What a difference a week makes.

Fellow Friends and Traders,

Just five short weeks ago the overall market topped out after Gold, CRB & S&Ps and others all hit new recovery highs. Even 10-year Government bond yields doubled and hit new yield highs near 4% as the world markets swing between waves of deflation and inflation. The market then traded sideways before breaking a head and shoulders topping pattern and promptly dropped inter-week nearly 10%. This week caught traders in a break down failure, coupled with some good earnings reports and the markets rallied over 7%. Even "They" wanted the markets higher to punish the large open put position buyers. Almost all puts expired worthless.

Given the enormous rally from the March lows most of the easy money has been made. Still, when traders get trapped after a false breakdown and given the strength of last week’s rally there looks to be a bit left to the old girl. I would not be surprised if the S&P reached our second target of 1007 projected a while back before re-entering a larger trading range and until the market sorts out additional information on the economic scene. I'm only talking about next twelve months. My crystal ball gets cloudy after eighteen months.

No, our problems haven't gone away. Just look to Japan. They have suffered what most of us would consider a depression since 1989. When their DOW dropped from 39,000 to approximately 7,000 by 2002-3 then rallied significantly until 2007-8 only to drop to even lower lows in Dec '08. The ruling Japanese party looks to be replaced in the next election. They haven't learned yet. I only hope we learn from history.

Doug Kass, one of my favorite money managers, writes in Barron's this week, “The long-term market headwinds haven't gone away.” Kass lists an elevated savings rate which lowers consumption, spreading wage deflation, the devastation of the construction and real-estate industries once big job creators, a reduced securitization market, a former growth engine, all as factors that will weigh on stocks for years. Kass writes, "These issues raise the specter of a fragile recovery and a double-dip both in the economy and stock market next year."  He sees a "lumpy and inconsistent" market for the next few years with substandard to negative returns. Investors have yet to reckon with a future with much less leverage, where normal corporate profit growth, after cost cuts are exhausted, is lackluster compared to the boom and where typical P/Es will reflect that.

There are many out there that truly believe our ultimate crises still looms with much lower lows still to come.  A bottoming crisis could take up to five years to unfold. However, it may not take that long given our fiscal deficit. This year’s deficit should exceed $2 Trillion and I'm expecting a much larger number next year. For now, I'll stick with Doug’s view.

I wonder when the reality is going to set in on Wall Street. Cost cutting is the story of the day and how reducing advertising, laying people off and cutting back on production is good news escapes me. The revenue numbers are horrible.  Even IBM and INTC had lower sales. Harley Davidson (HOG) sales were down 30%; Mattel sales down 19%. At Bemis, a packaging company, sales dropped 12%. General Electric saw a 17% decline. GE’s results validate the severe economic contraction world-wide. Callaway lowered its sales expectations and now thinks sales for the year will drop 15-19%. GOOG had weaker sales and only beat EPS numbers with a much lower tax rate and big head count reduction. Most disturbing was NOK's 25% revenue slide with profits tumbling 65%. The Port of Long Beach shows container shipments down nearly 30% when freight car loadings are down nearly 25% year over year.  State sales tax receipts are down double digits while federal income tax collections effectively collapsed.  Per Wendy’s old commercial, "Where's the beef Guys?" So where's the recovery? I don't even see green shoots. I don't care how much paper Goldman Sachs (GS) and Morgan Stanley (MS) trade that’s not America.

The Bottom Line: Those who bet on the market big time from here are going to be caught holding the bag.  Like I said in '87, '97, '00 and '07, trade your brains out with the S&P E-minis and learn what I offer you with the bigger, long-term trades. I've seen it all for the last 48 years, and yes, it is different this time thanks to Obama and I don't mean GOOD!

I did put out a new recommendation last week to buy the SML (SallieMae) Corp Rev 4.5% bonds due July 2010, trading under $96. The bonds hit $95 when the Gov announced $12.5B help to Community Colleges. Educational stocks were initially hit hard but came right back and closed near the high.  Six major brokerage houses are recommending the SML, the stock. I almost did under $8.00 myself. The Gov gave SLM a $500B contact a few months ago.

With the SLM bond, you are getting a straight 9%+ return over next year. I like the fact that half the return comes back to me in the form of tax free capital gains (gains against prior losses are tax free). I'm also recommending that aggressive investors use 50% margin at Interactive Brokers who have some of the lowest margin rates. IB’s rates start at 1.25% for accounts under $25,000 and drop to 0.65% for accounts over $1.5M. This means you can now earn nearly a 40% return versus only 9% fully paid for $17,600 versus $9,000 unleveraged. Get on board.

For the time being, think poker.  There's a time to play, there’s a time to fold and there's a time to wait. Learn now to trade short-term E-minis and Index options while also building substantial capital utilizing my special situation recommendations.