I am glad we have 5 dogs because after reading Barron's, I just wanted to kick and animal or do something bad. What a downer. It was one of the most pessimistic issues of Barron's I have ever read. I could find no hope at all. I am ready to go all cash. Nope, can't do that because we are going to have deflationary period followed by a hyper inflationary period so our dollars won't be with a thing. Guess we all have to buy Gold. Nope can't do that because they are tightening margins on the metals so people will be selling off and taking profits until the next rebound. So I guess we are back to equities. Nope can't do that because corporate profits are expected to shrink because the Asian markets are cooling and Europe is headed for a major recession. So I guess we have to look to emerging markets. Nope, can't do that because all of the bad debt contagion is going to collapse the fledgling banks in the emerging markets. That leaves treasuries. Nope can't do that because right now you have to go out at least 5 years in treasuries until you can break even on the yields. Ok then we will do some nice safe treasury mutual funds, but you can't do that if they are charging about 1% to pool treasuries with a negative yield.

So what do you do? First off stop reading all the noise and determine what time timeline you have in mind. Short term, you have to expect and play the volatility. The only way to do that is to understand the technicals. If your time line for investing goes out beyond twelve months, start reading O'Neils's Book How to Make Money In the Stock market follow his ideas and build your watch list of undervalued stocks and wait for the next rally. Follow his 20 rules for investing and you have a good chance of meeting or beating the market. Can things get really bad? Sure, but they can also improve.

On Monday we have a small but very important "Tell" coming up. For the non mariners of the world, a tell is a little piece of yarn or materials attached to a sail to show the skipper where the subtle winds are headed. This tell is a 1.2 Billion Euro of Greek debt is due.

If you look at the Euro Debt issue as a house of cards, at the very top you would have the ace of Germany, and the Queen of Italy, and the King of Spain, and the Jack of England. In the middle row you might have the Jack of Portugal and the Joker of Ireland (I can say that, I am Irish) and way down on the very bottom even below the 10 of Greece, you would see a card on the bottom tier called the 1.2biilion Euro Due of December.

As you know, when you start messing with the cards on the bottom, it ain't long till all the cards fall down. Now this may not seem like good news, but I feel that this 1.2 billion Euro payment might be one superfluous card at the bottom of our house of cards and whether we rip it out fast (NonPAYMENT credit default bad mojo type stuff) or work it out very carefully, (IMF assistance, ECB bail out, China and USA to the rescue type stuff) the shaking of the house of cards will get everyone's attention and we will see positive steps to resolving Europe's problems.

It is my humble opinion that President Obama and Guitner were correct (Hold on, my Aunt just fainted as I am about to say something nice about our President and I will now be uninvited to about 6 Christmas Parties in South Orange County) when they strongly recommended Europe use austerity as the primary weapon of self healing during this crisis. As they (The President and Guitner) suggested they should have primed the pump with some quantitative easing before government cutbacks in countries that have governments payrolls totaling 40-50% of the entire population. Now that Europe is getting serious about austerity, the result is a deflationary spiral which maybe difficult to come out of. How Europe reacts to what should be a debt payment shortfall tomorrow will help determine how they will work their way through 2012.

The Bad News The Good News

The bad news is this 1.2 billion dollar payment is due tomorrow which will be now in a couple of hours so the news of the success or failure of the payment will impact the market at the opening. Our guess is a drop of 1-2% regardless of the news. Look for a little spike in the VXX.

Other thing to look out for this week:

Monday

An International Trade Commission ruling about a patent dispute between Apple and HTC. If it goes against Apple look for a 2% fall and a drag on the Nasdaq.

Look for a disappointment in the housing market index shedding more sorrow on the market.

(Just in as I was editing, the news of Kim Jong Il death is sparking worries in Asia and elsewhere. Buckle your seat boys and girls we may be in for a bumpy ride tomorrow.)  

Tuesday

We have some retail reports which have a positive surprise on the market even though merchants are buying love with discounts that will clobber margins first quarter 2012.

Housing starts report on Tuesday and this one is hard to read. Housing starts have been flat lined at about 600,000 units since July 2009. We'll say a little short of estimates of 636. Our guess is 615,000.

Chanuka begins today so many traders will be at FAO Schwartz trying to by the latest and great for their families.

Wednesday

Despite record low mortgage rates the existing home sales number is pitiful. This should continue on Wednesday. The number is so low @ 5 Mil that even a great number like 6 mil still sucks.

Thursday

GDP reports and look for no change remaining at about 2.5%.

Initial jobless claims will stay well below 400,00 but not as low as estimates. Look for a little disappointment to say 375,000.

They are expecting a slight improvement in consumer sentiment. Heck we'll go with that after all its Christmas.

And we will finish out the week with new home sales which surprised us to the upside last month. Don't expect another positive surprise.

So on the week we are looking for another 3 % drop. We had a 2.6% drop last week.

By the cover of Barron's you and I both know its getting close to that time of year where I throw out my year end guess of where the market will bed up next year. I will have that number for you this week as well as how we are shaping up on our guess for this year.

Over the weekend we had time to get back to couple of readers on questions they had asked. One of those I would like to share with you because it shows the sophistication of some of our readers.

Bob H. had a question about a super cap ETF on German Equities. We can all learn something from the questions and possibly by the reply. I hope:

Hi Brian,

I'm not an expert on the VIX and you might already know about this.  You know how the stock market has seasons.  Like Santa Clause Rally or October usually sucks for the market.  Well maybe the VIX has seasons also.  This commentator said remember the VIX measures volatility in the next 30 days.  If you have a month with a ton of holidays in it.  Well VIX might go down.  I thought it was an interesting point.

Also I don't know when will be the right time to buy this German ETF (EWG).  But I would have this on my watch list.  The Euro going down in value will help BMW and Siemens.  (No Doubt)  What is the tricky part about this is with the German Banks will they go boom and have a major recession.  But this is how I'm playing Europe right now.  I'm going to watch the DAX, watch this ETF, watch the bond markets over there, and try to figure out when to buy EWG.

My reply

Bob;

All great points.

This week there was a mention of seasonality in the market as a result the VIX.  On Tuesday Chanukah begins and you will see volume dissipate immediately till the first of the year.  Volume direction and volume swing causes volatility.  Remember volatility up and volatility down is still volatility.  If you look at IBD or Barron's there are some interesting tells about where the market might be going.  Here are two that I watch on weekly basis. 

The NYSE Short Interest is near a 5 year high.  The investment advisors rating is correction to the mid range.  This tells me that some of the one day two day rallies we have seen of late have more to do with Short Covering the true market direction.  As long as that in decision is in the market place we are at the whim of headlines and that is a volatility catalyst.

Regarding EWG, you made me do homework on this one by the way, It is all of the Big Boys in Germany.  You logic is brilliant.  The big IF which you have already identified is IF Europe goes into recession.  Keeping it on a watch list is a good idea.  You mentioned volatiltiy, this one is whacky with volatility.  The Dax is 22% more volatile than the S&P 500 and EWG is 56% more volatile than the DAX.  (Morningstar has an informative write up about the ETF.  Let me know if its not public, as I can't tell without signing out.)  But as I say your using the noodle on this one. 

I may use your question and my reply in the blog.  Thanks for making me think.

You also asked about one of our readers selling their gold position, I don't know, as I don't administer their holdings outside of their co-managed Schwab account, but I am glad we got all of our Salve Lucrum Family out of GLD when we did.  We dropped about 7% and it is down about 22% from our high.  Spot looks to be forming a base around $1,590.00.  I will say more about Gold in the blog tonight. (Which I will this week)  I have some more homework to do.

Thanks Brian

Salve Lucrum