Signal Type	Trade Date	Return since issued
		World	U.S.
			Nasdaq 100 (QQQQ) Russell 2000 (IWM) S&P 500 (SPY)

Market Update

Stocks moved higher for the third consecutive week, thanks to a strong session Monday after the Treasury Department provided details on its plan to absorb toxic assets from distressed financial institutions. Investors cheered the news and bid financials markedly higher, helping lift the entire market. The S&P 500 soared 7.1% on the day. While such big gains induced some profit-taking the next day, stocks looked ready to resume their ascent Wednesday following better-than-expected readings on U.S. durable goods orders and new-home sales. Indeed stocks jumped at the open, but later reversed course to fall into the red before a last-hour rally helped the main indexes close with modest gains. On Thursday, Best Buy released an earnings report that handily beat expectations and provided an optimistic outlook. Combined with a final revision to fourth-quarter GDP that was not as bad as many had feared, the news helped the market tack on more gains, with the Nasdaq Composite rising 3.8% on the day. A good chunk of the gains disappeared during the week's last session, however, as investors decided to take money off the table after the top executives at JPMorgan Chase and Bank of America both indicated that March had been a tough month for the banking sector. The resulting losses caused the main indexes to close the week below Monday's levels.

The Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively gained 5.62%, 6.39% and 7.63% on the week. All 3 ETFs are now located above their 50-day exponential moving average (EMA) but remain below their 200-day EMA.

For its part, our World portfolio posted a 6.47% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of February 27, which marked the beginning of the current 4-week holding period. The World portfolio is being rebalanced today, as the current 4-week holding period is now over. Please note that since we now have an active Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the "Our Service" page for all the details.

From a technical standpoint, the current three-week rally appears much stronger than the failed ones we had in October and December. While our current Cash signal remains in effect for the time being, our Model is now in a position where a Buy signal could be issued any day.

Trend Timing School

Quantitative easing

With the recent Wall Street rally heating up all the talk has been of the new financial path adopted by the government to fight the financial crisis. It is what many economists call quantitative easing and, because it represents unprecedented levels of government intervention in the markets, we owe it to ourselves to investigate and understand the implications for us investors.

To grasp what quantitative easing is all about we need to take a quick detour down memory lane to find out how we got here. The current economic drama has everything to do with the financial industry, and their lobbyists who influenced politicians to deregulate derivatives (with the now infamous Commodity Futures Modernization Act of 2000 which then-senator Gramm snuck by everyone). Enabled by deregulation, spurred by greed, bankers went on a rampage creating and selling increasingly risky loans which they then disguised and repackaged in ever more complex derivative instruments. And insurers were only too willing to sell them insurance on these hazardous bets. This led to years of artificial prosperity and insane profits in the financial industry.

In the meantime our Central Bank the Federal Reserve System (Fed for short) was both encouraging more borrowing with riskier loans, such as subprime and adjustable rate mortgages, and busy cranking up the Federal Funds Rate - the target interest rate for overnight loans between banks - to reach 5.25% in June 2006. It is little surprise then that the pyramid of debt related instruments largely predicated on the principle of forever decreasing interest rates had to end in a bursting credit bubble.

As higher borrowing costs began to weigh on the housing market, the real estate boom came to an end. Cracks first appeared in the mortgage industry led by the subprime segment and related hedge funds. By the summer of 2007 things became critical with the very public failure of Bear Stearns hedge funds and the bankruptcy filing of American Home Mortgage, one of the largest independent home loan providers in the U.S. As the credit crisis spread internationally, global stock markets tanked. When in September 2007 the Fed finally understood that by hiking interest rates too high they had actually contributed to the credit crisis, they did an about face and started driving the Federal Funds Rate down.

What the subprime mortgage crisis did is expose a mountain of bad securities, derivative instruments with questionable or no value permeating the financial industry with no market for them. The net effect was to freeze all lending because banks, already saddled with their own bad investment problems, were afraid of what or how much bad assets other banks may have. Without the flow of credit and the investment capital needed by companies and individuals the economy started slowing at an accelerated pace. The worsening recession is threatening most world economies with a potentially disastrous deflationary spiral.

By December 2008 the Fed had brought the funds rate to a historic low of between 0% and 0.25%. Call it zero for all practical purposes. But the banks are still not lending. In this dismal economy the bankers still view loaning to businesses and individuals as unsafe, even for an 8% return, and instead they prefer investing the cheap Fed funds and other bailout money in the safety of U.S. Treasuries. A 10-year Treasury can return 2% to the bank, and be safe.

This is where quantitative easing really kicks in. Quantitative easing is a fancy term invented by financiers to obfuscate what is really taking place. The Fed decides to buy hundreds of billions worth of bad securities (the so-called toxic assets) from the banks. Since the Fed really does not have the billions, the government creates them out of thin air by issuing new debt. What this does is expand the central bank's balance sheet and effectively increases the quantity of money available in the system, thus the "quantitative" moniker. The buying of bad bank assets is intended to relieve the pressure on banks, "easing" the pain.

But the banks are still not lending. For that the Fed must remove their incentive to hoard the cash in the safety of Treasuries. Well then, the Fed announces that it will purchase back hundreds of billions worth of Treasuries which should drive the yields down, removing the bank's profit.

Just over the last couple of weeks the Fed has announced such additional spending of over $1.1 trillion. It will increase its purchases of agency mortgage-backed securities (an additional $750 billion), of agency debt (additional $100 billion), and longer-term Treasury securities (additional $300 billion).

These massive liquidity injections were music to stock investor ears and the markets have rallied on the news to gain nearly 20% from the lows set in early March. Before we get too excited about the positive short-term effects of lower interest rates on the bond and stock market rallies, we should take a look at the other consequence of quantitative easing.

The most obvious downside is to increase deficit and total debt. The current national debt amounts to about $11 trillion (get the exact official daily tally as provided by the U.S. government at Treasury Direct). The latest estimates coming from the Congressional Budget Office put this year's budget deficit at over $1.8 trillion. This means that the government must sell an average of $150 billion worth of new debt paper (mostly Treasuries) every month to fund the deficit spending.

Some say quantitative easing is a euphemism for devaluation. If you flood the market with something, you automatically reduce its value. No government anywhere proudly announces the devaluation of its currency, especially if it is the accepted world reserve currency. Yet leaders of indebted nations throughout history have resorted to inflating their way out of the problem. While government officials chant the virtues of a strong dollar, a lower dollar helps in several ways. It helps the trade-deficit by making American goods cheaper to foreigners and imports more expensive here at home. It also shrinks the national debt. But alas, a lower dollar is a double edged sword and our leaders are walking a very fine line.

The growing risks become obvious when one looks at who actually funds our deficit spending by purchasing our Treasuries: foreigners. Foreign governments own about 28% of our outstanding debt (over $3 trillion), led by China and Japan with $739 and $634 billion respectively, and we direly depend on them continuing to buy more, or at least not start dumping what they already have. If the perception of the U.S. dollar shifts from a safe and strong currency to one being weakened by our fiscal policies, the tide could reverse rapidly.

China this week, just days after Premier Wen Jiabao demanded the U.S. take action to safeguard their holdings of U.S. bonds, published a paper called "Reform the International Monetary System," which calls for the creation of an international currency. The proposal is said to be backed by Brazil, India and Russia, and is no doubt going to be the subject of heated conversations at next week's G-20 meeting in London where 22 world leaders, including the President of the United States, will gather to discuss the economic crisis.

We will not touch the debate as to whether this unprecedented explosion of deficits and debt will achieve the government's objectives of stabilizing the financial system and reviving the economy or instead lead to financial Armageddon. What we know is that more than ever we will rely on our trend following system to stay on the right side of the market. In particular, when our Model returns to a long position we will pay particular attention to the World approach which will keep our investments focused on the strongest markets with the strongest currencies.

FAQ of the Week

Question: Do you recommend the Buy and Rebalance strategy?

The short answer is no, we do not recommend using the Buy and Rebalance strategy. At the same time we also understand that placing all your eggs in one basket is risky, which admittedly leaves strategy diversification as one possible benefit of adding Buy and Rebalance to your portfolio.

Some may have noticed on our "Results" page the mention of a Buy and Rebalance strategy, which is the same as Buy and Hold for the World approach. This strategy ignores the timing signals altogether and stays fully invested in the World ETF Ranking's Top 5 ETFs at all times, rebalancing every 4 weeks. The Buy and Rebalance strategy is included in the results together with the Buy and Hold strategy for single ETFs for comparison purposes, not as recommended strategies.

We are Trend Timers at heart and we believe in timing to avoid losses during serious market declines which occur in world markets just as they do here at home.

Warm wishes and until next week.

The TimingCube Staff