Who’s afraid of the Big Bad Wolf that will huff and puff your home away?

There is a lot of talk in Washington about how credit swaps wrecked the financial markets and put many innocent Americans out of their homes (and their jobs). It would be interesting to take a walk down memory lane and determine if the wolf is not perhaps hiding in sheep’s clothing.

I had an interesting discussion over coffee, today, with a respected colleague. We were discussing the economic turnaround and brought many aspects into the discussion including Wall Street. And this discussion got me thinking about what really happened in real estate. As I recall, while the American economy was booming a growing number of middle-income taxpayers were looking at purchasing their own homes. However, the longer they looked the more expensive their dream homes became. Although these people were earning decent money, it seemed like their piece of the American dream was just a few unattainable dollars beyond their means.

So these average Americans, incredulously, turned to their lending institutions for help. These lenders could not bend the rules beyond what they had already done and sought to pull together loans that could be affordable to these frustrated (and cash-heavy) wannabe home owners. And, voila, the sub-prime lending market was created in order to serve a growing demand of customers: variable rate loans, short-term fixed loans with balloons, jumbo loans, all came to the party.

Now let’s look at this from the perspective of the financial institutions that made this American dream possible for the average American. Was a new math invented that, up until that point of exasperation within the middle class, did not exist? Did brilliant Wall Street or Ivy League minds rise to the challenge and invent a new Game Theory or revolution the Theory of Numbers? Of course not. Wall Street is specialized in managing risk and creating financial instruments to create cash in the economy (and in their investors portfolios, hopefully). So, without any malicious intent, how does Wall Street generate cash in a loan package that is affordable to a very risky class of borrower and provide incentive to investors to lay down precious cash?

First, they need to show that the risk isn’t that bad - that, in fact, it’s quite good given the return potential and certain safety mechanisms that minimize the risk. Besides, (second) these Wall Street folks and these investors all own homes as well, and I would imagine quite nice ones in fine neighborhoods. Why is this important? Because none of these people, and none of the average Americans that also own homes for that matter, want to see the prices of homes go down.

Then, they need to appeal to the home buyer with a low rate.

But the math of finance cannot reconcile the two. The price of homes is too high and the average American should not leverage itself above its means. What does common sense say? The price of homes should drop. What does Wall Street do? Protect the downward movement of home prices by spreading risk in investors’ portfolios so cash becomes available to the home buyer. Everybody wins.

Now about that math of finance. Look at the portfolios with those risky loans. If the risk is high, so should the reward be high. But high risk looks bad to investors. So, package the high risk loans with lower risk loans. Better yet, put a higher percentage of low risk loans into the package to minimize the risk of the entire portfolio. In this way, if a few loans default, the overall portfolio of loans won’t suffer too much. Sounds like a good plan. Investors accept stabilization of risk along with slightly lower returns. And, voila, a lower risk investment to Wall Street yields cash to mortgage companies in loan packages that are now more affordable to home buyers… with a few caveats - one of them that the home buyer accepts a “little more” risk as well. But who cares about a variable rate loan that is fixed for a few years then becomes variable, at a time when the country is experiencing the lowest interest in decades? At the time, this all looked like a good idea as well, from the home buyer’s perspective.

This could be the case of the road to Hell being paved with good intentions.

So, who’s the Big Bad Wolf now?

The right thing to do was to cool down the real estate market, not protect its exacerbated inflation. But demand was high, real estate promoters learned how to create market tornadoes by slowly releasing inventory and driving prices up as much as possible, and lenders made access to cash as easy as possible. Everybody wins, right? Everybody wants to play.

So how do we fix this? I hope we don’t point to the market itself and simply stop at the credit default swaps and say: “That’s it! That’s the culprit! Kill the credit default swap and all derivative instruments since they exacerbated the downfall of the financial system!” That’s too easy and, in this bloggers opinion, incorrect. It is not one instrument that is the problem. It is the entire environment. MAybe we should ask ourselves: what kind of laws, regulations, market mechanisms, etc. could have been in place to put the emphasis on reducing home prices rather than creating more and riskier liquidity?

One of the greatest achievements of the modern world is the free market economy. Yet it can only exist when proper parameters are in place, as ironic as it sounds. We have seen that it is possible to corrupt the free market system and we need to put safeguards in place to prevent this from happening again. We need to protect the free market system from Wall Street, from Main Street and from the average American. It needs to do what it’s supposed to do - and nothing more. The free market system cannot be abused for personal gain but it can, and should, be used to create prosperity through stability in a free flowing economic cycle.

My previous post bravely announced the achievement of a second recovery milestone - if the first milestone was the recovery of Wall Street, the second milestone would be the beginning of the recovery of Main Street.

Since then, two interesting events occurred. First, the Obama (read Pelosi) health care bill passed in Congress and, second, a real estate developer in large projects told me that the bubble in commercial real estate has yet to burst and should do so later this year.

This sounds like one step forward and two steps back. But to counter-balance this a little, I just read on the Marketwatch web site that Bank of America is looking at some of its hom loans in distress and considering taking write-downs on part of the principal on these mortgages to offer distressed home owners some relief.

So what does this all mean?

For small business, the news is very worrisome even though the ill effects are postponed for two years. At some point in the health care debate, there was a threshold that was established, if memory serves correctly. If a business had less than a certain number of employees, it would be exempt from mandatory health coverage for its employees. I wonder where that went? Currently, competition is rising because many unemployed professionals find it to be the only way they can get a job, rents in proportion to gross sales have more than doubled, mainly due to the fact that sales are off, generally, over the past three years, and banks still don’t get it when it comes to lending to small business. For example, I know someone who is paying 15% interest on a revolving line of credit. When this person applied to get a 0% interest credit card in order to transfer the balance, they were refused. How does this help small business?

Government really needs to step in and make lenders review their practices in lending to small business and really needs to think about the impact of implementing universal health care at the lowest point in economic history in this country except for the Great Depression. A suggestion would be that in addition to creating state-level health plan exchanges, small business should be given tax incentives for the first 5 to 6 years in order to absorb this new cost into their cash flow and do so in a time when we would reasonably expect to be in a phase of economic expansion.

As for the real estate developers prediction of a crash in commercial real estate this year, it for businesses generally because this would offer an opportunity for greatly reducing rental costs and could spur renovation and expansion through redevelopment at a lower cost. The thing to keep in mind, here, is that there are two opposing forces at plan. Hopeful renter-entrepreneurs looking for a low-cost opportunity to get in at the ‘right time’ and property owners wanting to maximize rental income. With depressed sales revenues on the part of business owners, their entire cost structure shifted downwards and the first place that business owners can right-size is payroll. Everything else is pretty much out of their control. The only way the rest of the income statement can adjust is if other parts of the environment drop their burden on small business, including rental costs and leasehold improvement and maintenance costs. The only way out of this economic vice is through lowering costs to something that the market will bear.

If landlords are too leveraged to be able to absorb the reality of the tenants current economic situation, bad things happen. They lose tenants and, due to loss of rental income, can face losing their properties. Unfortunately, the tax system does not support preservation of the economic cycle in such instances. At some point, the landlord benefits from interesting tax write-offs to keep buildings vacant or divest altogether from a losing position. This is another place where government, in concert with financial institutions, can step in. A controlled deceleration in commercial real estate could be good for everyone but government needs to play a role in setting up the right conditions for this.

In conclusion, Main Street fails in supporting soft landings and downward economic adjustments because it is based solely on profit-taking. And, profits are generated through growth. And, in turn, growth is not always rooted in the public interest. In such times, growth-focused mechanisms fail to do the right thing because they devolve the whole societal ecosystem in which they exist. We need a stabilization mechanism. This is not normally where Wall Street excels. So, where do we turn to for help? And, by help I mean setting the levers of the economic and social process to foster stability in order to set a new foundation upon which growth can return? It’s a tricky balancing act of meeting basic short-term societal needs and responsibly setting up for long term growth. If Wall Street’s only premise is that in such times only the strong should survive and that this cathartic process is fundamental to prompt recovery, then most of us face dire circumstances until the few strong ones can return us to growth. Given that the few strong can support only a small percentage of Americans, then we have a shortage of capacity to support the country’s population in employment and basic services. Such thinking is what got us into the Great Depression.

The vicious circle of negativity needs to be broken and the easiest way to do this is through a return to near-full employment. But if growth is not possible, then how do we ‘make do’ until growth returns? Enactment of social programs while simultaneously stimulating economic growth in key new industries seems to be our best way out. Basic products and services as provided by small business help on one end while spurring development of new technologies and alternative energy, on the other, builds new large enterprises. Keeping a low dollar to stimulate exports seems like a good idea for the next 2 to 3 years while keeping interest rates low until any commercial real estate bubbles explode and until small business and home owners get onto more solid financial ground can stabilize the domestic situation. Interest rates can rise when confidence returns and more businesses require loans and more people want to buy homes. In short, if demand is low prices should be low, on everything. As demand rises, prices can rise.

It has been one year since this blog accurately predicted and announced that the crisis in Finance was over. So what has happened since then?

As recovery slowly made its way through the rest of the economic system, it has done so with the help of government intervention, as would be expected in such a meltdown. Yet, some could say that this recovery may have been stalled due to political wrangling for the sake of wrangling. A protracted debate on healthcare in the US, the stalemate in how to discipline Wall Street have stalled economic progress in fueling green technology and Main Street.

Nonetheless, this focus was re-established a couple of months ago when President Obama’s attention was taken away from Healthcare long enough to pronounce a few words to Wall Street regarding the fate of Main Street and that money needed to flow downstream as quickly as possible. In addition, the federal government provided incentives to businesses to hire the unemployed. Add to this some positive results from Big Business and continuing signs of stability in Finance and it is no surprise that, in the past few weeks, we have heard major companies are starting to hire again, like Cisco. In addition, Daimler divested itself from what can be seen as a hedging position by moving away from Tata Motors, an investment it made after walking away from Chrysler. To yet further support the argument that the beginning of corporate recovery is currently in effect, some growth moves are being seen in corporate acquisitions and market penetration activities with new product announcements, rock-bottom pricing in the restaurant industry and positive growth indicators in consumption.

As for financial market indicators, commodities have edged lower due to a strengthening dollar. More specifically gold seems to be peaking, for now.

From all this, I am concluding that we have entered a second recovery phase. If recovery of financial markets was the first phase, then a beginning recovery of Big Business is the second phase. Analysts were not too far off in guesstimating that this would occur 12 to 18 months after recovery of the financial markets.

So, if all this is true, we should see a slow and steady decrease in unemployment, an increase in retail sales, and hopefully a reduction in personal debt (yeah, right) over the next 12 to 18 months.

Furthermore, if this assessment is correct and people are getting hired through the spring quarter, results from these new hires will be expected by autumn. So, this can be a brisk summer for travel, a tense but exciting time for families, and should be a precursor to a marketing-heavy fall. Maybe tradeshow activity will pick up, depending on budgets. Maybe teleconferencing activity will pick up if budgets are tight or if new customer relationship management policies come into effect.

My only question involves the other side of this scenario. Although marketing will pick up on the part of companies who hired during the spring, who will they market to? Where is the money? My guess is that financing will be offered at a reasonable rate to businesses with decent credit scores and this could fuel corporate purchasing in companies seeking to grow their customer bases and who have a clear plan to do so.

So, as a market observer, I would look for clean balance sheets, income statements with near-industry standard ratios, given the current economy, and companies with clear marketing plans focused on reasonable growth in key market areas. The clean balance sheets will ease borrowing. A clear marketing plan ensures money will go where needed with measurable results.

As a result, this is an opportune time for capable companies to get one-up on their snoozing, battle-weary competitors. This, in my opinion, is what the turnaround will look like at the microeconomic level. All the indicators point to now as the turning point on Main Street with an execution timeframe of 6 to 10 months at which point initial results will be measured and more marketing and investments tweaks will be made.

We’re not out of the woods yet, as the expression goes, but we’re headed in the right direction with yet another milestone passed.

Last week, President Obama was on 60 Minutes and sent a message to Wall Street: no big bonuses when Main Street still has not seen its fair share of TARP support and no bonuses until all TARP borrowed is paid back in full.

A few days later, CNBC provides live coverage of the Wells Fargo issue of billions of dollars in bonds, allegedly to cover a portion of their TARP repayment to the government. Now this is interesting… and it somewhat worries me. We, the People, lent money to Wells Fargo so it could help borrowers through mortgage difficulties and help Main Street preserve jobs. Yet, Wells Fargo, like many other of its peers, only did this in part. At the same time, it benefitted from a 0% loan of billions of dollars and invested those dollars to reap easy interest. In such a situation, the longer they are permitted to sit on their TARP loan, the more money they make - all the while those who were supposed to benefit from this money also wait. There is no incentive for banks to trickle this money down to where it belongs.

So, President Obama’s message to Wall Street, last week, was to get moving on trickling this money down to where it belongs.

My impression is that Wall Street is VERY anxious to get the government out of its board rooms and wants to pay back TARP money as quickly as possible regardless of how it is done. So, a Wells Fargo, for example, will incur debt on the open market and possibly also dilute its shares in order to raise its “own” money to make the government go away.

Yet, Wall Street has not changed its ways. No policies have been implemented to avoid the errors of the past. Is this the time for government to go away? Furthermore, is this the right way to make it go away… by incurring more debt, and of a less secure and more costly nature? I’m confused. Maybe someone out there can explain to me why issuing bonds is a better idea than staying with TARP, financially?

In any case, President Obama’s message on 60 Minutes clearly designated entrepreneurs as that segment of society that is best positioned to enable the next phase of a turnaround by creating jobs. I have even heard that there is a program available that enables some small businesses to hire more employees and the government will pay their salaries as long as the employer pays the payroll taxes. I will look into this further and let everyone know what I find. In the meantime, if anyone out there has more information on this, please post a reply to this blog entry.

Now is a time where execution is key and money should be easier for entrepreneurs to obtain. Let’s see what happens over the next six months.

By now, it’s common belief, I daresay common knowledge, on the street that financial companies, those that exploded universally in November of last year, are on the road to recovery and some are even doing well.

Over the past 4 weeks or so, we’ve seen some broad stabilization across the stock market and a Dow number that is slowly and reliably pointing upward. I still maintain that my original call of a March 2009 bottom is correct and that underscoring that this is the most delicate time in any broad economic recovery is correct - if we have money to invest then when, where and how should we do this? If we are surviving, where are the jobs that will help us get by, day to day?

TARP money has not completely trickled down to the end-most working level as of yet but it has been making its way down. I’m hearing that some grassroots level companies and sectors are or will be getting some stimulus money very shortly.

Friends in larger companies, multinationals, have been telling me that decision-makers have not been making any moves as of yet because they are trying to figure out what the post-economic-meltdown world looks like. In a way, that’s sad to hear because anyone who has been unemployed through this turmoil (and there are up to 15%+ of such folks in many areas of the US, right now) can tell you exactly what this world looks like and where the priorities are. Some may look at such business leaders and lament that they have been spared the worse and now live in an ivory tower, unaware of what is truly important.

On the other side, this is one of those times in history where haste can make waste. We can be so eager to help the loudest voice complaining about kids to feed and foreclosures to avoid and lose strategic perspective. However, I would like to believe that the past 6 months has been about strategic thinking. Those who have been holding down a job in a position of authority, I hope, have been working on a turnaround strategy beyond merely cutting costs and saving their jobs. If not, it’s time to go beyond self interest and developmental myopia because the public will be demanding the next step in the recovery process with a louder and more pressing voice than ever before and this is certainly not the time to figure it out as we go along.

It has been the job of government to temporarily step in where the private sector has egregiously failed and bring stability back to the markets and calm broad spread panic. This has been done, pretty much.

The next step has been to ensure that money continues to flow through the economic cycle. This also has been done. And, if money disappeared, the government needs to enable the creation of more money to ensure that the value assets is maintained and enough cash is flowing to get business done. And this, too, has been done.

So, money has been available and some of it has been spent (and some squandered but that’s beyond the scope of this posting). Since the firing of GM’s CEO, the focus has moved from Wall Street to Main Street, but it’s now focused on the Park Avenue end of Main Street - meaning that businesses deemed at some point to be too big to fail have been getting all the attention.

I would expect small business, which accounts for the majority of jobs in the country, according to most reports from EDD and chambers of commerce across the country, to get some focus very soon. SBA loans are still ridiculously unavailable and many landlords that lease commercial space are still unaware of the fact that many of their small business tenants have experienced a very serious drop in revenue - to the extent that it is not uncommon to see some struggling mom-and-pop shops paying 25% or more of their gross income to rent alone. The landlords claim that the drop in business of their tenants is not their problem. They are in the real estate rental business, not the coffee business, or insurance business, or hairdressing business. To them I say, we are all in the survival business, right now, and that is all that matters, for now. The government did its part, tax payers have done their part, and entrepreneurs have gone bald and become neurotic over managing their risk in order to survive and push beyond mere survival with gutsy promotions and product introductions in the toughest economic times since the Great Depression. What makes landlords so special that they feel that they are immune to doing their part in keeping our collective head above water? But I digress.
While business leaders on the front line think about their company’s next step and eye ‘free money’ from the government (and tax payers), I would encourage them to think strategically and for the long term while minimizing current woes. Simply plugging random holes with cash doesn’t ever fix anything. And, these same business leaders are in the extremely stressful position of having to think very quickly and act even faster.  The best way to ensure permanent dependence on the government for services and business management is to needlessly over-spend taxpayer money. Paradoxically, inaction could be worse than making a bad decision.

So, the true mark of a leader in such times is clarity of thought and swiftness of action. And, this also means that we are in a time where getting the initial steps to a turnaround are critica. Small businesses, program managers, and divisional leaders still need to get it right the first time but a few failures in the context of a larger number of successes will not prevent economic reocvery but could prevent a business from taking full part in it.

This really is the time for Ying/Yang balance in business, isn’t it?

Over the past couple of months, the US economy has been showing signs of stabilization and hope for very modest growth. However, as we enter another earnings reporting season, many market analysts fear that we may experience another drop, effectively erasing the recovery gains we have recently experienced, because they are expecting corporations to announce dismal results.

However, if we look at the situation from a longer term perspective, we see a few encouraging signs.

First, the stock market’s rising trend subsided because stock values have sufficiently risen and investors took some profit. From this point of view, the market is taking a healthy pause and investors are making up for some of their past losses.

Second, it is normal to expect that earnings results will be weak. We’re in the middle of the greatest recession in decades and the entire world is feeling it. Analysts are hoping that corporations sufficiently lowered expectations so that the stock market doesn’t take a beating. Fair enough. However, we are facing macro-economic problems of worldwide systemic proportions and any weak financial corporate results would reflect multiple levels and sources of problems, not just bad execution. It’s time to read quarterly reports very carefully and it would behoove corporations to provide full-spectrum explanations, specifically relating certain financial results and ratios to the most prevalent macro-economic conditions affecting their companies and industries. This is one time that companies can blame part of their performance on a very bad economic environment. But generalizations will not convince. Companies need to be specific and make specific commitments to recovery.

Third, we are likely all concerned about job loss and this leads us to focus on what the government and individual CEOs will do to payrolls. Although there is ample cause to be concerned, focusing on such an issue is like looking in the rear view window of a car moving forward. Unless corporations receive information from customers and potential customers that an increase in demand for their products and services is imminent, they will look at past results to make decisions about the future. It’s the only sane way of managing but, as financial analysts and accountants like to remind us at the beginning of every financial statement: “past results are not necessarily an indication of future performance.” And this puts the consumer in full spotlight.

So, where does this leave us in worrying about this worldwide economic mess?

First, it has been said that we are not out of the heaviest part of this recession yet because major financial institutions are still, in fact, broke. Government’s injection of cash is simply a way to keep the economic cycle moving but apparently no progress has been made by financial institutions to clean up their balance sheets. However, there have been discussions between these financial institutions and government to find a way, soon. Furthermore, the US government sent a clear message to bank CEOs that they are not immune to dismissal.

Second, most of us are still working and still spending money, even if it is at a reduced rate and in a more considered fashion. And this is where savvy entrepreneurs can make a difference.

And it’s at this point that we can see some light in all this darkness. Even though companies want us to over-consume so they can continue their linear extrapolations of past results to point to a predictable future, reality does not work in such a fashion. And this is why we turn to the average consumer to see where the bottom is. Consumers need to eat, move, work, heal, bathe, etc. These necessities are what I like to consider the ‘organic’ part of our economy. Growth and stability in such areas indicates ‘organic’ economic stability and growth.

And, it is in these areas that we see potential. For example, all these food safety issues that we experienced over the past year created a need for process re-engineering, or analysis and reconfiguration at very least.

Also, many new products such as cars, refrigerators, washing machines, barbeques have all experienced interesting technological improvements over the past few years. If suppliers are stuck with inventory that has not moved for a few quarters, they are under pressure to cut margins and move inventory.

So, what’s different from 12 months ago? What’s different is 4 financial quarters of a falling bottom. In academic terms, we are not moving along the supply and demand curves to establish new market clearing prices for goods and services. The demand curve, itself, isshifting and this is causing a shift in the supply curve. This is big stuff. In plain English, this means that the need for employees shrank (and likely got eliminated), as did the need for factories, land, and any other resources that go into producing goods and services. In other words, we made too much stuff that nobody wants.

So, for those who still have jobs, it’s important to keep spending. For corporations, it’s important to focus profits on general economic prosperity above-and-beyond the mere survival of one’s company and personal objectives. Where this process broke down is that massive amounts of profit left our economy, in one instance, and we disregarded macro financial responsibility in another instance.

By continuing to focus on basics, our economy can recover, over time, through organic growth and stability. Thanks to egregious greed, the next decade, or so, will see much more humble growth since we need to focus on the basics: food, healthcare, shelter, and maybe transportation. This may seem obvious to the consumer but it has implications for corporate executives - this is what it means to get an economy back on its feet.

By maintaining such a focus, employment can stabilize. And, although net revenues may be flat to modestly up, as long as individual income is stable and predictable, the employed will continue to support the economy by spending on every-day necessities, getting their children to school and spending time with family and friends. Even keeping the dog fed helps the economy with over $20 billion/year in gross revenues to dog food makers, distributors and retailers.

For the entrepreneur, it’s important to look at today differently from yesterday. We have new customers that are spending less, are more deliberate about finding value, but still need stuff - they need food, clothes, transportation, education, health care, moderate activity. And, both consumers and suppliers can use some reassurance that everything is fine as long as we don’t get greedy and impatient.

For the unemployed, it’s important to diligently continue a sharp job search and, as organic growth fuels the recovery, each new quarter can bring a few more jobs until we return to normal employment rates. Here, too, government will need to help us along. (Tangentially, if corporations got bailouts because they owed more than they earned, shouldn’t consumers get bailed out as well? Just a thought.)

In addition, prices need to drop to a point where an average family’s budget is back in balance. Because Americans carried more individual debt than virtually any country in the world, this is probably the most fundamental issue that should be addressed. Both former President Bush and current President Obama provided cash-back solutions to citizens. Bush gave the money in-hand through income tax reimbursement checks. Obama is providing it through a reduction of withholding taxes on pay checks. In either case, however, people lamented that the actual amounts received bore little impact on them personally.

Looking at it simply, except for the price of food in restaurants, which has dropped significantly in the past 8 months, stuff costs too much: cars are too expensive, homes are too expensive, healthcare is too expensive, and so is technology in many respect. Have you seen your home communication bill recently? What does it cost you for cable, telephone, and internet? I remember a $12 cable bill, and a $15 phone bill! I also remember a $1.10 gallon of gas, 12 years ago. Have our salaries climbed as quickly?

It’s not just the financial institutions that are in crisis. The consumer has been in crisis for much longer. We may even argue that because of the consumer’s crisis, the banks failed.

The best way out of this recession is for the average American to become debt-free (except for a home and a SMALL loan on a car), get employed, and live healthier. For this reason, I can easily believe that suppliers of large ticket items and luxury goods will experience a very challenging sales environment and responsible, employed families will continue to help us out of this recession through regular, organic growth.

Government will need to ensure the correct circulation rate of the economic cycle until it can do so on its own because too many parts of the free market system are broken. Nonetheless, the free market system remains the best means of managing resources known to Man… as long as you don’t break it.

It’s now a few days into my JPM prediction and you may be wondering why, with the stock clearly below my $20 floor, I’m still optimistic?

Nothing will happen in a day or two. Technicals showed that the price of this stock needed to ease up a little. That said, today’s pivot point analysis shows S2 at $17, S1 at $18.24, and you guessed it, the pivot point at $20.

Furthermore, today’s daily price chart (based on 5-minute dojis) shows that JPM suffered the ill-effects of being in horrible company in its sector. Nonetheless, Fast Stochastic indicators show that we are nearing a price decline bottom. No signal of direction change as of yet but we are getting close the bottom percentile range. In addition, if price continues to decline tomorrow, RSI may hit the 20th percentile mark, matching its lowest mark in some time. (Typically, when this happens, price reverses upward.)

Lastly, during the last 15 minutes of trading, today (Thursday),we saw a solid price jump above the midline of the Keltner Channel and price range remained above the midline, albeit not as solidly as one would like to see.

I reiterate that JPM is solid as long as the macro-enviornment cooperates. Unfortunately, dinosaurs like CITI and GM are in bad need of resolution so the rest of the market can continue to heal. It really is a difficult time when one must weigh employment security against stabilizing the financial markets.

There are, however, a few bright spots in the market, vindicating my long-standing prognostications on low-end retail, healtcare IT, and alternative energy: Wal-Mart showed excellent performance, today, under the circumstances, with a 5.1% increase in sales. A few days ago, First Solar announced its acquisition of a competitor and healthcare IT is about to break through with the support of the White House.

On this last item, healthcare IT will have the political and financial support it needs to thrive. However, support from medical practionners cannot be assumed to be readily available. In effect, according to my week-long inquiries, medical practitionners continue to maintain their skeptical demeanor towards automated solutions. And I can understand, to a certain degree. IT is famous for glibly shrugging off bug after bug and technological incompatibilities like they are no big deal. If a stock market trading station goes down, oh well, there’s insurance for that. However, if a wireless network skips a few packets and doesn’t deliver a vital bit of heart monitoring information, it could mean a patient’s life-critical status escapes the attention of an attending nurse.

So, having a solid understanding of the players in healthcare IT and what, specifically they deliver, can help us navigate the multifaceted sea of vendors in order to pick out the safest solutions to invest in and explain to medical practioners that automation can be most beneficial in certain areas, namely document management, processing, delivery, backend process management, and non-vital status monitoring, to name a few obvious ones.

Clearly Misys, eClinicalWorks and the like seem to have a leg up, at this time. But their success depends on physician support and adoption.

I commend the current American government for their solid commitment to reducing the cost of healthcare through various means, including automation, but let’s ensure that medical practitioners are at the forefront of learning about technology and help guide this evolution judiciously in this very delicate and vital area of society. As President Obama and Senator (Sir) Edward Kennedy said earlier today:”let’s put the patient first.” And, let’s ensure that the doctor is an integral part of the process. Let’s ensure that we don’t automate for the sake of automating without regard for how the practice of medicine will change. There is such a thing as too much automation.

Steady as she goes, folks.

JP Morgan has a history of bailing out the American economy. And it did so again in 2008. In concert with the Fed, they judiciously planned a way to prop up Wall Street as it disintegrated before everyone’s eyes. JP Morgan acquired Chase, as the Fed let Leehman fail and propped up Citi and others. This is one of the reasons I like JPM. It has a history of  doing the right thing at the right time. Yet, with such a worldwide system failure of the financial markets, even a JPM is not immune. Nonetheless, those that weather the storm get to live to see the sunshine again.

JPM has had an intersting 6 months and may be in a position to be one of the first to emerge from this financial chaos. Of course, may moving parts need to function properly again but I believe that the JPM piece is working just fine and it should reap the rewards as soon as the rest of the system starts to come together.
Let’s look at the numbers. Let’s go back to August 2008 and see how JPM has fared and attempt some interpretation of the future.

The trouble starts at the beginning of October  2008. JPM took the bulls by the horn and, in a deal with the Fed, agreed to buy one of the largest failing financial institutions on the Street. Nonetheless, the following months showed that even JPM cannot withstand a worldwide systemic breakdown.

Starting mid-November, this stock, as well as everyone else, goes into free-fall, losing half its value on moderate to high trading volume. At this point in time, looking at a doji chart could have led big investors to declare that the sky is falling and will continue to do so until the stock hits $0.

At slightly below $20, when RSI hit a record period low of approximately 18, we see additional indications of a low point. Price is below the Bollinger Band low threshold and the doji pattern indicates a narrowing of the trading range. At this time the Fast Stochastic indicator hints towards a turnaround signal at the 10th percentile. And, the next 3-4 weeks we see a rally.

Although the 200-day SMA shows a decline, it is not very useful in understanding the current turmoil. Yet, it nonetheless shows a decisive downtrend. However, by looking at the 10-day and 20-day SMAs, to this point in time, we see a clear indication of the bull and bear rallies. Although it was not useful in announcing JPM’s positive turnaround at approximately $18, it did reliably indicate the bear turnaround when it peaked at approximately $38. The Fast Stochastic indicator was most reliable overall. Combined with the RSI, Bollinger Bands and doji, we got a pretty clear sense of market inclinations.

But the big question still remains: what does this mean for the future? To mid-December 2008, one could have concluded that stability was returning to this stock, and if it is an indicator of the rest of its sector, maybe good news was on the horizon for financial stocks, generally.

Maybe it was a holiday season reprieve, maybe it was hope of change in Washington, DC, but not much happened until the first few trading days of the new year. Then, a near falling star doji is formed on the first day. The second day, a clear drop is recorded and, on the third day, a falling star doji has clearly formed. At this point, the Fast Stochastic indicator signals a bear market. This could have taken a few people by surprise because sales volume was relatively low since the third week of December 2008 and RSI was at the mid-point. Likely, disappointing wholesale and retail numbers as well as rising unemployment had investors second-guessing their commitments in the market.

Sales volume increased and investors held their breath for another plunge. In the second to third week of January, the Fast Stochastic indicator showed the possibility of a trend reversal to growth as RSI hit the 20th percentile, stock price dropped to approximately $12 and clearly broke the lower threshold of the Bollinger Band yet again. And this started the second large rally since September 2008.

Between mid-January 2009 and the present (end February 2009), we see that JPM’s price has varied in an increasingly narrow range with the 10-day and 20-day SMAs crossing more often and in shorter time intervals, albeit in an overall decreasing direction.
In addition, plotting a trendline between lows indicates a possible flattening. Interpretation: it’s getting harder to form new lows. Also, with the dollar gaining some strength against the Yen, we see one source of this pricing support.
Simultaneously, plotting a trendline between price highs shows a possible smoothing as well.

We need to keep a close eye on the first few trading days of the upcoming week to see how the market responds to a ‘dark’ doji that may be indicating a peak. However, looking at the Fast Stochastic indicator, which has been bullish for some time, we see that it is not even hinting at a peak/trend reversal signal. RSI is at 45 and has rarely grown past the 60th percentile in the last 6 months. Yet, a good part of February shows that JPM enjoyed an RSI well beyond the 55th percentile. Combined with a strengthening dollar, I get the feeling that market and macro-economic conditions are trying to combine to form a price bottom at or around $20.
Switching to a 3-month chart, the last doji that I see shows a top price of approximately $24. Breaking a $25 ceiling would indicate a credible attempt at a bullish trend reversal as long as the macro-economy cooperates.

We all need to keep a close eye on the news, early next week, and hope that the sentiment is high. If the economy holds for a week to 10 days, volume remains solid and a trading band of $24 to $28 can be maintained, we may indeed be seeing a trend reversal.

I like JPM because it has done everything right, acting quickly and decisively, very early in this market meltdown, in cooperation with the Fed, with government, and in the better interest of its investors. From what I’ve heard, its fundamentals are solid, relative to the current economic environment, and it will be completing its integration of Washington Mutual (a well-liked retail bank on the West Coast) by October 2009. It made smart acquisitions in these troubled times and became a coast-to-coast banker in the process.

Let’s hope that with Wall Street setting up shop on Main Street, entrepreneurs can see hope in the form of reasonable credit, very soon, so they can help alleviate a now 10.1% unemployment rate in some parts of the country (e.g. California).

Humana’s stock got battered today, after President Obama’s statement on the news, last night, about reducing payments to health insurance companies, hospitals, etc.

For those who were eagerly anticipating a supportive gesture towards the ailing healthcare industry in the US, the President’s first statement leaves me perplexed. Perhaps it’s half a statement and the rest is yet to come.

It’s easy to understand that he sought to “stop the bleeding of cash” to providers and payers who were overcharging for many services. However, this also turns off the cash flow necessary for funding technology development projects. And, the President clearly put healthcare at the top of his priority list with “computerizing health records” as a key initiative.

So, if cash flow to providers and payers is decreasing, how will they fund new IT projects that are so badly needed?

The President has an interesting dilemma to manage. On the one hand, he tries to close out what seem to be egregious expenditures but, on the other hand, needs to ensure that required investments in business infrastructure continue to flow. Is he changing how this money will flow (by changing its source) or is he simply stopping the flow altogether?

A healthcare IT product and service provider needs to know. Where will the money come from to develop a badly needed healthcare information system upgrade?

Let’s see what the President’s next move will be and let’s hope that it’s very, very soon. More jobs are at stake.

Here is a link to some wonderful charts of the Dow Jones Industrial Average since 1895, on which you can find all the major events that shook the world. 1895-1909http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=18951910-1919http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19101920-1929http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19201930-1939http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19301940-1949http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19401950-1959http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19501960-1969http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19601970-1979http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19701980-1989http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19801990-1999http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=19902000-2009http://www.djindexes.com/mdsidx/index.cfm?event=showavgDecades&decade=2000 

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