Sentiment is that the market is now ready to rally

Stock markets posted their first two-week gain in three months as the Federal Reserve reduced interest rates to a record low. Japan is up sharply after following the USA and reducing rates and making Japan's production more profitable. Other Asian and European markets are down slightly as investors in those countries wait for stimulation packages for their economies. US market futures are mixed with the markets at their 20 day moving average line which means oversold if the market has reversed and is bullish on a recovery in 2009.

Treasuries climbed for the seventh week so the Federal Reserve decided it was time for American taxpayers to cash in. So the FED cut its benchmark rate to as low as zero and said it would buy long-term debt, possibly including Treasuries, to lower borrowing costs and spur growth. Basically taxpayers can now pay zero interest for the USA stimulation package which is funded by the cash hoarders, many of whom are the prime cause of the recession.

President George W. Bush granted the emergency loans to General Motors Corp. This will provide the auto industry with the time needed to restructure and downsize so that they emerge profitably as the recession ends in 2009. Toyota, the world's leading auto manufacturer could go bankrupt if Japan does not provide liquidity so Japan lowered rates too and is planning to provide loans.

Sentiment is building that the market will rally into the end of this year and into 2009. Some market professionals are bullish in light of recent rallies because stocks usually rally at year’s end as Funds buy to reduce cash and beef up portfolios selecting stocks that are performing. Low volume during the holidays also makes it easier for the funds to move prices higher with less cash and thus raise performance and show due diligence.

Robert Pavlik of Oaktree Asset Management said he has seen "a reduction in the overall selling pressure." Pavlik also said he’s also optimistic because of the amount of cash on the sidelines and the "large number of reluctant and underperforming portfolio managers" that could turn more optimistic if they start to see stocks rally. Short selling is slowing and in Brazil it has returned to low 2007 levels.

James Paulsen of Wells Capital Management agreed, and said that a comparison of this current downturn with four previous market panics [1903, 1907, 1920 and 1973-74] shows that things might not be so bad. Paulsen said that each time, the markets recovered to their pre-crisis peak levels "within about 12 to 18 months of reaching their respective bear market lows." He said "it implies the S&P 500 should more than double from its 752.44 low established in November by May 2010." (Assuming we were correct and November 2008 was our major buying opportunity). We are not looking that far ahead. We are looking for half that in the first half of 2009.


But what should we be buying now?

Jonathan Garner, strategist for Morgan Stanley agrees with us and said that emerging-market stocks are a better buy than those of more developed regions because their economies will rebound more quickly from the global slowdown. Garner heads the global emerging-markets strategy team. He said, "Emerging markets were the last to drop and will pull out the fastest." "It’s very encouraging that since the end of October the tendency to outperform has re-asserted itself," he said. MSCI Inc.’s index of emerging-market stocks beat the developed-market gauge from the start of last year’s fourth quarter, to August. The emerging-market index fell as recessions in the U.S. and Western Europe dragged down growth in China, Brazil and Russia. Since October, emerging-market stocks outperformed again, a trend Garner says will continue next year.

James Cramer agrees with another strategy we recommend and is advising investors to load up on high dividend stocks that have good balance sheets and can sustain their dividends. Then no matter what happens they give the best possible return during a recession due to the cash they generate that they distribute as dividends.

Warren Buffet and Jim Rogers were buying and recommending stocks and commodities for two month already.


Scandal smolders.

Emanuel and Obama have remained silent about what, if anything, Emanuel knew of the governor's alleged efforts to peddle Obama's vacant Senate seat to the highest bidder. The friendly rapport Blagojevich and Emanuel had over the years has suddenly become a troubling liability for Emanuel and the new president he will serve as chief of staff. Any hint of scandal for Emanuel tarnishes any promise of political leadership free of scandal and corruption at a time when politicians are swimming in cash being borrowed from America's future. The taped conversations reveal Blagojevich telling others to float his idea by Emanuel of forming a nonprofit that he hoped would, with Obama's help, receive millions of dollars that the governor and others could tap later. They already have one that has been responsible for pervasive voter registration fraud. Stealing money from Americans is bad enough but Americans can get pretty upset when their votes are stolen so the newly elected can steal even more and corrupt even more. Probably Obama should have Emanuel resign now.

"We're not going to end corruption in Illinois by arrests and indictments alone," the prosecutor said. "What's going to make the difference is when people who are approached to 'pay to play' first say no, and, second, report it."