Market Cycles and Self-fulfilling Prophecies

By AdamKhoo http://www.ProfitFromThePanic.com ========================================== "How To Make Your Fortune From The Greatest Investment Opportunity Since The Great Depression!" ========================================== The market is a predominantly irrational place filled with many investors who will believe anything and everything. Therefore, it is not a surprise that superstition and self-fulfilling prophecies prevail. That's actually not a bad thing if you realise how you can leverage on knowing when and what will happen. It can help you decide whether to profit take or hedge your position. Here are some interesting events that have been observed to happen. However it is important to note there are exceptions when they do not occur. Pattern 1: January Barometer Often used by analysts as an indication of the year's sentiment. If January ends down, the year to follow will be bearish (downward trend). If it closes up, the year will be bullish (upward trend). During election years when the first five days of January closed down with the month of January also down, the year had always closed negative. Pattern 2: The January Effect Here's a bit of January Effect Trivia: Traditionally in bullish years, the 10 best performing stocks on the S&P 500 will end the year up, while the 10 worst performers will go down. Pattern 3: Sell in May and Go Away A trader's superstition that has more credit than most would like to admit. The months from November to April are often bullish, while May to Halloween (end October) are bearish. September is traditionally one of the worst months of the trading year. Other interesting trivia: ------------------------- 1) The first trading day of the month is reliably a very bullish day - often the month's most bullish. 2) April is the most bullish month of any trading year. 3) Quarter 3 is the worse quarter of the trading year starting with July and ending with September - with September being the worst of those three months. 4) November, December and January make up the best three months of a trading year. 5) The end of October starts the best six months on the S&P500 and the start of the best eight months on the NASDAQ. To your investing success, Adam

Companies with the Biggest Earnings and Losses (2008)

Top 10 Company Earners in 2008 1. Exxon Mobil - $45.22 Billion 2. Chevron - $23.93 Billion 3. Microsoft - $17.68 Billion 4. General Electic - $17.41 Billion 5. Wal-mart - $13.40 Billion 6. Johnson & Johnson - $12.94 Billion 7. A T & T - $12.87 Billion 8. IBM - $12.33 Billion 9. Proctor and Gamble - $12.07 Billion 10. Hewlett Packard - $8.33 Billion- Stock Article Link Top 10 Company Losses in 2008 1. AIG - $99.3 billion 2. Fannie Mae - $58.7 billion 3. Freddie Mac - $50.1 billion 4. General Motors - $30.9 billion 5. Citigroup - $27.7 billion 6. Merril Lynch - $27.6 billion 7. Conoco Phillips - $17 billion 8. Ford Motor - $14.7 billion 9. Time Warner - $13.4 billion 10. CBS - $11.7 billion Stock Article Link

Focus still on America to lead global recovery

By David Caploe IN THE aftermath of the G-20 summit, most observers seem to have missed perhaps the most crucial statement of the entire event, made by United States President Barack Obama at his pre-conference meeting with British Prime Minister Gordon Brown: 'The world has become accustomed to the US being a voracious consumer market, the engine that drives a lot of economic growth worldwide,' he said. 'If there is going to be renewed growth, it just can't be the US as the engine.' While superficially sensible, this view is deeply problematic. To begin with, it ignores the fact that the global economy has in fact been 'America-centred' for more than 60 years. Countries - China, Japan, Canada, Brazil, Korea, Mexico and so on - either sell to the US or they sell to countries that sell to the US. To put it simply, Mr Obama doesn't seem to understand that there is no other engine for the world economy - and hasn't been for the last six decades. If the US does not drive global economic growth, growth is not going to happen. Thus, US policies to deal with the current crisis are critical not just domestically, but also to the entire world. This system has generally been advantageous for all concerned. America gained certain historically unprecedented benefits, but the system also enabled participating countries - first in Western Europe and Japan, and later, many in the Third World - to achieve undreamt-of prosperity. At the same time, this deep inter-connection between the US and the rest of the world also explains how the collapse of a relatively small sector of the US economy - 'sub-prime' housing, logarithmically exponentialised by Wall Street's ingenious chicanery - has cascaded into the worst global economic crisis since the Great Depression. To put it simply, Mr Obama doesn't seem to understand that there is no other engine for the world economy - and hasn't been for the last six decades. If the US does not drive global economic growth, growth is not going to happen. Thus, US policies to deal with the current crisis are critical not just domestically, but also to the entire world. Consequently, it is a matter of global concern that the Obama administration seems to be following Japan's 'model' from the 1990s: allowing major banks to avoid declaring massive losses openly and transparently, and so perpetuating 'zombie' banks - technically alive but in reality dead. As analysts like Nobel laureates Joseph Stiglitz and Paul Krugman have pointed out, the administration's unwillingness to confront US banks is the main reason why they are continuing their increasingly inexplicable credit freeze, thus ravaging the American and global economies. Team Obama seems reluctant to acknowledge the extent to which its policies at home are failing not just there but around the world as well. Which raises the question: If the US can't or won't or doesn't want to be the global economic engine, which country will? The obvious answer is China. But that is unrealistic for three reasons. First, China's economic health is more tied to America's than practically any other country in the world. Indeed, the reason China has so many dollars to invest everywhere - whether in US Treasury bonds or in Africa - is precisely that it has structured its own economy to complement America's. The only way China can serve as the engine of the global economy is if the US starts pulling it first. Second, the US-centred system began at a time when its domestic demand far outstripped that of the rest of the world. The fundamental source of its economic power is its ability to act as the global consumer of last resort. China, however, is a poor country, with low per capita income, even though it will soon pass Japan as the world's second largest economy. There are real possibilities for growth in China's domestic demand. But given its structure as an export-oriented economy, it is doubtful if even a successful Chinese stimulus plan can pull the rest of the world along unless and until China can start selling again to the US on a massive scale. Finally, the key 'system' issue for China - or for the European Union - in thinking about becoming the engine of the world economy - is monetary: What are the implications of having your domestic currency become the global reserve currency? This is an extremely complex issue that the US has struggled with, not always successfully, from 1959 to the present. Without going into detail, it can safely be said that though having the US dollar as the world's medium of exchange has given the US some tremendous advantages, it has also created huge problems, both for America and the global economic system. The Chinese leadership is certainly familiar with this history. It will try to avoid the yuan becoming an international medium of exchange until it feels much more confident in its ability to handle the manifold currency problems that the US has grappled with for decades. Given all this, the US will remain the engine of global economic recovery for the foreseeable future, even though other countries must certainly help. This crisis began in the US - and it is going to have to be solved there too. The writer is the CEO of the Singapore-incorporated American Centre for Applied Liberal Arts and Humanities in Asia.

Big Bank Profits Are Bogus! It’s A Massive Public Deception!

By Martin D. Weiss on April 20, 2009 More Posts By Martin D. Weiss Author's Website A big bank CEO on a mission to deceive the public doesn’t have to tell outright lies. He can con people just as easily by using “perfectly legal” tricks, shams, and accounting ruses. First, I’ll give you the big-picture facts. Then, I’ll show you how big U.S. banks are painting lipstick on some of the fattest pigs ever raised. Six of America’s Largest Banks at Risk of Failure As we have written here so often … as we documented in our recent white paper … as we showed in our presentation to the National Press Club … and as we explained again with new data in our follow-up press conference, the nation’s banking troubles are many times more severe than the authorities are admitting. First, look at the megabanks: The authorities SAY that all of the 14 largest banks have earned a “passing” grade in their just-completed “stress tests.” But just six months ago, the authorities swore that, without a massive injection of taxpayer funds, those same banks would suffer a fatal meltdown. Was the bad-debt disease magically cured? Did the economy miraculously turn around? Not quite. In fact, we have overwhelming evidence that the condition of the nation’s banks has deteriorated massively since then. How can our trusted authorities be so blatantly deceptive and still keep their jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago, for example, he declared that the total losses from the debt crisis would not exceed $100 billion, while conveying the hope that most of those losses could be soon written off. Also around that time, the International Monetary Fund (IMF) estimated the losses would be $1 trillion, with only a small percentage written off. The IMF’s latest estimate: $4 trillion in losses, with only one-third of those written off so far. Bernanke’s error factor: He was 4,000 percent off the mark, in a world where 50 percent errors can be lethal. Meanwhile, based on fourth quarter Fed data, we find that, among the nation’s megabanks, six are at risk of failure in our opinion (seven if you count Wachovia and Wells Fargo (WFC: 16.36 -0.64 -3.76%) as separate institutions). JPMorgan Chase (JPM: 29.05 -0.64 -2.16%) is the nation’s largest, with $1.7 trillion in assets in its primary banking unit. It’s massively exposed to defaults by its trading partners in derivatives - to the tune of 382 percent (almost four times) its risk-based capital. Plus, since it holds HALF of ALL the derivatives in the U.S. banking industry, JPMorgan is at ground zero in the debt crisis.

Citibank (C: 2.65 -0.29 -9.86%) is the nation’s third largest, with assets of $1.2 trillion in its main banking unit. Its total credit exposure to derivatives is a bit lower than Morgan’s, at 278 percent, but still extremely high. Plus, it has other troubles, especially the surging default rates in its sprawling global portfolio of credit cards and other consumer loans. (More on these in a moment.)

Wells Fargo and Wachovia now make up the nation’s fourth largest bank with combined assets of $1.17 trillion. But in the fourth quarter, they still reported separately, which is illuminating: Even without Wachovia’s troubled assets, TheStreet.com Ratings has downgraded Wells Fargo to a D+. Wachovia, meanwhile, got a D. This tells you that Wells Fargo wasn’t exactly the best merger partner, unless you believe in some bizarre math wherein adding two negatives somehow gives you a positive result. SunTrust (STI: 13.80 -0.91 -6.19%), with $185 billion in assets, is getting hit hard by the collapse in the commercial real estate. Its Financial Strength Rating is D+. HSBC Bank USA (HBC: 32.09 -1.36 -4.07%) has massive credit exposure to derivatives that’s even greater than Morgan’s: 550 percent of risk-based capital. We’re not looking at its larger foreign operations. But the U.S. numbers are ugly enough, meriting a rating of D+. Goldman Sachs (GS: 115.01 0.00 0.00%), which reported for the first time as a commercial bank in the fourth quarter, seems to be taking the biggest risks of all in derivatives. Its total credit exposure is 1,056 percent of capital. Bottom line: It debuts as a bank with a rating of D, on par with Wachovia. Regional banks: Banking regulators have been largely mute regarding major regional banks. But several are also at risk of failure, including Compass Bank (Alabama), Fifth Third (Michigan), Huntington (Ohio), and E*Trade Bank (Virginia). Primary reason: Massive losses in commercial real estate loans. Smaller banks: On its “Problem List,” the FDIC reports only 252 institutions with assets of $159 billion. In contrast, our list of at-risk institutions includes 1,816 banks and thrifts with $4.67 trillion in assets. That’s seven times the number of institutions and 29 times more assets at risk than the FDIC admits. What Explains the Huge Gap Between Official Declarations and Our Analysis? We all use essentially the same data. And conceptually, the analytical approach is also similar. The primary difference is that the regulators have an agenda: Instead of protecting the people from bank failures, they’re trying harder than ever to protect failed banks from the people. Specifically … They have forever hidden the names of the banks on the FDIC’s “Problem List,” making it almost impossible for average consumers to get prior warnings of troubles. They have never disclosed their own official ratings of the banks - the CAMELS ratings - making it difficult for the public to find safe institutions they can trust. They have religiously underestimated - or understated - the depth and breadth of the debt crisis. And as I explained a moment ago, they have rigged their recent stress tests to give passing grades to all of the nation’s 14 largest banks, sending the false signal that even the most dangerous among them are somehow “safe.” Legal Cover-Ups, Flim-Flam and Sham In the Big Bank’s “Glowing” First-Quarter Earnings Reports Wall Street is aglow with the latest “better-than-expected” earnings reports by major banks. But take one look below the surface, and you’ll see three of the most egregious accounting gimmicks in recent history. Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away. Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison. Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He’s lost a fortune in his properties. And he’s on the brink of bankruptcy. Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right? But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half. In practice, of course, that’s a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn’t be financially distressed in the first place. And if he weren’t financially distressed, his loans wouldn’t be selling on the market for half price. The reality is that he can’t buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise. That’s why the government would never let real estate developers - or hardly anyone else, for that matter - mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that! It’s the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they’re allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.

Accountants call it a “credit value adjustment.” I call it cheating. Finding all of this hard to believe? Then consider … How Citigroup Mobilized ALL THREE of These Gimmicks to Create One of the Greatest Accounting Shams of All Time in Its First-Quarter Earnings Report I’m outraged. But I’m glad to see that someone besides us is speaking out: Meredith Whitney, one of the few no-nonsense analysts in the industry, says that the banks’ latest reports are, in essence, “a great whitewash.” Jack T. Ciesielski, publisher of an accounting advisory service, calls it “junk income.” And Saturday’s New York Times, picking up from their research, lays out precisely how Citigroup has transformed a massive loss into what appears to be a fat profit … First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million. Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year’s fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion. Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone. So here’s Citigroup’s true math for the first quarter: So-called “profit” $1.6 billion Gimmick #1 $0.4 billion Gimmick #2 $1.0 billion Gimmick #3 $2.7 billion Total gimmicks $4.1 billion Actual result: $2.5 billion LOSS! And all this despite the fact that Citigroup’s loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that: Net credit losses in Citi’s global credit card business surged from $1.67 billion at year-end 2008 to $1.94 billion by March 31. And compared to March 2008, they surged by a whopping 56 percent! (Page 9 of its data supplement.) Foretelling future credit card losses, the delinquency rate (90+ days past due) on those credit cards jumped from 2.62 percent at year-end to 3.16 percent on March 31 (page 10). Credit losses on consumer banking operations jumped from $3.442 billion on December 31 to $3.786 billion on March 31. And compared to the year-earlier period, they surged 66 percent (page 12). By almost every measure, Citigroup’s first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before. My forecast: Citigroup’s effort last week to twist this into an “improvement” will go down in history as one of the greatest banking deceptions of all time. But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis. Bottom line: Rather than the private-public partnership the government has called for to address the nation’s banking woes, we see little more than private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole. My Recommendations In my book, The Ultimate Depression Survival Guide, I give you very detailed, step-by-step instructions on what to do immediately. Here’s a quick summary: Step 1. Get away from risky stocks. Use the recent stock market rally as a selling opportunity - your second chance to get out of danger before it’s too late. Step 2. Get out of sinking real estate. If there’s a temporary improvement in the market, grab it to sell the properties you’ve been wanting to sell all along. Step 3. Raise as much cash as you possibly can - not only by selling stocks and real estate, but also by cutting expenses and selling other things you own. Step 4. Make sure you keep your cash in one of the safe banks on the list we provide on the book’s resource page. Or better yet, follow my instructions on how to buy Treasury bills. They’re safer than any bank, with no limit on the Treasury’s direct guarantee. Step 5. For assets you cannot sell, buy protection using exchange-traded funds that are designed to go UP when stocks fall. The more the market goes down, the more you make; and those profits can offset any losses you suffer in the stocks or real estate that you cannot sell. Step 6. Later, get ready for the big bottom in nearly all markets. That’s when you should be able to lock in relatively safe interest rates of 10 percent or more for years to come … buy shares in our country’s best companies for pennies on the dollar … buy a dream home in a great location that’s practically being given away. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive.

Is Copper Poised For A New Secular Bull Market Run? Probably Not

By Guy Lerner on April 14, 2009 More Posts By Guy Lerner Author's Website Over the last 4 months, copper has bounced about 70% from its lows. Yet it is only recently that such a significant price move is beginning to attract attention as pundits try to explain what is going on. With stocks roaring back over the past 5 weeks, the obvious (and wrong) connection is that the global recession is ending. To me, copper’s price rise is more technical after a deeply oversold condition, and it appears that the pundits are only crafting a good story to explain its recent price movements. It is often stated that copper is more like Dr. Copper, the base metal with a PH. D. in economics. If copper, which is used in commercial and residential building, electronics and automobiles, is surging, then all must be right in the world and in the economy too. Copper knows all (sic). But there appears to be a disconnect from reality as strength in copper generally occurs late in the economic cycle, and there is little or no relationship between price rises in copper and the beginning of a new economic cycle. This can be seen in figure 1 a monthly chart of copper. The indicator in the lower panel is an analogue representation of economic expansions and contractions from the National Bureau of Economic Research; recessionary periods are noted with the vertical gray bars across the graph. Figure 1. Copper v. NBER Expansions/ Contractions

Of the six recessions since 1974, the current recession would be the only one that would see copper prices acting as a leading indicator. In fact, the most bullish price moves for copper occur late in the economic cycle not at the beginning. These bull markets in copper are noted by the maroon colored vertical lines. Another explanation tossed about to explain copper’s rise is that the easy monetary policies of the Federal Reserve will lead to inflation, and copper is only anticipating these coming changes. While higher copper prices would be expected as inflation rises, the fact remains that there is a very poor correlation between higher copper prices and inflationary expectations. Of the 5 bull runs in copper since 1974, only 2 were associated with any real significant inflationary pressures, and these were in the 1970’s. This can be seen in figure 2 a monthly chart of copper; in the lower panel is the inflation rate as measured by a year over year change in the CPI. As before, the vertical gray lines note recessionary periods. Recessions by definition are deflationary, and we should not expect copper prices to rise during the current de-leveraging, deflationary environment. Figure 2. Copper v. Inflation So why is copper rising? Brent Cook at explorationinsights.com has written a very balanced commentary on copper. He states the following: “What’s behind the current price increase? Both China and South Korea have been adding to strategic reserves and restocking at what they consider to be much better prices. Copper producers and marketers all down the supply chain are keeping some supply out of the market due to low prices or a complete lack of buyers. The desire by Asian buyers to turn US dollars into hard assets-a phenomenon we are seeing across the entire hard asset class. Short covering as the copper price stabilized. A favorable arbitrage between the London Metal Exchange (LME) and Shanghai Exchange that made it cheaper to import copper cathode into China. Scrap supplies having dwindled due to the lack of credit, low prices and slowing manufacturing activity. With the exception of Asia’s desire to convert their substantial holdings of US dollars into something of value, I believe all the factors listed above are temporary. Going forward inflation may also play a role. “ If you note, none of Mr. Cook’s observations as to what is driving the price of copper have anything to do increasing copper consumption. In fact, he goes on to state that in all likelihood copper utilization will be down for 2009: “To come to some sort of understanding of underlying fundamentals of the copper market we need to look at where copper actually goes. The retail and commercial construction markets use about 46% of all copper. Another 12% goes into vehicles. These two industries were trashed, to say the least, in 2008; they are not likely to do too well this year either. Without a global recovery in both industries to past levels I don’t see how copper consumption can possibly increase significantly. “ The serial bottom callers and those pointing to the magic, predictive powers of copper can always point to China. But haven’t we been down this road before? Wasn’t decoupling disproved in the summer of 2008? Yes, the Chinese economy might be the world’s economic engine, but they don’t live in isolation. According to Cook, global demand and Chinese consumption of copper will remain weak: “Can China save the day? Most copper imported into China is then reprocessed and extruded as copper wire. When the copper wire is manufactured into tubing, refrigerators and batteries for export it still shows up as internal Chinese copper consumption. There is no way of knowing how much of China’s copper consumption actually stays internal and how much goes back out in other export products. If China is going to save the day for copper we have to approach usage from the perspective of China’s total economy. China’s GPD in 2007 and 2008 was approximately 6% of global GDP-Europe and USA account for nearly half of global GDP. Based on the most recent World Bank statistics, China’s 2007 total GDP was $3.3 trillion, a full 55% of which was attributable to exports. In 2008 China’s exports were down 28%. This year is not getting off to a roaring start as the Shanghai Daily reports that industrial output is down 12.7% for the first two months of 2009. China’s building boom is not fairing very well either. Post Beijing Olympics, China’s real estate market has collapsed. According to Jack Rodman, a China real estate expert, in Beijing alone approximately 500 million square feet of commercial real estate was developed over the past few years; this is more than all the office space in Manhattan. Rodman estimates 20% of that now stands vacant. Similar stories are being reported across Asia as documented by the Asia Property Report which estimates that real estate transactions were down 70% in Q-4, 2008. With Asia and the world’s building boom gone bust or at least slowed significantly, and China’s export markets in a severe and prolonged recession, demand for their products and the copper within is unlikely to recover soon. In the near term at least, increased copper consumption would require a global recovery approaching the levels of a few years ago. Confirming the obvious: true internal Chinese consumption is much less than many analysts believe and is unlikely to take up the slack in global copper consumption. “ My Take From a technical perspective I do not believe copper is in a bull market or even poised to enter into a new bull market. In addition and as explained above, I attach no significance to the price movements of copper as they relate to economic growth. What we do know is this: 1) over 7 months copper dropped 70% from high to low; 2) over the last 4 months, copper has bounced 70%; 3) copper still stands 50% below its all time highs. Figure 3 is a monthly chart of a continuous copper futures contract. The indicator in the lower channel is our “next big thing” indicator, and the purpose of this indicator is to identify those assets that have the potential for secular trend change. Figure 3. Copper/ monthly The first thing we notice is that copper bounced at support or the breakout point (labeled with a “1″) of the previous bull run. In other words, copper made a round tripper over the past 4 years. The bounce has carried 70% higher but right into the down sloping 10 month moving average. In other words, copper prices are behaving as they should. There was a breakout of historic proportions. Why did this breakout lead to such monstrous gains in 2005 and 2006? Because the breakout of historic proportions was 12 years in the making. In other words, the breakout was from a 12 year trading range. The current 70% move has the makings of a snapback or countertrend rally. So the question I want to answer is this: Is copper poised for a new sustainable, secular bull market run? Based upon the “next big thing” indicator, the answer is no. Based upon the technical setup, the answer is no. Going back to the 1970’s, every major move in copper was heralded by the “next big thing” indicator signaling the possibility of a secular trend change. Even though copper has moved 70% off its low, I attach no significance to such a move. From my technical perspective, this is a bounce off of support and into resistance. Copper will need more sideways action and time before another new bull market is launched.

My Top Inflation-Fighting Stock Ideas

By DailyWealth on April 18, 2009 More Posts By DailyWealth Author's Website “What marks our Great Recession for greatness is neither the loss of jobs nor the shrinkage in GDP, but the immensity of the federal response to those afflictions. The scale of the government’s intervention is much more than unprecedented. Before 2008, it was unimaginable.”- Grant’s Interest Rate Observer, April 3, 2009 Earlier this month, I was at Grant’s Spring Investment Conference in Manhattan. This is one of the elite investment conferences in the world. It draws a who’s who of brilliant investors… people like investment master Jeremy Grantham… real estate legend Sam Zell… and short selling guru Jim Chanos. I try to attend this conference each year. The amount of intellectual “firepower” is just incredible. I met several of my advisory readers there. At our lunch table, the big topic of discussion was the inflation-deflation debate. Inflation, for our purposes, means prices and interest rates are rising, and the purchasing power of money is falling. Deflation is the opposite: Prices for most things fall, interest rates fall, and the purchasing power of money rises. Over the last year, deflationary forces prevailed. The price of homes, commodities, shipping rates, gasoline - even wages - generally fell. Interest rates keep going lower. I just redid my mortgage for 4.25%, no points, over 15 years. The dollar - perversely, given how our government treats it - has gained strength. This will be a huge decision for investors over the coming years. If inflation prevails, then commodities, for instance, will do very well. Bonds will do horribly. If we have deflation, commodities will likely suffer, and bonds will do well. Making the right decision will mean the difference between a large and growing retirement portfolio and a tiny, inflation-ravaged portfolio. “I think there has to be inflation,” said the lady to my left. “With all the spending and what the Fed is doing… there is no way around it.” I agreed that inflation will be the ultimate result. But the question is how long between now and then? If we have deflation for the next two years, for example, that will be very painful for many investment ideas. “Yes,” the guy on my right said. “If you knew we were going to have another year of deflation, then you would do some things differently.” I can’t resolve this debate here. But I can tell you I’ve given it a great deal of thought. As a result, I fall in the inflation camp. Much of the reasoning behind that has to do with the government’s response to this crisis. It has been more than unprecedented, as Jim Grant recently noted in his newsletter. Grant goes on to note that the combination of fiscal and monetary stimulus comes to about one-quarter of the size of the U.S. economy (as measured by GDP). And that does not take into account all of the guarantees - of bank deposits, money market accounts, bank bonds, and other liabilities. Currencies don’t react well to being treated like this. Right now, the dollar is holding up because people are fearful… and debts need repaying. Cash is dear. But that will not persist for long - especially with stimulus as great as it has been. Never in the history of paper currencies has a single currency consistently appreciated in value over time. Never. That’s why I recommend you fall on the side of owning “real assets” through the stock market in order to protect yourself from inflation. I like owning energy fields, gold mines, water rights, and the producers of agricultural fertilizer. After suffering a big correction in 2008, these assets are cheap right now. They’ll hold their value much better than your bank CDs during inflationary times. Don’t worry about not having physical possession of these assets. As Jean-Marie Eveillard, the great money manager at First Eagle, reminded conference attendees: “Stocks are claims on real assets; they are not just paper.” The kinds of stocks I just listed - which deal in tangible goods that cannot be easily reproduced - will do very well in the coming years. If you come down on the side of inflation, start your “wealth protection” strategy here.

The Market Is At A Crossroads

Posted Fri Apr 03, 05:37 pm ETPosted By: Weekend Wisdom by Kevin Matras There are signs of both a potential market recovery (the beginning of a larger bull rally), and signs that this recent 20%+ run-up was nothing more than a bear market rally. The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out. Bull Market Rally Scenario The move that we have recently seen, i.e., 24.82% in the Dow Jones Industrial Average ($DJI), 26.82% in the S&P 500 (SPX), and 28.26% in the Nasdaq (COMP), from the lows made in early March to the highs made just 4 weeks later, suggests a larger move could be in store. For one, it's generally believed that a 20% rise in the stock market, marks the beginning of a bull market. Likewise, a -20% decline in the stock market, signals the start of a bear market. Secondly, the market had become terribly oversold (by Mar 6). You can see this on many technical oscillators such as the Relative Strength Index. (See the chart below.)

S&P 500 Index

It can also be quantified by the sheer number of new 52-week lows that were made in individual stocks while the market indexes were making new lows. In fact, each successive major new low made in the market (S&P 500: 839.80 on Mar 10, 2008, 741.02 on Nov 21, 2008 and 666.76 on Mar 6, 2009), brought with it fewer new individual 52-week lows each time, with the difference being in the thousands between the last lows in March 2009 and the 'first lows' in October 2008. This shows the market has either gotten ahead of itself or that perhaps too much value has been stripped out of the market. Either way, the market indexes are simply a composite of individual stocks. And if fewer and fewer stocks are able to make new lows, an upside test ultimately has to take place. Thirdly, the major indexes are all trading above their shorter-term moving averages (10- and 20-day) and medium-term moving average (50-day). This clearly shows the market's recent momentum has turned positive.

S&P 500 Index

And fourthly, on the fundamental front, there has been a steady stream of massive initiatives aimed at getting the financial sector and the broader economy moving again. The markets have reacted to these new developments, such as the second stimulus, the buying up of toxic assets and the purchase of US Treasuries. In addition, the Financial Accounting Standards Board (FASB) also made their long awaited decision on mark-to-market accounting for mortgage backed assets to something closer to "significant judgment" when valuing these assets. Combine this massive action from the U.S. with other significant steps taken from countries all around the world, and the market seems to be in a 'let's see if this will work' mode. Plus, recent earnings have come out better than expected on many companies (not necessarily stellar, but not as bad as feared) suggesting that maybe things have stopped getting worse, or at least the pace at which thing have been getting worse has slowed. Who knows if this is THE BOTTOM or just a bottom. If it is THE BOTTOM, then statistics show that a much larger move is in store. In fact, in a study of the Top 10 Worst Bear Markets since 1929 (using the Dow Jones), the average increase within one year of the lows was +55.62%. I don't want to get ahead of myself, but the 3-year increase is +77.56%. And the 5-year increase is +103.41%.

Dow Jones Industrial Average

Bear Market Rally Scenario The case for this being just a bear market rally, is just as compelling, and sadly, maybe even more so. But this does not mean it is and in fact, may even work against it being so.

First, let's address the 20%+ upswing we've seen in the market. While it's true, a bull market won't officially be called until there's been a 20% increase, not all 20% increases turn out to be bull markets. In fact, as the below chart illustrates, while the market was collapsing between 1929 and 1932, there were six 20%+ rallies that ultimately fizzled. And the market ultimately made new lows in 5 of those 6 instances. Of course, the 6th time turned out to be the charm, culminating in a 172.17% rise within the next 12 months.

Dow Jones Industrial Average

So while the 20% increase is a hopeful sign of life, it's far from being a done deal. This is already our second 20%+ rally (low to highs) within just the last six months. (Three, if you count the +24.25% jump within just 3 days in October 2008.) Aside from that, we saw a 22% rally between December 2008 and January 2009. In the current rally, we're up 24.82% so far. Of course the previous rallies failed, so we'll just have to wait and see.

Dow Jones Industrial Average- close as of Thursday, Apr 2, 2009

Second, while the market had recently been oversold, thus precipitating the rally, the oversold conditions have indeed been relieved, with conditions now reversing themselves and getting close to being potentially overbought. It's also ironic and worth pointing out, that even though the market has been charging higher, the last part of this rally (except for this past Thursday) has been made on declining volumes. Is the rally running out of buyers or believers already?

S&P 500 Index

- close as of Thursday, Apr 2, 2009

Note: the market's recent rally has bounced back to the underside of its bearish Descending Triangle that foreshadowed the recent downside breakout. And meaningful pullback from these levels could signal more downside to come. But an upside breakout would nullify this pattern's bearishness and remove a technical negative to the market. (See the chart below.)

S&P 500 Index

- close as of Thursday, Apr 2, 2009

There have also been some spectacular gains made in many individual stocks. Far greater than the averages reflect. And quite large for arguably one of the worst economic and business environments since the great depression.

This has led to an increase in valuations as well. The P/E ratio for the S&P 500 on Mar 6, 2009 when the last lows were made, was 11.16x 2009 estimates. Within a few short weeks, the P/E surged to 13.33. That's a 2.17-point increase or 19.44%. The run-up in the P/E ratio essentially mirrors the price increase without any real increase in projected earnings. Third, it's true the short-term moving averages (10-day and 20-day) and medium-term moving averages (50-day) are reading positive, but the longer-term moving average (the 200-day) is still negative (above the market and trending lower still). The bright spot is that it's quite a ways away from current levels. And since the 200-day moving average often acts as a long-term moving trendline (markets usually test and retest trendlines as the move up and down), a test of this important moving average, even if it gets turned away, could mean higher prices are still in the offing.

Dow Jones Industrial Average

- close as of Thursday, Apr 2, 2009

And fourth, while there has been a tremendous amount of action to get the banks and the economy rolling again, none of this is guaranteed to work. There have been some great ideas put forth. But sadly, there's a lot of politics involved and we have all seen how irresponsible some in Congress can be. This is important to note because the administration has said that it needs the private sector to be a partner in this. But the recent fiasco over bonuses from the first TARP funding, and the resulting hysterics that followed in Congress, has made the private sector very leery about 'doing business' with the government. This is evidenced by several big recipients of bailout funds, pledging to give it back as fast as they can to decouple themselves from the long and intrusive hand of the government. Conclusion So what does one do? There are clearly cases to be made for this being the beginning of a bull market rally or just another bear market rally. Whatever it turns out to be, there are plenty of opportunities to make money. For one, in October, when the market completely fell apart, it was almost impossible to make money on the long side of the market. The metaphor I like to use for that time is that it was like raining knives. Hard to not get hurt in that kind of market. But as we outlined earlier, each successive new low in the market witnessed fewer stocks making new lows, which shows that many stocks are starting to trade based on their own individual merits. This of course can be both good and bad. But it allows for the reward of individual stock analysis, and that's what we're all in the market for in the first place. To be rewarded for finding the right stocks to invest in and make money. And with billions of dollars of stimulus getting pumped into the economy, there will be plenty of winners in the months ahead. Focus on companies with the best Zacks Rank that also have real earnings growth, in the present year and in the future. Pay attention to the earnings estimate revisions, as they can be your first warning sign of trouble or good times ahead. I would also look at the technicals, especially chart patterns, as I believe they give clues as to when a stock will breakout and in what direction. Omniture, Inc. (OMTR) and Vertex Pharmaceuticals (VRTX) are 2 great examples and they are both stocks I picked for the Chart Patterns Trader service. Both of these stocks have just broken out: Omniture to the upside (we are long based on a bullish Inverted Head and Shoulders pattern) and Vertex to the downside (we are short based on a Bear Flag pattern). OMTR is a leading provider of online business optimization software, allowing customers to capture, store and analyze information from web sites and other sources, including social networking sites like Twitter for instance. This is an exciting company with dramatic increases in earnings projections. The numbers are small, but the projected gains are impressive. In 2008, OMTR posted 2 cents. In 2009, the company is projecting 12 cents. And in 2010, they're expecting 25 cents. Big growth, in a dynamic industry. VRTX discovers, develops and markets small molecule drugs that address major unmet needs. The company has several drug candidates in development including teleprevir, a drug for HCV infection, i.e., Hepatitus C, the most common form of liver disease. However, data from phase III trials for teleprevir won't be submitted to the FDA and the EU's EMEA until the second half of 2010 with the company then expecting approval in 2011 if all goes well. In the meantime, VRTX lost $3.25 per share in 2008. Is expected to lose $3.27 in 2009. And $3.07 in 2010. Hence our short position. Regardless of the market, there's opportunity no matter what and in either direction. Great Trading,Kevin Matras During today's crossroads market, Kevin and his team comb through hundreds of stock charts. No matter which way the market turns, they're finding companies poised to make sharp price moves. Certain chart patterns have proven to be uncanny predictors – with success rates up to 70%. Kevin's analysis indicates that something big is about to happen in the overall market. So Zacks is extending the special Chart Patterns Trader discount that had expired Friday. You now have until Monday, April 6, to take advantage of this substantial savings at a critical time. - close as of Thursday, Apr 2, 2009

Alarming News: Bank Losses Are Spreading!

By Martin D. Weiss on March 30, 2009 More Posts By Martin D. Weiss Author's Website For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates. In a moment, I’ll explain what this means for your savings and your stocks. But first, here’s the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1 And here’s why the losses are so ominous: Until the third quarter of last year, the banks’ losses in derivatives were almost entirely confined to credit default swaps - bets on failing companies and sinking investments. But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market. Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2 Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we’ve seen so far. Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9 billion in the fourth quarter. And remember: These represent the aggregate total for the entire banking industry, after netting out the results of banks with profitable trading. Why This Crisis Could Be Nearly as Bad as the Banking Crisis of 1929-31 Yes, I know the standard argument: In 1929, bank regulation and depositor protection was primarily run by state governments. Now, with the FDIC, the OCC, and more direct Federal Reserve intervention, it’s far more centralized. But offsetting that strength are serious weaknesses in the banking system that did not exist in the 1930s:

• In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation’s high-roller megabanks dominate the market.
• In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it’s precisely in this dangerous sector that the megabanks dominate the most.

According to the OCC’s Q4 2008 report, America’s top five commercial banks control 96 percent of the industry’s total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 … while the rest of the nation’s 7,000-plus banking institutions control a meager 22 cents!3

This is a massively dangerous concentration of risk. The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they’ll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it’s the primary reason they lost a record $3.4 billion in the last three months of 2008.

The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead.

Worst of all, the five biggest banks are exposed to breathtaking default risk - the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers.

Here’s our chart on these risks, updated to reflect the new data just released on Friday: Specifically, at year-end 2008,

• Bank of America’s (BAC: 6.82 0.00 0.00%) total credit exposure to derivatives was 179 percent of its risk-based capital;
• Citibank’s (C: 2.53 0.00 0.00%) was 278 percent;
• JPMorgan Chase’s (JPM: 26.58 0.00 0.00%), 382 percent; and
• HSBC America’s (HBC: 28.22 0.00 0.00%), 550 percent.4

What’s excessive? The banking regulators won’t tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view.

And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs (GS: 106.02 0.00 0.00%).

According to the OCC, Goldman Sachs’ total credit exposure at year-end was 1,056 percent, or over ten times more than its capital. The folks at Goldman think they’re smart, and they are. They say they can handle large risks, and usually they can. But not in a sinking global economy! And not when the exposure reaches such stratospheric extremes! Major Impact on the Stock Market In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century. The same is happening today. Whether the nation’s big banks are bailed out by the federal government or not, the fact remains that they’re jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations. And regardless of how much lawmakers try to arm-twist banks to lend more, it’s rarely happening. With scant exceptions, bank capital has been reduced, sometimes decimated. The risk of lending has gone through the roof. And many of the more prudent borrowers don’t even want bank loans to begin with. Those credit shortages, both acute and chronic, have a big impact on the economy and the stock market. Moreover, unlike the 1930s, banks themselves are publicly traded companies whose shares make up a substantial portion of the S&P 500 (^GSPC: 797.87 0.00 0.00%). The big lesson to be learned: Don’t pooh-pooh comparisons between today’s bear market and the deep bear market of 1929-32. From its peak in 1929, the Dow Jones Industrials Average (^DJI: 7608.92 +86.90 +1.16%) fell 89 percent. Compared to the Dow’s peak in 2007, that would be tantamount to a plunge of more than 12,600 points - to a low of approximately 1500, or an additional 81 percent decline from the Friday’s 7776. Even a decline of half that magnitude would still leave the Dow well below the 5000 level, which remains our current target. Does this preclude sharp rallies? Absolutely not! From its recent March 6 bottom to last week’s peak, the Dow has already jumped a resounding 21 percent in just 20 short days. And the rally may still not be over. But this is nothing unusual. In the 1929-32 period, the Dow enjoyed even sharper rallies, and those rallies did nothing to end the great bear market. My father, who made a fortune shorting stocks in that period, explains it this way: “In the 1930s, at each step down the slippery slope of the market’s decline, Washington would periodically announce some new initiative to turn things around. “President Hoover would give a new pep talk promising ‘prosperity around the corner.’ And often, the Dow staged dramatic rallies - up 30 percent on the first round, 48 percent on the second, 23 percent on the third, and more. “Each time, I sought to use the rallies as selling opportunities. I persuaded more of my clients to get rid of their stocks and pile up cash. I even told them to take their money out of shaky banks.”

Your approach today should be similar. Specifically, Step 1. Keep as much as 90 percent of your money SAFE, as follows:

• For your banking needs, seek to use only institutions with a Financial Strength Rating of B+ or better. For a list, click here. Then, in the index, scroll down to item 13, “Strongest Banks and Thrifts in the U.S.”
• Make sure your deposits remain comfortably under the old FDIC insurance coverage limits of $100,000. The new $250,000 per account limit is temporary and, in my view, not something to rely on long term.
• Move the bulk of your money to Treasury bills or equivalent. You can buy them (a) directly from the U.S. Treasury Department by opening an account at TreasuryDirect, (b) through your broker, or (c) via a Treasury-only money market fund.

Important: You may have seen some commentary from experts that “Treasuries are not safe.” But when you review their comments more carefully, you’ll probably see they’re not referring to Treasury bills, which have virtually zero price risk. They’re talking strictly about Treasury notes or bonds, which can - and probably will - suffer serious declines in their market value

Step 2. If you missed the opportunity to greatly reduce your exposure to the stock market in 2007 or 2008, you now have another chance. And the more the market rises from here, the more you should sell. Step 3. If you are still exposed to stock market declines, seriously consider inverse ETFs, ideal for helping you hedge against that risk. (For more background information, see my 2007 report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.) Step 4. If you have funds you can afford to risk, seriously consider two major profit opportunities in the months ahead:

• To profit handsomely from the market’s next decline. The best time to start: When Wall Street pundits begin declaring “the bear is dead.” They’ll be wrong. But their enthusiasm can be one of the telltale signs that the latest rally is probably ending.
• To profit even more when the market hits rock bottom and you can buy some of the nation’s best companies for pennies on the dollar. The ideal time to buy: When Wall Street is convinced the world is virtually “coming to an end.” They will be wrong, again. But that kind of extreme pessimism could be one of your signals that a real recovery is about to begin.

------------------------------------------------------------------------------------------------- 1 For the banks’ $3.42 billion loss in interest rate derivatives, see OCC’s Quarterly Report on Bank Trading and Derivatives Activities Fourth Quarter 2008, table at the bottom of pdf page 17, “Cash & Derivative Revenue,” line 1. As you can see, that was 7.2 times larger than the previous record - the fourth quarter of 2004, when the nation’s banks lost $472 million in interest rate derivatives. 2 See OCC table at the bottom of pdf page 11, “Derivative Contracts by Type.” In it, the OCC reports total U.S. bank-held derivatives of $200,382 billion at year-end 2008. Among these, the single largest category is interest rate derivatives, representing $164,404 billion, or 82 percent of the total. In contrast, credit derivatives are only $15,897 billion, or 7.93 percent of the total. Within the credit derivative category, the OCC reports (page 1, fourth bullet) that nearly all - 98 percent - are credit default swaps, which have proven to be the most toxic and damaging category of derivatives so far. But they represent only 7.77 percent of all derivatives (7.93 percent x 98 percent). 3 OCC. In Table 1, pdf page 22, “Notional Amount of Derivatives Contracts.” 4 OCC, table at bottom of pdf page 13. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive.

Mastercard And Visa Will Outperform The Credit Card Industry In The Long Run

By Taylor DeStefano on March 30, 2009 More Posts By Taylor DeStefano Author's Website Despite all of the problems surrounding consumer credit, the credit card industry is in a position to benefit over the long run, as the public continues to make the transition from paper to plastic. Additionally, consumer spending, although it has hit a speed bump, will rise over time. Indeed, late payments on credit cards hit a record high in January and defaults are likely to worsen until the economy makes a turn around. Although the commercial banks, such as J.P Morgan (JPM: 26.58 0.00 0.00%) and Bank of America (BAC: 6.82 0.00 0.00%), saw net losses in their credit card divisions last quarter, credit card companies like MasterCard (MA: 167.48 0.00 0.00%) and Visa (V: 55.60 0.00 0.00%) fared better. Visa and MasterCard are unique in that they operate the electronic payments networks the cards are processed on but do not have direct credit risk due to lending. The following is a run down of companies that are part of the credit card industry and how consumer spending is going to affect the industry in the future. Visa & MasterCard Visa and MasterCard are the two companies that I believe will outperform the industry in the long run. Don’t be fooled; the next two quarters still pose risk for a their stock prices as the economy continues to contract and consumers spend less money. However, that could present a more attractive buy-in point. Many trends that these companies will be able to capitalize on are the same, as their business models are extremely similar. For example, both will want to concentrate on their debit -card businesses, as this is seen as the quickest growing electronic payment option going forward. It makes sense that debit will be more likely to beat out cash and checks than credit, especially in these economic times as consumers try to borrow less. Visa, which operates the world’s largest electronic payments network, makes money from serving, processing, and transactions fees rather than issuing credit cards, which is one reason why it is poised to excel. Payment volume and transactions are the drivers for Visa’s revenue, as it benefits every time a card is swiped, and more cards are being swiped every year. Operating in over 170 countries, Visa is also in a great place to expand abroad. Visa may seek to acquire Visa Europe in the coming years to geographically diversify their revenues. The company will rely primarily on growth in emerging markets to offset some of the slowdown in developed countries. Many investors might think expanding abroad is not smart during a global financials crisis, however, this is a great opportunity for the company to grow in countries with large populations and very low penetration of credit and debit cards. This means the relative growth rate in these nations is much better than in more mature and currently struggling economies. The company recently launched its first global marketing campaign, entitled “More people go with Visa,” which perpetuates the idea of a single global company. MasterCard generates its revenues from operations fees and assessments. Furthermore, not only does the company processes payment transactions but it also offers consulting services to customers. Similar to Visa, I expect transactions volumes to increase for MA due to a shift toward greater credit usage, despite a slowdown in consumer spending in the near term. The other positive to MA’s business model, just like Visa’s, is that it does not have the same credit risks that lenders like commercial banks have. Increasing its debit card business has been a priority for MA, and it recently launched a new debit card program with KeyBank, which is a unit of KeyCorp (KEY: 7.87 0.00 0.00%). What hurts MasterCard is that Visa has more of the U.S. market share in the debit business, with over 53 percent of its total volume in debit cards and the rest in credit. MasterCard only has about 30 percent of its transactions coming from debit cards in terms of gross dollar volume. To put it in perspective, total debit card volume last year grew 13 percent versus a 2 percent decline in credit cards in the U.S. With many Americans avoiding excessive borrowing now, debit card use is likely to increase as people stick to their budgets. MasterCard is also seeking to capture emerging markets growth in the future, particularly in China and Brazil. MA reported that emerging countries in Asia and Latin America have had double-digit growth in gross dollar volume in credit and debit transactions in the fourth quarter of 2008; they fell 5 percent in the U.S. for the same period. One way that Visa and MasterCard will boost their bottom lines is charging banks that issue cards higher fees to offset lower consumer spending. The new transaction fees planned are just under 2 cents per transaction but could mean over $600 million in added revenues for the networks. The new fees will most likely be passed on to merchants. American Express American Express (AXP: 13.63 0.00 0.00%) is a leading global payments and travel company. While Visa and MasterCard are embracing their current business models and positioning for more growth, American Express has recently decided to go back to its roots. The company ramped up its credit card business just before the financial crisis, which was bad timing to say the least. Now, it plans to return to its policy of issuing charge cards to more affluent customers with healthy credit. However, in the process of the transition the company is cutting lines of credit to long time customers which does not bode well for its reputation for customer service. If the company would not have handed out credit so freely prior to the housing bubble, it would not be experiencing this problem to this extent in the first place. Historically, AXP has performed well in prior economic recessions due to the focus on charge cards. Charge cards differ from credit cards in that the user must pay off his or her balance in full each month. One reason this downturn has hit AXP the hardest is that many of its customers come from the U.S. coasts, meaning more exposure to California and Florida. These two states are among the worst suffering in terms of the real estate market. AXP’s major transition away from its original reputation as an exclusive brand began in 2003, as the company was attempting to get a bigger piece of the credit card market. With 2003 being the first year that total annual use of cards exceeded cash and checks, it seemed like the right strategic choice at the time. The problem is that as it expanded its customer base, the company kept giving out more and more cards and increasing limits to promote spending. After all, AXP collects fees from merchants every time a card owner makes a purchase, so it wants the number of purchases to be as high as possible. Now, the company is thinking about returning to its typical affluent customer base. So, the real questions is, can American Express hold onto the loyalty of its customers after all of these strategic changes, or will the company be bought out by a competitor? Although many potential buyers for American Express are laden with their own issues, AXP would be a great target for a buyout. Lately, many analysts have been revising their earnings estimates for American Express for the next two years, even noting a significant possibility that AmEx will post a loss. Standard & Poor’s has placed the company on review for possible downgrade as its credit quality worsens at a pace that exceeds average levels for the industry. One possibility for the credit card company is to cut its dividend to help conserve capital; it currently stands at 18 cents per quarter. One thing is for sure, this is definitely a credit card company to stay away from in 2009. Discover Financial Services Discover (DFS: 6.31 0.00 0.00%) is one of the largest card issuers in the U.S. and also offers different loans and savings products to customers. DFS currently operates through two business segments: U.S. Card and Third-Party Payments. In the Third-Party Payments segment, Discover is looking to increase the number of financial institutions that issue credit and debit cards to be used on the Discover Network; the company just entered the debit card business in 2006. While the company has solid fundamentals, weakening credit quality and this type of economic environment mean industry charge-off rates will continue to increase. Increased charge-offs prompt companies to bulk up their reserves, which is what you are currently seeing at the big banks. This will definitely hurt DFS as a credit card issuer, which is why I still favor V and MA going forward. Credit, Saving, and Spending Consumer spending is extremely important as it contributes to 2/3 of the U.S. economy. However, as Meredith Whitney from Oppenheimer notes, what is under-appreciated is the role of credit card availability in that spending. She estimates that over $ 2 trillion of credit card lines will be cut this year; this is relative to the $ 5 trillion of lines outstanding now in the U.S. This could potentially be detrimental to consumer confidence and the economy. Currently, five lenders comprise 2/3 of the market. The problem is that none of them want to be the last one holding an open line of credit to a customer. As lines are cut, since people have more than one relationship with credit card providers, risk exposure shoots up for the lender with the largest remaining line outstanding. A major reversal in how credit is obtained and used in the U.S. is necessary and will result from the current crisis. It cannot be argued that savings can always be relied on, although it was the reliance on credit that got our economy into this mess in the first place. As consumers de-leverage, their savings rate will have to rise. However, a dangerous result of banks cutting lines of credit is taking credit away from people who have the ability to pay their bills. If credit is taken away from a typically able borrower, that borrower’s financial position weakens considerably, which does not bode well for consumer spending or the economy. In order to try to ease the pain on consumers, regulators have outlined new rules for card issuers that restricts them from raising interest rates on existing card balances except under certain circumstances. The banking industry has until July 2010 to comply, and this plan will cause card issuers to reconstruct their lending practices which increases costs. Naturally, the banks are looking into ways to combat the new rule or strategies for other types of fees to pass onto customers. Either way, consumers are guaranteed to see rates hiked up. As default rates continue to surge and banks pull lines of credit, consumer credit problems are going to get more serious, and it’s possible that this will have to be the government’s next big focus. Disclosure: The Fund the author is associated with is long JPM.