Tim Connolly: Winning Strategies

Foreign Demand for US Treasury Securities Take $53 Billion Record Fall in December—is this the Canary in the Gold Mine for US Debt Demand?

CNBC reported today that per US Treasury data, foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits. This could be the leading indicator of a precipitous drop in demand for US debt, and absolutely reinforces the need to FREEZE THE BUDGET NOW!

Per CNBC, The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

The big drop in China's holdings meant that it lost the top spot in terms of foreign ownership of U.S. Treasuries, dropping to second place behind Japan.

Japan also reduced its holdings of U.S. Treasuries, cutting them by $11.5 billion to $768.8 billion in December, but that amount was still more than China's December total of $755.4 billion.

The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by $52.3 billion. The holdings of foreign private investors fell by $700 million during the month of December.

CALL YOUR SENATOR OR CONGRESSIONAL REPRESENTATIVE AND DEMAND THAT CONGRESS FREEZE THE BUDGET NOW!

www.winningstrategies.net

Wayne Allyn Root: W.A.R. Strategies

America: A Big Fat Greek Tragedy

Greece is the insolvent, bankrupt country that threatens to bring down the entire EU (European Union) with its exploding and toxic national debt. But it's just one of the PIGS- Portugal, Italy, Greece and Spain. The EU is damned if they do, damned if they don't. If they choose to bail out Greece in order to save the union, soon they'll have much bigger bankrupt nations to deal with (Portugal and Spain are next in a long Conga line). There isn't enough money in all the world to bail out all of them. The EU is in big trouble.

But the real problem is that Greece isn't the worst Greek tragedy on the horizon. Greece is only "the canary in the coal mine." The United States is one big fat Greek tragedy. We are Greece- SQUARED. All the same problems that plague Greece, plague this country- huge national deficits and debt; high unemployment; gigantic entitlement programs; too many government employees; not enough tax revenues coming in; endless bailouts and stimulus; and pension and healthcare systems (Social Security, Medicare, Medicaid) that threaten to eat every dollar of the budget. Just the interest on our national debt is enough to destroy our economy. It's all a Greek tragedy.

America is Greece- except on a much grander scale. Our economic collapse is still a year or two down the road. Obama is laughing, celebrating, dancing and handing out gifts (stimulus, bailouts, entitlements, corporate welfare) at a big fat Greek wedding...oblivious to the the coming economic Armageddon...oblivious to the madness of his plan- to triple down on spending to save us from insolvency.

But it didn't take Greece to warn America of the impending doom. California is our Greece. I warned long ago that Obama's stimulus plan was a disaster. That handing out $120 billion dollars to state and local governments so that they could prevent layoffs of government employees; hire more teachers and government employees; and actually protect raises for government employees...was pure madness. I pointed out at the time that state and local governments across the USA were bankrupt and insolvent. The only possible solution was massive cuts in government spending and layoffs of government employees (just like the private sector). I pointed out that once the stimulus ran out in 2 years, we'd have the same exact problem...except with more government employee salaries, pensions and health care to pay for. All we did was kick the can down the road a bit. We delayed the inevitable economic disaster- just as Greece has done for decades, just as California has done for years. But the day of reckoning is fast approaching.

California is still insolvent and bankrupt...so are most state and local governments...now we have more government employee mouths to feed...more pensions to pay...how will we pay the even larger bill once the stimulus runs out? Where is the next stimulus coming from? How do we pay back the $2 trillion that the Fed has printed? Where are the tax revenues when everyone is a government employee?

All the king's men...all the countries of the world...all the bankers and Goldman Sachs partners...cannot pay the bills that are coming due for America. The national debt has zoomed past $100 trillion. As a sign of things to come, our December deficit doubled in the past year. Obama's budget pressed the pedal towards Armageddon- by spending more than all the budgets of all the Presidents that came before him, combined.

The old saying goes, "A trillion here and a trillion there...pretty soon we're talking about real money." Well let's give you some perspective of the trouble we are in. Greece owes $300 billion to the banks. That amount...from a tiny country...threatens to bankrupt banks across Europe and bring down the entire EU. Yet Obama spent $800 billion in one stimulus bill last year. That stimulus by the way, created zero jobs. ZERO. He wanted to spend a trillion more on his expansion of government-run healthcare. If $300 billion can bring down the entire EU...and make big European banks insolvent...who can possibly bailout America's $100 trillion tab? Just one state- California- is in similar shape and facing the same kind of economic collapse as Greece.

The lesson we must learn is that government cannot spend taxpayers' money endlessly; that not everyone can work for government; that not everyone can depend on government for survival; that government cannot give raises and bonuses to government employees in a depression; that big pensions and universal healthcare bankrupt nations; that unions are poisonous to the survival of an economy; that "spreading the wealth around" is a failure whenever and wherever it's been tried- Argentina, Greece, California. The socialist experiment is a disaster.

Now we wait...as the clock ticks...to see if we can avoid becoming the next Greek tragedy that pushes the world towards a second Great Depression.

John Merrill: ETF/Fund Strategies

SUMMARY.  The U.S. economy continues to show strong cyclical strength that should last well into this year.  The economy may decelerate to more moderate growth later this year or in 2011.

The cyclical bull market continued after an 8% correction in January and early February.  Corporate America is in very good shape with strong balance sheets and improving earnings and revenues.

ECONOMY.  Economic statistics released in February give added support to the strength of this cyclical recovery.  The government’s upwardly revised its estimate of economic growth in the fourth quarter to a very strong 5.9% (annualized) gain in real GDP.  Leading indicators suggest that this strength will continue well into the first half of this year.

The widely followed Institute of Supply Management (ISM) survey of manufacturing provided a strong reading of 56.5 for February, down slightly from a reading of 58.4 in January.  Numbers above 50 indicate that the manufacturing sector is growing. 

The nonmanufacturing (services) ISM index also produced a solid growth number of 53.0 in February.  This was its fastest pace in over two years.  This is a sign that the recovery is beginning to broaden out. 

All of the good news for the economy as a whole – and business in particular – has not yet shown up in increased payrolls.  The “Payroll Report” (a survey of businesses) released Friday continued to indicate that the U.S. economy is still treading water – neither adding new jobs nor letting more jobs go.  The report added 35,000 jobs to the December and January reports while showing a similar number of lost jobs in February.  The “Household Survey,” the report that determines the unemployment rate, was unchanged at 9.7%.  With each passing month, it appears that the peak in unemployment was reached this past October.

The combination of a rebound in manufacturing and negligible job growth is behind the sharp increase in the nonfarm business productivity numbers.  Fourth quarter productivity was revised to a 6.9% annual rate from 6.2%.  This is a huge number that is far higher than any other developed country.  This means that our companies are getting financially stronger, and are more competitive.  Eventually such numbers must lead to job growth.  For now, they are spurring corporate investment.  Capital equipment (“capex”) spending was up 18% in the first two months of 2010.  This can continue for some time as the level of corporate cash flow relative to capex is at 50 year high.

A continuing surprise behind the better economic numbers is how well the consumer has held up.  Retailers reported that store sales rose in February by the largest amount since November 2007 – despite the terrible weather and snow storms around the country.

Housing is a part of the economy where the statistics are still uneven.  The housing affordability index is at its best level in over a decade and the government’s $8,000 tax credit is still available yet pending homes sales fell 7.6% to 90.4 in January (the latest monthly statistic).  This may have been partially caused by the bad weather, yet this is an area that has yet to demonstrate a sustainable rebound.

Despite the current economic recovery, we still have questions about the ongoing strength and longevity of this economic rebound.  The “Long Leading Indicators Index” from ECRI, which measures economic growth six to twelve months out, has flattened out in recent readings.  This indicates that the strong rate of growth we are currently experiencing may fall back into a milder rate later this year.

The economic headwinds which we have pointed out before include:
•       Commercial real estate financing.
•       Below average wage and benefit growth.
•       Contraction of state and local government spending as they adjust to smaller tax collections.
•       Two new waves of mortgage problems coming from Alt-A loan and Option-Arm loan resets.
•       Uncertainties as to future government policies, taxes, and debt.

International economic growth has its own uncertainties.  Europe’s economy stalled at the end of 2009 – expanding at just a 0.4% annual pace in the fourth quarter.  In addition, sovereign debt issues in the peripheral countries of Europe, (Portugal, Spain, Greece, and Ireland) continue to be a concern; although Greece was easily able to sell government debt last week.  The Euro has weakened against other currencies over the past three months which should help their industry competitively.  Hopefully, their growth will pick up this spring.

As we have said for the past six months, we are now in the sweet spot of this economic expansion.  The solid and improving economic news is likely to continue well into this year.  However, we are watching closely those areas that may slow this recovery down.

MARKETS.  The S&P 500 fell over 8% from early January to mid-February in the most severe correction so far in the current bull market.  This pullback took it within 2% of its 200 day moving average.

As we noted in last month’s Commentary, most bull markets tend to stay above their 200 day moving averages although they will periodically fall back to it before beginning another upward leg.  In other words, this looked like a “textbook” correction.

The market got major support from this corporate earning season.  Approximately 72% of companies exceeded their earnings expectations.  Perhaps more importantly, about 2/3 also beat their revenue estimates.  Corporations have migrated from beating earnings from primarily cost cutting to improvements in top line growth, too.

The fundamental underpinnings of this bull market remain intact.
•       World economic growth has come back everywhere but Europe.
•       Inflation is still well in check (and will likely continue with the high unemployment and low factory utilization).
•       There is ample cash on the sidelines for investment.
•       Monetary policy is very accommodative (0% Fed funds rate)

We are ever more confident that the earnings per share of the S&P 500 index will reach $75 in 2010.  The historic average range of earnings multiples is between 16 and 17.  This puts the “normal” value of that index in the range of 1200 to 1275.  It is 1138 today.  This suggests that valuations are supportive of further gains in the markets.  More positive earnings surprises in the next couple of quarters could push this valuation level up further.

TANGLEWOOD STRATEGIES.  Our equity weightings remain:
•       Overweight U.S. large companies
•       Underweight U.S. small companies
•       Underweight REITs
•       Underweight International Developed Country stocks
•       Overweight Emerging Market stocks

We continue to believe that large, U.S. high quality multi-national companies are among the cheapest stocks in the market in terms of their own historical valuations.  They are also among the safest (overall) in terms of downside volatility.  We also believe they are well positioned to take advantage of growth opportunities wherever they present themselves around the world.  Several of our selected mutual funds focus on these companies – Amana Growth, Jensen and Parnasus Equity.

We believe emerging markets are likely to continue to outperform developed markets over the balance of this bull market.  The trailing return on equity (ROE) for the MSCI emerging market index is 12% versus 7% for developed markets.  This is likely to be the 10th year in a row of emerging market outperformance in this area.  Yet emerging markets are selling at a forward P/E multiple estimate of only 14 based upon consensus earnings estimates.

We have substantial positions in what we call “Defensive Winners,” funds that have substantially outperformed their relevant indexes over the past two complete market cycles – with less risk (volatility) than that of the indexes.  These funds include T. Rowe Price Capital Appreciation and Mathews Asia Growth and Income.

We made one change to our portfolios in February.  We added a small 2% position in the U.S. large-cap index (Russell 1000) when the market declined by 7%.

Underground Options Strategies

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Jan Vandersandee: Income Strategies

Technical, Sentiment and Cycles:

I had a short-term cycle is in mid-February which I expected to be a low and it came in on Friday February 5. The market was very oversold and there was excessive pessimism at that low, which resulted in the snapback rally into February 19 exactly as expected. The next intermediate cycle is early-March (plus or minus a week) and is expected to be a low. However, last week the CBOE put/call ratio was over 1.0 three days in a row showing extreme pessimism. That pessimism plus early this week being the beginning of the month (when 401k and pension money comes into the market) are the main reason for this current rally. Selling should start once the current rally runs out of steam. Hence a cycle low is still expected (making a higher low above the February 5 low). It is always possible that the cycle inverts to a high. The next longer term cycle is in April-May which is currently expected to be a high (and it could end up being the high of the cyclical bull market).

Recommendations for Income:

Some of our recent buy and write recommendations (ENZ, CHBT and CSR) have done very well and nice profits have been/ or will be taken.

This week I have a buy and write recommendation that has been made before and looks attractive again:

1.  Buy Hi-Tech Pharmacal- HITK - at around 24.00 and sell the April 25 call for around 1.70 (so the net cost of around 22.30) which would generate an approximate 12 % income (less commissions) in just over six weeks if called away. If the stock closes below 25 on expiration in April then we will write the May call. HITK is cheap at current levels with limited downside. It is selling at around 10-12 times estimated earnings and is growing at around 20% a year. They will report earnings next week. The stock is very thin so very volatile.

Gary Cella: Under the Hood

AIG, The Pay Czar And Other Silly Things...Well, well the Wall Street Journal reported recently citing "unnamed people" (Why are they always afraid to be named?) that AIG head Robert Benmoshe is going to quit, take all his marbles and go home. Seems that old Bob is upset with his company having to pay only up to 500,000 dollars salaries to the top 25 highest-paid executives...Say it isn't so..That's just about going to cover the cost of the country club dues, summer home tax's, trip to Europe and private school for three kids.Gee, that hardship? Wow no wonder main street hates wall street. With real unemployment over 17 percent, the average salary of 28,000 dollars per person, and taxes and unemployment  going higher, you would think someone would thank their lucky star's to be making $500,000 per year.I guess not. Maybe Bob can just return all the money AIG got from us the taxpayers. Remember us? Were the people that that you got the money from so you can have a company that CAN pay you and your 25 Best Friends 500k. Maybe write a book called How to get by on $9600 per week. (Robert Benmosche has since announced he is staying with AIG).