Where we go from here.

Fellow Friends and Traders,

The stock market is now down 4 weeks in a row and nearly 10% to this week’s low. Reality is setting in.  Hope can only take the markets so high.  Commodities were crushed as the market questioned the world-wide recovery. Oil is now trading under my short term target of $60 thanks, in part, to a move to curb speculative trading in the markets.  Oil looks even lower from here. The leading exchange, the CME, is down almost $80 a share in a flash as trading should decline sharply if trading regulators have their way.

Shipping Flashing Early Warning Signal - Again?  Shipping or port statistics was a leading economic indicator before the 2008 collapse. Amrita Sen at Barclays Capital says the number of Baltic Dry ships waiting to berth — mostly in China and Australia has begun to fall after peaking at 154 in mid-June. The Capesize Iron Ore Port Congestion Index is replicating the pattern seen a year ago just before the commodity boom tipped over.  Sen says, “The anecdotal evidence we are hearing is that vessel queues have been falling.  There are reports of cancelled tonnage from China pointing to a slowdown in Chinese buying of coal and iron ore. We are definitely expecting a correction."

Roger Altman, a former Treasury official, discusses the growing US budget deficit and escalating US debt and says, "[it is the] most serious and fascinating fiscal policy challenge I've ever seen." He further writes, "The administration is in a nearly impossible situation. Growth is going to be distinctly subnormal for 2010 and 2011.  The deficit outlook will emerge as much worse.  You can’t withdraw stimulus, i.e. pursue deficit reduction when the economy is so weak but the public and financial markets will be rebelling over $1 trillion deficits as far as the eye can see. This will be Gettysburg for Obama. Hopefully he’s in a blue uniform."

For the first time Obama's strongly unfavorable ratings now exceed his strongly favorable according to Rasmussen Reports, an independent pollster. Thank God.  The is a new coalition of 15 conservative democratic Senators that should prevent Cap and Trade, health care reform, more government takeovers and more budget blowouts from moving forward as currently planned.  Yes investors, there is a Santa Claus.

Again, Barron's Alan Abelson slices through the housing recovery BS of the Obama administration with pithy comments from an old favorite Mark Hanson of Hanson Advisors. Obama has made home loan modification the cornerstone of his recovery program (not the stimulus package) because until we solve housing we have solved nothing. Guess what?  After months of working with the bank modifications of non-defaulted loans, defaults range from 34% to 59% at various banks.  Re-defaulted loan modification from already defaulted loans range from a low of 62% to 80%. So much for saving your home.

Instead see Hanson's thoughts.  "Loan mods," Hanson contends, "are designed to keep the unpaid principal balances of the lender's loans intact while re-levering the borrower" and are worse than all those horrors concocted by mortgage bankers during the bubble mortgage. Modifications, he thunders turn "homeowners into underwater, over-levered renters for life, unable to sell, re-buy, refi, shop or save. They turn homeowners into economic zombies." So much for a housing recovery anytime soon.

Ok, as an investor, tell me what this means to me. First and foremost much lower returns ahead. The government will control over 30% of the economy. Historically, the market has enjoyed historical average market returns of about 8-10% over the past 50 or so years.  Ain't happening going forward. For general investor population look for a 4-5% annual return if you are lucky. You must become more proactive regarding your financial well being. Trade more and hold fewer but larger positions in sectors slated to benefit from the new future outlook.

Charles Schwab’s general comments in this week’s Barron's, paraphrased - We're building a vast reservoir of potential inflation.  He hopes it stays low but there's an argument out there it could be 10% in a few years.

Think reflation but not yet.  If the market gets down near 820 I will begin to sell puts on a number of our recommendations and if lower start to add calls and stocks.  Patience!!  With any luck we'll trade in a sideways-to-down market for the next two months until the seasonally strong bias starts late Sep/Oct.