For Tuesday, January 3, the market forecast is for growth

If you choose to invest now we recommend any leveraged ETF that grows with the US market.

Here are some options:

2x Leveraged ETFs


Russell 2000

S&P 500




3x Leveraged ETFs


Russell 2000

S&P 500




Technical Comment:

Friday the S&P 500 closed down 0.4% on volume just below Thursday and far below the 30-day moving average volume.  On Tuesday if the S&P 500 drops about 13 points (1.1%) our forecast could change to uncertain.

Note: US markets are closed on Monday, January 1, 2012 to observe the New Years’ holiday.

Subjective Comment:

For the year the S&P 500 ended 2011 where it ended 2010, down 0.04 points or 0.003%.  However, the Dow finished up 12% for the 4th quarter, the best quarterly performance since 2003.  The burst of summer lending by US banks started a bubble-boom in the US economy and fueled the 4th quarter results.  During the 9 weeks from June 6th through August 8th US M2 expanded by $470 Billion Dollars or at an annualized rate of 33%.  Since August there has been a much slower annualized growth rate of 4.2%, resulting in $164 Billion Dollars of M2 growth over 19 weeks.  US banks dramatically scaled back the originations of new loans since August in response to the growing debt crisis in Europe.  The insolvency of European banks began to show by increasing usage of the ECB deposit facility starting at the same time US banks ended the rapid rate of summer lending.  It is doubtful US markets will continue to grow as long as US banks hold their $1.47 Trillion of excess reserves as a cash contingency against their potential losses of over $1 Trillion from European debt.

Time will tell if the European Central Bank (ECB) is successful at using its new 3-year, 1% LTRO loans to cause European banks to resume loans to one another and to businesses.  If this happens and the European Money Supply begins rapid growth, then US banks will conclude the Eurozone debt crisis has subsided.  In reality the problem will have only been delayed into the future, but that would be sufficient to encourage US banks to use their enormous excess reserves to resume rapid lending, probably at the same rate seen in the summer of 2011 (32% annualized M2 growth).  This is turn would fuel an economic expansion and growth in US stock markets.  All of this will also cause serious price inflation across the Eurozone and in the US.  (The price inflation will come after the initial growth.)

As we progress into the early part of the new year, the focus will be on the Eurozone and the ability of the various sovereign to roll over maturing debt via bond auctions.  The LTRO should be successful at supporting these bond auctions.  What remains to be seen is if the LTRO will also be successful at sufficiently recapitalizing European banks so they feel comfortable resuming private lending and inter-bank lending.  If the ECB only supports enough Euro growth to help the sovereign bond auctions then expect the Eurozone economy to stagnate and quite possibly some European banks to go bankrupt.  If this happens, US banks will probably continue to hoard their cash and the Federal Reserve might initiate another round of Quantitative Easing.  If Euro money supply grows more rapidly and European banks are recapitalized by the ECB, then US banks might resume rapid lending without additional QE from the Fed.  Should the ECB fail to provide enough money printing, European markets and the Eurozone economies could crash further and in turn put significant downward pressure on US markets.  If that happens, QE3 from the Fed would likely start quickly to counteract the declining US markets.  We think the best advice is to closely watch the money supply data from Europe and the US combined with the daily market data to determine what is happening.  The current situation could go either way, so having investments in a risk-off position is important.  If you are going to hold cash, avoid money market accounts as they still have exposure to European debt.

If you have not read our comments posted on December 29, please do so.  We discussed much of the above along with more details on the most recent money supply data from the US and Europe.  Our comments posted on December 28 provides more details concerning the usage of the ECB deposit facility and the coincidental timing at the end of the burst of summer lending by US banks.  Our next posting will be several hours after the market closes on January 2nd.

Happy New Year!

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