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  • I'm hosting an exclusive online video event, "Profiting from Crisis in Europe". Investors are scratching their heads trying to figure out how to make money in the markets with Europe's debt crisis seemingly expanding everyday. Go to http://www.100kportfolio.tv/video to find out more.

Stocks have been unable to make any headway over the past few sessions. And late-day sell-offs have been a common theme.

I often refer to oil prices as a proxy for growth expectations. And with oil prices set to drop below $72 a barrel today, it's clear that investors are not bullish on growth. Of course, recent economic data has indicated that economic activity in the U.S. has slowed down.

Perhaps the biggest drag on the economy is housing. That's nothing new. But New and existing home sales have been weaker than expected after the expiration of the homebuyer tax credit in April.

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In a case of unanticipated consequences, the recent activity in the bond market is being cited as a harbinger of economic weakness. Of course, one reason bonds have rallied so spectacularly is the Fed's recent move to roll profits from mortgage backed securities into Treasury bonds in order to keep mortgage rates low.

Rates are low, all right. 10-year yields are at their lowest level since March of 2009. And lest you forget, stocks were making some sickening lows in March 2009. The S&P 500 bottomed at 666 that month.

It would seem to me that there is more downside than upside for bond prices right now. And there's no doubt that any individuals and corporations who are taking advantage of these low rates to refinance or re-structure their debt are putting themselves in great position going forward.

And of course, that assumes you can find a bank willing to lend.

The recentrally for bonds should be cause for concern at the Fed. And I maintain that the Fed will step in and defend the stock market at some point. What will the Fed do? Well, that's a good question.

I asked Daily Profit readers for your thoughts last week. Let's get to some of those responses…

Cutty wrote: My suggestion is that somehow you need to promote the stock market. A case in point when the market goes down I lower my spending. I am retired so I spend money as the market goes. Now the interesting point is for the first time in American history there are more people retiring each day (10,000) so somehow we have to limited the amount of bad news. When I managed my business when it came time to hire and even though my fiscal guide lines were in order I would hold off, If I saw bad news on the TV. I think given the same economic conditions with less hype on the news we would come out of this recession much sooner.

This a very astute comment. There's no doubt that many individual investors take their cues about economic health from the stock market. There's also no doubt that the backbone of investing, whether it's in stocks or in one's business, is confidence that growth is ahead.

Without confidence, no one will put their money at risk.

The problem is, there's no way to manage bad news. At least, there's no inexpensive way to do it. We've seen stimulus (homebuyer credit, cash for clunkers) temporarily reverse negative trends. But stimulus has been unable to reverse those trends.

As I wrote earlier in today's letter, those who are using low interest rates to refinance debt are setting themselves up for when growth returns.

Thomas wrote: As a small business owner the greatest thing that the Federal Government could do is 1. renew the tax cuts; and 2. promise no change in regulations for the next five years.

I'm not convinced that tax cuts are the answer right now. But they might instill some confidence. I do agree that the administration made a mistake by pursuing healthcare reform when housing and unemployment are our primary concerns right now.

John wrote: Thanks for your research and articles. Here is my view and suggestion about a way out! The days of expecting so much out of our economies and providing them very little in term of innovations and inexpensive labour may have to come to a stop. The way out will be to focus on making North America a place that generates exports because our products/services are what the world wants . We have to give up the idea of this false sense of growth that we have created by supplying internally in our countries products and labour to each other instead of exporting them to others in the world. For now forget the frills (flashy vehicles, over sized homes, over sized motor homes, over sized anything for domestic consumption) just focus on exports to foreigners. We do have an aging workforce so jumps in production will not be achieved easily or cheaply, but on the innovation front a lot can be done. Since Ford mortgaged everything and the barn to focus on R&D; there seems to be a lot of buzz about their new products, what would happen if the entire continent was to commit to the same value. I support government subsidizing early adopters of new technologies as long as the process is part of the Marketing concept of refining and rolling out better and better products that the world needs. We are an intelligent and creative bunch (some would argue overall more creative than the Chinese because of our less structured world) , so lets encourage and foster that kind of environment. Now let's roll up our sleeves, maybe even consider spitting in our hands ahead of the hard work (our forefathers had to).

I completely agree that innovation is the key to bringing the U.S. economy back to prominence. I also believe the U.S. should be investing heavily in alternative energy technologies. This would help solve the unemployment problem and the expensive energy problem.

Rod wrote: I am a Realtor in Sequim, Wa. I would like to see the Fed do something for the sub prime people that are under water with their homes and can't do a refinance with out bringing a ton of money to the closing table. I have heard and would hope they would consider, for that part of the problem to refinance at these low rates to a fixed rate, no appraisal, no credit check and no qualifying as long as they have been making their payments to this point . There are a lot of those loans out there and when rates start to go up they will lose their homes, adding to the repo market which is already full. 93000 in July alone. How do you feel about this?

There's no doubt that debt levels are out of proportion to asset values and growth levels. It's also clear that there is still a lot of debt that needs to be written down to be in line with asset values.

But who foots the bill? Do we force banks to take it on in the form of foreclosures? Or does the government take it on in the form of refinancing?

Mike wrote: Until businesses, large and small, know what the future rules will be, attractive loans will do little to pull us out of economic doldrums. I have no plans for any expansion of my business no matter how cheap the money may be. Until the administration stops messing around with major negative legislation and stops denying who was responsible for the current meltdown, (many on both sides) there will be continued uncertainty in the economic landscape. I know what I have now and I can position myself properly regarding any new legislation that affects my sector. Increasing my business footprint creates a unknown factor that may prevent me from maneuvering delicately through what ever new rules are thrown my way.

I would:

1. Permanently extend the Bush tax cuts.
2. Give business a reason to expand and hire back workers by laying out specific positive rules and eliminating uncertainty in the business climate.
3. Stop shifting entitlement burdens to those who support the economy the most. People need to pay more of there own way and they would if the taxation issue favored it.
4. Elected officials should be paid a minimum amount as "public servants". Those in it for lifetime retirement/medical after one term will flee like rats from a sinking ship. Government needs to be direct when spouting policy or actions and stop looking for an escape route guaranteeing re-election. Public service is not a career.

You know I'm in agreement that our politicians are far too concerned with re-election.

F.D. wrote: This year seemed sell on April and buy on Nov. Pattern works. DJI is now above 10 years on average ( 9650-9750 ) and are under 1-5 years average line. So if DJI broke 10 years average that will trigger another selling pressure to reflect the scare of Double Dips if Economic News continued like yesterday. There were two times DJI touched two times and bounded back immediately. The last two times to break 10 years average were early of 2000 Y2K and 2008 Bank System failed in the past 20 years. Can we guess it will happen again due to the scare of Double Dips?

What Fed can do? Boost up Investors Psychology Suggest to President Obama to set up another jump stimulus plan. It is easy to save now to avoid other dip.. If they can not save now, it will cost more money/price to save the economy. To save the economy normally you need save Stock Market and House Market first. It is too hard to push up House Market since Bank System big failure on year 2008. They can not let stock market went down again. When people feel more money on their pocket from upright stock market, they will go out to shop and pour more money on House Market and V.V. When market is down, everyone has suffered even the Bear Holders. Their fixed assets also suffered. No one is a winner !

What are your thoughts on what we should do? I'd like to hear from you. Send comments in to ianwyatt@wyattresearch.com





Posted 08-25-2010 9:20 AM by Ian Wyatt