CF Industries

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The chart above shows a chart moving from Stage 1 (sideways consolidation at the bottom, to Stage 2 (uptrend). It's a chart of CF Industries. Although this is exactly what the breakout marking the end of Stage 1 would typically look like, this may not be one of those times. Agrium placed a hostile takeover bid for CF Industries, causing the stock to spike.

Either way, it's still important to note that the fertilizer stocks are faring better than the broader market (demonstrating excellent relative strength). The takeover attempt is yet another healthy sign for the sector. First, it tells us that AGU has quite a bit of cash. Not bad, given the times. Second, it tells us that insiders see value in their competitor's stock price. What better vote of confidence than a vote from insiders themselves about what their stocks are worth? We normally only find out what the insiders knew after it's too late. Their vote to attempt to buy a fertilizer stock at this time suggests that they are fairly valued factoring in every metric including whatever corruption only insiders are typically privvy to. It's an inside peek into the health of these companies, both for CF and AGU.

Cramer

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We love Cramer's optimism and passion for his work, but it is nevertheless important to question his advice from time to time. Many blogs have been set up specifically to bash Cramer. This is not one of them, but we can't help but notice how his "recession-proof" stocks have fared.

In late 2007, Cramer warned that the market looked very ominous. He suggested that investors "stay in the game", but exercise caution. He chose a handful of "recession-proof" stocks that were intended to protect your capital while keeping you invested.

The two stocks we remember him choosing were FWLT (Foster Wheeler), and FCX (Freeport McMoran). FWLT is down about 71%, and FCX is down about 75% since that recommendation.

The chart above is of FCX.

On March 14, 2008, Cramer chose a new group of "recession-proof" stocks. Again, intended to preserve your capital while keeping you "in the game". This time, he chose AVP (Avon), HLF (Herbalife), and TUP (Tupperware). Since that recommendation, AVP is down 53%, HLF is down 60%, and TUP is down 56%.

Without being overly critical about Cramer's investing acumen, it's important to note that no stocks are "recession-proof". In a bear market, the best approach is to avoid ALL individual stocks. Make a note of that, because no bear market in history has ever rewarded stock pickers.

Here's a link to the article/video in which Cramer chooses his "recession-proof" portfolio...

http://www.cnbc.com/id/23638778

The stock prices in the text of the article are constantly updated, but if you watch the video, you'll see that the stock picks were made in March when the stocks were much higher.

(Please vote in our updated poll)

Long Term Dow

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The chart at the top is a chart of the Dow from 1969 to present. It's a log chart, wherein each vertical unit equals the same percentage as the others. This removes the parabola effect charts tend to have when viewed long term.

The way we see it, from 1964 (not shown) to 1982, the market went sideways (for 18 years). Then it expanded from 1983 to 2007.

2008 changed everything, and we've now entered a new stage for the market. Although we've drawn the trendline in such a way as to make it look like 2008 was the start of a whole new macro-trend for the market, there is another possibility. 2000 may have been the top, and we've been in a sideways market ever since. This certainly would jive with the 18 year cycles the market typically has, as shown on the lower chart.

This chart shows that the market goes up for 18 years, then consolidates for 18 years. If 2000 was the top, then 2018 will start the new bull market. Good news, we're halfway through the market's consolidation phase!

If we truly are in the midst of an 18 year consolidation which began in 2000, then the market's highs and lows may have already been carved out... more or less. Of course, 1000 points on this chart just looks like a blip. Nevertheless, a look at the market's last major consolidation (from 1964 to 1982) shows a market that moved in a 50% range, from 1,100 to 550. This is very similar to the range we're trading in now, from 14000 to 7000.

If you believe that macrotrends repeat themselves, then you would be looking for the market to bottom soon, rather than looking for the Dow to continue its slide to 5,000.

Eric & Shana

The SEC has compliance officials whose job it is to make sure investment firms comply with the rules. In turn, investment firms have rules-compliance lawyers to prove their firms are in compliance.

Eric Swanson (top left) was a top SEC compliance official who worked for the SEC when they found no problems with Bernie Madoff's books over the past few years.

Shana Madoff (top right) was a rules-compliance lawyer at Madoff's firm, and is the daughter of Bernie Madoff's brother, Peter, who was head of compliance at the firm.

So on one end you have Eric Swanson, the investigative arm of the SEC, dealing with Shana and Peter Madoff on the other end, who both work to provide proof that the firm is following the rules.

The burning question is this... why are Eric Swanson and Shana Madoff looking so friendly in the picture at the bottom? Is it photoshopped? After all, they are opposing forces in the fight against corruption on Wall Street. These two, of all people, should be at arm's length. Our trust in the backbone of our nation's financial system, free trade, depends entirely on these relationships being kept strictly at a professional level. Would you be suprised to find that Eric Swanson and Shana Madoff are actually a married couple? One can only imagine what conversation must be like at their Thanksgiving dinner. Truth is stranger than fiction.

LDK

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After the bell today, LDK warned investors that it will post a loss for Q4 2008 when it reports earnings on March 11th. This will be the company's first quarterly loss. The loss comes amidst lower demand and falling prices... a lethal combination for any company.

We may be way off base here, but our guess is that the stock will stay in the single digits for all of 2009, and may even fall below $5 at some point. If the company survives this recession/depression, its stock will not show signs of life for at least another year. Bottom line... you should not look at tomorrow morning's gap down as a buying opportunity. For at least the next 12 months, your money will be better off under a mattress than in LDK.

We once owned and supported LDK, but jumped ship when the stock broke down from its uptrend on 10-03-2007 when an insider leaked rumors of an accounting/inventory scandal. At that point, we decided that Chinese business antics, although entertaining, were not something we wanted to expose our capital to.

Long story short, we'd seen similar tragic companies in the past, and tried desperately to warn investors that the company was a rotten apple, but found that for some unexplained reason, it had developed a cult-like following. Its investors did not approve of our warnings, which eventually led to us starting this blog. We continue to dislike LDK primarily because its CEO holds almost all of its outstanding shares. Now that we're in an economy where people are struggling to buy milk, plans to put solar panels on their roofs have been shelved. Meanwhile, oil prices have plummeted and now they've forgotten they wanted solar and yada yada, you get the idea.

Gary

We haven't been checking in on Gary's performance lately knowing that many of his stocks reversed course and ruined his overall performance. Still, suprisingly enough, his approach is resilient enough to beat Buffett. Since Gary chose his stocks 15 weeks ago (on November 3rd), he has lost 5.0% compared to a 27.2% loss for Buffett's Berkshire Hathaway, and an 18.2% loss for the S&P500 index. For the record, we actually like Warren Buffett. He did not swindel investors out of their capital. Anyone working on Wall Street and not blatantly stealing from the investing public is a hero by today's lax standards.

Remember, Buffett is outperforming other big names like Icahn and Kerkorian. All in all, despite "Gary version 1" being a failure of sorts, his performance makes the experiment nonetheless compelling.

What Gary taught us...

Some of Gary's small caps made sharp reversals of trend, while his large cap names remained more stable and predictable. We knew this going into the experiment, and were told by readers that the imbalance was a flaw in the system. We took the stance that "Gary version 1" was allowed to be flawed. After all, he's a chimp. His performance will theoretically improve with human interference in later versions... or at least we hope.

Large cap 3M (MMM) was one of Gary's shorts. It did exactly what it was supposed to do, and probably will continue to. On the other hand, one of Gary's longs, LPHI, did the opposite of what it was supposed to do. It reversed course. LPHI trades approx 200k shares a day compared to MMM's 6 million.

Another lesson from "Gary version 1" is that short term timing is critical. Gary bought his stocks at all points in their channels, paying no mind to short term timing. He spent a long time treading water, or underwater, on stocks that eventually moved in his direction.

And finally, he taught us that when a stock breaks its channel and/or moving average, it should be replaced by a new candidate.

.......

Of course we knew these things going into the experiment, but at least now we have a control for future experiments. We're going to start up "Gary version 2" very soon so we can see if human intervention can get us closer to our goal. And what is that goal? The goal with the Gary experiment is not to create an environment in which we can all poke fun at the "pros" and feel better about our own performance, but instead to create a system that works over time, regardless of market direction. In our opinion, there is very little that is predictable about the stock market. Even fundamentals are sometimes thrown by the wayside, and therefore cannot be trusted. There is one thing, however, that seems to be true again and again. And that's the overall compulsion stocks have to continue in the direction in which they're currently headed. That is to say that stocks spend the majority of their time moving in one direction, and a small amount of their time reversing course.

Our Gary experiment is an attempt to harness some quantity of that phenomenon and package it into a simple system that can generate profits with little maintenance consistently over time regardless of the market's sentiment.

Can't Buy Here

We wanted to buy some more SSO when the Dow reached its November lows, and now that it's happening, we find ourselves unable to pull the trigger. And it's not because of fear, or because we want a better price. It's because we strongly feel that investing in any stock or index fund at this time is a "yes" vote for a system that supports criminals such as Madoff. And now there's Stanford, another $50B investigation that surfaced this past weekend.
The government has demonstrated to the public that corruption and theft on Wall Street is an acceptable practice. How can we vote "yes" when we don't agree that corruption and theft are acceptable? We cannot in good faith support a system that rewards bad behavior. It simply goes against our principles.
So while we struggle with this crippling moral dilemna, here's something to think about...
Toyota, now the world's largest automaker, posted their first annual loss since 1980. Until now, the Japanese automakers were seen as bulletproof, at least compared to their domestic counterparts. If there was any doubt about this recession/imending depression being global, there should be no doubt now. Toyota (TM) actually makes a good short, as it's in a Stage 4 downtrend, yet close to its moving average. We have nothing against the company itself, it's just that with U.S. automakers selling at less than $2 per share, a fair price for TM in this economy is probably in the ballpark of $10 - $15. GE may even be below $10 soon.
With oil making new lows every day, you would think there would be some relief at the pumps. But then, you'd be wrong. Oil companies are getting rich, and the wealth is certainly not going to their shareholders. Well, except for Cheney and other high-ranking government officials. If you want to question Cheney in depth about his retirement package with Halliburton, we hear he'd be happy to take you on a "hunting" trip.
But it's not all bleak out there. Here's a silver lining...
There was a time when investors, in addition to doing all other fundamental research, faced the overwhelming task of trying to guess which privately-run company was being truthful. Now that the government is taking over our banks, insurance companies, automakers, etc, investors can look forward to a new era of truth in accounting practices! With the government at the wheel, we expect this new era to be corruption-free and completely transparent!
Ok, the Dow is down 280 now. Maybe other investors don't share our enthusiam about the new, government-run corporate America, backed by the full faith of a government that rewards criminal activity. Wait a second, we're back to where we started this post. So much for a silver lining, this country's going to hell in a handbasket! The only thing that could make us even have a sliver of hope in restoring our faith in America would be to see Madoff and his sons behind bars. From there, we could start to repair the psychological damage the S.E.C. has done to our confidence in Wall Street. Until then, it's really, really hard for us to pull the trigger.

The Dow

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We've been bullish for the past 4 months not so much because we thought the market was headed much higher, but because we figured it wouldn't crash again after its big drop in October. We were expecting either a snap back to the averages, or a long sideways consolidation to the averages. Either way, the market over any "multi-month" term is attracted to the averages like a magnet. In this case, while they didn't snap back to them in a single formidable rally, the gravitational pull of the averages helped keep the market bouyant for the past 4 months. This consolidation could continue for another few months, going by the support and resistance lines drawn on the chart of the Dow above. The resistance line of the triangle is actually getting pretty close to the 100dma. At some point, the market will have to make a decisive move one way or the other. We're hoping for another leg down, as we remain only 30% invested.

If you want to feel good about the market, you can seek solace in the fact that the Dow is the worst looking index chart. The Nasdaq and S&P are outperforming it. This may be due to the Dow's dependance on its financial stocks, which of course are weighing heavily on its performance. Some stocks in the Dow-30 do not even meet the criteria to be in the index at this point. Some have suggested that this makes it a broken index, and its performance is therefore not indicative of the health of the broader market. While there is some truth to this, we strongly believe that its psychological effect on investor sentiment cannot be ignored. Even if the Nasdaq and S&P were to remain above support, and just the Dow were to break down to a new low, the headlines would make it appear that the world is ending. A new low for the Dow could easily lead to a new low for the other indexes.

We will continue to watch and wait while the market remains in its consolidation phase. Only a return to 7500 would pique our buying interest. Maybe adding another 10% at 7500 would make sense. But we're saving the other 60% for the "big puke", if it ever comes to pass. Just our opinion, but if the market does break to new lows, it will be another one of those "taking out the stops" scenarios, where it breaks it quickly and not by much more than a few hundred points. In other words, a Dow bottom of 7,250 is more likely in our minds than a Dow bottom of 6,000.

S.E.C.

Linda Thomsen, the head of the unit responsible for ferreting out securities fraud at the SEC, failed miserably in her multi-year quest to maintain what little confidence the public once had in the financial markets. Of course she cannot be blamed for the credit crisis, but she is at the center of the confidence crisis. By ignoring numerous credible tips about Madoff and other scam artists over the past several years, she enabled these opportunistic parasites to take control of our financial system, and determine the fate of our confidence in its future.

We understand that along with $50B comes hardcore politics such as, perhaps, the Russian mob, threats to personal safety, cash and prostitution bribery, inside plea bargains, etc. One can only imagine the intricate web of politics connected to a $50B scandal. Whatever the reason Thomsen chose to not do her job, we are left to deal with the consequences. The good news, and the reason for this post, is that a replacement is currently being sought for Thomsen.

It's amazing to think that during the years of one of our country's greatest economic expansions, CEO's, regulators and lawmakers were asleep at the wheel. From 2001 to 2006, the U.S. was on autopilot, relying heavily on the working class to pick up the slack. The guys banging the nails were on the job from 6am to 6pm every day, while the CEO's were out playing golf and drinking beers with folks like Linda Thomsen. And now they're asking for our tax dollars to bail them out!

We liked Obama's move to cap CEO's salaries at $500k for any company receiving Federal bailout money. That just makes sense. He makes sense. Another few years of good moves like that may just reverse some of the damage Bush has done. We have a lot of hope for Obama, because he did not grow up with a silver spoon in his mouth. Our country is long overdue for leadership that is grounded by the reality of hardship.