Powerful rebound in stocks may signal short-term bottom, or not

We are up over 250 points right off the open this morning, after a very volatile week to-date, with stocks gaining about 420 points on the Dow Monday and Tuesday, and then giving back 180 yesterday.  What does this mean?  Well, if we look at the apparent progress of the EU with regard to increasing the scope and size of the European bailout, it would appear that we could be turning the corner with the crisis.  If a viable plan is set in motion and the financial markets gain confidence that the various EU member countries providing the funding will pay, and those in trouble will stick to their austerity measures, this could be a short-term bottom for stocks, both here and abroad.  I would like to believe that we can put the crisis behind us and get back to focusing on domestic issues, like unemployment and U.S. economic growth, which are still major concerns.  However, I have heard estimates as high as $2 trillion to fix what is broken across Europe, and candidly, they don't have the money.  My sense of this is that they are all posturing and stalling, hoping we will feel enough pain that we will find is less expensive to step in and pay the bill.  The problem is that we don't have the money!  We can't even pay for our own problems, much less bailout all of Europe.

We already are the largest contributor to the IMF, which is a key contributor to the EU bailout already, so indirectly we are already sending Europe a ton of cash.  We are also providing swaps for euros to dollars, to help provide liquidity, which costs us money also.

To me, this is a game of musical chairs, or hot potato... the music has stopped, and there are not enough chairs.  The potato has been passed from Greece, Ireland, Spain, and Portugal, to Germany and France, to the IMF (us) and back to Europe.  At some point we have to accept that there is not enough money to go around.

If Greece ultimately defaults, I feel there is a strong likelihood that the EU will fall apart and the euro as a currency will be dead.  German is really the key - they have to decide if they are willing to take the bad with the good.  Germany can't simply generate a reported 60% of total GDP from the EU countries, but then when there are problems, not contribute significantly to the solution.  So far they appear to be (reluctantly) participating in the bailout.  But, in the long-run, they are the key to Europe's recovery, and if they are unwilling to stick it out, like dominoes, the EU countries with financial problems will default, one by one, and the euro and EU will fall apart.  We have our own serious problem, so it is up to Germany to do whatever it takes.

Noozhawk Column - Getting out of debt is as easy as 1, 2, 3, 4, 5 - published Monday, September 26, 2011

http://www.noozhawk.com/article/092511_craig_allen/

Global sell-off crushing U.S. markets

Everything is down hard today after Asia and Europe suffered heavy losses overnight.  The Dow is down 428, the S&P 500 40, and the NASDAQ 80 so far.  Gold is off $80 an ounce.  Copper, silver, oil and just about everything else is getting hit, except for treasuries.  The Fed announced yesterday that the U.S. economy and the global economy, face significant risks, and they announced that they will swap short-term treasuries for long-term, basically trying to buy-down long rates with $400 billion they will get from selling short-maturity paper.  Bad idea.  Rates are already at historic lows.  People and businesses are not constrained from borrowing because rates are too high, they are not borrowing because they have no confidence in the economy and their jobs, and banks are simply not lending.

We have returned basically to the recent lows, and I would suspect that we will once again bounce from here.  I would again recommend long-term investors step in here and buy quality names.  We rallied about 8% from here after the recent correction to get back above 1,200 on the S&P 500, and I expect the same rebound this time as well.  Longer-term, I feel that valuations are very attractive here, even with consideration given to the fact that earnings estimates need to come down somewhat.

The facts on taxes in the U.S.

Obama's argument that the "wealthy" should pay "their fair share" is grossly flawed.  His focus is on the rate that the wealthy pay versus the middle class, while the reality is that the wealthy pay, in real dollar terms (which is what matters) far, far more than any other class of people in the U.S.  Here are the facts:

• The wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of income taxes
• The top 5 percent pay more than 50% of the taxes 
• The top 10 percent pay 68 percent of the tab
• The bottom 50 percent—those below the median income level—now earn 13 percent of the income but pay just 3 percent of the taxes

These are proportions of the income tax alone and don’t include payroll taxes for Social Security and Medicare.

Obama's "Plan" for getting us out of this economic slump is to tax the only people who can hire

Obama's latest plan is to cut $3 trillion out of our deficit with a combination of cuts in spending and tax increases.  He basically wants to raise taxes on "the wealthy" and "large corporations."  These are the people and businesses that he also expects to do the hiring, which is the only way unemployment will decline, and the only way the economy will ever recover.  Most importantly, the Republicans will never, ever agree to these tax increases, so all he is doing is making a political speech aimed at setting his talking points for the coming election.  It is a sad day with the President of the United States is solely focused on playing politics when the country is teetering on a double-dip recession and so many are out of work and suffering.

The First Step to Getting Out of Credit-Card Debt Is Creating Your Budget - Published in Noozhawk Monday, September 19, 2011

http://www.noozhawk.com/article/091811_craig_allen/

Netflix blooper costs shareholders big time

Netflix made a classic and foolish error when they decided to raise prices in a terrible economic environment, and now they are paying for it.  Their real problem is that they, for some reason I still cannot understand, do not offer their entire catalog in streaming format.  I canceled my subscription when they raise their prices because I couldn't get the DVD and streaming service together without paying close to twice what I had been paying for the same service before the price increase.  Obviously I was not alone.  They have lost an estimated 1 million customers since the price increase.

Worse yet, their exit survey did not allow me to explain why I was canceling, forcing my responses to fit within their preformatted questionnaire, which neglects to offer a response about pricing.  I think they have gotten the message now.  The real question is, will they reverse the price increase, make their entire catalog available for download, and most importantly, can they regain their lost customers if they do so?  Possible, if they act quickly, as Coke did when they stopped making real (Classic) Coke, and changed to "New Coke," which cause a worldwide negative reaction.  Coke admitted it screwed up, and immediately offered Classic Coke again.  Because of that quick response, some questioned whether it was a mistake at all, and a few to this day think Coke execs did it on purpose in what could have been the most brilliant marketing stunt ever.

I certainly wouldn't compare Netflix to Coke, an iconic product with a very powerful brand identity and generations of ferociously loyal customers.  But, I do believe that streaming entertainment content is what people want, and Netflix already has about 25 million customers.  If they act now, reduce prices, and get all of their content converted to immediate download format, I believe they can recapture their momentum, and their valuation.

Keeping the streak alive

If we close higher today, we will have been up for the past five trading sessions in a row.  We started the week at 1,154, and are currently hovering around 1,213, up just a few points so far for the session.  This represents a 5.1% gain for the week (if we were to close here).  Not bad considering all of the negativity we have experienced this week, including the continuing bad news out of Europe and especially Greece!

Perception becomes reality

We have been bouncing between roughly 1,150 and 1,200 on the S&P 500, and are right back up to 1,200 today, despite so much negative news out of Europe and elsewhere.  The reason, I believe, is very simple - valuations.  When the S&P 500 was around 1,350, even with good news, stocks were selling-off.  Now, after a 20% correction, valuations are more attractive, and therefore, investors are buying, even in the face of seemingly dire news.  Go figure.

Nice finish!

Stocks were pretty much down all day, but rallied in he final minutes to end up 69 points for the Dow, The S&P 500  up 8 points, and the NASDAQ adding an impressive 27.  This is a really powerful result given the negativity out there and the hammering that foreign markets took today.

The Ins and Outs of Buying Foreclosed Properties - Published in Noozhawk, Monday, September 12, 2011

http://www.noozhawk.com/article/091111_craig_allen/

Stocks set to start the week with heavy losses

Dow futures are pointing to a 200 point plus decline this morning after renewed fears have surfaced over Greek and European debts.  French banks will likely receive downgrades as Greek debt exposure continues to pressure their balance sheets and erode confidence in them.  The S&P 500 lost about 2% on Friday, and is set to drop about the same percentage off the open this morning.  Foreign markets are down across the globe.  I continue to believe that current valuations or stocks are attractive and would recommend  buying quality names.

El Erian a bigger joke than Obama's jobs plan

One again El Erian is clueless.  Hand-picked to succeed Bill Gross at PIMCO, one of the worlds largest bond houses, El Erian recently wrote an op/ed piece supporting Obama's $447 billion jobs plan.  Not only is this plan far too small to make any meaningful impact, but it would have to pass Congress, which is a non-starter.  There is no way Congress, especially Republicans are going to "coalesce around the President."  Has El Erian forgotten the debacle that caused S&P to downgrade the U.S. debt rating a few weeks back?  Further, how are we going to fund another $450 billion in spending, which is exactly what the President proposes?  We will have to borrow it, and we have already borrowed so much that we are teetering on oblivion.  El Erian is a sham.  He flies around the country making speeches while Bill Gross does all the work.  Look at the investments El Erian made for Harvard and how they have performed.  Unfortunately, the only thing that is more of a joke than Obama's jobs plan is El Erian.

Craig D. Allen
Montecito Private Asset Management, LLC

Stocks snap back

After an ugly start to the month and this week, we had a 276 point gain on the Dow today.  Gold dropped dramatically as well, as money flowed out of the safe haven trade and back into stocks.  Gold's recent activity appears to be signalling a top for the commodity.  Obama's $300 billion stimulus package announcement certainly helped, although we will need to borrow any money to be spent on any stimulus package - money we certainly can't afford to borrow.  The argument has always been that by stimulating the economy, and especially by adding jobs, economic activity will generate more tax revenues for the government.  I agree, but the problem is that there is always a time-lag between the time you spend the money and the time the economy picks up steam.  Further, we have already had a stimulus, the TARP program, and two rounds of Quantitative Easing (QE), and we haven't seen the positive results expected or needed to justify the massive borrowing it took to fund these initiatives.  Will this package be THE ONE?  In the big picture, $300 billion, unfortunately, is peanuts, so I doubt it will have a lasting impact, much like the Cash for Clunkers program, which stimulated car sales for a few months, but in the long-run, probably hurt the automakers by compressing future sales into a shorter period of time, without driving any real sales increases.  I have yet to see the details of this proposed stimulus, but regardless of those details, any stimulus package will require borrowing, since we have no money.  Sooner or later, and likely sooner, this massive bill is going to come due.

What will the bottom mean?

http://www.noozhawk.com/article/082811_craig_allen/

Declining Real Estate Market Still Offers Opportunities

http://www.noozhawk.com/article/090411_craig_allen/