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Yesterday’s market drop was based on old news (the world’s economy is weak) and built up negative sentiment very quickly.  The VIX Fear & Greed Index went back over 30 as options premiums expanded.  That probably means we’ll see a bottom soon, maybe at 890 but more likely at 842.

While the bullish case is not derailed by yesterday’s move, I was disappointed that yet more work needs to be done before the move to 1060.  I think that is where this market is going, but days like yesterday reduce the chances of pushing on from there to the next big attractor/repeller level at 1160.  We’ll have to see if the news for the rest of the week can overcome today’s renewed fear of a weak economy.
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Protect and Grow Your Investment Portfolio, Join Me at the San Francisco Money Show!

I’m inviting you and a friend to join me for the San Francisco Money Show, Aug. 21 – 23, at the San Francisco Marriott.

Get your free tickets now by clicking here.

This volatile market environment presents investors with some of the biggest challenges and opportunities in recent history. Not since the Industrial Revolution has the financial landscape seen such a major shift in the way wealth should be held today.  The recession is over and the deflation in asset prices is nearing an end, but inflation is about to rear its head in a BIG way.

That’s why it’s so important that you attend this show! It will be three days of intense investing seminars designed to help you protect, manage and grow your portfolio.  People who “got it right” like Jim Stack, Peter Schiff and I will be there to go over our latest thinking – not that we agree!

In addition, I’ll have two sessions, one focused on the big picture that will rule the investment world for the next five to ten years, and one on the MegaShifts that will help you identify the emerging trends that will give you the biggest profits over the next decade. Of course, I will name names by telling you the stocks I want you to buy to invest in these MegaShift trends – and the ones to avoid.

Here’s my session schedule:

SATURDAY, AUG. 22

2:10 p.m. to 2:55 p.m. – Survive The Great Inflation Ahead

SUNDAY, AUG. 23

8:00 a.m. to 8:45 a.m. – Stock Winners In The Great Inflation Ahead

As always, my goal is to meet with you face-to-face, talk about the most effective strategies for managing your portfolio in these challenging times, and answer your questions.

Get your free tickets now by clicking here.

I’m looking forward to seeing you in San Francisco!

Michael

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Dear New World Investor:

The recession is over.

That may look like a nutty statement to you, as nutty as this from the March 5 Radar Report, the day before the market bottom:

“Today’s drop to 678 intraday and close at 682.55 will probably be followed by a touch of 664 tomorrow, after the awful labor numbers come out. That would be driven by lots of investors just giving up, which is exactly what the market needs to clear the decks for a sprint to 750 and, perhaps, just maybe, beyond. We’ll know soon how this will play out.”

“Here is my short-term and, more important, long-term take. Near-term, the S&P 500 is way oversold. The following chart shows that the gap between the current level of the Index and its 200-day moving average is at near-record levels, about 35% below the 200-day moving average. Last November 20 there was a one-day gap of 39.7%, just before the market entered a five-day, 19% rally. We saw similar gaps during the Great Depression, each of which also preceded powerful upside reversals. It certainly looks like the market is setting up for at least a corrective bounce.”

“Beyond that, 12-year lows are very rare. Aside from Monday’s retest of the 1997 low, it has only happened two other times, on April 8, 1932 and on December 6, 1974. The 12 year low in 1932 was about three months before the end of the bear market. In 1974, it was the exact low for that bear market. In both cases, the economy continued to contract, unemployment continued to climb and GDP stayed weak – all typical of recessions. That’s why economic surveys lag the market turns. After the 1974 bear market low in December, the March 1975 quarter GDP fell 4.7%, the worst drop of the whole recession, yet the Dow shot up 24.7%. Today’s fear levels after the nearly vertical drop of the last three months make a contrarian’s heart warm.”

You have to remember how bearish people were at the March lows. I discussed in that same Radar Report how wrong one TV guru was in his belief that price/earnings ratios had to come down at least 25% more to get the Dow to 600, blah blah. He missed the first 35% of this new bull market, and has finally turned bullish. Many others have not. But being right on the market and being right on the economy are two different things, so let me tell you why I opened with and am repeating:

The recession is over.

That means when the National Bureau of Economic Research gets around to dating this recession, I predict they will pick June 2009 as the bottom. I know it doesn’t feel that way now. After all, if July is just a bit better than June, it will still be terrible and the year-over-year comparisons will be awful. That’s how it always is at the bottom of a recession.

Furthermore, there is lots of bad data coming. How can I say the recession is over when it is obvious that unemployment is going to continue to climb for months, possibly the entire rest of the year? New jobless claims improved a bit today, but were still over 600,000 for the week. The average duration of unemployment – the number of weeks people are out of work – has been steadily climbing and I agree will certainly get worse. Consumers are sitting on their hands and saving money, so the ratio of installment credit to personal income is sinking. The weakness in consumer spending even is showing up in the consumer price index for services, which is increasing each month at very low rates, if at all.

What about business capital spending, currently in the toilet and doomed to remain there, according to most surveys? (The main exception is enterprise software spending, where surveys of future spending are showing the first signs of life.) And don’t forget labor costs per unit of output, which remain stubbornly high because companies are not cutting costs fast enough to keep ahead of declining output.

Add in unwanted increases in inventories as consumers continue to sit on their hands. That shows up in the inventory-to-sales ratio, which may have further to climb (bad) or be topping now, but is likely to stay high for a while. You can bet you’ll hear some bearish economists on CNBC talk about that over the coming weeks and months. And weak demand will show itself in a continued low Fed funds rate and prime rate, as the Fed frets about economic weakness and the threat of deflation. The weakness in commercial and industrial loans outstanding shows it is not just consumers sitting on their hands; corporations aren’t borrowing money to spend and help out this economy either, even if prime interest rates are low.

So, what does this litany of future woe have in common? The average duration of unemployment, the ratio of consumer installment credit to personal income, the consumer price index for services, the inventories-to-sales ratio, changes in labor costs per unit of output, the average prime rate, and commercial and industrial loans outstanding?

These are the

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Dear New World Investor:

BPS replaces MPH. Bits per second replaces miles per hour as the electronic highway becomes more central to the world economy than the concrete highway. The New Economy replaces the Old Economy, so Cisco Systems (CSCO) replaces General Motors in the Dow Jones Industrial Average, joining IBM (dumped in 1938, back in 1979), Hewlett-Packard (1997), Intel (1999) and Microsoft (1999). GMW replaces GM as the stock symbol for Government Motors, the “W” marking the stock as a bankrupt company. They normally add “E” to a symbol to designate bankruptcy, but GME was already taken by GameStop, a Grapevine, Texas retailer of video games. After all, someone thought when assigning the GME symbol, we’ll never need it for GM – they’ll never go bankrupt.

Last August at the San Francisco Money Show I said GM would file bankruptcy by the end of the year, but thanks to billions of taxpayer cash, they held on for an additional five months. I’m not clear why

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