S&P 500 Addition of First Solar Idiotic

I heard this evening that First Solar (FSLR) will be added to the S&P 500 index when Pfizer closes its acquisition of Wyeth soon. First Solar is an innovative fast growing solar firm. However, there is a glut of solar cells on the market which is expected to cause a decrease is solar pricing and margins. As a result, this is another case of S&P adding a company to its index when the company is at its peak. S&P did the same thing during the technology boom adding Yahoo and others to its index during the height of the tech bubble. This action once again demonstrates why the S&P 500 is a not a good index to be invested in.

Down Day but Optimism for Hotel REITs

The markets were lower today with 4 stocks up for every 5 stocks down. Notable today was a continued increase in casino and hotel REIT stocks. The most beaten down and speculative securities have continued to outperform in this market. I have serious concerns that this winning streak will not be able to continue forward.

No Social Security Increases for the next two years

I was watching NBC Nightly News tonight and Brian Williams announced that there will be no increases to Social Security for next year and the year after.

Sure looks like no inflation on the horizon anytime soon.

It is amazing to watch the action in the commodity stocks today. Energy, Metals, and Agriculture all up big today. Is stagflation in the future? I think there will be pockets of inflation as there was a discussion on Fast Money tonight that water prices will soar over the next few years because of a lack of supply. Scary news!

Let's hope for the best.

Swine Flu Adding Pressure to Stocks

The swine flu continues to spread throughout the world, causing stocks to feel downside pressure this morning. Also not helping is the Federal Government telling Citigroup and Bank of America that they need to raise more capital. Trading continues to be challenging in this market.

Market weakness continues. Strength in metals and agriculture.

Market weakness continues with financials leading the way lower.

From Jan. 1st through the 17th:
The S&P 500 is down 5.9%
The Dow Jones is down 5.6%
The Nasdaq Composite is down 3.0%

Strength is currently being experienced in Metals and Agriculture.

Ride these sectors until they cross back below their 50-day moving averages.

HENRY's Susceptible in this Recession

The latest BusinessWeek magazine highlights HENRYs (High Earners, Not Rich Yet) which are families that earn $250K - $500K per year, but who are vulnerable to the economy due to the lack of job security given their high earnings. These families have seen their costs for child daycare, private schools, and paying college expenses for their children increase dramatically along with the increase in the AMT tax. Due to these high costs, these families have not saved susbstantially to be self sufficiently wealthly in an economic downturn making their earnings very vulnerable to today's recession. The impact of these high wage earners to the overall economy is still uncertain, but even this group of high wage earners is getting squeezed today.

Hardly anyone has been immune from the current credit crisis and its effects on the economy.

Will the U.S. Follow Japan?

Will the U.S. Follow Japan into nearly two decades of stagnant growth?

I believe the risks are increasing that the U.S. will act similarly to Japan.

Full-time jobs are hard to find in both the U.S. and Japan. Innovation has become more expensive and productivity gains have continued to slow. The social burdens of caring for an older population keep growing. The high value of both the Yen and Dollar impede economic growth by discouraging manufacturing and imports. Deflation has become a growing threat to both economies. Each generation lacks more ambition than the previous generation. Interest rates are gradually heading towards zero. Fiscal stimulus by both governments have failed to ignite either economy. Spending has slowed dramatically and savings are increasing for both economies as well.

The similarities between the U.S. and Japan is quite scary. I do not see how the U.S. will be able to avoid the same fate as Japan.

I hope I am wrong.

Is the Market Rally This Past Week Sustainable?

The U.S. stock market appears to have rebounded nicely this past week?
Was it end of month window dressing or an indication that fundamentals are improving?

Here is what we know:

1. Earnings estimates for 2009 are still too high and will need to be revised lower.
2. Job cuts are continuing at a rapid pace and unemployment will continue to grow.
3. Balance sheet deterioration in financials and insurance companies continues.
4. Consumer confidence is at record lows.
5. There is no sign of a bottom in real estate yet.
6. Commodity deflation will effectively lower prices over the next 6 months.
7. Social Security checks will increase 5.8% in January.
8. Private sector workers will most likely get no increase in pay in 2009.
9. A second federal stimulus package will probably be passed in 2009.
10. The Federal Budget deficit will continue to grow enormously in 2009.
11. The strong dollar will make exports less competitive and reduce earnings for multi-national firms in 2009.
12. The U.S. trade deficit may improve in 2009 if imports decline dramatically due to a slowing U.S. economy.
13. Retirements will be delayed by millions of baby boomers in 2009 due to the market losses in 2008.
14. No country in the worls has been immune from the effects of the U.S. credit crisis. We are one world whether people acknowedge it or not.
15. Mutual fund window dressing ends in October. Funds typically sell losers and hold winners that month. Were there any winners to hold on to?
16. The U.S. stock market rebounds typically 6 months prior to any bottom in the economy.

So is the U.S. economy ready to rebound in 2009?
Most likely not.

However, bond yields and dividend yields on stocks are looking very attractive relative to U.S. treasury bonds these days, making these securities more attractive in today's market.

Unfortunately today's market is still requires one to tiptoe and sift through for potential opportunities. Market opportunities found today will require patience as the market recovery will most likely be very slow and drawn out.

So in answer to my title for this post, th market rally this week appears to be sustainable over the long-term, but not so much over the next 6 months.

Major Short Covering Today

The biggest gainers in the U.S. stock market today are the Financials, Home Builders, Restaurants, Airlines, Hotels, and Consumer Discretionary companies.

All of these sectors have been heavily shorted with 10% or more of the outstanding shares being bet against.

Traders are unwinding these short positions resulting in large gains of 5% or more in these stocks.

Both high-quality and low-quality companies are increasing in value today.

This is a good time to continue to hold certain high-quality names for the long-term while taking profits or establishing new short positions in lower quality names.

Commodities Falling Rapidly Today

With global growth coming to a standstill and recession spreading from the U.S. to the rest of the world, demand for commodities is falling.

Today, gold is down $30/oz. and oil is down $10 per barrel.

The U.S. dollar also is gaining value today, especially relative to the Pound, Euro, Canadian $, and Australian $.

The gain in the U.S. dollar is exacerbating the downside move in commodities.

The relief in commodity prices is welcome for those of us who have had limited pay increases over the past two years.