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John Dalt
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John Dalt is a retired small business owner who is now operates for stock investors and traders.
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  • Sell in May and Go Away
    Sell in May and go away sounds like good advice after the market action on  Thursday.  The market has been punishing investors for the last two months, and it doesn’t look like it is over.  We crashed through the 1040 support line on the S&P 500 Wednesday.  Thursday morning touched 1010 before bouncing.
    This was close to support of 1009.  We have identified 1009 as the 38.2% retracement of the market advance from March 2009 to April 2010.  This is strong support.  The next line in the sand is 943, which is the 50% Fibonacci retracement of the market advance from March 2009 to April 2010.
    The market should get a bounce from here, if we can get some good news. The employment report Friday morning didn't ignite a fire under buyers.  Lacking any bad news, a rally could occur when institutions and funds start buying and supplying some support to stocks that are beat down.
    Deep pockets buying in volume would give a boost in confidence to retail investors that prices were reasonable and raise the greed gauge. We need some dollars chasing stocks as opposed to the low volume we have been experiencing as stocks have consistently sold lower and lower. Our highest volume days have been when the market is moving down.
    S&P 500 on July 1, 2010
    You can see the higher volume (bars on bottom of chart) on down days.  Also, please notice the blue 50-day moving average line at 1116 is approaching the red 200-day moving average line at 1111.  If and when these cross (Friday) that is known as a “Death Cross.”  You can fill in the meaning of this, but suffice it to say, it is not what bulls want to hear.
    A Death Cross is widely recognized as a bearish signal.  Unless the market can rally and move these moving averages apart we look to see more selling in July.  Earnings season starts next week, and we don’t know if it can get here soon enough!
    We wrote about the China 25 etf (NYSEARCA:FXI) going into a Death Cross condition on March 24 in Death Cross Indicator.  It has not recovered.  This was one etf, now the Mark of Death applies to the U.S. S&P 500.
    The U.S. economy is recovering, but at a slower rate than investors expected and big government predicted. The disconcerting effects of slow growth, higher taxes and continued deficit spending by the government are the new economic reality. All we need now is for inflation to start rearing its ugly head. We are just a few steps away from the days of “Stagflation.” All the gaiety and excitement of the Jimmie Carter years.
    As an investor it is wise to sell into the rallies and raise some cash.  Our long-term subscribers are 25% cash right now, and may be selling some more assets if they hit our trailing stop losses.  It is better to have dry powder to use when the fight is good than to continue in a losing battle, even if it is less powder!

    Disclosure: No positions
    Jul 02 10:05 AM | Link | Comment!
  • Big Boys, Little Guys
    What do we do when only the big boys are left?  This question cuts to the unintended consequence of the current attitude in Washington.  Whether health care, financial regulation or off-shore drilling, more regulation means less competition and higher prices for consumers.
    The current political party in control of all things politic in Washington say they are the “champions of the little guy.”  The populism sweeping through the hallowed halls is palatable.  The president never misses a chance to demonize ‘big oil’, big insurance or big banks.  The dirty secret every one of the pols know?  More regulation means less competition for the ‘big boys.’
    The financial regulation bill agreed to overnight is hailed as regulation that was overdue and will reign in the big banks.  That it may do, but provisions of the act will also be a millstone around the necks of every neighborhood bank in America.
    This is known as the ‘cost of compliance.’  Every piece of paper, survey, or audit costs the small bank more as a percentage of assets or profits than it does the large bank with mega-assets.  The small bank must raise his interest spread, and user fees in order to maintain profitability.  What does the larger bank do?  Use the cost of compliance to squeeze the smaller bank into a merger, or sell him services through a correspondent banking relationship.  It seems like a win-win situation, the small bank lowers their cost of compliance, but becomes reliant on the larger bank to supply this service.  Over a period of years, the large bank erodes the smaller banks independence and gradually swallows it.
    Who will be able to drill in the Gulf of Mexico after the BP disaster?  On June 3, Moody’s Investors Services said the cost of insurance for an off-shore well has increased by more than 50% since the BP disaster.  India’s largest exploration company, Oil and Natural Gas Corp., reported a threefold increase for insurance renewal.  John Lloyd, of Lloyds of London reports that available insurance coverage has been reduced by at least 30%.
    The U.S. Congress is considering increasing the $100 million economic damages liability cap for off-shore drilling to $10 billion.  This amount is well below the expected cost to BP, but it should be added that BP appears to have been negligent.  Negligence negates the liability cap.
    If the cost of insurance raises the bar so high that the little guy is removed from the market, who is left to drill off-shore?  According to energy consultant, PFC, only three companies have the balance sheet to self-insure; Royal Dutch Shell Plc, Exxon Mobil Corp., and BP.  We can probably mark BP off the list; they are going to be a much smaller company when the current accident is resolved!
    What board of directors would sign off on risking the whole company for the right to drill a well?  Would you take your whole account and buy just one stock?  If so please read The Four Legs of Wealth.
    We could look at a Venezuela style government owned enterprise, but who wants the postal service drilling for oil?  Do you really trust the government to do better than BP?  Remember, they inspected the Deepwater Horizon 10 days before it caught fire, and were slated to give BP a safety award.  This ceremony had to be canceled after the explosion, less the bureaucrats be embarrassed. has an interesting article on how price controls threaten the availability of health insurance.  Just like gasoline in the 1970's under Nixon, what difference is the cost if none is available?
    The net result of all the populism and beating the drum against ‘big _________”, we end up with less competition and higher prices.
    Our recommendation:  Buy Exxon Mobil (NYSE:XOM), they completed their acquisition of XTO Energy on 6/25/10.  They are now the largest natural gas exploration company in the U.S. and the largest corporation in the U.S.  They pay a nice dividend of $1.76 and buy back shares of the company every year.  The stock closed cheaper than in the last four years.
    If you can’t beat the big boys, you might as well own them!

    Disclosure: Long XOM
    Jun 25 10:54 PM | Link | Comment!
  • A Billable Catastrophe
    American greed and creative accounting are on full display in the gulf region.  Commercial clam fishermen have been hit hard with lost fields.  The toe bone's connected to the foot bone, with hotels and restaurants claiming lost bookings and meals served.
    The foot bone's connected to the ankle bone as counties claim lost tax revenue because of lower tax receipts. The ankle bone's connected to the shin bone, the Alabama State Superintendent of Schools was on TV today, they are preparing a bill for BP claiming lost tax revenue to run the state school system, it will be a monthly bill. Let’s move to Louisiana and set up a surf shop, then claim lost business!
    I talked to a friend Friday that runs a construction company in the Midwest.  One of his company’s crews hit a two inch natural gas line causing a release along a commercial street.  Area businesses were evacuated for two hours.  It took this long to safely stop the leak and make repairs.  Afterwards, safety personnel allowed the public back into the area.
    One business with less than 100 employees, submitted a bill for $147,000 dollars in lost production and wages. That is one super profitable business! Sometimes a billable catastrophe can be the best stimulus you can find.
    BP executives are meeting with President Obama Wednesday.  The President wants BP to put money in a special fund for the government to begin paying claims.  BP should agree to this if congress will pass a law barring individual lawsuits for economic damages resulting from the oil spill in the gulf.  This could be fashioned like the 911 Victim Compensation Fund.  Pay all claims out of this fund, and absolve BP of any additional liability.
    If BP could negotiate a one time payment to the government to cover all outstanding liability concerning the gulf oil spill, their stock could quickly recover.  The cost would not be small, but would stop the bleeding.  A known cost, even a high one, is preferable to the years of litigation they face.  If they do not or cannot reach this type of settlement, the leecherous bleeding will continue until there is little left of the company.

    Disclosure: No Position
    Jun 14 6:38 PM | Link | Comment!
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