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Market Update for March

1-2-3 Model in Red Light Mode

by

Van K. Tharp, Ph.D.

I�d like to make a comment about these monthly updates that I have been doing ever since Safe Strategies for Financial Freedom was released in 2004.  First, these updates reflect my beliefs.  If my beliefs and your beliefs are not the same, then you will not find them useful. 

Second, I continue to do them because they are useful for me and my trading.  And I hope they are useful to those of you who like to be updated and appreciate the information that follows.  However, as I said above, if your beliefs are not similar to mine, then they are probably not useful at all.  Thus, if you are inclined to do some sort of intellectual exercise to prove one of my beliefs wrong, simply remember that everyone can  find lots of evidence to support their beliefs and refute others.  Just know that I admit that these are my beliefs and that your beliefs might be different.

These monthly updates are published in the first issue of Tharp�s Thoughts each month and are based on the closing month�s data.  These updates cover each of the major models mentioned in the Safe Strategies book: 1) the 1-2-3 stock market model, 2) the five week status on each of the major stock U.S. stock market indices, 3) our four star inflation-deflation model, and 4) U.S. dollar tracking; plus one new thing that wasn�t in the book, 5) the five strongest and weakest areas of the overall market.

I am writing this update from 39,000 feet in the air, returning home from a six week round the world trip.  I�ve visited Germany, Singapore, Vietnam, and Australia.  Vietnam was a trip I�ve wanted to take for some time and I�ll be writing two articles in Tharp�s Thoughts on Vietnam. Also, you�ll find this interesting.  It took me 23 hours from my arrival at the Sydney International airport to arrive at JFK in New York , a distance of 12,000 miles.  It took another 17 hrs from my arrival at JFK to reach Raleigh , a mere 500 miles.  Welcome home, Van.

Part I:  Market Commentary

The subprime crisis continues to exert its ugly head in world markets.  Bear Stearns (BSC) basically had creditors who evaluated its debt at practically nothing.  As a result, J. P. Morgan was allowed to buy BSC for $2 per share with the help of the Federal Reserve.  It�s interesting that the Fed allowed J.P. Morgan to buy BSC because if you trace the ownership of the Fed back to its roots, J.P. Morgan is a big part of that ownership.  BSC was trading at $146 per share a year prior to the takeover and opened at $54.24 the day before the takeover.  And it's currently trading at over $10.  Did J.P. Morgan get an absolute steal?  And how much of the price will be footed by the U.S. taxpayers?  J.P. Morgan had no time to do any due diligence.  This was an immediate deal that had to get done, and it was only done because of the relationship between J.P. Morgan and the Fed.

To the credit of the Federal Reserve, without the Fed stepping in, the bankruptcy of BSC could easily have caused the credit markets worldwide to freeze the next morning. No one would have known what the exposure to BSC was. Fear would have set in; margin calls would have been rampant and trillions of dollars in equities and commodities would have been wiped out overnight. There would have been a complete collapse of the credit markets worldwide and it would have taken some time for it to unravel.

What�s next in this continuing unfolding drama?  Many financial institutions have had to virtually write off all of their assets involving subprime mortgages and for many of them that amounts to losses that are several times their book value.  They are basically at the mercy of their creditors, and their creditors are not being kind.

The Federal Reserve (and the central banks of countries all over the world) are injecting massive amounts of liquidity into the system.  For example, M3 is currently rising at a 16% plus rate.  When the injections occur, the market tends to go up.  And then institutions that need cash tend to sell, and we lose all the gains.  It�s getting pretty hard to find things that are in long-term uptrends that haven�t at least had a major correction.

Remember that we are in a secular bear market during which PE ratios will go down and continue to do so for some time to come.  And based upon real CPI figures (see www.shadowstats.com), we�ve been in a recession since 2000 with the exception of one quarter in 2003.  Eight years is a long time to be in a recession.

CNN Money interviewed John Williams of shadowstats.com recently. To see this interview, click here.

Part II: The 1-2-3 Stock Market Model Is in RED LIGHT MODE and That�s Bad for Stocks

The 1-2-3 Model is in a clear red light mode and that�s not good for the stock market.  The Fed is not in the way and has actually started to lower interest rates.  That�s positive.  The market is acting poorly and the PE ratio of the S&P 500 is above 17, both of which are negative. Thus, we are in red light mode. 

I�m also listing the strongest and weakest areas of the market in this update.  However, I have trouble listing an area as being strong, when it is actually down in price over the last 40 weeks.  Thus, I plan to only list the strongest areas that are also up over the last 40 weeks.  The relative strength of each component is given in parenthesis.

Five strongest components, in order:

1)  Spain (76)

2)  Oil (71)

Only two of the five strongest components are up over 40 weeks.  The others, just because of recent upmoves, include Singapore, Real Estate, and Mexico.  Even gold has had a big correction since the last update.

Five weakest components:

1)  Brazil (24)

2)  China (25)

3)  Malaysia (26)

4)  Canada (33)

5)  UK (34)

The biggest conclusion that we can make at this point is that it is very difficult to find strong trends to invest in.  It�s beginning to look like it's time to be mostly cash.

Part III: Our Four Star Inflation-Deflation Model

As I�ve stated many times in these monthly updates, we are in an inflationary bear market.  The bear market is not necessarily reflected in prices, but in PE ratios.  PE ratios will continue in a downtrend even when the Dow makes new highs.  And the inflation is obvious, but simply masked by government statistics.  Okay, so now let�s look at the results for the last six months.  And remember that the Fed has now chosen to produce inflation and a strong dollar devaluation over the pain of the subprime crisis.

We�ll now look at the two-month and six-month changes during the last six months to see what our readings have been.

The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom.  The model once again shows that inflation is winning slightly.  Click here for more information on the model.

As of this writing, Gold is well over $900 per ounce and hit all time highs over $1000 during the last month before a major correction.  However, these are not inflation adjusted all time highs.  The Gold market has a long way to go to reach that number, especially if you look at real inflation and not the fake government CPI statistics.  Similarly, the CRB has really shot up.  As a result, this is a time to be in commodities, and real assets such as precious metals, and top quality collectables such as rare stamps, which we�ve talked about previously in this newsletter.  There are also starting to be real estate bargains out there if you know where to look.  However, it�s also a dangerous market, so cash is probably the best place for most people to be. 

Notice that both gold and the CRB took significant corrections in March.  However, my suspicion is that this is temporary.

Part IV: Tracking the Dollar

With the Federal Reserve lowering interest rates, I expect the dollar to really be weak now.  Who wants to buy treasury bills as the interest rate gets lower and lower?  So expect currency traders to start selling the dollar and moving to currencies that pay a better interest rate.  Look at the data in the chart because it really says it all. 

Notice how big a drop the dollar had during the period I was on my world tour.  So far I haven�t gotten any pleasant surprises while on one of these trips. 

Until next months update, this is Van Tharp.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling book Trade Your Way to Financial Freedom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.

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Attendees enjoy a relaxing break between workshops 
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Trading Tip

More on Bailouts

by  D. R. Barton, Jr.

�It�s tough to be a cynic � it�s so hard to keep up��

  --D. R. Barton, Jr. misquoting someone from his youth

I�ve always had an optimistic take on things.

From my earliest memories, I have been motivated by reward rather than by avoiding risk.  I tend to see the positive side in people and situations.

So when I get pessimistic about something, all kinds of bells and whistles go off in my subconscious.

Today (Wednesday, April 2) as I read about how the Senate cast a vote that was one shy of unanimous to revisit widespread mortgage bailouts, all kinds of fireworks were exploding in my head.  We have many �untouchable� issues coming home to roost at once, and I�m left feeling that this could be a significant economic tipping point.

But before I climb all the way up on my soapbox, I want to reiterate that I�m not a traditional �perma-bear� who is always waiting for the economy to drive off a cliff.  Van and I always emphasize how important beliefs are.  And my beliefs are not that the U.S. is headed to �heck in a handbasket.�

I do believe that the U.S. economy has remained robust through some pretty nasty economic cycles because of our deeply entrenched entrepreneurial spirit (supported by policies that encourage entrepreneurial risk-taking behavior). We innovate and produce our way out of some tough stretches.

But new winds are blowing on Capitol Hill: one can take big risks with greatly reduced downside.  Buy a house that is three times bigger than you can afford.  Either the real estate market will appreciate to the point that you can refinance with impunity or the government will bail you out.

One of the proposals in Congress is for the Fed to backstop $400 billion worth of mortgages.  With all the huge numbers thrown around recently, that may not seem like an eye-opening figure.  But consider that this would be more than 3% of the nominal GDP of the U.S.   This means that every man, woman and child in the U.S. has to work 11 calendar days just to backstop bad mortgage decisions.

As we keep printing money to make up for obligations like this, the dollar will continue to weaken over time (though in the intermediate term, it�s certainly due for a bit of an up move to relieve the oversold condition).

Last week, I mentioned that top thinkers out there are seeing what�s going on as a �creeping nationalization� of the banking system.  If the government actually starts buying up this bad debt, we�ll have a generation of home owners who still think real estate deals can only go in one direction.

I don�t like the idea of folks having their houses foreclosed.  But when it happens because of bad judgment and greed, I'm less sympathetic.  I believe society should help those who don�t have the means to help themselves.  But I don�t think we should have to backstop poor decisions, even if a whole lot of people were in the boat when the poor decisions were made.

An interesting piece was on the front page of the Wall Street Journal today (Wednesday) about how car loans are getting tougher to get and rates are getting higher, despite the Fed�s recent lowering of rates for institutions.

Talking with banking insiders (thanks Douglas!), there is a real fear and tightening about all loans that starts in the housing markets and overflows into all credit sectors. 

Bottom line: the government, the scoundrels on both sides of the aisle, will do whatever they can to make people feel good going into the November election cycle.  So don�t expect these problems to come to full fruition just yet.  But the credit markets really need some fiscal discipline and some folks who made mistakes to pay for those mistakes rather than looking for Joe and Jane Six-Pack to pony up more tax $$$ to bail them out.

Let the risk takers reap the rewards when they get things right.  But let�s not bail them out when they don�t.

Next week, I'm off the soapbox and back to more about some cool trading tools.

Until then�

Great Trading!

D. R.

About D.R. Barton:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV,  and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  �drbarton� at �iitm.com�. 

Along with systems guru Chuck LeBeau, D.R. will be presenting the How to Develop a Winning Trading System That Fits You Workshop in Cary, NC, this weekend, April 4-6, 2008.

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Melita's Inspirational Corner

The Reality Boot

by Melita Hunt

This is my last week in Australia and then I head back to my parallel life in the USA. I guess that it is fairly typical that when I am in America I look forward to coming home to Australia, and then after a stint in Australia I am ready to head back to America. I fantasize about my time in both locations and what I am going to achieve and accomplish, yet neither place is exactly as I am expecting it to be and I end up completely disillusioned until I wake up and decide to learn from the situation. The reality boot has a great way of coming out and giving me a good hard kick sometimes. Usually when I need it! 

That�s why it is important to keep expectations in check. 

Often, we wear our rose tinted glasses in life and always expect things to be rosy.  Of course, we get bitterly disappointed when those expectations are not met. In reality, we would probably be a lot happier if we just let things be as they are and choose to be happy anyway.

This trip was my first time back to Australia since I was diagnosed with cancer.  When I look back now, I realize that I had set up a string of unrealistic expectations in my mind before I even got onto the plane. The sun was going to be shining everyday.  I would catch up with all of my family and friends regularly (oh happy times�).  I would have plenty of rest and recuperation.  I would handle all of my accounting and legal affairs, get back some much needed energy, get to the beach, exercise, eat big healthy meals and still have time to do work and write as required. Family life would be smooth and harmonious (I mean who could possibly argue when there is a serious illness in the family to contend with?) and pigs would fly�

It is a lovely a Pollyanna dream, until reality kicks in. 

And it started as soon as I �de-planed� after a long haul flight. I guess that I forgot the seriousness of my illness, the jetlag that would go with it, the recovery after treatment in Mexico, the changeable weather, the impact and feelings of my family and friends and the subsequent dynamics that go with that, coming into the lives of others and their own daily dilemmas, and my overactive imagination that can fool itself into thinking I can do anything at anytime and help everyone. Recipe for disaster? You bet.

Too often we expect miracles from ourselves and those around us. The truth is that we are all just doing the best that we can do at any given time. If we lighten up on our expectations, the world is a much easier place to live in. 

We jump into the trading world, ready to make our millions, expecting the markets to do exactly what we think they should do and whammo! They do the opposite.  But the market doesn�t care; it is just doing what it does. It�s our unmet expectations about the markets that cause us grief.

We prepare for the holiday of a lifetime in Paris and imagine how perfect and romantic everything is going to be, but it rains every day. So instead of making it perfect and romantic in a different way, we just complain about the holiday that �never was� because our expectations were not met. 

We jump into a relationship, imagining that our new found love is the most wonderful human being on earth. They are so kind and loving and attentive at first that we expect that they can do no wrong. And then things begin to change, and we start to blame them. We put them up on the make believe pedestal and then expect them to stay up there!

Needless to say, there have been many lessons for me on this Aussie journey. It took me a while, but I finally realized that I just had to go with the flow. It even took me a while to find the flow because I was still pushing against everything, trying to meet some of those unrealistic expectations.

So where are you pushing? What do you expect from yourself or from others that isn�t coming to fruition or is causing problems? Perhaps it is time for you to get a kick from the reality boot. 

Take a step back and either lower those expectations, or let go of them all together (even better). Just go with the flow and let it be. It may turn into a very freeing, relaxing experience. And what could be better than that? 

Melita Hunt is the CEO of the Van Tharp Institute. If you would like to keep up with Melita�s progress regarding her recently diagnosed lung cancer (she is a never-smoker). Please feel free to read her blog at www.myleftlung.com.

You can contact Melita at [email protected]

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