Barron’s seems to think that we will see close to Dow 10,000 this year. Here’s their reasoning:

The U.S. economy is likely to expand in the current quarter for the first time in a year. Economies in Asia and much of the developing world are healing, and corporate profits have bottomed. Monetary policy is highly accommodative in most developed nations. The corporate bond market has had a huge rally, with investment-grade debt spreads narrowing to where they stood just before last fall’s Lehman Brothers bankruptcy.

All major U.S. market indexes — and major foreign bourses — now are solidly in the black in 2009. The Dow, at 9093, is up 3.6%, while the S&P 500, at 979, has risen 8.4%. The Nasdaq has starred, rising 24.7% this year, to 1966, boosted by sharp increases in tech stocks such as Apple (ticker: APPL), Intel (INTC), Oracle (ORCL) and Cisco Systems (CSCO). The Dow has been held back by year-to-date declines in such blue chips as ExxonMobil (XOM), General Electric (GE), Chevron (CVX), Procter & Gamble (PG) and Wal-Mart Stores (WMT).

They go on to say that the March 9 lows were “generational lows”. Well, that’s one opinion. Here’s mine:

The U.S. economy is experiencing very high unemployment. 64 American banks have failed this year, and when you look at the number of branches that have closed we’ve had more bank closings than in the Great Depression. Interest rates are low, but banks are still very reluctant to lend, even in New Zealand. It’s hard for an economy to recover when people aren’t working, and when banks aren’t lending.

Then as the cooler weather of the Fall approaches, we will have the renewed threat of swine flu, that may infect as many as 40% of Americans. How good for the economy will it be when 40% of us are off sick?

I know the Dow chart “looks good”. The intermediate down trend line appears to be broken, so the next obvious resistance level is the long term down trend line around 11,000. We are above the 50 and 200 day moving averages, so all is well, right?

Unfortunately the more broadly based S&P 500 shows a slightly different story. The market is now approaching the intermediate down trend line at the 1,000 level, which presumably will offer some significant resistance, both psychological and real. Even worse, on both the Dow and S&P charts the Relative Strength Index is over 70, which almost always indicates that the market is getting ahead of itself.

Could the S&P rally to 1,200 this summer? It could. Could it rally even while being over bought? It could. But it’s highly unlikely.

The last time the RSI was over 70 was in April, 2007, and it’s easy to see where the markets topped out soon thereafter.

I have been pessimistic all the way up over the last four months. I have stayed on the sidelines, and I have let this rally pass me by, so at the moment I look completely wrong. But we all know from past history that there can be sustained and powerful rallies in the middle of bear markets, as we saw in early 1930. That doesn’t mean the bear market is over.

We each have a decision to make: Do we decide that the worst is behind us, and the trillions of dollars in government spending will save the economy, and it’s only a matter of time until the unemployment rate falls and all is well? Or do you decide that massive government debt has never lead to a sustained economic boom, so there is still some trouble ahead?

I am obviously in the latter camp. I know we could rally for a few more weeks, even a few more months, but I will not be swayed by week to week gyrations in the market. I will not be fooled. I will sit on the sidelines, and if I’m wrong I’ll leave some profits on the table, but I’d rather do that then start buying now in advance of a crash.

My cash is ready, and when the time is right, it will be deployed.

Maybe next week. We’ll talk again then.

The upside of being sick (from food poisoning or the flu, I’m not sure which) is that I spent a day without watching CNBC, or hearing any market commentary whatsoever. The good news for each of you is that I will keep my comments brief today, since I’m not sure how long I will last before I crash again.

The first order of business today is to give the results of our first ever 2009 Predictions contest. At the start of the year some of you emailed in your predictions for the price of Gold and the Dow at the end of each quarter. The consensus estimate was that on March 31, 2009 the price of gold would be $1,026 per ounce, and the Dow would be trading at 9,107. In fact, gold was trading at around $919, and the Dow closed the quarter at 7,609, so we were high on the price of gold, and way too optimistic on the Dow.

“Closest to the pin” awards go to Croaker, who had the gold price at $950 per ounce, which means that everyone in the survey was too optimistic. Good job Croaker. I predicted gold would be $1,200 per ounce, so I was not even in the ballpark.

As for the Dow, the best guess was by Designer, who predicted a Dow level of 7,900, which turns out to have been a very good guess. In fact on both April 2 and April 3 the Dow did touch the 7,900 mark, so that was a very good guess. I predicted Dow of 8,000, which was also hit on April 2 and April 3, so I too will take some credit for being close.

What does this all mean? Nothing. Guess are fine, but unless we guessed correctly and put our money in the right place, we didn’t make any money. My portfolio on the year was up 3.5% on March 31, so although my guesses were close, they didn’t translate into great riches, which of course is the objective here.

Before I get to where we go from here, I would like to pick up on some comments made over on the Forum. A number of you have commented on the ETFs. Adiandunn, re-appearing after a long absence, commented that “almost any leveraged ETF is a bad long term investment.” Richmanch made the point that, and I paraphrase, “while this is a bear market rally, not the start of new bull, there may be money to be made on the upside, short term.”

I agree. Leveraged ETFs are a short term gamble, not a long term multi year investment. Leverage helps you on the way up, and kills you on the way down, so you have to take your profits when you can get them. In fact, after a long absence, I even posted on the Forum this week, when I commented that I had sold my shorts (specifically RSW – Rydex Inverse 2X S&P ETF) and placed a small bet in FAS – Financial Bull 3X Shares. The long-anticipated introduction of the revised mark to market rules caused a bump up in the general markets, so being out of the shorts made sense. I only held the FAS for two days, took the profit, and sold.

So where do we go from here?

I believe that this bear market rally will soon run out of legs. I have no idea if that will happen in April, or a bit later, but the Dow has bounced from 6,547 on March 9 to 8,017 on April 3, a gain of 22%. That’s a big gain for less than a month, and given that the RSI is now over 60, a pullback is inevitable (unless you actually believe that a 20% gain constitutes a new bull market; I don’t).

I’m not going short now, but I am holding cash (46% of my portfolio, at the moment).

Gold has been beaten down this week, and the case can be made that we are in a downtrend. However, since the October lows we have made a series of higher lows, and with an RSI down to 39.88 I don’t think the correction will last much longer. I hope the $875 levels hold; if not, we could see a fall to the $850 or even $800 range. If that happens, I’ll be adding to my positions. In fact, I will probably place some stink bids this week to increase my holdings in the event that we have an unanticipated blip to lower levels.

Longer term, unemployment is still high, personal debt levels are high, bankruptcy rates are increasing, and all governments are spending like drunken sailors, which is inflationary and very good for gold.

Those are my thoughts for this week; I’m going back to bed; thanks for reading; see you next week.

There’s lots of bad news out there. GM shares are at 75 year lows. They are exploring their options, so expect a bankruptcy filing sometime in March. Citigroup shares are worth less than a buck. Even Trump Resorts has had to seek bankruptcy protection. And don’t get me started on AIG.

So with all of this doom and gloom, what am I doing?

Buying.

Yes, I like to do the opposite of what makes sense, so on Wednesday I closed out my short positions (like RSW – Rydex Inverse 2X S&P ETF) (one day early, as it turned out), and I went long, buying the RSU – Rydex 2X S&P ETF.

Have I lost my mind? Is everything good again?

No, of course not. We are in a depression, and we are in a bear market. But, all bear markets have bear market rallies, and it looks to me like it’s time for one here.

here’s a shorter term view:

Obviously the charts look overbought, since historically an RSI below 30 leads to at least a short term rally, and the RSI closed at 28 on Friday. Aside from the charts, is there any fundamental reason why the markets could rally?

How about this: Legislation introduced on Thursday night proposes to eliminate mark to market rules. You see, under mark to market accounting principles, the value of a financial instrument must be restated to it’s current market value. If I bought a share for $5, and it is trading today at $6, I would show it on my financial statements (my balance sheet) as $6. Of course if it’s only worth $4, that’s the value it would have on my balance sheet.

If prices are rising, the conservative accounting treatment is to leave the price at the lower of cost or market ($5 in my example above), on the theory that a gain should only be recognized when it’s realized on sale; a paper gain is not a gain at all. The opposite is also true. If the price has fallen, is it fair to show a $4 stock on your balance sheet as being worth $5, because that’s what you paid for it? In that case, market value is more realistic.

Test time: let’s assume you are a bank with a sub-prime mortgage portfolio originally valued at $100 billion, but today, because no-one is paying their mortgage and the underlying houses are close to worthless due to the real estate market crash, the portfolio is worth zero. What portfolio value would you like to show on your balance sheet?

Hmmm, let me think. If I have to write down my portfolio by $100 billion, my balance sheet is wiped out, and my company is worthless. If I can keep the portfolio at it’s original $100 billion value, my company is worth $100 billion, and everything’s fine. If I’m a banker, I pick option B. Or, to quote the AP story on this:

Bankers pressed the SEC to suspend the mark-to-market rules as an emergency measure. Congressional allies managed to get a provision into the law setting up the $700 billion financial rescue plan directing the SEC to study the issue. But the agency in December recommended retaining the rules while suggesting improvements to current practices.

The latest proposal may not gain traction or become law, but it opens a new window on the debate over the highly charged issue of mark-to-market, or fair value, accounting rules. It’s expected to figure in discussion at the hearing Thursday by the House Financial Services subcommittee on capital markets.

“Part of this is pressure from banking regulators and the banking industry,” Mercer Bullard, the head of a mutual fund watchdog group and a former SEC attorney, said Friday. “It’s really the same old-same old.”

The bill proposed by Rep. Ed Perlmutter, D-Colo., joined by a more senior Republican, Rep. Frank Lucas of Oklahoma, would create a new federal board to oversee how accounting principles are applied to the financial markets. The board’s members would be the heads of the Federal Reserve, Treasury Department, Federal Deposit Insurance Corp. and SEC.

That would put an array of banking regulators, who generally look less favorably on mark-to-market rules, in charge of a crucial province now overseen only by the SEC.

The new board makes sense “because a broader group of individuals with a view of the greater economy should be in charge of applying” generally accepted accounting principles, Perlmutter said in a statement. “As we work to stabilize financial markets and rebuild the economy, we must look closely at the regulatory structure to see what is helping and what is making things worse.

“Proponents of mark-to-market rules argue that suspending or scrapping them would weaken transparency in companies’ financial statements, hurting investors and the capital markets. Critics say the rules mandate onerous writedowns — sapping investor confidence in banks — that don’t reflect the true value of soured, mortgage-linked assets and the prices they may fetch in the future.

The Perlmutter proposal “represents much needed reform that will help address systemic risks that accounting standards can have on the economy,” Edward Yingling, president of the American Bankers Association, said in a statement Friday.

Brilliant. Allow me to summarize:

This is an emergency. Instead of showing mortgages as worthless, we will show them as being worth billions. Stock prices go up. Investors are happy. The markets go up.

Brilliant.

It’s even more brilliant because the new rules cost the government nothing. No increase in taxes. No bailout money. No increase in the deficit.

Even better, since the government now owns half the banks out there (okay, I’m exaggerating, but you get my point), the value of the government’s investment instantly increases. They can sell their shares at a profit, instantly lowering the national debt, and the deficit. At no cost to the taxpayers!

So, on Thursday, at 10:00 am, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will meet to discuss relaxing the mark to market rules.

(As an aside, do we really need a committee called the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. Isn’t that an unusually long name? Couldn’t we just call it the HFSSOCMIAGSE? Or perhaps just get rid of the Committee altogether? But I digress).

Governments will do what governments do. They don’t actually fix things, but they will make things appear better. So here’s JDH’s fearless prediction:

On Thursday the government will make noises about relaxing the mark to market rules. The stock market will rally. Big time. Everyone will be happy. All will be wonderful.

Lest this little blog of mine starts to sound like a late night infomercial……………..Wait, there’s more! If you order now, for a limited time, not only do you get the mark to market adjustment, but you also get the great big beautiful Bad Bank!

Here’s the deal: the government uses a trillion dollars, or whatever, to fund a newly created Bad Bank. The Bad Bank then uses it’s trillion dollars in cash to buy up all of the crappy assets (bad mortgages, etc.) from the banks that exist today. Instantly all of the bad stuff is off the balance sheets of the banks, and their stock price soars! Happy Days are here again!

The newly created Bad Bank then hires the same idiots on Wall Street who got us into this mess to manage the portfolio of toxic assets. They earn huge fees to do this. The banking industry is saved, and everyone makes money!

Yeah!

So, to summarize, I am buying for two reasons:

1. The charts are looking over-bought; we are due for a rally.
2. The Powers That Be will not allow the stock market to tank forever. They will do whatever it takes to force a rally. Spending trillions of dollars didn’t work, so changing the rules of the game is the next step. And creating a Bad Bank to make things look great is a certainty.

As I mentioned above, I bought some RSU – Rydex 2X S&P ETF, which is an ETF that goes up, in theory, by twice the percentage increase in the S&P 500. I bought some on Wednesday, and I averaged down on Friday. If the market falls on Monday, I may buy more to continue averaging down.

Second, I also bought some call options. I bought the April 76 S&P 500 calls (the SPYs, ticker symbol SZC C APR 76.00). If the S&P 500 closes above 760 by the third Friday in April, I’m in the money.

Like the DOW, the S&P 500 is trading at an RSI of 28.47, which is not sustainable. I think a move into the 800 range is almost inevitable. That would still leave the down trend intact, and would not even get the index back to it’s 50 day moving average.

Has JDH lost his freakin’ mind?

So, here I am, Mr. Doom and Gloom. In Story Time with JDH I told you many stories to illustrate why the world was ending. Last week I talked about shorting the market and buying gold. (I was correct last week, by the way, and thanks, it worked out well).

So why, this week, am I going long? Buying call options? What’s changed?

Nothing has changed. The world is still ending. Consumers have too much debt. Unemployment is at record highs. The stock market is crashing. Gold is rising.

But, and it’s a big but, nothing happens in a straight line. The markets will not fall by 200 points every day, day after day. There are always bear market rallies.

And that’s where we are today. Or next week. Or within the next few weeks.

The Obama Administration knows it’s got problems. The Dow opened at 9,326 on November 3, 2008, Election Day. On Inauguration Day the market opened at 8,280. The Dow closed on Friday at 6,627, a drop of 29% since Election Day, and a drop of 20% since Inauguration Day. Yes, we all know that President Obama inherited a big mess from George Jr. But if one accepts the premise that the stock market is forward looking, it does not appear that the markets believe Mr. Obama can fix things.

But fix things he must. He promised to do great things in his first 100 days. A 20% drop in the markets was probably not one of those “Great Things”. He needs a rebound in the markets, and fast. If miniscule consumer confidence disappears completely, he’s done. He’s a one term president.

He will not allow that to happen.

He will make sure the Bad Bank is created, and Mark to Market rules are changed. And when he does, the markets will rally. And I will profit.

For a short period of time.

Changing accounting rules, or moving bad assets from one box to another does not actually change anything. And, once the market realizes that, the downward spiral will continue.

I predicted Dow 8,000 on March 31, 2009, and I’m sticking to that prediction. (To be honest, I thought the market would fall to the 8,000 level by March 31; I didn’t think it would fall to 6,500 and then bounce back to 8,000, but hey, whatever gets us there, I guess). I expect a big bear market rally over the next few weeks.

How sure am I of a big bear market rally?

Not very sure. I am only placing small bets. I am still holding a significant amount of cash (over 40%), and a significant amount of gold and silver stocks (around 50%) with the balance in my gambling bets RSU – Rydex 2X S&P ETF, and the April 76 S&P 500 calls, in which I have invested a tiny amount of money, since I will probably lose the bet and lose everything). If I’m correct, I make a few bucks. If I’m wrong, I lose a few bucks. Either way, it won’t be significant.

Doom and gloom is an opportunity, so for now, I’m buying. It’s very possible that within the next week I will also be selling again.

Time will tell, and the time to tell will be next week, so thanks for reading, and see you next week.