I have been watching the market and had been preparing something to write on the Froth and Fluff in the market. That Goldman Sachs is being sued by the U.S. Securities & Exchange Commission with civil fraud trumps those concerns.

However, let me first comment on the Froth and Fluff because the major U.S. stock market indices have continued to advance and have now gotten back to their September 2008 pre Lehman levels or 18 month highs but are still off significantly from 2007 all time highs. This is despite the fact that the confidence of small business owners remains at all time lows (most new jobs are created by small businesses) and the number of home mortgage foreclosures continue to set all time new monthly records.

The froth in the market has been the sharp advances of the lower priced financials such as Citigroup (NYSE:C) and especially Ambac (NYSE:ABK) whose shares have risen six fold from about $.50 to as high as over $3.00 in the last two weeks alone. The fluff is the reporting of better than expected first quarter earnings by banks and financial companies such as J.P. Morgan, whose results were based on their reduction of loan loss reserves and increasing proprietary trading profits instead of an increase in actual loan demand.

Additionally the volatility index (Symbol:VIX) which gauges the differences in volatility and complacency hit its lowest point since July of 2007 indicating an extreme in market complacency that had only been reached just months before the Dow and S&P 500 hit their all time highs. Investors should pay a lot of attention to the VIX which increased by over 14% alone today because a sharp increase in volatility at the same time the stock market has hit a 18 month high means that the roller coaster is on its way back down.

Froth and fluff aside the SEC’s action against Goldman will put a big crimp in the market because its only a tip of the iceberg on the bad news that is coming regarding the packaging and selling of mortgage backed securities by all of the broker dealers. The next shoe to drop for Goldman will likely be the filing of a criminal law suit by New York’s Attorney General, Andrew Cuomo and the filing of hundreds of civil actions by those investors who actually purchased the securities. Given the distaste that the politicians and voting public have for Goldman investors should expect a long drawn out legal battle in which Goldman will likely have to settle for tens of billions of dollars. The bottom line is that it will be very difficult for a U.S. stcok market, which has been steadily increasing on steadily decreasing volume to act well. For market historians the SEC v. Goldman Sachs law suit will likely prove to be a watershed event which signaled a bear market top. I continue to suggest that investors remain in 80% cash.

For more information on the super or secular bear market and why I believe that it will last until 2015, I suggest a visit to www.bearmarkettracker.com.

Investors should take notice that March 31, 2010 is a key date for the global financial markets for three reasons:

• March 31st marks the end of the quarter for all mutual funds, hedge funds, professional money managers and any other financial institution who manage money. Since the S&P 500 advanced by approximately 5% for the quarter I suspect that a lot of window dressing has been going on for the last two weeks and that the window dressing activities pushed the markets higher. Window dressing generally occurs at the end of each quarter (3/31, 6/30, 9/30 and 12/31) because those investment managers who underperformed during the first two and a half months of a quarter scramble to acquire the shares of the companies that performed best during the quarter. The theory behind window dressing is that a manager does not want to send their clients a quarterly report that indicates that the manager sat in cash while the market moved up or was fully invested when the market moved down. Therefore, window dressing activity at the end of each quarter tends to follow the directional momentum of the markets, which occurred during the first two and one half months of the quarter. The bottom line is that this window dressing and the cross currents it causes in the markets can easily mask the overall direction that the markets are moving. Investors who are risk averse should carefully monitor the first two weeks of a new quarter.

• March 31, 2010 marks the end of the U.S. Federal Reserves’ program to buy up to $1.25 trillion of mortgage-backed securities. After the global capital markets began to melt in 2008, the U.S. Federal Reserve entered into the markets and became the primary buyer of U.S. mortgage backed securities. The result was that it was able to keep interest rates at an artificially low level. With the Fed’s withdrawal interest rates are likely to move higher. This could further slow the recovery in the U.S. housing market and cause U.S. interest rates to head higher. Both could put significant pressure on the stock market. .

• March 31, 2010 marks the end of the tax credit program that has been in place for first time U.S. home buyers. With the 10% tax credit no longer in place the jury is out as to whether buyers who had been subsidized will continue to buy homes now that the tax credit is no longer available.

The U.S. stock market has not yet entered into the corrective phase and the lapsing of the Federal Reserve’s program to buy mortgage backed securities and the tax credit for first time home buyers definitely increases risk for the overall markets. Thus, investors should continue to be cautious. I also don’t believe that the Euro’s new 10 month low against the U.S. Dollar last week has been priced into U.S. equity markets because of the window dressing, which occurred during the last two weeks of March. I expect that the Euro will continue to weaken against the Dollar and that multi year lows for the Euro against all major global currencies could occur by the end of 2010. A weakening Euro will cause significant problems for U.S. manufacturers whose exports and increasing share prices benefited from a steadily declining U.S. Dollar between 2003 and 2008. For more information on why currencies will play a key role in the global stock markets over the next several years I suggest a review of my reports “Safe Haven Status of U.S. Delays Recovery” and “The Damage to the Euro has been Done”. For more information about the Super or Secular Bear market, which began in 2007 and will not end until 2015 at the earliest go to www.bearmarkettracker.com.

The following article "The Great Recession of 2011-2012” was written by James Srodes. It was published in the February 2010 issue of “The American Spectator. Mr. Srodes is an author and broadcaster and was the former Washington bureau chief for Forbes and Financial World magazines.  I believe that his article is worth reading.

The Great Recession of 2011-2012

Are you ready for the Great Recession of 2011–2012? You should be, for it is getting under way even as you read this. Just as the 2009 “greatest economic crisis since the Great Depression” actually began back in 2007, so we are in the early days of the next cycle. Only this recession is going to be a doozy. And the aftershocks will be felt long after President Hillary Clinton leaves the White House in 2024.

The coming crisis should be no surprise, for we all have had plenty of advance warning. If it is a surprise, blame those chat-show economists who have become so politicized that they ignore the truths of their own science in order to acquire celebrity. Nor should we forget those politicians who deliberately suborn national interest for the security of zero-sum pork-barrel politicking. Combine it all with a news media largely made up of self-referential ignoramuses and it is small wonder that most of the world has been diverted as Dorothy was in Oz by the lightning bolts, explosions, and billowing smoke screen being generated by the men behind the curtain. The truth is our wizards dare not admit that the levers they pull are not really connected to the true crisis that confronts America or its place in the global market.
Despite the self-congratulatory assurances from the White House, Congress, and part of Wall Street that we have been saved from a slide into a 1930s depression, our most serious trials still lie ahead of us. We are unlikely to be able to get back to those halcyon days of perpetual prosperity and optimism that Americans (and most of the industrial world) enjoyed for the last 50 years. A tectonic shift is occurring beneath our feet and the world’s economic climate has shifted. We face not just a few abrasive years of getting back to normal, but a generational hard slog of constricted markets, limited resources, and rolling setbacks. And in each episode of crisis, some will prosper, the weak will suffer most, and radical visions propounded by political snake-oil salesmen of all persuasions will make rational discourse nearly impossible to conduct.

This is not to say that the Apocalypse is upon us, as morally satisfying as that might be to some. Nothing so dramatic is going to happen. The future offers no therapeutic collapse of civilization, with roaming bands prowling the rubble for Soylent Green. Folks will try to live just the way they have been but those lives will be more pinched, the opportunities more limited; caution and bitterness will replace the open-handed optimism that made it a wonder to be a 20th-century American, or even a Western European. If the stolid Swiss now quake at the sight of a minaret in Zurich, it is just one of the many new worries for all of us to fret over in the years to come. Civil privileges now considered “rights” will be up for renegotiation.

One has to feel a twinge of sympathy for the people who have chosen careers of service in government—not just in Washington but in all the capitals of the industrial West. Life just is not going to be as uplifting as it once was back when policy innovations were both credible and idealistic. But it must be especially hard for the crowd of wizards in Washington these days. Building consensus is hard when no one will talk to anyone else. Little wonder then that so much of the dramatic rescue being claimed by the White House in reality turns out to be merely putting rouge on the patient’s cheeks and exclaiming how well the poor soul looks.

Underscoring the difficulty in charting a new economic course is the truth that the government’s own statistics have become so distorted by age and the dynamics of change that they really don’t reflect the depth of the crisis that is upon us. So the wizards continue to twiddle the levers of stimulus and regulatory rules changes without realizing that the dials and barometers have long ago broken connection with what is going on. Houston, we have a problem.

CONSIDER JUST A FEW of the economic bellwethers one hears about on the evening news as proof that the crisis has been stabilized and recovery is imminent. Stock prices are up, true. But trading volume is way down and that is because retail investors—citizens making real investment choices— are on the sidelines. The price rises that swell the Dow Jones Industrial and other indices reflect almost pure speculation by Wall Street’s investment houses that are soggy with Washington’s cash injections. Just as Cash for Clunkers inflated Detroit’s hopes last summer, so the share price recovery is more of a sign of a new bubble inflating than it is of real value returning to share market prices.

The same for housing prices, only more so. It was headline news recently that house prices in “some” areas of the country had stopped declining quite as fast, while in some fewer areas there were even tiny increases in prices of houses sold, if not much increase in the volume. Yet there are uncounted hundreds of thousands of vacant houses, condominiums, and commercial office space for which there is no rational prospect of a buyer during 2010 or perhaps ever.

It will get worse. Of the 47.4 million home mortgages in place today, nearly 10.7 million are “underwater,” that is, the money owed on the loan is greater than the value of the house. And that’s not counting the 2.3 million other mortgages that are “near-negative equity.” Most of these latter will face sharply higher upward ratcheting of their interest rates in 2010 and 2011 and that will automatically plunge those debts below the surface.

In Nevada already the amount of mortgages outstanding is estimated at $132.6 billion against property worth $116.7 billion, a loan-to-value ratio of 116 percent. Even another slight decline in prices in areas such as California (loan-to-value ratio of 72 percent), Arizona (91 percent), or Florida (87 percent) will swamp Washington’s promised next round of mortgage subsidy relief. The government’s own rescue agencies, Fannie Mae, Freddie Mac, and FHA, are dead in the water, and the government’s bank deposit insurance agency, the FDIC, says it has no more reserves to offset the coming next round of failing banks.

EVEN WHEN WASHINGTON ADMITS to a worrying 10-plus percent unemployment rate the real numbers are so far from reality as to be laughable. The recent headlined dip in the jobless rate turns out to have been caused by more than 50,000 already jobless people simply giving up and dropping out of the workforce. This has the statistically absurd result that the percentage of people deemed to be unsuccessfully seeking work is judged to have improved. When labor data is closely parsed for the measure known as “U-6,” which includes people forced to work part-time, those “discouraged” from seeking jobs, and those “marginally attached,” the rate trends above 17 percent.

But even that fails to accurately gauge the cold reality of the hopelessness facing folks at either end of the workforce demographic—the very young (where unemployment is trending above 60 percent) and those 55 and older who are forced back into job quests because their nest eggs vanished in the storm. Two-thirds of the job losses across the country have happened to the very blue-collar workers the Democratic Party has claimed for its own. For those Americans who still have hourly-wage jobs, their employment week would be the envy of a Frenchman—33 hours, on average. Sectors such as manufacturing, construction, and even retailing continue to shed workers; the only consistent gains over the last two years have been, no surprise, in government employment.

The policy response of all Western governments is to follow the failed Japanese model of trying to inflate one’s way out of a downdraft, pumping up another bubble. The theory is that if interest rates are forced low enough, and the money supply increased enough, and the government ramps up deficit spending to redistribute more wealth from the supposed rich to the supposed poor, a “multiplier effect” of economic growth will be sparked by consumers buying more, businesses investing more, and more jobs being created with prosperity spreading and growing. But if interest rates are already at zero, and the value of the dollar has been halved by doubling the supply of it, and the debt service burden of government spending is already suffocating the capital markets, how can one expect consumers to buy more (to buy more of what?), or businesses to invest more (for a new machine to do what?), much less to hire old workers back when the jobs they used to have are vanished, not to some Third World haven, but just vanished?

No one in Washington can say with a straight face just what the U.S. gross domestic product is except that we have been pushed back at least a decade and will probably be more than a decade in just getting back to where we were in 2006 (when GDP rose by an anemic 2.7 percent) just before the bubble burst the next year. Meanwhile new bubbles are forming all around us, in the commodity markets, in Hong Kong real estate, in the troubling data coming out of China and other Asian economies, all just waiting to buckle. Can you say Dubai? Greece?

FURTHER CONFUSING ANY ATTEMPT at a rational public analysis of the current crisis are the prevailing lies that the fault for the crisis lies in the failed economic theories propounded by the late Ronald Reagan and, more, that what we need is to return to the sound prescriptions of the even later John Maynard Keynes. Reagan, this slander says, set the financial markets off on an orgy of speculation and risk-taking by taking off the restraints of sound government regulation and by insisting on deficit busting tax cuts. By returning to the true religion that Keynes revealed to Franklin D. Roosevelt in a dream, government, and only government, can return us to prosperity by even grander deficit spending coupled with a massive expansion of liquidity and the lowest interest rates possible. If that sounds confusing, it should; neither man prescribed any such thing.

I think that Mr. Srodes’ article is dead on point and this is the reason why I continue to suggest that all of my readers and followers remain in cash equivalents or at least maintain a bearish posture towards investing in the stock market. Even though I believe that we will be in a bear market for some time to come there are always industries, which emerge and thrive during economic downturns. One that is emerging that I continue to harp on is the online investor services industry or the online financial sector. An investor would have to be brain dead to not to expect that there will be fall out from the depressing performance of mutual funds, indices, etc. over the last ten and next ten years. That fallout will guaranty that the online investor services providers will grow for the rest of our lives. Investors should maintain 80% of their investments in cash or equivalents and can invest 20% of their monies in those two sectors, online financials and certain industries within the health care sector. For more information on the online financial sector go to www.onlinefinancialsector.com.

For more on the current Super or Secular bear market and why I expect it to last until 2015 at the earliest and until 2027 at the latest I suggest a visit to my website, www.bearmarkettracker.com. The site is loaded with free information that you will enable investors to not only survive, but to thrive from the Super Bear Market.

Yesterday’s Decline in the U.S. Consumer Confidence index to 10 month lows underscores the severe problems that the U.S. economy and stock market is facing. Additionally, the present situation index for consumers dropped to 19.4 from 25.2 in January, the worst since February 1983. An un-expectant decline in housing prices for December of 2009, is also an ominous sign of woe. The problems for the economy continue to mount. A recent U.S. Government spokesperson recently stated that over 50% of all commercial real estate by the end of 2010 will be subject to foreclosure.

As I have recently stated the U.S. stock market was able to mount a bear market rally for the ages off of its March 9, 2009 lows because the Obama administration purposely casted a blind eye to financial regulatory reform in 2009. Now that financial regulatory reform is on the front burner the shares of financial companies will remain under pressure and will lead the rest of the stock market lower.

In light of the significant declines in consumer confidence the move by the Federal Reserve to increase interest rates last Thursday February 18, 2010, seems to be premature and illogical. This is especially since the move by the Federal Reserve strengthens the U.S. Dollar against the Euro. Given that the Euro continues to weaken against the U.S. Dollar and that I expect that it will ultimately go to new all time lows. I continue to predict that the U.S. stock market’s major indices including the S&P 500 and the Dow 30 Industrials will see new lows before the next Presidential elections occur in the U.S. I continue to suggest that investors maintain a 80% cash position in their portfolios.

For more information on the bear market go to www.bearmarkettracker.com, which is my web site.

For the week ended February 12, 2010, the shares of airline companies advanced and several hit 52 week highs even though the shares of many stocks were down for the week. At the week’s close Southwest (NYSE:LUV) closed at its 52 week high. Airline shares are rallying for two big reasons. The first is that a higher dollar means lower fuel prices and the second is that a higher dollar means that there will be a pick up in air travel abroad. The shares of those industries and companies who benefit from a higher U.S. Dollar are poised to rally since the U.S. Dollar closed the week at a nine month high versus the Euro and has increased by over 10% against the currency on the other side of the pond since December of 2009.

The price action of the airline stocks is confirming the sirens, an article, “The Damage to the Euro has been Done” and a blog, “A Rising U.S. Dollar will Hammer the Stock Market”) that I have been sounding that the rising dollar has put the U.S. stock market on the precipice of another significant downturn in the coming weeks and months. The other industries that will also benefit are all of those industries and companies, which participate in the U.S. Transportation sector. They include air freighters such as Fedex (NYSE:FDX), etc., and truckers which include J.B. Hunt (NASDAQ:JBHT), etc. Utility companies will also benefit from lower energy prices, but to a much lesser degree.

The industries, which have the most to lose in a rising dollar environment are those who are involved in Metals and Mining and companies such as Alcoa and U.S. Steel, etc. All fossil fuel industries, which include, International Oil, Domestic Oil, Natural Gas, Oil Services and Coal will suffer greatly from a higher Dollar.

There are three companies that I am currently recommending which will benefit from a higher U.S. Dollar. They are in three separate industries; Airlines, Utilities and Shipping. Information on each of them is available at www.bearmarkettracker.com