think about it…he isn’t even an economist but did get and accounting degree from Case Western University…scrap the tax code? Get real!


Have a great day!




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