[This is a re-write of an article first posted 2 weeks ago.

It has been polished

and updated based on 2 weeks of trading action. There are no changes in
our views, they are more carefully expressed herein].

Our view of 2010 is based on where we are economically and where we

have come from. "U.S. Companies Expand by Most Since 2006 in Sign
Recovery Is Gaining Speed." Bloomberg.com Dec. 30, 2009. Another recent
headline, with the big picture in mind : "S&P 500 on pace to record largest
annual gain since the 1930s".

Put in context, the S&P 500 fell 39% in 2008, its biggest loss since falling
39% in 1937. The Dow Jones Industrial Average fell 34% in 2008, the most
since 1931. So one of the largest annual declines in the history of the stock
market (2008) was followed by one of the market's largest historical gains,
on average around 30% (2009). The same thing happened in the 1930s. One
pundit: "Simply put, the larger the drop, the greater the recovery; the
greater the rally, the larger the subsequent correction." Some are calling for
a big correction (but when?). I'm not so sure. It hard to call tops...bottoms
are easier. BUT this sure doesn’t feel like a frothy, greedy, we’re making
money and getting rich top. Does it to you? I was there in the 1998 -2001
period, so were you...we’re not even in the same ballpark. Correction?
Always a possibility...but that just takes the market higher after the dip. But
do we want to just hold indexes? Nope, we want to be where the money is
flowing. This article anticipates just that. Part I sets the stage and theses,
Part II is the investment road map for 2010.

A number of forecasters are expressing great caution, imploring a larger %

retreat to cash and bonds from equities for 2010 as the “easy money has
been made”. First, NO money made in 2009 was “easy”, even by
professional money managers. We climbed a wall of worry. That worry
continues…we are entering a growth cycle and there are huge opportunities.

The truth is, despite Fibonacci retracement lines on Index charts and many
technical experts convinced of their bearish analysis, we don't know from
pure technical analysis what 2010 brings ... the answer more likely lies in
observation of the technical framework but focused on fundamental analysis
of the world's economy, US policies and expected economic performance
and how select industries, sectors and companies therein fit into the likely
trends in 2010. I have read a series of forecasts this week of what the Index
charts show and what the fundamental trends “should“ be. My reaction has
been that these guys don’t know. And I don’t know. But I am forming a view
based on the now and will change as the money flow in the market tells me I
am wrong. Bottom line, the market is never wrong ... so “should” doesn’t get
us there.

I don’t worry about the price of oil, the strength of the dollar, interest rates
or inflation. I do care about how the market reacts to these as they unfold.
And we’ll know how they unfold as earnings are reported and how the
market reacts to those earnings reports starting with Alcoa (AA) on January
11, 2010 (which was a sell the news reaction). I am not a leading economist,
a top Wall Street analyst or even a pundit. I just invest and trade and write
about what I do and think. But I (we) do have the need to evaluate what all
the experts project. Then I form my view. My outlook is fluid. The current
trends ARE the trends until they are not. So, what are our trends?

Let’s start with metals and mining, our favorite 2009 sector. Bucyrus (BUCY),
the leading manufacturer of machines (some 4 times the size of a 4000
square foot house) that mine coal, gold and copper is a good company to
project based on its industry’s trend, and that analysis can be used for other
industries, sectors and trends. Bucyrus started 2009 around $20/share and
finished $60/share. That’s a triple. It was our largest holding in our IRA and
was our favorite stock in our active trading taxable account.

The XME was our largest ETF (exchange traded fund), in our IRAs and we
owned it in our trading account as well. XME “seeks to replicate as closely
as possible, before expenses, the performance of an index derived from the
metals and mining segment of a U.S. total market composite index.” It
started 2009 @ $30 and finished near $52. Interestingly, XME does not own
BUCY or JOYG, the other major mining machine company. So, one mining
machine company, up 200%; one ETF which owns a group of companies
using the machines, up 65%. That’s a powerful trend and one we’ll examine
to see if it will continue for 2010. BUCY is up about 5%, XME about 7% so far
in 2010, both having pulled back from their 2 week long 2010 highs. We
expect the metals/mining/materials trend to be very strong going forward
based on global growth, developing economies and the emerging middle
class world wide in the emerging economies…and the attendant demand for
commodities, a long term trend.

We’ll dive deeper into BUCY and XME later in part II of this article. Suffice it
to say, fueling/supplying growth with materials and enhancing productivity
and therefore growth will be key...whether through technology, industrials,
energy or commodities. Also, with the emerging middle class
worldwide....those people want more meat and less rice or seaweed. We’ve
seen them and talked to them in 20 countries. This emerging middle class
not only needs to be fed, they need housing and basic goods. Providing their
shelter and basic necessities requires use of energy and commodities. The
early cycle trade will continue...how could it be stopped? But necessities and
consumer “wants and needs” include both detergent but also technology,
like smart phones. Yes, a smart phone is now almost a basic good ... its the
only “computer” many people have or aspire to have.

And security is coming more into focus, militarily and technological security,
whether to secure against attacks on networks or airports ... due to the weak
hand presented to the world by the US in this administration. Its common
sense ... if the US appears weak, then Russia, the Taliban, Iran, Al Qaida et al
will challenge us and take advantage while our guard is down. We see it now.

The US consumer...18% of whom are unemployed or under-employed...aren't

going to be the primary or perhaps dominating engine for a world-wide
economic recovery this time, at least not in 2010. But they will participate in
a unique way. Many are debt riddled; per a recent report, 10% are in default
on their credit cards, 6% more are late in paying. But that means 84% are
current on their bills. How does this play out?

What I found most interesting of all the material I’ve read, is this from a
December 1, 20099 interview with Lakshman Achuthan (the managing
director of the Economic Cycle Research, an independent institute dedicated
to economic cycle research in the tradition established by its founder,
Geoffrey H. Moore, whom The Wall Street Journal called "the father of leading
indicators." ECRI’s clients include buy- and sell-side investment firms,
Fortune 500 companies and governments worldwide):

“... Q: What is your forecast for consumer spending? Isn’t your forecast for a
cyclical recovery dependent on growth in consumer spending?

This is a recovery. It’s not going to falter in the first or second quarter and
very likely will make it to the second half of next year. You are going to see
broad consumer consumption numbers continue to grow. Part of that will be
accompanied by jobs growth. This is already happening. Underlying that,
though, is literally a tale of two worlds.

If you have a job and didn’t lose it during this recession, then you are looking
around and you have pent-up demand. Prices are lower across the board,
noticeably so. That combination means you are going to consume a bit. If
you don’t have a job, you’re not going to do that.

A recent poll made a related point. If you are earning over $100,000, then
your plans are to spend over 50% more than last year. That’s stunning.
Equally stunning was that if you are making less than $30,000, then you are
going to cut your spending by a third.

In a related backdrop, the wealthiest consumers, say those in the top decile
of earnings and net worth – and this is not something new – account for
almost half of all spending. The lower 90% account for the other half. You will
see weird things happening in consumer spending.

If you go to Wal-Mart, and they are offering a deal, consumers will buy at the
right price. Discount stores, if they are executing a good business plan, will
make the cash registers ring. At the other extreme, some luxury brands are
actually working. Tiffany’s is actually doing well. In the middle there is a big
gulf.

I’m not describing something that is terribly healthy, but, when you add it
up, you are going to see consumer spending grow. When we look at what a
business cycle is, at its very base, the classic definition is that you have
employment and GDP growth either peaking or troughing to mark the start
or end of a recession. The supplemental information used to break a tie is
sales and income. Those are your big coincident indicators of cycles. You
can’t have a recovery if only GDP is going up....“ For the full interview
transcript: http://www.businesscycle.com/news/press/1665/.)

Finally: please watch this ... a Bloomberg interview with Lakshman Achuthan
who says we clearly will NOT have a double dip recession, that recessions
will be far more frequent, that if you haven’t figured out “buy and hold” is
dead, you better start with that, and we may be entering a period of
chronically high unemployment. Even if we do add some jobs, we’re not
getting all the way back to full employment any time soon..
http://www.bloomberg.com/avp/avp.htm?N=video&T=Achuthan
%20Interview%20on%20U.S.%20Economic%20Outlook
%20&clipSRC=mms://media2.bloomberg.com/cache/vMw1qJUhHCkE.asf

A summary of our thesis so far:

1) Bloomberg: “U.S. Companies Expand by Most Since 2006 in Sign Recovery

Is Gaining Speed.”
2)ECRI: December 31, 2009 “ (Reuters) - A weekly gauge of future U.S.
economic growth edged higher in the latest week, and though its yearly
growth rate slipped, recent patterns in the index still point to a steady
recovery and growth in the job market as well…ECRI’s Leading Index rose to
a 77-week high of 131.2 for the week ended Dec. 25, from a downwardly
revised 130.3 the prior week, which was originally reported as 130.4...”

3) US companies will compete and participate in meeting world wide demand

for consumer goods, for basic materials, machinery, energy and for
technology ... by squeezing even more productivity out of the physical
capital investments they have already made ... through more technology
itself, but not through more employees than just necessary, especially when
the employee on the margin will cost more in benefits and health care due to
the policies of those in power.

4) No US double dip, job growth but a slow and bifurcated consumer

economy of have and have-nots with an average consumer who has a
balance sheet still in need of repair or in need of a job, heavy taxes, high
health care costs. Not a jobless recovery, but with potentially relatively high
unemployment but also high end consumption (which we know accounts for
half of all consumer spending).

In "2010 Outlook: Part II - An Active Trader's Perspective", we discuss:

1) why tech will lead (remember NASDAQ 5000?);

2) why the commodities cycle has less to do with the Dollar than larger
trends, may decouple (or may have) and will roar ahead;

3) why Bucyrus and stocks of this profile could see additional 50% gains
(we'll further compare it to the XME, up 65% for 2009, and show how to use
this framework to find other stocks like this);

4) why we hold steady movers in our retirement accounts and runners who
take rests in our trading account (we'll compare SNDK to MSFT); and,

5) why both technical and fundamental analysis are needed, especially by

the little guy.

For updated long positions in our retirement account, please read Part II,
coming soon...

Remember, its not as much what you own as at what price you purchased.
Author: Don’t Take Losses

Reprinted from: http://www.investortradestocks.com/

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