The sentiment that the market always goes up has long been in play and is still the fact used by most professional money managers to assume positions in beaten down companies.  The average is about 10.5% a year for large cap stocks over the long run, some 100+ years.

Market timing is something that is critical for a short term trader and not so necessary to the retirement fund manager.  The short term trader needs to show huge daily profits from relatively small movements in price.  A move from $25 a share to $26 would be a gift from the heavens for most full time traders.  For the long term investor, that’s just a 4% return, very unlikely to make a considerable difference in the long run.

When the markets get beaten down, look at the last few months, the new favorite term is “timing the market.”  Many investors tried to time the real estate market only to get trounced, many ran out the commodity boom and the USDJPY carry trade watched their profits unravel as it broke down.  Market timing can be a difficult thing to learn but can bring huge gains for correct timing.  The losses can be huge as the gains, many investors lose big by chasing returns.

Short term traders do not profit from the difference in value in a company, they profit by merely buying X stock and selling it for more than they paid.  Traders, unlike investors, just want to flip their shares for a profit rather than hold on for the long term.  For this reason, data such as corporate earnings and economic outlooks play a very minor role in the short term trader.  Long term analysis is unlikely to affect a trader’s short term perspective.

For the rest of us, market timing really isn’t that critical.  As much as we’d like to follow the world’s best investments and be invested in each of them, its entirely impossible.  Most of us have our retirement portfolios invested into a series of profitable companies rather than the hot biotech down the street.

There is some role for market timing in a bear market, especially for the long term investor.  A bear market is likely to bring down the values of all stocks, even those with strong fundamentals.  A boring market in the US looks like a great opportunity for foreign countries.  Fundamentals remain strong even amongst this very technical-driven investment cycle.

As things weaken on the American front, there are still many great investments that have become oversold due to market sentiment rather than an actual difference in company quality.  Take for instance the deep-discounters, the fall in prices was due mostly to a market event than an internal event.  If anything, the balance sheets of deep-discounting corporations have never looked better.

And as much as the market hates the financial sector as a whole, there are still many great investments.  Firms with limited exposure to subprime mortgages have been hit just as hard as those with maximum exposure.  The rebound for these companies who managed their investments wisely will be huge, driven by profits rather than the rumor-mill.  Just by being in the financial industry it is likely to see a stock price tank by 20-30% without any hard evidence that the company will be doing worse.  This kind of sentiment is easy to beat with high quality, profitable stocks which are still lingering in the mess of illiquid lenders.

This past week produced economic data that looked bad to say the least.  Job losses are the highest since hurricane Katrina and the amount of people seeking benefits is actually higher than the months after the catastrophe.  Job losses are both a lagging and a future economic indicator as they judge how corporations are cutting back and also shows that the production of wealth is also limited.

Wealth can only be generated by producing more than you need.  In this case, lets take a lemonade stand as an example.  Sally has a lemonade stand, to do business she need her factors of production, lemons, water and sugar (promotion not included).  She buys $5 worth of lemons water and sugar which will produce 5 gallons of lemonade that she can sell for $3 per gallon.

Sally’s investment is a mere $5 but she is able to produce $15 worth of lemonade.  In this example she can sell her $15 in lemonade and produce a $10 profit, which is wealth.  She provides a good or service that people want (lemonade) for a higher price than it costs her to make.  Customers are happy because they have their lemonade and she is happy because she has produced a profit.

The job market slowdown shows either an increase in productivity, unlikely, or a decrease in overall business activity.  Workers are needed to produce goods and profit for a company, so when they are laid off, it appears that business activity and wealth creation are temporarily slowed.

A corporation could lay off workers for a variety of reasons, but it is usually to cut costs and limit the amount of one good they can produce.  Corporations would much rather have a smaller workforce work at 100% capacity than a much larger force work at 70% capacity.  The difference between 70% and 100% is waste to a company.

When the job market slumps it is indicative that the “wealth creators” are also taking a slump.  If this is the case, the overall size of an economy is shrinking because it is no longer producing as much as it once was.  In this case, 80,000 jobs were lost indicating that the economy will shrink as it produces less.

No wonder why job losses have Wall Street in an uproar.  A cut of 80,000 jobs means less is being produced.  The economy is by all definitions shrinking, or showing the effects of a recession.

Bernanke’s acknowledgement of a future recession worries many on the street but it also provides the chance to get into several major deep discounters.  Deep discounters such as Big Lots and Family Dollar surge when economic news gets worse.  When people make less, they flee to these two stores for big savings on items.

Just as the housing bubble helped grow Target’s middle to upper class customer base, an ongoing recession will do much to line the pockets of Big Lots and Family Dollar which buy merchandise in bulk for dirt cheap to turn around and sell again for much lower than competitors.  These two companies are known for their low income customer base and benefit when the economy looks less than par.

Both these companies have a strong branding image and are known for their low prices.  Both stores offer brand name products with a much lower price than can be found at stores like Target or even WalMart.  The companies benefit by buying product that is overstocked and take in merchandise from other stores that might be out of season.   The loss of other retailers quickly becomes the gain of deep discounters.

I like deep discounters much more than regular dollar only stores because they have the ability to negotiate prices.  A dollar store that switches to a deep discounter usually faces tough marketability as consumers lose interest as prices rise.  Deep discounters are not as prone to losing money when the dollar falls, as the dollar loses value, the dollar only stores must cut the amount of their product or raise prices.

Big Lots reported very good earnings last quarter and set high marks for the next year.  The company has seen steadily increasing business as consumers look to cut costs by shopping at the deep discounter.  Biglots trades near its lows in share price at a tiny PE ratio of 14.  This kind of value is rarely seen even in deep discounters, especially with such high growth rates.  A PEG ratio of .7 is comforting that the company will continue to grow even amidst an economic downturn.

Family Dollar is another strong stock with much room to improve.  When the downturn of 01-02 came, Family Dollars stock moved up to the upper $40s to settle at record highs.  As you can see, this company proves to be very solid in periods of economic downturn and fluster as the market stabilizes.  Currently the stock trades at $21.40 per share, about the same price it traded before the internet bust.  This one trades even cheaper than  Big Lots at a PE ratio of 13 but has a much lower growth rate than Big Lots at a 1.26 growth rate.  Either way, if history repeats just like it did during the internet bust, this company is set to boom.

Beating the market in a downturn is much easier than in an upturn.  If the economy follows through with expectations, both companies can expect higher earnings and better than expected growth.  Both brands are known for their low prices on brand name products.

Last year brought much news about the USDJPY carry trade, or holding a trade merely to gain interest.  At the time, the Japanese lending interest was far below the borrowing interest paid by US banks, investors could simply borrow in Japanese yen to deposit into US accounts and make money on the interest.

Carry trades are usually highly leveraged, forex accounts allow up to 400:1 leverage at some brokers.  This kind of leverage allows an individual to control $1,000,000 in currency with just $250 down.  This kind of investing is very dangerous and also compounds the effect when the markets turnover, or the trade becomes unprofitable for carry trade investors.

The dollar faces a critical problem, at this point the Federal Reserve Board is pushing rates so low that it may soon be privy to being the new carry trade currency.  This has already happened with the Eurozone and the pound as the dollar is now pushing low interest rates that are a few points lower than the central bank rates in other countries.  This creates unnecessary selling pressure when investors go to sell dollars and buy other currencies to profit from the interest rate difference.

When the USDJPY carry trade broke down, investors quickly bought back Japanese Yen to cover positions.  This caused the yen to advance by 20% in 2007.  As rates were lowered and investors lost confidence, the dollar was sold to buy yen which moved the exchange rate from 120 yen to the dollar to less than 100.

This puts a daunting strain on an already hurting US Dollar.  If the same carry trade that perpetuated with the yen persists in the opposite direction with the Euro and GBP, the value of the dollar will continue to slide.  In this kind of position, investors borrow dollars to deposit in Euro banks.  This puts artificial selling pressure on the value of the US Dollar, causing it to correct.

Further action by the Federal Reserve to cut interest rates will only hurt the dollars value, pump up the price of commodities and cause a dollar sell off in favor of other currencies.  The difference between interest rates is still tight, but a further move of 50 or 75 basis points will be the beginning of a large, multi-year carry trade.  We’ll have to see how the Fed responds, surely they know that further action will create a large difference in interest rates and more selling pressure.

Investor confidence and market direction can be predicted just by watching the inflows and outflow of money from large mutual funds. When money floods the street, prices become inflated and stocks rise, an outflow causes large drops in stock prices as equity is taken out. After the last few months of decline, it is now apparent that outflows are huge. Investor confidence in big banking and anything related to mortgages are at all time lows.

A quick glimpse at a four week chart shows that equity funds tanked in February with the weekly outflows topping $12 Billion. Investors lost confidence in the market and thus started taking cash out of stock funds and at the same time loading up in money markets. While stock funds tanked, money market funds were taking in an extra $40 Billion a week. This shows that investors only felt safe in guaranteed return investments, even if the yield was as low as 3-4% per year.

Bond funds dipped at the same time as stock funds, either investors lost confidence in corporate holdings or they were wary of mortgage backed securities which are essentially mortgage debt repackaged as a bond. The monthly repayments of the mortgage were used to secure the bond interest, but as that money slowly dries up, the possibility of repayment drops.

Coincidentally the amount invested in money market funds has dropped with every FED rate cut, but the figures still remain positive. Net inflows to money market accounts were around $15-20 Billion a week, half as much as they were before the FED rates were dropped. Throughout the latter parts of February and into March, investors turned away from money markets and bought back into the market at bargain basement prices. Up until this week, there were heavily inflows of cash to equities of about $4 Billion a week, still much lower than money markets.

It appears that investors have again begun to take money out of equities and now back to money markets. From this viewpoint it looks like investors will start fleeing the market again, probably in droves when the Dow and other large indices drop. The impressive gains from last week are going to be wiped away if investors continue this sell off.

Watching these key statistics can help you better time the market. When the inflow/outflow statistics are weighted by a 4 week moving average, the charts flow smoothly. Very rarely do the charts move down and then back up, instead they move down and keep moving down or move up and continue up. This shows that the market is following the returns, investors don’t know where to put their cash.

Gauging just a few months history, equities are going to get killed in the coming weeks. Inflows topped at $7 Billion a week and now down to just $4 Billion a week, next week will probably go negative. If this continues, the next month will be filled with more 200 point losses. Hold on tight.

The approval of the XM-Sirius merger is now complete and both companies plan to work together to sell satellite radio subscriptions.  The companies both sell proprietary equipment that can access only the satellite radio provided by each company but now after an agreement is made the two hope to sell a package of both XM and Sirius channels for just $16.99 a month.

The companies both had the ad-free claim to fame that is popular with music and sports enthusiasts.  For just a small fee of $6.99 consumers were able to get 24/7 ad free programming of music and sports from a variety of stations offered by the companies.  Now that the merger is complete it should be possible to get programming from both companies without having two devices.

There was some serious lobbying in the merger, broadcast radio lobbying firms were adamant about keeping the merger from completion.  The lobbyists wanted to convince consumers and regulators that this would prevent competition and create a monopoly.  XM and Sirius made the case that the satellite radios were still in competition with broadcast radio and had a reason to keep prices down in order to win customers.  XM and Sirius must have been very convincing as the merger will go through, even with two giants in one industry.  The new company will not have any competition in the satellite radio industry.

XM and Sirius should be able to achieve profitability as they will no longer have to spend billions in advertising to put each other out of business.  Since their inception, neither satellite radio provider has made a profit.  In fact, both companies are on the brink of being grossly unprofitable.

We’ll have to see what the companies can do after the merger, at this point its anyone’s game.  The duo are facing huge losses and a limited customer base but have plenty of room to grow.  The balance sheets should look better after the two merge and cut costs, hopefully gaining customers in the meantime.  I’d hold here, no new positions until we see a lively balance sheet.

The Yuan or Renminbi is the Chinese currency and might as well be the next hot investment.  The run into metals, commodities, oil and the Eurozone has brought huge gains to those areas, but the Chinese Yuan is something that has yet to be exploited.

The Renminbi was subject to a peg to the dollar for decades.  The old peg was valued at about 8 Renminbi to one US Dollar and was in effect to keep a low Chinese currency value.  If the currency was always devalued against the dollar, US consumers would look first to China for the production of goods.  Thus so many “Made in China” stickers appear on virtually everything you own.  The drop in the dollar’s value went unnoticed against the Yuan because its always been pegged to the US Dollar.  Never has it been allowed to free float against the USD so its value has remained the same.  Lately, the Yuan has been on top of the headlines as the main reason for the large trade deficit between the United States and China.

Now that the economy is on the forefront of political discussion it has been made public that US legislators are looking for a way to let the Yuan free-float against the value of the dollar to bring back the manufacturing base to the United States.  The currency is being artificially devalued in an attempt to keep China’s booming manufacturing district, well, booming.

One proposal was to create an import tax on Chinese goods to make them more expensive to US consumers and thus, force companies to send the manufacturing jobs back home.  In response, China allowed its currency to now float against a “basket” of different currencies including the pound, euro, and 6 other large currencies.  At the font of the basket is around a trillion dollars worth of US Treasuries which has for the most part maintained the value of the Yuan to about 7 Yuan to the dollar.

If the market were to let the Reminbi free-float, an instant 30-40% correction is expected.  Economists predict that the value of the Yuan would jump quickly to 4-5 Reminbi to the dollar, instead of today’s value of around 7 to the dollar.

It is certain that the Yuan will eventually be set to free float.  The new tax legislation and pressure from the rest of the world to go to a floating currency will eventually send China to let the currency float.  When it does, huge overnight gains will occur for anyone with a position in the Chinese currency.

Everyone should have some exposure to the currency market by making a direct investment into the currency, buying Chinese stock such as Petrochina or taking a position on the spot markets.  I would recommend making an investment on the spot markets through Oanda forex.  With Oanda, it is possible to enter a position at 30:1 leverage, meaning it will only cost $100 to control $3000 of currency.  A modest investment of $1000 to buy $15000 in Reminbi would be suggested as this provides a position against the currency and provides a great return if the Reminbi does get revalued.

A move from 7:1 to 5:1 would mean that the value of your investment ($1000) would turn into $5500 if the currency was revalued to 5 Yuan to the dollar.  Using $1000 to buy $15000 in Reminbi has a huge upside potential with the only possible loss of $1000.  Get in, its inevitable.

There is absolutely no reason to be pulling equity from the markets.  Rate cuts by the Fed have dropped interest bearing accounts to new lows, this is certainly not the time to be in cash.  Inflation is reaching 4-5% per year, its not the time to be invested at 2% per year.

Oil companies are looking very cheap when compared to other stocks.  Their revenue stream will continue for years to come as oil prices are unlikely to drop.  The only risk at these prices is a higher corporate tax, but the current administration is opposed to tax hikes.  I like Rowan (RDC) at this price.  With just a PE ratio of 8 and a growth rate of 16%, this is the best investment you’ll find in the oil market.  Rowan makes their own rigs to rent and sell to various refiners and exploration companies in the Gulf of Mexico and more recently off the coast of Africa.  They rent rigs for a daily rate in the hundreds of thousands of dollars.  Oil rigs are in short supply and the bidding wars intense, just last year Rowan moved a number of rigs to Africa where they get up to three times the rate Rowan was getting in the Gulf.  Oil companies are the place to be.

Next positions are mining stocks.  Mining companies make money regardless of current price because they enter contracts well before delivery date.  Some companies  refuse to enter these contracts and have benefitted greatly from higher prices.  Stocks like Gammon Gold do not contract price for gold or silver and thus always sell at market price, which has been remarkably high.

With the economic stimulus package right around the corner, it might be smart to make a few speculative plays on which stocks are likely to benefit the most. Home Depot and Loews are on the top of my list.

Eligible people will receive a $600 “advancement” on next years taxes, plus $300 per dependant. A family of four would receive a check totaling $1800, provided they don’t earn over the criteria.

With this amount of money fresh in the hands of consumers, chances are that a very select few will save it and the remainder will blow it on something. Home improvement stores top my list because the amount ($600) is about the price of most big appliances and summer home improvement ideas. The checks will come just in time for summer and things like lawn mowers, new air conditioners, a variety of landscaping elements etc.

To profit from this, we’ll have to see a very good quarter come out of either stock. Out of the two mentioned, Home Depot is well off its highs and looks a lot better for a turnaround than Loews. For example’s sake, lets suppose we want to invest in Home Depot.

In this particular scenario, it is a lively quarterly earnings report that we want to see out of Home Depot. Because quarters are compared to the previous year quarter, it is very likely that Home Depot will destroy last years earnings. No economic stimulus last year, $155 Billion stimulus this year. Got it?

To maximize our returns and limit the downside, we’ll elect to buy January 09 call options with a $20 strike price for just $9.10 each. This can also be used to further leverage our position, but its better just to limit the downside if HD happens to fall off a cliff.

The timeframe to January 09 also gives some time to sell when we want, rather than be tied to just a few months after earnings announcements. Good earnings in the second quarter could easily carry into the third and beyond, it really just depends on how effective this economic stimulus is.

Consider buying some Home Depot calls as a quick way to make some money when the economic stimulus package goes through. This is certainly one store that will benefit the most from the $155 Billion burning a whole in the public’s pocket. That $155 Billion has to go somewhere, I think it will go to the home improvement stores.

Google has been very quick to respond to the overall markets, it seems as though it is easily affected by the market rather than its own inner workings.  The company topped out last November with a share price of $750 only to find itself to be at $430 just four months later.

Prior to the fallout from $750, Google had never managed a significant move down.  A quick look at a Google chart will show that the price has never made significant, quick drops but rather rose at a very linear pace until November, where it began to spike.  This tells us that the spike was due to mal-investment that led to large profit-taking and short selling.  Google’s drop in price has very little to do with the internal workings of Google and more to do with trading.   Traders were quick to drive the price up then back down, something that hadn’t happened in the two years prior.

Now that Google has shed about 40% of its value, this might be the place to buy in.  For the first time, Google trades at just 32 times earnings with a PEG ratio of .61.  It is very rare that you every get into a growing internet company with a 53% growth rate for just 32 times next years earnings.  At this rate, Google is set to reach a blue-chip PE level within the next couple years.

While the world might be entering a recession, internet traffic is not slowing, nor is the need to advertise on the internet.  Google boasts low overhead costs and is very well prepared to continue working even through economic slowdown.  Its ad sense program extends all over the internet and the world, profiting from the day to day currency flux.

Large offers for Yahoo make Google look even more attractive.  Microsoft and Yahoo have yet to even come close to Google in textual advertising.  Yahoo has produced a similar program but has been in beta for two  years while MSNs marketing program never really gained traction.  Google has the key to the text based advertising market and is unlikely to give it up.

All in all, Google looks like a great investment.  A PE ratio of 32 and growth rates in the 50s tell us this is one for the long term.  Look to buy on the dips at this price.