The S&P 500 (SPX) has risen too far and too fast thanks to all the liquidity overflowing in the markets. But it will be a prudent move for all the retail investors and people who actively manage their 401(k) to get out of the US stocks now. All the news of them sitting on the sidelines are a gimmick to lure the remaining retail investors into this frothy market and make profits from them.

I don't think the market has any more room to rise further unless governments are now switching their policies to directly invest in stocks. A quick look at the results of Bank of America (BAC), Citigroup (C) and even Goldman Sachs (GS) is a clear indication of the frothiness of this market. These banks booked huge profits in the investment banking divisions while still bleeding in the actual core banking businesses. But given the 60% rise in the S&P500 in the past 6 months and an almost 10% rise every month, does it come as a surprise that these banks made high profits in investment banking business? Not at all.

Overnight there was a huge sell-off in China with CSI 300 Index down around 4.96%. But I don't think it should affect US equities badly because what we are seeing in China is exactly what some analysts and investors including myself fear about governments' intervention in free markets. Money that China's government was providing in the form of stimulus was directly getting plowed into the Chinese stock market and Chinese real estate market. That is why we were noticing the steepest rise in CSI 300 index and ofcourse China's GDP soaring (because of real estate demand). But that is exactly how bubbles get created. What happens is that the last person in (who normally has to be the most leveraged also) will try to be the first person out. And then the chain reaction triggers.

But I think US equities have not seen such a huge flow of stimulus money directly flowing into the stock market. So any sell off reaction triggered by China should only see a muted response in US markets, if any. I think US will soon be grappling with a different problem if lawmakers don't take prudent measures immediately after economy is seen somewhat stabilized. US dollar is under huge pressure and any slack from government to rein in the supply will have the consequences of huge dollar devaluation. In any case, all these arguments point commodities stocks and mining sector as the huge beneficiary. I have had a buy rating on some of the stocks in metals sector (UYM) and am adding them to portfolio.

Today's market is seeing a sell-off in equities because of alignment of expectations which had outpaced the true improvement in world economy. However, I believe that the long term growth story for metal and mining sector is still intact. The reason is that these companies are sitting on real assets which have long term value. So while fools rush in to buy Bank of America (BAC), savvy investors should rush in to buy metal and mining stocks whenever they are unreasonably discounted on a day like today.

First reason is: While BAC is a solely US based company, the economy which is in the deepest trouble and will stay so for any foreseeable future, mining and metal companies are the true global plays. In fact these days most of the demand for their products is coming from emerging economies rather than already developed ones. And by definition, emerging means that's where the growth lies.

Today metal and mining stocks are seeing some weakness with XME down about 3%. This perhaps is primarily driven in part by market view about economic recovery and in part by Chinese rambling about Rio Tinto (RTP). RTP shares are in particularly down about 5.8%. But I personally think that any weakness in metal and mining stocks is a buying opportunity. Adding them to the portfolio by utilizing any weakness will provide a great boost to portfolio. The reason is that these companies are the only ones which are actually sitting on the most tangible and valuable resources (because of sheer limited supply of them) in the world.

Any recovery, however small and limited it might be, will have to buoy the demand for these scarce resources. So both RTP, FCX and BHP are definitely a buy for our portfolios, especially RTP with today's weakness. There is some nervousness in investors about RTP due to comment from a Chinese official. But the swift denial from other Chinese officials about the authority of the comments I think clearly reflects intentions of China to pressurize Rio Tinto into coming to the discussion table. This is a lot of politics but investors should note that these events started after RTP denied China government's majority owned Chinalco (ACH) to offer a stake in the company. But China clearly realizes that importing iron ore from Australia is much cheaper for it than any other major producers like Brazil simply due to its geographical location and transportation costs. So I don't think China will have any other viable alternative to import iron ore in the near future. And in any case we have to remember that China represents only a fractional part of iron ore business operations for Rio Tinto. The other good thing is that its ADR is not available to retail investors for shorting and thus avoids any false panic situation to be created. So I am putting a buy on RTP, especially given that its stock is down about 25% from recent highs. This is a great stock with 2 year target for ADRs of $240 (in weak economic recovery scenario) and $285 (in strong economic recovery scenario).

It wasn't that long ago when Bear Sterns had gone down, market enthusiasts were still careless, commodity prices were peaking with oil trading near $140/barrel, investors were listening Goldman Sachs making $200/barrel predictions and everyone thought that state of denial was the best course of action. It was only last year around the same time. Markets perhaps are getting into that same mode of operation again. But reality will hit sooner than later.

Most of my channels have indicated to me that U.S. banks are not disclosing their actual state of affairs. It should not be very surprising to many - if that weren't the case then Congress wouldn't force FASB to change its rule within a month's notice. Geithner wouldn't be so worried to visit China and offer them a special treasury yield of around 4% without local investors getting even a whiff of it. But then, who cares as long as music is going.

Today the US Treasury 10Year note rebounded from yesterday's big selloff. Which is not very surprising given that lot of US based investors have now formed an opinion about 10Yr notes returning 1% or less. These investors derive their optimism from their faith in the stupidity of the Federal Reserve chairman and treasury secretary. But unfortunately, as clearly reflected in yesterday's selloff, these people do not govern the policies of the rest of the world.

With today's respite given or not, 10Yr notes will be heading towards 4.5-5% yield by the end of the year. But if the dollar starts its slump again, then effective yield of these notes will be lessr. So what that means to an investors outside of the US is that buying longer duration treasuries is a loss-making proposition.

Yesterday, US insurers got a bailout. And chances are, if you are running a company, you already know this. That if you can somehow convince or just even scare the US administration that your company will fail, the magnanimous US treasury will give you at least few billions to play with. The US treasury is now in the same mode of putting money in every firm and sector as were its (until now) highly revered financial institutions. The assumption of financial institutions was that the assets they were purchasing would never fail or go down in value and they could always sustain 30:1 leverage.

Now the same bug has somehow bitten the US treasury and Federal Reserve. And it does not surprise me at all if I look at who is at the helm of these institutions. They are putting money into every company that operates in US in the hope that they can sustain huge deficits with the blessings of idiots in China and other parts of the world who, instead of doing the welfare of their own countrymen, would rather prefer to invest in US treasury bonds and US Dollars so that a homeless person in the US can afford to buy a half million dollar house. And when he defaults on the very first mortgage payment, the Senate can reduce his first mortgage, second lien and third lien.

Financial stocks have seen a huge turnaround in the past month and it's as dramatic as a fairy tale can be. It's like suddenly a frog turned into a beautiful princess. Just 60 days ago these banks were bleeding and were in an as ugly shape as an institution can be. But thanks to all the magic potions applied by Congress and the White House, these banks are now in an imaginary healthy shape. Basically what happened was that in a desperate effort to turn around the economy, government threw away all the rational accounting rules and voila, we had a rally. But sooner or later the reality will start showing up again.

Results from Mastercard (MA) and Visa (V) both showed deteriorating consumer quality in the US. While Visa did well in the overseas market, their US revenue was abysmal. Same story goes for Mastercard. Now we take the lessons learned from these two plastic money leaders and apply them to paper money lenders like Bank of America (BAC) and JP Morgan (JPM) and we'll soon reach the conclusion that the US consumer is in as bad a shape as it was 60 days ago.

On Monday, treasury secretary Tim Geithner announced an elaborate plan to get rid of current toxic assets on banks' balance sheets and once again create new ones. In this run to make quick fixes by the administration and congress, the US is losing credibility in the eyes of international investors.

The market was euphoric Monday and why wouldn't it be. Now the US government has officially joined the herd of hedge funds and in fact is pledging future generations to prop up institutions that would be much better served otherwise. Just a few days ago Ben Bernanke, the Fed chairman, was lamenting in front of congress that AIG was running a hedge fund and all problems at AIG were due to this. And now the 3 most important agencies of the government's financial system have joined forces to run the mother of all hedge funds.

This is the era of Ponzi schemes. And while on one side we are punishing people like Madoff and Stanford, here we have the greatest and biggest schemer of all, US Federal Reserve Bank. Yesterday, the FOMC came out with a new policy to buy up to $300 Billion of US Treasurys. I hope every reader understands that how this is the biggest and dumbest Ponzi scheme of all. The government is authorized to have a printing press that prints US dollars, then can amass as much debt as it wants and puts it back by printing more US dollars. This is exactly the scheme that the US government and federal reserve have devised to rob other countries from the fruits of their labor. While companies and people in other countries are working hard and saving for a rainy day, companies in the US are outsourcing their jobs, slashing their payrolls (just to stay competitive) and people are spending as much as they can.

Instead of embarking on a path of future prosperity that involves working and producing, the US is embarking on a path of consuming. Authorities are devising new ways to sustain it and federal reserve's latest move goes exactly in that direction. So it's high time to downgrade US Treasury debt. I'm warning investors to stay as far away from US Treasurys right now as they can. This market will blow up with double trouble. Not only will Treasury yields decline, but the US dollar itself will be devalued further. I hate to see that, but that's the outcome of these policies.

Trading looks like it has become the art of fools of late. And here is the proof: Anyone who has read Accounting 101 will tell you that the treasury department's action in Citigroup's (C) preferred stock does not change Citi's bottom line, assets or liabilities even by an iota. In fact, if anything, it helps Citi's balance sheet because now Citi will not have to pay interest on the treasury's preferred stock. Even more amazing is the fact that this news was not really news, as Citi itself had notified this discussion last Monday. And even then, for the whole week Citi's stock was climibing up. And then suddenly traders (fools) seemed to be awakened and read the news. Even more astonishing is the fact that financial channels like Bloomberg repeatedly called it a new government bailout for Citi. They called it multiple times the "third bailout of Citi". And I was just amused that these reporters seemed like they were out on a high school pass - not any one who knows about finance and/or accounting, not even an ounce.

Let me reiterate for those who care to know the truth and want to listen from people who understand the subject: treasury's action on Friday was NOT a new bailout of Citi. All treasury did was to take a position in Citi to bolster its tangible common equity by utilizing the funds already injected in Citi. Now some people might make the argument of Citi being semi-nationalized with that move. I would disagree with that because that does not seem to be the intention of government and rightly so.

In case you missed the rally the past few days, the opportunity is knocking again. Tuesday's session saw some big drops in the banking index and major names like BAC, JPM, C and WFC were all feeling the heat of misplaced expectations of investors (or I should say traders). Most people were loading up these shares in the hope that Tuesday Mr. Tim Geithner would announce a plan to close his eyes and sweep clean the banks. Or maybe swing a magic wand and every bank suddenly finds 1 Trillion dollars each in their balance sheet. And when magic didn't happen traders started selling these shares with their eyes closed. This just shows how naive market players are these days. So I'll leave the rest of the article for wiser, calmer and valued investors.

Major national retail bank shares are a good buy at these levels. And in case you were reluctant to pick them up while they went up almost 25% in the past 4 sessions, here is your opportunity again to snap them up. First, details or no details, what Geithner (with almost a 2 Trillion dollar on the line) and the Federal Reserve (with unlimited dollars) have been telling us time and again, is that these national banks will not fail (or will not be allowed to fail in one way or another). So investors should not even think about that outcome.

Stock markets are trying very hard to call current index levels as a bottom. That's why optimistic investors jump in every time the DOW goes down and we see especially large run ups toward the end by stock manipulators. The reason is that they want to set the tone for next day, if the DOW jumped by 100 points the previous day. Current optimism coupled with some manipulators is based on the theory that stocks are too cheap now. But investors are only looking back at the past 3 years for relative valuations. Since the past 3 years were actually the biggest run up years (e.g. Apple (AAPL) went from $50 to $200, Goldman Sachs (GS) went from $60 to $240 etc.), the stock valuation assumption itself is flawed. I wrote in previous articles that we are slowly clawing back towards more reasonable valuations. But, unfortunately, some investors get fooled into buying at these levels which, in my opinion, are still too high and optimistic. Also, our government is playing a very active role these days in trying to manipulate asset prices, including stock prices. In fact, their actions seem to be governed more by the stock market than anything else.

So stocks are encountering resistance in going down to more sustainable levels. The more sustainable level for the DOW (DJI) is around 6800, given that it was the level before two recent bubbles (internet and the current financial innovation bubble). That was the level governed more by fundamentals and economic growth. For S&P (SPX), a similar level would be around 700 level. Comparing these levels with current values clearly shows that stocks still have further down to go before we reach a bottom. We can reach these levels faster, but given the constant government intervention in proper functioning of markets, we might have to wait 6 months before we reach these levels. But one thing is very clear: Stocks still have to come down in prices further.

Sunday, the US government announced its plan to bail out Citigroup (C). Stocks staged a huge illogical rally on that plan again. I call it illogical because in the first place, it was built onto another big mistake by the US government, which is hell bent on digging itself far too deep into debt in the hope that eventually things will stabilize and it will be able to get into the same get-debt-and-spend-it-all soon again.

Secondly, this rally was built onto another illogical rally on Friday, which happened because Tim Geithner was finalized as Obama's Treasury Secretary. This guy has been the president of the New York Fed for some time now and was very instrumental in the US government's bailout of AIG.

The Dow has been all over the place in last two days. Yesterday it finally ended up higher after a jig-jag motion throughout the day. However, warning signals are emanating from everywhere. Just because stocks have seen sharp selloffs in the past, analysts are trying to call it a bottom. All those undecided investors choose one side or the other in last one hour. Wednesday we saw a move down and Thursday a move on the upside. However, stocks haven't bottomed as yet. This momentary relief in selling should not be considered the bottom. The first round of sellers might have been exhausted by this time. But economic conditions are really bad.

San Fransisco Fed governor Jenet Yellen said yesterday that there are still significant headwinds facing the economy and we are nowhere close to the end. The mistake some investors are making is that they think stocks are cheap at these levels and since the first round of sellers is exhausted, we are seeing some buyers in the market. But yesterday Hartford Financial (HIG) warned about the significant problems being faced by the insurance companies. And to my surprise Prudential (PRU) and MetLife (MET) were up in the morning session.

Average stocks have plunged more than 25% just this month - and some analysts are coming out to tell you that stocks are becoming too cheap. But that's not a true and complete picture. Most stock valuations are determined based on P/E ratio. Saying that stocks are historically cheap is basically implicitly assuming that the earning power of companies will soon improve. However, given the current economic conditions, that does not sound like a very convincing assumption.

Corporate America became too greedy during its heyday and acquired companies which only remotely tie to its core business. That leverage has still not come out of the stocks. Remember that stock is merely a paper whose value lies in the perception of other people. Most companies did not issue equities because they wanted to make Jim or Tom rich. They wanted their money at 0% interest and zero liability. That's why we are not seeing many companies buying back their stocks while analysts are saying that they are cheap - because companies don't want to buy back and return your money. What does it tell us? That stocks are not too cheap.

Research in Motion (RIMM) announced its quarterly results last Thursday and in the wake of that result its stock lost 27% of its value. It missed the estimates by one penny for the current quarter and mid-range of its revenue expectation for next quarter is slightly below the consensus. And seems like it spooked investors.

I consider it a big investor folly, which is of course abetted by equally un-analytical analysts on Wall Street who can be found there in plenty on the streets. In fact I am surprised that even after seeing the mess on Wall Street and wrong decisions of these same analysts over the years, investors are willing to buy their theories. For me, mentioning the mess on Wall Street gives another lens to look at RIM's results.

In my last article I talked about the folly of rating agencies and US financial system. Considering the junk that most US financial companies hold today without disclosing it openly and that the US government is slowly acquiring that junk by giving them dollars for it, I wonder why rating agencies are not downgrading the US treasury rating to junk. The system of fiat money is very interesting because a government can print as much of it as it wants. And the US government must have installed a few new printing presses recently to provide all the dollars it's showering on failed financial institutions, its war and its public in general.

Even after going through this mess for almost a year now, US political leaders have the guts to talk about tax cuts to wealthy people and allowing totally non-deserving people to stay in their homes. It's like a free economy where you are entitled to live beyond your means because you are guaranteed loans and credit from investors around the world. How long can the US government continue to deceive other countries of the world? Most governments borrow money to improve the infrastructure in their countries, while the US government borrows it to lavishly spend on wars, to provide $200K houses and $25K cars to people with no means to pay for it and to allow its wealthy people to lower their taxes. And most unfortunately, everyone seems to be ok with it.

Lehman (LEH) shares have been hammered or just killed in the past few days. And our beloved rating services are once again proving to be champions of creating chaos and market turmoil. But they are the byproduct of investing firms' laid back attitude and hands-off approach.

Probably, well in the past, rating agencies did their jobs and made a reputation for themselves. Nowadays it's easy: First work with underwriters and dealers to give high ratings to whichever bond or security they issue. Then one fine day, the whole world finds out the folly of that. So to salvage some reputation, you start working on the vagaries of the stock market and base your rating decisions on the stock price. Give the reasons that even a taxi driver on Wall Street knows. Because if everyone is saying it, then nobody can single you out for saying it. And voila, we have a rating agency.

On Wednesday, a Goldman Sachs analyst came out again to say that oil is headed for $149 by the year-end. Looks like Goldman has made big bets on rising oil prices, and of course, this analyst may just trying to turn that position into profit.

But I wonder if this analyst really knows how the fundamentals of analytics work. Goldman is again harping on the supply-demand equation, while we have seen clear indications that demand for oil is highly elastic. People will cut back their oil consumption (the biggest consumer, of course, is the US, where individual consumers are the primary oil consumers) if oil prices try to rise further.