The HEDGEfolios Timing Indicator is approaching a crossover towards a bullish bias.  Since the HF Bearish line hit .4939 on January 8th, the market has been improving and if the current trend continues, I expect to see HF Bullish to exceed HF Bearish as early as next week.  If that happens, it would be the second incorrect signal in seven crossovers since I started publishing it two years ago.  The market has increased 2.8% from November 27, 2006 when the HEDGEfolios Timing Indicator was expecting a decline.  It’s not over yet, but unless something negative occurs, I’ll be more bullish around here.

At the last FOMC meeting , “substantial” was inserted and comprised the sole change to the statement. I spent a little time spoofing on the spin that one word created in the bull camp and wrote about it here. If you remember, the bulls suggested that “substantial” meant a rate cut was on the way this spring. How did that work out? Now that we are no longer looking for 3 cuts during 2007 and the market is not expecting a rate cut this year, I wonder what the substantial word(s) of the day will be this time. Since mid-December’s meeting, oil has declined from $61 (then) to $50 (January 18th) to $58 (today.) The drop to $50 was substantial but the economy seemed to grow and show some mild inflation pressures. On one hand, oil declines spur growth and on the other hand, increases in oil restrain the consumer. Now that oil prices seem to be on the rise, it will be interesting to hear the Fed’s interpretation. As for housing (the other big issue from the last meeting), we have seen another mixed bag of results and comments from homebuilders during a period which saw the 10-year Treasury yield jump from 4.5% to 4.85%. I am not sure what word or words will make it into the statement today, but I am certain of one thing - the bulls will do their best to spin it. Just like their wrong interpretation last time, I am betting they’ll convince quite a few investors. As I wrote on Sunday, there seemed to be a PR campaign last week to convince everyone that it really doesn’t matter that we don’t get the rate cuts they told us were so necessary to fuel the market. It’s a no-lose scenario and all the bulls need are a few good words.

As a former employee of a broker bought buy a bank, I got a kick out of seeing a broker (MER) buy a regional bank (FRC.) After Glass-Steagall fell, it was popular for banks to acquire regional brokers and to put it mildly, this was a disastrous idea. Here are some other deals to reflect upon -

• Fifth Third - The Ohio Company
• US Bancorp - Piper Jaffray
• Key Bank - McDonald Securities

When these and other unnamed bank / brokerage marriages were announced, there were good intentions. Then the honeymoon was over and a major culture clash between the two businesses became apparent. Banks are product-focused and try to find clients for their products while brokers are client-focused and try to find the best products for their clients. These are two very different concepts and so are the pay scales that caused bankers to be very envious of “overpaid” brokers. After years of trying to bankify the brokers, most of these deals never delivered the synergies that were dreamed about at the onset.

Now we have Merrill buying First Republic and there is a lot of talk about synergies. I seem to remember Charles Schwab having similar goals for its acquisition of US Trust. That experiment failed as well. I am not saying that a bank and brokerage combination cannot work or hasn’t worked. The fact is that most of them have not. Maybe Merrill has the answers?!?

I looked at two competitors to FRC and found that I had changed BPFH to UP this week while leaving PVTB as a DOWN signal. As I wrote on Sunday night (before the announcement), I was surprised by firming in some of the regional banking stocks given the higher interest rate environment. BPFH was one of the charts that had increasing positive volume last week and I cannot help but wonder whether there was a bit of a leak and confusion about which bank was going to be acquired. Regardless, I am very doubtful about the long term results of any similar deal involving banks and brokers.

How much have you lost on NutriSystem? No, I didn’t mean weight! Since I started watching the chart a few weeks ago, NTRI has trimmed about 25%. This week, I added it to coverage at HEDGEfolios with a DOWN signal and it was an easy call. The chart looked bad enough before today’s big slide but all that was just a continuation started on Friday by Thomas Weisel’s downgrade from “Market Overweight” (funny term in this case) to “Market Weight.” Today Citigroup’s analyst piled on and that’s all it took. I usually don’t single out individual stocks with negative posts, but I am making an exception. First of all, I hate their commercials. If you watch Bloomberg and CNBC as much as I do, you will probably be able to recite Dan Marino’s or Zora’s lines by now. I think NTRI must have decided that watchers of financial tv were “fat, dumb and (un)happy” and decided to place the majority of their ad budget targeting us. Are we really so out of shape? Anyway - I started working on a related post (unfinished) a few weeks ago because I just couldn’t believe how much they were spending on these commercials. I understand it’s peak season for initiating weight loss dreams due to the useless New Year’s resolutions, but I began to think that sales were not going so well and they needed to push these spots. The second (and more important) reason I decided to pick on them today was to suggest that if you ever want to see a picture of the interplay between fundamental and technical analysis, this is it. Combining the fundamentals reflected in the analyst’s work with a thorough look at the charts and you couldn’t miss the signal here. I hope their products help people lose weight as well as their stock helps them lose money.

Here’s a list of UP signals that I am watching this week. Every time I do one of these lists, I caution you to do your own homework and this group is no exception. These are highly volatile names and tight stops are always suggested.

ASVI, CAT, CATT, CNW, CONN, DW, EEE, EGOV, ELNK, ESLR, ESST, FCBP, FDG, FDP

GLBL, GYI, HDL, HIMX, IDIX, INFS, IOTN, IVAN, KEM, MIND, MRCY, MSPD, NOIZ, NTMD

ORGN, PEET, PLLL, QTM, RAIL, RHB, RSYS, SALM, SBCF, SBP, SCUR, SFG, SGY, SHRP

SKYE, SNWL, SOLD, SONO, SRDX, SSD, STLY, SUN, UACL, WIRE, XRTX, ZGEN

With the significant rise in market interest rates last week, I was a little surprised to see a fair amount of the rate sensitive stocks holding their own. Ever since the FOMC stopped raising rates in August, many bulls have been relying heavily on a rate cut as justification for higher stock prices. In January, the economic data made it increasingly clear that not only was a cut not on the way, but now it’s off the table for the foreseeable future. There is even a slim bet towards hikes before cuts. This left the bulls with two choices: 1) throw in the towel or 2) spin the story towards growth. We know permabulls have a great inability to admit their mistakes so it almost seemed like there was a conference call to get everyone on board.

• “Cuts are not necessary.”
• “Look how great the economy is doing.”
• “Earnings are going well.”
• “The greatest story never told.”

Pretty impressive actually.  Whenever I hear this backtracking, I keep saying to myself  “Cut it out”  but in fact, that is what they are trying to do.  And after looking at a lot of charts, it really does seem like the impact of higher rates is less serious than a week earlier.   I am keeping a close eye on it, but if I see more strength in areas that I am expecting weakness, I will hesitate to stay negative on stocks that should be heading lower on higher rates.

Yesterday, Charlie Gasparino of CNBC suggested that James Chanos of Kynikos made campaign donations to Governor Eliot Spitzer (NY-D) to avoid a problem or gain some other favor (click here to watch the actual video). I know it’s easy to assume that every donation is meant to influence or that every politician is influenced, but that is absurd. Clearly, our campaign finance laws are abused and we have way too much corporate power in politics. But let’s stick to the assumption that most people are good and that contributions are not illegal. The same Constitution that gives our press the right to make salacious insinuations, also provides for the right to petition the government. That means the right to lobby and by inclusion, contribute to political campaigns. If you don’t like it, try changing the Constitution or another attempt at general campaign finance laws, but keep the smear out of it. If there is an admission or a guilty verdict, then smear away.

So now the facts, Jim Chanos is a short selling specialist in the investing / hedge fund industry. Eliot Spitzer is now the governor of NY and no longer is charged with pursuing legal action, largely against abuses in the investment world. Chanos has a long history of donating to politicians and with the exception of his cousin’s campaign for Nevada Attorney General and the Defend America PAC, all the donations I found were to Democratic campaign causes. He has donated to previous Democrats running for Governor in NY (Cuomo 2002) and for Phil Angiledes, the failed 2006 Democrat gubernatorial candidate in California. Spitzer happened to be a Democrat running for governor - go figure he got money from Chanos. But then again, Spitzer campaigns have received Jim’s support since his second attempt to become Attorney General in 1998 - long before Eliot’s first targeting of Wall Street.

One of the great things about the mess called “campaign finance” is the transparency of legal donations and lobbying efforts. If you consider the political scandals like ABSCAM or more recently, Abramoff, the real abusers aren’t disclosing their activities in online databases. So for people like Chanos that document the trail of funds, I tend to assume they do not have evil intent - call me naive. You can do your own homework online by searching a few databases like this one for state elections or this one for federal elections. He has donated to general committees that make the decision about which candidates get how much money and he has donated to a bunch of candidates that have not won. In fact, I think his ability to pick winners in short selling stocks is much better than picking winners for elected office. How much influence do you get from candidates that lose? Regardless, not all contributions are bribes and not all politicians can be bought. Chanos and his wife also contribute a lot of money and time to other causes. Click here to learn the amazing details of one such contribution. If you want to help them out with a donation, I promise that you will not be accused of trying to influence any political behavior. I don’t know Jim personally and I am not saying he is a saint, but let’s stick to boring details and not make exciting unfounded accusations.

I have repeatedly said how unnecessary I find potential hedge fund legislation and regulation, but it is inevitable - so we must ensure the process is equitable and thorough. I have made no campaign contributions to Spitzer or anyone else for that matter, but yet, I agree with Chanos. If I make a contribution in the future, will that suddenly prove a desire to corrupt a politician? Obviously not. However, this subject requires a lot of thought, hearings and analysis. The SEC and Congress are empowered to take those actions and yet, we all have an obligation to provide them with as much meaningful information as possible so they can make whatever decision they feel is right. That includes both sides of the debate and yes, you can bet that people who oppose my view and Chanos’ view are making contributions to one politician or another (maybe even Spitzer.) But their legal contributions should not be stopped or criticized. Amid all the oversight by regulators and lawmakers, hedge funds must pick up their responsibility in the debate. And as a leader in the industry, Chanos must be involved. Besides, he has a history of testifying in front of Congress - like when he volunteered info about his significant role in exposing the Enron fraud and how to help prevent something similar happening in the future.

Today, it is appropriate to pull out some of the old standby’s for the spelling of FORD.

• Fix Or Repair Daily
• Found On Road Dead
• Failure Of Research & Development
• Factory Ordered Road Disaster
• Ford Owners Recommend Daimler
• Ford Owners Really Dumb

Ford announced the largest loss in its 103-year history and followed that up with guidance of losses for 2007 and 2008. They missed estimates of a $1.35 loss per share by 15 cents. But don’t worry - CEO Mulally said “We know where we are. We are dealing with it and we’re on plan.” Go get ‘em tiger! Winston Churchill once said, “If you are going through hell, keep going.” Keep going Alan - you and your investors are in hell. Whatever your plan is ….2009 is a long time for investors to wait for a promise of profitability. Ford expects to burn through $10 billion in cash for operations through 2009 and spend another $7 billion to invest in new products. Good thing they mortgaged everything except the kitchen sink to borrow about $23.4 billion to cover all this red blood ink. I keep hearing about cost cutting but as everyone knows, at some point there is nothing left to cut or the cuts you really want to make (union labor contracts) are not on the table. About 38,000 hourly workers have signed up for buyout or early retirement offers and Ford says it plans to cut its white-collar staff by 14,000. Apparently, at the same time all these jobs are being lost and sacrifices are being made, part of Alan’s “Way Forward” plan includes paying managers and execs bonuses to reward them for their progress in the company’s cost-cutting plan. That is a PR disaster and a negotiating nightmare. And yet, the stock has traded flat to slightly higher today so what do I know. I have had an UP signal on Ford since 12/26/06 and a 10% gain, but my signals are a reflection on what the market thinks, not my personal opinion. Analysts and investors are supposedly buying the story that Ford threw all the losses and the (kitchen sink they did not mortgage) into last year, this year and next year. I hope they are right and the worst is over (or at least will be over in 2009). But if they aren’t - this company will be bankrupt or if you prefer - “Found on Road Dead.”

Pick one.  Doesn’t matter which one.  Tomorrow you can pick the other.  That seems to be the case in the past week and if you don’t mind selling IBM one day because you are certain techs are failing and buying EBAY the next because you like their leadership, this market is for you (not for me.)  It’s always tough during earnings season to avoid knee jerk reactions one way or the other and this quarter is no exception.   For my part, I am trying to ignore the day-to-day moves and it’s getting pretty nutty.  I lean on one theory of mine at times like this… increased volatility (like switching from “Wreck” to “Leadership”) usually signals a change to prevailing trends.

Do bears shit in the woods? Whenever the market declines and enough pain is felt, the bulls receive deep sympathy and often times, we hear rumors of an impending “capitulation”. After the market had only pulled back 5% from the 3-year high recorded the first week of May, commentators were already throwing around the “C” word. To say the least that was premature, there never was a washout and the market continued to slide for another month. When stocks are dropping, there is a crowd that hopes for the mythical “capitulation” to signal a reversal, get the pain over with and put the worst behind them. Of course, these events are very rare and they are not required to turn stocks around.  So back to the title question….are capitulations only reserved for bulls? They are not, they just have different names and are commonly referred to as “short covering rallies” and “short squeezes.”  If traditional capitulations are good for stocks, then are bearish capitulations bad for stocks? Hardly - they are great for stocks and lately they have been much more common.