Too Many Moving Parts
Research for Online Investors

by John Dalt

5/19/10

We have a short letter today as your editor is busy in the market.  We have a lot of moving parts coming together in a perfect storm to cause traders and investors great concern.  If you are not watching the market closely we closed Tuesday at 1120 on the S&P.  This is the level of resistance the market encountered in February when we were recovering from the swoon in late January.

The 200-day moving average is at 1101.  We don’t want to penetrate this level of support.  The market has now fallen 8% from the highs in January.  Decisions in these circumstances are difficult, as we don’t know what the future holds for the markets.

We are sitting at a precipice, waiting for some piece of information to push us into the bathtub or nudge us higher.  Six months from now, our decisions may look silly, let’s look at the information we have, and what it tells us.

The euro is at a four year low.  This fact has driven the cost of most global commodities down from their highs, when priced in dollars.  Crude oil (USO) is trading 20.4% below its high at the beginning of April.

The Chinese economy is overheating with rising prices on real estate.  The government has applied the brakes through the financial sector by increasing capital requirements.  Chinese exports increased last month, as they regained a balance of trade surplus.

The Chinese currency (yuan) is pegged to the value of the dollar.  The U.S. is pressuring China to let the yuan appreciate against the dollar.  The dollar has appreciated against the euro over 8% in the last two weeks.  Thus, China’s currency is rapidly pricing their products out of their number one export market (Europe).  If the Chinese let the yuan appreciate against the dollar it would compound their pricing disadvantage for exports.

The European Union countries that use the euro may come to an impasse on agreement in managing the currency.  The disparity between Greece and Germany may prove too large a divide to cross.

One final input for our consideration.  U.S. companies are growing profits.  Approximately 80% met or beat their estimates for the fourth quarter, and earnings for the first quarter seem to be improving.

We are watching, and closing positions with small losses in the SwingTrader, rather than let them run away from us.  (We have a few we are caught in.)  The danger now is understanding our Rat Brain.  Are we scurrying to hide after the damage has been done?  Are we ignoring the danger, preferring to play dead, hoping the danger will pass?

We don’t think things are near as bad as the market is trying to price.  We are reminded of Warren Buffett’s saying, “Value is what you buy, price is what you pay.”  I didn’t look that up, so don’t write me with a correction.  My memory isn’t perfect but that is close enough when the market is rollicking.  Aw, go ahead and correct me if you want!

The important thing is sleep well at night.  The market is poised to take us on a roller coaster, if your stomach can’t take it, get off.  There are safe names that should give you exposure to a positive market, but not punish you too bad in a downdraft.  Look at WMT, XOM, and BRK-B for safe stocks during market turmoil.  Turmoil may be the best word we can use to describe the summer ahead of us.

I picked up a family friend at the airport last night.  Andrew flew in from Germany for a four week visit in the U.S.  I spent an hour in the car, talking politics and economics from his perspective.  He is not happy that Germany is rescuing Greece.  If I might paraphrase, “The Greeks retire younger and are paid more than in our country….Not Good, Not Good.”

The scary thing Andrew thought was the “reformulated” Communist Party might have the answers.  This has been a source of irritation since the ‘90’s, as Andrew’s family was caught behind the Iron Curtain.  He grew up in a police state, with cradle to grave socialist programs and very little incentive to work hard.   Why work when you could not get ahead, if you did make any extra money the government took it.  Is this where we are going?

There is a lesson to be learned from Andrew.  Socialist programs and mentality are hard to end.  After 20-years of rebuilding by West Germany, the old East Germans would rather return to the “safety” of the communists than live under the velvet glove of Germany’s social safety net.  It really astonishes me.

I will bring you more of Andrew’s observations in the future.

Quote for today, sent by paid up subscriber T.M.

'In the first place, we should insist that if the immigrant who comes here in good faith becomes an American and assimilates himself to us, he shall be treated on an exact equality with everyone else, for it is an outrage to discriminate against any such man because of creed, or birthplace, or origin. But this is predicated upon the person's becoming in every facet an American, and nothing but an American...There can be no divided allegiance here. Any man who says he is an American, but something else also, isn't an American at all. We have room for but one flag, the American flag.... We have room for but one language here, and that is the English language... And we have room for but one sole loyalty and that is a loyalty to the American people.'—Theodore Roosevelt, 1907

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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