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[dTraderB]

Still think the major decline will be in 2012, as early as January, but now we get a shallow pullback that started on Friday and ends next week. I am almost flat...waiting on the next move. Here are 2 bearish, and I must say, very persuasive views:


Dec. 2, 2011, 12:01 a.m. EST
Don’t be fooled: Get short now
About David Trainer
As author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook" (Wiley Finance 2010), David Trainer is a distinguished investment strategist and corporate finance expert. He specializes in analyzing accounting rules and their impact on the underlying economics of business performance and stock valuation.

Trainer combines his expertise with an analytical focus to assess the core impact on stocks from accounting rule changes and corporate actions. He and his research team cover over 3000 stocks by leveraging New Constructs’ Patented Research Platform. This platform sources all financial data directly from the SEC and is capable of analyzing and delivering corporate financial data, most notably the Notes to the Financial Statements, for all U.S. companies.

Trainer is also Managing Partner of Novo Capital Management, LLC, an adviser to a hedge fund that licenses New Constructs’ uniquely granular data to implement proprietary trading strategies.

By David Trainer
Do not be fooled by the recent stock market run-up. Think of it as a set-up for a fall. Do not be fooled by how long insolvent organizations can perpetuate the poor capital allocation and spending decisions that created their insolvency.

The euro is not that different from Enron, WorldCom or the Madoff fund. All of these organizations were able to pretend they were profitable or solvent long after they were insolvent. The euro has the distinct advantage of support from central banks around the world, but printing money, as I explain below, does not create solvency. It only delays the inevitable, albeit for a bit longer than accounting manipulation and ponzi schemes delay their inevitable implosion.

Investors should brace themselves and their portfolios for a big market decline now. The shell game in Europe is ending and markets are yet to discount the structural decline in the productivity of economies around the world. These declines result from large-scale mis-allocation of capital over the past several years and in the present.

And when I write "brace" your portfolio, I mean take a net short position as I have in my portfolio.

Whenever a general market decline is on the horizon, the best protection is shorting super expensive stocks with little underlying economic value. In other words, the stocks that will fall the hardest are those whose economic earnings are already too weak to support over-extended valuations.

I recommend shorting the following stocks because they all have sky-high valuations, according to my discounted cash flow analysis, and low returns on invested capital (ROIC), which, in these cases, result in misleading earnings (accounting earnings diverging from economic earnings):

— Valeant Pharmaceuticals International VRX -0.02% :

Current valuation ($46.21) implies 16% compounded annual growth in after-tax cash flow (NOPAT) for 20 years.

Low ROIC at 4.4% versus weighted average cost of capital (WACC) of 8.1%

— Digital Realty Trust DLR +0.44%

Current valuation ($63.50) implies 18% compounded annual growth in NOPAT for 20 years

Low ROIC at 5.9% versus WACC of 8.6%

— Zion Bancorporation ZION +0.75% :

Current valuation ($16.09) implies 14% compounded annual growth in NOPAT for 20 years

Low ROIC at -2.7% versus WACC of 12.0%

Compare the market-implied growth rates to historical organic growth rates and your jaw will drop, especially for ZION.

Another comparison, the current valuation of the S&P 500 SPX -0.02% (at 1,248) implies just 9% compounded annual growth for 20 years. However, the S&P, according to our model, actually generates significant profits with an ROIC of over 20%, making it economically profitable. The companies above are not currently profitable, which makes market expectations for future profit growth that much more difficult to meet.

I also recommend avoiding or shorting the ETFs and mutual funds below because they hold significant positions in the stocks above and get my "very dangerous" predictive fund rating .

CGM Trust: CGM Realty Fund CGMRX +0.39% - allocates 5% to DLR

Saratoga Advantage Trust: Financial Services Portfolio SFPAX +0.95% - allocates 4% to DLR (Same applies to the B, C and I classes of the fund.)

PowerShares KBW Bank Portfolio KBWB +3.54% - allocates 3% to ZION

John Hancock Investment Trust II: John Hancock Regional Bank Fund FRBAX +1.30% - allocates 3% to ZION (Same applies to the C and F classes of the fund)

Touchstone Funds Group Trust: Touchstone Mid Cap Fund TMAPX -0.07% - allocates 3% to VRX (Other classes of the fund get a “dangerous” rating instead of “very dangerous” because of their lower total annual costs .)

this­clo­sure: I am short VRX, DLR and ZION. I receive no com­pen­sa­tion to write about any spe­cific stock, sec­tor or theme.

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False bravado undercuts Fed's risky Europe loan
Jon D. Markman writes the “Speculations” column for MarketWatch. He is an investment advisor, money management consultant and best-selling author in Seattle. He and his team publish four daily advisories: Gemini 252 on S&P 500 E-mini and Treasury bond futures timing; Gemini SGX on gold and silver futures timing; Strategic Advantage on growth stocks, ETFs and the global investing environment; and Trader's Advantage on swing-trading high-beta stocks and options. Markman is a former MSN Money managing editor; Los Angeles Times financial columnist; winner of the Gerald Loeb Award for Distinguished Financial Journalism; and senior investment strategist at a stat arb hedge fund. He is also author of five books on investing, including most recently an annotated edition of "Reminiscences of a Stock Operator." His Twitter feed is @jdmarkman.

By Jon D. Markman
Stocks raced higher Wednesday after central bankers around the world ganged up to announce a titanic effort to improve bank liquidity in Europe on the same day that China loosened credit big-time to help its own beleaguered banks.

It was nice but unsettling to see markets move up so strongly because there was a lot of false bravado in the sprint. This was the markets on financial steroids, not to mention artificial sweeteners and a shot of adrenaline. We may look back on this day like we view a late-career Mark McGwire home run blast: Big but fake.

The central banks' coordinated action was so powerful and unexpected that it suggests the liquidity and solvency situation in Europe must be really bad. There were persistent rumors that a major French bank was on the verge of going bankrupt and that common financial transactions were on the verge of a total halt.

The super-low priced dollar swaps from the Fed to the Continent at the heart of the announcement was essentially an emergency loan, no questions asked, from U.S. depositors to the European banking system. We should feel very uncomfortable about this, and the response it triggered.

Precedents for the amplitude of this jump in the Dow DJIA -0.0051% are scarce, as it was the seventh best day for the indexes in the past 110 years. That sounds good until you realize that most of the rest were in the middle of bear markets. These sessions reek of panicked short-covering , not thoughtful buying.

The best single net gain in the Dow Industrials in history, for instance, was Oct. 13, 2008 — up 936 points. In the next few days the market went on to fall by 11%, then rise by 15% and then plunge by 25% before bottoming in March 20.

The next best net up day in history was Oct. 28, 2008. Same result. The fifth best day came six days after the top of the Nasdaq COMP +0.03% , on March 16, 2000, and the sixth best was Nov. 21, 2008, another bear market squeeze.

The only one of the top 10 net point gaining days that led to much higher prices over the next few weeks and months was March 23, 2009.

In sum, in nine of the ten most similar strong up days, the only message delivered by a session in which the Dow rose over 4% was that you were in the midst of a volatile bear market. Occasional waves of optimism create big but short squeezes that don't last long. That is most likely what we just saw.

* * *

So what if it was more than that? Well, it's as if the central banks just flooded a desert with water. It could really get traders going as there is going to be a lot of very cheap, very "high velocity" money sloshing around the global financial system.

Some will go to fix European banks, and a lot more will go into the most speculative uses. That's why Wednesday featured a "last shall be first" profile, as veteran traders use the discounted money to buy stocks that had been smashed the most and therefore have the fewest natural sellers left.

Now beware. Big up days create a kind of dangerous euphoria. Imagine it is November 2008 like those other precedents. Definitely a good time to buy low-priced assets like Caterpillar CAT +0.03% and IBM IBM +0.16% at a significant discount from prior highs — and in retrospect very good prices for three-year holds — but in 2008 they ultimately sank 50% before they were done declining.

In the present case, keep in mind that the euro zone is facing a recession, major countries are nearly bankrupt, and lawmakers are curbing public spending and recapitalizing banks in a way that will chill lending. Central bank tricks don't change these realities.

It's fair to prudishly observe that curing a debt problem by making more money available for borrowing is not the most prudent activity.

To makes sense of the contradictions and forge your own path, I suggest leaning on the comments of the late Walter Wriston — the banker who built Citicorp into a titan a couple of decades ago. He once said that money goes where it is most wanted and best treated.

So rather than focusing too much on the really speculative corners of the equity markets, I suggest focusing your risk-taking activities on the stocks and the funds in the Dow Jones Industrials DIA -0.02% , iShares Midcap Growth IJK +0.36% and SPDR Staples XLP -0.35% .
THE VIEW FROM SYDNEY
When you need to really understand what is happening with banks and credit, you have to turn to Satyajit Das, the derivatives expert based in Australia who has been chronicling and explaining the great financial crisis for us over the past four years.

I caught up with him on the road, and he answered a few questions overnight:
What was the central banks' action really all about?

Das: Same, same. Another day, another plan!
Will this coordinated effort to provide dollar liquidity change the game in Europe?

Das : No. This is just alleviating the funding problem for banks which have found it difficult to obtain deposits in the wholesale markets. It's similar to a plan used in 2008. European banks have been struggling to raise dollars. Rumor has it they cannot roll over deposits. For example, most Asian banks have substantially reduced their credit lines to European banks.

Is the issue about liquidity or indebtedness in euro zone?

Das : It is purely about liquidity and bank funding. It does not deal with the problems of debt levels.

How will that story of indebtedness change?

Das : When and if and only if, people start to write down debt to more sustainable levels and recapitalize the banks. Unfortunately, it is isn't happening. We are just trying to find new lenders to replace the old lenders, that's all.

In summary, Das said he would not read too much into this action. A more telling indicator will be what the meeting to save the Euro announces on December 9 — though he observes it probably will be just a plan to have a plan to have a plan.

JUST BUYING TIME

Now let's look at another angle on the Wednesday surge from the perspective of KGS analysts.

They noted late Wednesday that Eurostat, an research arm of the European Union, published the latest unemployment figures for the region's core states this week. It reported that 16.294 million people in the 17-nation euro zone were out of work in October 2011, the highest tally since records began in 1995 and more than the combined populations of Belgium and Ireland. The figures beg the question of how much worse it can get, according to the report.

In addition to the suffering of the individuals who have lost their job, the rise makes it harder still for governments to end the debt crisis, KGS analysts note. More unemployment means higher social security payments and lower tax receipts. Growth suffers, public borrowing rises, investors get anxious, and the debt crisis rolls on.

The Eurostat report was overwhelmed by the report of action by the European central banks to improve liquidity. The action of the banks is what financial theorists call paying the "price of time," the analysts said. They bought more time for European banks and governments to meet immediate commitments, while hoping longer term economic improvements start to emerge. They bought approximately two weeks of time.

The main strategy of the big banks is to buy time and wait and see whether economic conditions, such as jobs, get better. So far that strategy is proving disastrous as public confidence is less a function of time than of present and future ability to pay.

The Eurostat unemployment data justify a negative outlook on present and future ability to pay in many of the EU countries. That is an indicator of a lack of confidence and increased stress in the financial system that will persist no matter how much free-range liquidity is unleashed.

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