Today’s most fascinating (non-Lehman) reads are:

• Economists Credit Fed For Alleviating Crisis (WSJ) The $787 billion stimulus package was a good for the U.S. economy, but the Federal Reserve played the biggest role in rescuing the economy from the financial crisis;

• US takeover defenses come tumbling down (FT) Only 28% of S&P1,500 companies had a poison pill in place last year, vs 43% the prior 2 years

• For Stocks, 16 Lean Years (Barron’s)

• Look who is late to the party: Optimism Arises After Year-Long U.S. Stock Surge: Chart of Day (Bloomberg)

• Siegel vs. Shiller on Bull Market Valuations (WSJ) Guess who is bullish and who is concerned with overvaluation?

• Miguel Barbosa Interviews James Montier on Behavioral Investing (Part I and Part II)

• Treasury hopes new rules send short sales to the rescue of underwater mortgages (Washington Post) With new Treasury Department rules designed to expedite short sales set to take effect April 5, relief can’t come soon enough for some area buyers, sellers and real estate agents who have waded through a long and arduous process to get short sales approved by the bank.

• China’s Property: Bubble, Bubble, Toil and Trouble (Time)

• The Professor Who Chases Financial Bubbles (WSJ) Wall Street firms and governments around the world are looking for the sort of predictive system this prof has.

• Verizon FiOS Buildout Is Dying (Fast New News)

• Color Visualization of one year in Boston (FlickFlow)

What’s on your browser?

Fernanda Viégas and Martin Wattenberg are research scientists in IBM’s Visual Communication Lab. Their blog is called Visual Hint.

I liked the way they depict a year of color in Boston, FlickrFlow:

via kottke

The Journal does yeoman’s job finding banks that have cash to lend:

“U.S. banks posted a 7.5% decline in 2009 in total loans outstanding, the steepest percentage drop since 1942, according to the Federal Deposit Insurance Corp. Consumer lending fell by 3.8% as roughly 7,200 banks and credit unions pulled back on mortgages, credit cards and other loans . . .

Across the country, thousands of other banks and credit unions also are bucking the just-say-no mentality that dominates the headlines. In the wake of the financial crisis that saddled banks with huge losses, the largest 10% of banks by asset size shrank their consumer lending by 4.7% last year, tightening the spigot on loans that aren’t backed by the government.

At many smaller banks and credit unions, though, cash continued to flow. Consumer loans grew nearly 3% at financial institutions that fall in the bottom 50% of the industry in assets, according to the Journal’s analysis of financial-institution data filed with regulators. Some smaller banks and credit unions continued to ramp up their business in mortgages, auto loans and credit cards and gain from the pain of their larger rivals.”

The one thing these lenders all have in common: Their balancde sheets are not festooned with all manner of garbage loans carried at fraudulent levels due to the corrupt rule change Congress foisted on FASB.

These smaller lenders are the only thing standing between a Japan like lost decade or two, and financial health.

> click for larger map courtesy of WSJ >

Source: Where to Find the Money RUTH SIMON and MAURICE TAMMAN WSJ, MARCH 13, 2010http://online.wsj.com/article/SB10001424052748704869304575110073746360224.html

The Implications of Velocity March 12, 2010 By John Mauldin

The Velocity of Money Our Little Island World GDP = (P) x (T) P=MV A Slowdown in Velocity Dallas and Thoughts on the Economy

This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed.

But before we jump into that, I want to let my Conversations subscribers know that we have posted a recent conversation with two hedge-fund managers, Kyle Bass of Hayman Advisors [and his staff] here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussions centered on what we all think has the potential to be the next Greece, but on a far more serious level. It was a fascinating time.

Then next Wednesday we will post a Conversation I had with George Friedman of Stratfor fame, and then the following Wednesday a Conversation that I just completed with Dr. Ken Rogoff and Dr. Carmen Reinhart, the authors of This Time Is Different.

For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to “listen in” on my conversations with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I will call one or two friends each month and, just as we do at dinner or at meetings, we will talk about the issues of the day, with back and forth, give and take, and friendly debate. I think you will find it very enlightening and thought-provoking and a real contribution to your education as an investor.

And as you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html. Click on the Subscribe button, and join me and my friends for some very interesting Conversations.

The Velocity of Money

The Federal Reserve and central banks in general are running a grand experiment on the economic body, without the benefit of anesthesia. They are testing the theories of Irving Fisher (representing the classical economists), John Keynes (the Keynesian school) Ludwig von Mises (the Austrian school), and Milton Friedman (the monetarist school). For the most part, the central banks are Keynesian, with a dollop of monetarist thrown in here and there.

Over the next few years, we will get to see who is right about debt and stimulus, the velocity of money, and other arcane topics, as we come to the End Game of the Debt Super Cycle, the decades-long cycle during which debt has grown. I have very smart friends who argue that the cycle is nowhere near an end, as governments are clearly increasing debt. My rejoinder is that it is nearing an end, and we need to think hard about what that end will look like. It will not be pretty for a period of time. The chart below shows the growth in debt, both public and private.

But the end of this debt cycle involves more than just debt reduction. There are a number of ideas we have to get our heads around, including the velocity of money. Basically, when we talk about the velocity of money, we are speaking of the average frequency with which a unit of money is spent. To give you a very rough understanding, let’s assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 of flowers from you. You in turn spend $100 to buy books from me. We have created $200 of our “gross domestic product” from a money supply of just $100. If we do that transaction every month, we will have $2400 of annual “GDP” from our $100 monetary base.

So, what that means is that gross domestic product is a function of not just the money supply but how fast that money moves through the economy. Stated as an equation, it is P=MV, where P is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing P by M. By the way, this is known as an identity equation. It is true at all times and all places, whether in Greece or the US.

Our Little Island World

Now, let’s complicate our illustration a bit, but not too much at first. This is very basic, and for those of you who will complain that I am being too simple, wait a few pages, please. Let’s assume an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island is $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.

But what if our businesses get more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers, etc., and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses are static. They buy and sell the same amount every month. There are no winners and losers yet.

Now let’s complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP rises to $14,000,000. In order for everyone to stay at the same level of gross income, though, the velocity of money must increase to 14.

Now, this is important. If the velocity of money does not increase, that means that (in our simple island world) on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply times velocity. If velocity does not increase, GDP will stay the same. The average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000. The prices of products fall.

Each business now is doing around $80,000 per month. Overall production is the same, but divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall. So, in that world, the local central bank recognizes that the money supply needs to grow at some rate in order to make the demand for money “neutral.”

It’s basic supply and demand. If the demand for corn increases, the price will go up. If Congress decides to remove the ethanol subsidy, the demand for corn will go down, as will the price.

If Island Central Bank increases the money supply too much, you will have too much money chasing too few goods and inflation will rear its ugly head. (Remember, this is a very simplistic example. We assume static production from each business, running at full capacity.)

Let’s say the central bank doubles the money supply to $2,000,000. If the velocity of money is still 12, then the GDP will grow to $24,000,000. That will be a good thing, won’t it?

No, because with the two new businesses only 20% more goods are produced. There is a relationship between production and price. Each business will now sell $200,000 per month, or double their previous sales, which they will spend on goods and services, which only grew by 20%. They will start to bid up the price of the goods they want, and inflation sets in. Think of the 1970s.

So, our mythical bank decides to boost the money supply by only 20%, which allows the economy to grow and prices to stay the same. Smart. And if only it were that simple.

Let’s assume 10 million businesses, from the size of Exxon down to the local dry cleaners, and a population that grows by 1% a year. Hundreds of thousands of new businesses are being started every month and another hundred thousand fail. Productivity over time increases, so that we are producing more “stuff” with fewer costly resources.

Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, the population, and productivity, or deflation will appear. But if money supply grows too much then you have inflation.

And what about the velocity of money? Friedman assumed the velocity of money was constant, and therefore he stated that inflation is always and everywhere a function of the supply of money. And it was, from about 1950 until 1978 when he was doing his seminal work. But then things changed.

Note that nothing Friedman says contradicts the equation MV=PT, if you assume constant velocity. Almost by definition you get inflation if the money supply grows too fast.

Let’s look at two charts sent to me by Dr. Lacy Hunt of Hoisington Investment Management in Austin (and one of my favorite economists). First, let’s look at the velocity of money for the last 108 years.

Notice that the velocity of money fell during the Great Depression. And from 1953 to 1980 the velocity of money was almost exactly the average of the last 100 years. Also, Lacy pointed out in a conversation that helped me immensely in writing this letter, that the velocity of money is mean reverting over long periods of time. That means one would expect the velocity of money to fall over time back to the mean or average. Some would make the argument that we should use the mean from more modern times, since World War II; but even then, mean reversion would result in a slowing of the velocity of money (V), and mean reversion implies that V would go below (overcorrect) the mean. However you look at it, the clear implication is that V is going to drop. In a few paragraphs, we will see why that is the case from a practical standpoint. But let’s look at the first chart.

Now, let’s look at the same chart since 1959 but with shaded gray areas that show us the times the economy was in recession. Note that (with one exception in the 1970s) velocity drops during a recession. What is the Fed response? An offsetting increase in the money supply to try and overcome the effects of the business cycle and the recession. P=MV. If velocity falls then money supply must rise for nominal GDP to grow. The Fed attempts to jump-start the economy back into growth by increasing the money supply.

In this chart from Hoisington, the recessions are in gray. If you can’t read the print at the bottom of the chart, he assumes that GDP is $14.5 trillion, M2 is $8.2 trillion, and therefore velocity is 1.7, down from almost 1.97 just a few years ago. If velocity is to revert to or below the mean, it could easily drop 10% from here. We will explore why this could happen in a minute.

P=MV

But let’s go back to our equation, P=MV. If velocity does slow by another 10%, then money supply (M) would have to rise by 10% just to maintain a static economy. But if we assume 1% population growth, 2% (or thereabouts) productivity growth, and a target inflation of 2%, then M (money supply) actually needs to grow about 5% a year, even if V is constant. And that is not particularly stimulative, given that we are in recession.

Bottom line? Expect money-supply growth well north of 7% annually for the next few years, or at least the attempt. Is that enough? Too much? About right? We won’t know for a long time. This will allow armchair economists (and that is most of us) to sit back and Monday-morning quarterback for many years.

A Slowdown in Velocity

Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early ’90s, like securitizations, CDOs, etc. It is financial innovation that spurs above-trend growth in velocity.

And now we are watching the Great Unwind of financial innovations, as they were pursued to excess and caused a credit crisis. In principle, a CDO or subprime asset-backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in, and Wall Street began to game the system. End of game.

The financial innovation that drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply hadn’t risen significantly to offset that slowdown in velocity, the economy would have been in a much deeper recession, if not a depression. While the Fed does not have control over M2, when they lower interest rates it is supposed to make us want to take on more risk, borrow money, and boost the economy. So they have an indirect influence.

And now we come to the policy conundrum for the Fed. They have pumped a great deal of money (liquidity) into the economy. Normally, banks would take that money and multiply it by lending it out (through fractional reserve banking at a potential 9-times factor), increasing velocity and the overall money supply. In the past, the more the Fed increased the money supply, the more banks lent.

But today bank lending is still falling at an average of 15% annually, so far this year. But what if that trend stops?

Corporations in the US have more money on hand than ever in the last 54 years. They are more productive. Their debt-to-equity ratio has been dropping by about 25% for the last 3 quarters, as they repair balance sheets. Capital spending jumped 18% annually in the last quarter. If we are not at an inflection point of rising employment, we are close to it (although we do need at least 100,000 new jobs a month to make up for increased population). And thus are the stock market bulls inspired, and we hit new trend highs weekly.

While growth this quarter will not be as robust as last, it will be fairly good for an economy with 10% unemployment. If you are a Fed governor, you have to be worried that things could turn around quicker than now seems plausible. What if corporations decided to take their cash and start investing in growth?

The last chart showed a small uptick in velocity at the end of last year. What if that is for real? What if we have turned the corner? Then the Fed will have to start taking back the money they have put into the economy, unless they want to see inflation. And indeed, that is what some Fed governors are arguing. They want to raise rates now, or at least signal that they will begin to do so soon. Note there have been a number of speeches by Fed officials of late assuring the bond market that they are aware of the problem, and that they have all the tools they need to keep inflation (and higher interest rates) at bay.

But then again, while there are signs that the economy may be picking up, it is a strange type of recovery. It is what I call a statistical recovery. Let’s look at this litany from my friend David Rosenberg of Gluskin Sheff. He notes that there are measures of economic health other than the stock market and GDP. To wit:

Wow. 18% of personal income in the US is now from the US government (also known as taxpayers, current and future).

If you take away the punchbowl too soon, you risk strangling a very shaky recovery that is significantly dependent on stimulus spending, which is going to rapidly go away the second half of this year. Further, the Fed situation is complicated by the fact that taxes are highly likely to go up in 2011 (maybe the largest tax increase ever), which will put a serious strain on the economy.

I think the Fed is on hold throughout 2010 and well into 2011, as they see what effect the tax hikes, coupled with decreased stimulus, bring. Next week we will explore the potential effects of the tax hike on the 2011 economy. Stay tuned.

Let me ask for a little bit of help. I am trying to find data on the potential tax increases, and what I am finding is all over the board. In fact, I had intended to write about that topic this week, but simply don’t trust the numbers I am reading. If you have a source or RECENT paper, I would love to see it. Thanks.

Dallas and Thoughts on the Economy

What started me thinking about tax increases was the problems that so many people I know personally are having, including my kids. It is difficult watching your kids struggle with fewer work hours, the need to make car payments and buy diapers. For many, it’s cuts in pay, lost jobs, and more. Lack of health insurance is often a worry, too.

And knowing it could get worse is rather sobering. Trust me, I see the human side of the need for health-care reform, but also balance it with the need for some fiscal responsibility. We have $38 trillion in unfunded Medicare liabilities. How can we add more? Does anyone really believe that this bill being offered will actually cut spending? How do you cut Medicare by $500 billion when it is already so underfunded? Really? But what about kids and families with no insurance? Something better than what we are seeing is needed to get the problem solved. More on this next week.

I will be a panelist in the inaugural “America: Boom or Bankruptcy?” summit to be held in Dallas on March 26. There will be five of us, presenting problems (plenty of those!) and possible solutions. This promises to be a no-holds-barred, full-throttle event. It should be a lot of fun. Details at www.fedfriday.com.

It’s time to hit the send button. I have kids coming to the airport, and I want to be there. Spring break and all, and I look forward to it. Have a great week.

Your worried about the kids analyst,

John Mauldin John@frontlinethoughts.comCopyright 2010 John Mauldin. All Rights Reserved

You cans ee what Professor Black warned about a year ago on PBS here.

Hat tip New Economics Perspectives

“I don’t want to protect institutions that are engaged in essentially speculative activity. The danger has been vastly increased by the reaction to the crisis where everybody was getting saved, to exaggerate a bit, whether they were banks, nonbanks, whether they were engaged in speculative activity or not. If they were big they got saved.”

-Paul Volcker, former Federal Reserve Chair

> Reuters takes a fascinating look at Paul Volcker in the delightfully titled Cheap cigars, politics and the Volcker Rule.

“I don’t want to be inhibited in what I say,” he said. “I’ve been inhibited all my life. It’s time to be uninhibited.”

No one would accuse him of holding back. Volcker has criticized what he calls the “reform lite” of congressional regulatory reform proposals. And he has kept a hectic travel schedule that belies his age, in Canada one day and Germany the next, as he seeks to drum up international support for a revamping of the financial system.

The people who know him best say outspokenness is part of the package. “He doesn’t temper his remarks as much as he might have in the past,” said his daughter, Janice Volcker Zima. “In his view, he’s old and it doesn’t matter anymore. He thinks (the risk of another crisis) is really dangerous and people need to do something about it.”

Friends say the former Fed chairman was surprised when Obama named the Volcker Rule after him. The president’s fiery, anti-Wall Street rhetoric in the Diplomatic Reception Room in January catapulted Volcker into the role of populist hero.

Well worth a few minutes of your weekend . . .

>

Source: Cheap cigars, politics and the Volcker Rule Caren Bohan and Kristina Cooke Reuters, Mar 12, 2010 EST http://www.reuters.com/article/politicsNews/idUSTRE62B2YN20100312

Video footage showing Aston Martins definitive sports car the One-77, undergoing extensive testing in advance of the first customer deliveries beginning later this year.

According to the CFTC data for the week ended Tuesday, net shorts again went to a record high in the euro after last week’s modest drop. Net shorts in the pound fell a touch from last week’s record high. In contrast, net longs in the Canadian $ rose by 60% to the most since Nov ‘07 and net longs in the Australian $ rose 26% to a 7 week high. Net longs in gold rose for a 4th week, up slightly. Net longs in crude rose to a 7 week high.

Visit msnbc.com for breaking news, world news, and news about the economy

Your weekend reading assignment is this terrific long form piece by Senator Ted Kaufman, titled Wall Street Reform That Will Prevent The Next Financial Crisis.

I do not know anything about him other than to say that he understands the recent crisis and is proposing reasonable fixes.

The Senator wants to restore Glass-Steagall, and repeal the Commodity Futures Modernization Act of 2000. He supports the Volcker rule and is against TBTF. He favors cutting the behemoth banks down to size, and wants to give a “too big to fail” resolution authority to a single entity.

That’s a good start as anything else floating around D.C. . . .

>

Source: Wall Street Reform That Will Prevent The Next Financial Crisis Senator Ted Kaufman March 11, 2010

http://kaufman.senate.gov/press/floor_statements/statement/?id=aca5b91a-6e51-4d6b-a367-414ad9641500

WALL STREET REFORM THAT WILL PREVENT THE NEXT FINANCIAL CRISIS (PDF 163.7 KB)

"Every once in a while you must go to cash, take a break, take a vacation. Don't try to play the market all the time. It can't be done, too tough on the emotions." - Jesse Livermore

In the wisdom of Livermore, I'm out of here for a couple of weeks until Monday, March 29th. Until then, be well.

Almost a year ago I asked members to submit the ticker of a stock they think would bring investors the most luck over the coming year. I remember at the time receiving more than a few emails suggesting I was being ridiculous for asking such a stupid question with the market and economy doomed.

Remember those wonderful days?

Nevertheless, the Lucky Charms Portfolio we put together last year was indeed very lucky. Here's the performance as of this morning:

The member who submitted the best performer overall will receive a nice gift next week!

From time to time we put together portfolios of this nature so that we can share our best ideas with each other. In fact, we'll be updating this lucky charms portfolio this coming Thursday. If you'd like to participate, please consider joining us. In addition to having access to portfolios like this throughout the year, I provide a lot of good stuff that will be helpful to you.

In law school when I started trading actively on a full-time basis, I had little money and lots of interest in the market. In order to continue to improve myself and learn to be better, I had to find creative and fun ways to test myself. I simply could not afford to lose any money because I had so little of it to begin with!

Fortunately I become close friends with several other newbie traders early on who were in the exact same position as I was - i.e. lots of interest and desire to learn to trade but very little capital to learn with. That forced all of us to be extremely creative during the beginning years. Looking back at now, that was also one of the best things that could have ever happened!

Almost every week we would figure out some sort of side game to play concerning stocks and the market. Whether it be how many days until a certain stock managed to break out from a trading range to when the market itself crossed a specific moving average. Each week would be something different and would present a fun test. The loser from the prior week would select the side game to be played the following week so it made for a fair competition. And, in case you were wondering, we never once put money on the line in these games.

Only our pride was on the line.

Given how competitive in nature we all were (and still are today), the weekly contests have been a fun opportunity even when I was the big loser which happened more often than I would like to admit. As payback, I've had to do some really crazy things over the years after losing. My two personal favorites required me to eat a pickled pig ear (which I gagged) and playing in a golf tournament I had paid big money to play in while dressed only in pink clothing (pants, hat, shirt, socks, bag, etc.) with people I didn't know. You can imagine the embarrassment! Others in the group have been forced to skydive, run in marathons, jump in a lake on a cold winter day, serve as an unpaid volunteer for the political campaign the loser hated the most, shave off all of their hair, etc. In picking the punishment, we'd usually focus on whatever the person would fear the most and it was sure has been fun watching last week's loser squirm when they lost!

To this very day, I continue to play those same games with the group of guys I started doing this with over 12 years ago. Although, I must confess that as each of us has grown older and the payouts have become far less painful or interesting (because we're getting older and we now live in different areas of the country making it difficult). But, it is something we continue to do even though capital is no longer an issue for us now. Most of the guys in the group now manage money professionally or trade full-time independently and have become quite successful (two are already retired). In a recent gathering, most of us attribute it to the fact that we "made it fun" early on and enjoyed what we do much more than making money.

So with that in mind, I really encourage you to find and explore new and creative ways to make trading and investing fun especially with others who share similar interests. While this is a zero sum game in many ways and making money is a serious business, if you can learn to enjoy the game more than the bottom line, I think you will give yourself a greater chance of long-term success. Surround yourself with people who enjoy and revel in the challenge and you'll raise your own game to new heights.

Dave Landry from DaveLandry.com will be here at 12:PM EST to take our questions.

To attend the session live (or read it later) please visit the following link:

Strategy Session: Dave Landry

It is difficult to believe that it has been almost an entire year since our excellent Q&A with Dave. That was one of the more popular Q&A sessions last year (take time to read it if you haven't already) and it will be fun to have him here again today.

We hope you will find time to join us!

We certainly have been enjoying the Olympics and watching the competition. Although my wife and I are not huge sports fans (you can occasionally find me watching the golf channel but that's it), the Olympics is special because you can become inspired by the personal stories of amazing amounts of sacrifice and dedication so many athletes gave in order perform at their very best.

This year we especially enjoyed the story of speed skater Apolo Ohno who talked about the struggles he had with his father as a child. Ohno shared a personal story that when he was a young man his father took him to an isolated cabin and left him there for a week by himself to "think about and figure out what he wanted from his life." Apolo now believes that his father's actions laid the foundation for his incredible success.

Knowing what you want out of life is certainly the first step. But the second step, making the sacrifice to make it happen, is even more important. Many people express the desire, but when it comes to actually making sacrifice that truly hurts, it is entirely different matter. Which is why these athletes are so inspiring!

Earlier this morning the good Doctor provided a link to an article that offered the following quote:

"First, you decide what you want specifically; and second, you decide if you're willing to pay the price to make it happen, and then pay that price." - Nelson Bunker Hunt, Texas Oil Billionaire

What a terrific quote and, if you had the opportunity to get to know every successful athlete in the winter games, you would find out that each one went through this process. And, most importantly, they made lots of sacrifices and took many risks to make it happen.

The same is true with every single successful trader. While so many in this business want others to think it is easy for them, that they've somehow become smarter than the market, and/or that everything they touch easily turns to gold, the truth is that those who are successful work really hard and constantly make enormous sacrifices to improve themselves so they can perform at their best. They know from experience and the battle scars they've earned over time, how truly difficult it is to do consistently well in the market. And more importantly, they understand what it takes for them to do their best AND they make every sacrifice they need to in order to make it happen.

In the many years I've been blogging online about the market, I've learned that while many have the desire to be successful in the markets, when it comes right down to it they don't fully understand and appreciate that they must also make tremendous amounts of sacrifice to achieve the goals they've set. Much like Apolo Ohno's father, there are many times I would very much like to put readers of this website in a cabin for a week and tell them to figure out what they really want (and if that includes trading successfully) before they come out. Then, when they say they know and are ready to leave, I would ask them a simple question - "Ok, now I know what you want, tell me what you are going to sacrifice to make it happen?" If they didn't have a good answer for me, I'd send them straight back into the cabin until they had an answer.

In spite of everything you may wish to believe, those who achieve great things in the market or in life, sacrifice greatly. So, I ask you, what are you willing to sacrifice today, tomorrow, and every week that follows to achieve your goals whatever they may be? Without sacrifice, you'll never fully reach your full and great potential.

All of you who read this have dreams and the potential and talent to make those dreams a reality. I sincerely believe that. I wouldn't be doing what I do and working hard to share what I share if I didn't truly believe that with all of my heart. But, it will require sacrifice. It will not be fun. And, it will hurt. But, that is the price you must pay for success. The same as I have and the same as any other successful trader has each and every day.

Jeff Pietsch from ETF Rewind will be here at 12:PM EST to take our questions.

To attend the session live (or read it later) please visit the following link:

Strategy Session: Jeff Pietsch (ETF Rewind)

As a fund manager for Maple Park Capital and fellow blogger at Market Rewind and the man behind the ETF Rewind service, I'm excited to have Jeff participate in today's strategy session. For more background about Jeff, please visit LinkedIn. We hope you will find time to join us today!

On the 10th day, Uncle Russ ran out of luck.

Everything that seemed to be working in the bulls favor was absent in today's session. And, frankly, even the most novice of chart readers can probably easily see the head and shoulders formation starting to form on the daily.

But, just like one day doesn't make a bull market, a one day pullback following two weeks of gains doesn't either. We'll need to see fledged beat down as today's action only pulled us back to the bottom of the upward trend channel. If you're going to catch and trap the bulls and the "buy every dip" momentum chasers, we will have to see a lot more pain than this. A lot more!

Read more of my after-hours report.

A few to review over the weekend...

Weekend vantage points (TraderFeed)

What's on tap for next week? (MarketBeat)

The state of the market for Monday (MarketSci)

Is this a bull trap? (DecisionPoint)

The up correction now will be limited and possibly already completed (Vervoort)

The chart pattern indicator still flashing green (PatternSite)

5 reasons to feel positive (MillionaireNow)

Still no 10% correction (Dshort)

It's not different this time (Rosen)

Right now the market is talking to us. Are you listening? (TradeKing)

The market is a cruel mistress - especially for the long term memory impaired (EvilSpeculator)

Watch that downtrend resistance (Dshort)

In case you were living on another planet, major indicies back above their 50 day ma (Bepoke)

Don't fight the Fed? The historical effect of the first rate hikes on the market (TradersNarrative)

What is the difference between the discount rate and the fed funds rate? (KathyLien)

Bulls charge past Uncle Ben (ETFdigest)

Watch those darn credit markets (FinancialSense)

Can the bull market put on some muscle? (Barrons)

The case for being bullish (JasonTrennert)

As the market rips higher, the bears give up and go positive (HarryNewton)

When the next wave of selling hits, you won’t have time to place orders (1Option)

Why the correction isn't over (BI)

5 factors that could rescue U.S. stocks (MoneyMorning)

Love the stimulus? Then you are really in luck! (BI)

More stimulus is needed to avert double-dip (GuruInvestor)

Economic momentum may have already peaked? (PragCap)

Surging earnings (ChartOfTheDay)

EconomPicks of the weekend (EconopicData)

Weakest inflation since 1982 (CrossingWallStreet)

Strong rebound? Not in rail traffic (MarketTalk)

A reversal in fortune in the ECRI leading indicator (Ritholtz)

Three reasons why is the copper ETF soaring (ETFdb)

How Americans view their strengths and weaknesses (Gallup)

Why are Americans are so angry? (NewYorker)

A parable about how one nation came to financial ruin (Slate)

This time is really different - debt doesn't matter and the Fed is always right (Rosen)

Asinine assumptions abound in turbulent times (TreeceReport)

Would you rather be Greece or California? (LAT)

History doesn't repeat exactly, but.... (Ritholtz)

Three ghosts of bear markets past, redux (Greenbackd)

After a recession, all sectors don't recover equally (Ritholtz)

Percentage of stocks above 50 day moving averages (Bespoke)

Weekly sentiment overview (TradersNarrative)

Investor sentiment is in bounce mode (TechnicalTake)

The equity culture's demise has been greatly exaggerated (ReformedBroker)

Americans doubt theri stock-market savvy (CNBC)

Charles Gasparino's account of the credit crisis (PrivatePortfolio)

Number-crunchers crunched (Economist)

Ghosts in the machine (FT)

10 lessons not learnt (GMO)

Where are the client's yachts RBS? (NYT)

Bank reform and the future of Wall Street (PBS)

Selling out America to Wall Street (EconomyInCrisis)

A quick look at household balance sheets (Ritholtz)

So, will luxury spending save the economy? (Portfolio)

Welcome to the General Motors economy (WSJ)

Currency trading is place to make your fortune (Bloomberg)

High yields aren't always a good thing (WSJ)

Is gold a crowded trade? (Ritholtz)

Metals remain attractive for good reason (SmartStops)

Tepper's Appaloosa goes long airlines (MarketFolly)

Where the true values are usually is where the momentum is not (GuruInvestor)

3 macro themes (Hedgeyeblog)

Hedge funds dislike U.S. equities, but really hate the euro (MarketFolly)

Big hype for Bloom Energy's new fuel cell (Fortune)

A comparison of government finances and the economy between China and the U.S. (TFS)

Prepare for a Chinese currency revaluation (SeekingAlpha)

10 reasons to invest in Chile (TFS)

Can game theory predict when Iran will get the bomb? (NYT)

Rightnow is a play on cloud computing (InvestWithAnEdge)

What debt free stock yields over 16%? (StockerBlog)

Chart pattern setups for the weekend (PatternSite)

Stocks with healthy bases (Downtowntrader)

Best and worst performing stocks on earnings (Bespoke)

Low-priced stocks with attractive valuations (ValueExpectations)

Stocks primed for shorting (SharePlanner)

10 dividend kings (DivdendGrowthInvestor)

Over 35 stocks with tax free yields above 7% (StockerBlog)

10 biotech stocks facing FDA approval (TheStreet)

3 stocks that seem oddly cheap (SmartMoney)

8 stocks you should know about (TradeRadar)

Screening for utes (WinningInvesting)

Livermore active issues index (CSSanalytics)

13 symptoms of a bad stock trader (WildInvestor)

4 skills every trader should master (TradingMarkets)

How to project price targets from triangles (AfraidToTrade)

Using the detrended price oscillator (StockCharts)

Has anyone had success using equivolume other than Dick Arms? (StockCharts)

However, I do find Bollinger Bank %B helpful (StockCharts)

Stop using 60 minute charts (Alphatrends)

Use MetaStock? Vervoort's free formulas (Stocata)

Should you reconsider re-entering trades that have stopped out? (StockTickr)

What to do when a company misses earnings? (MarkMinervini)

Yes, the trend is still your friend (TradersNarrative)

5 key components to your success in the market (Marketclub)

Understanding your trading psychology (Optionetics)

Trading is not about guessing or hoping (AIQ)

The importance of using multiple time frame analysis (TradingMarkets)

Understanding what to look for in the balance sheet (InvestingCaffeine)

Understanding Vega (OptionsZone)

Q&A with John Dorfman (GuruFocus)

Q&A with Jason Goepfert (MarketHeist)

10 things I learned from Brian Shannon (SMB)

7 habits of highly ineffective investors (InvestWithAnEdge)

Lots of positive chatter over Market Rewind's rotation model (CSSanalytics)

This week in ETFs (ETFdb)

Why EQL may be a better S&P 500 ETF than the SPY (ETFdb)

Income ETFs with less risk (ETFexpert)

5 ETF targets to consider selling now (Jutia)

ETFs were wider off the mark in 2009 (WSJ)

What's the best IRA for you? (ConsumerBoomer)

Taking the time to write a financial plan is a crucial step in securing your retirement (Merriman)

The math of retirement; not good (RandomRoger)

7 things about money I wish I knew in my 20s (Quizzle)

8 things you need to know about reverse mortgages (GoodFinancialCents)

Planning your spring break? Cheap airfare links & bookmarks (MyMoneyBlog)

Booking a flight the frugal way (NYT)

The best iPhone personal finance apps (Mint)

The two best credit cards (ClarkHoward)

A side-by-side look at tax software (NYT)

How to tame taxes in your taxable account (Morningstar)

8 ways to shield your business from hackers (Open)

Thiefs tap into social networking (PleaseRobMe)

Tired of hearing others brag? Just consider the context! (DarwinsFinance)

Don't get trapped in the constant news treadmill (HedgeWorld)

What makes someone a great entrepreneur & trader (FasterTimes)

9 simple ways you can bring yourself into flow (Zenhabits)

Are you too distracted? 5 ways to manage yourself for increased productivity (FreelanceSwitch)

How to restore balance in your life (Open)

Research reveals three qualities common to people who build great fortunes (Forbes)

Pros & cons of being wealthy (Monevator)

Happiness, health, and the quality of life (TraderFeed)

"The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise." - F. Scott Fitzgerald

Pradeep Bonde from StockBee will be here at 12:PM EST to take our questions.

To attend the session live (or read it later) please visit the following link:

Strategy Session: Pradeep Bonde (StockBee)

Pradeep is one of the hardest working traders I know and his blog is one of my favorites. It will be a pleasure to introduce him to you so you can learn more about his strategy and focus. Although I've linked to many of his posts in the past, I hope you'll find this session helpful.

One of these days I'm going to set aside an entire week and just respond to every question I can! But until then, I'll be talking about the following today:

Mark Minervini's Trading Philosophy

Market Opinions As Contrarian Indicators

Using Weekly ATR Analysis

Screening For Deep Sector Values

Other Indicators That Work With ATR

Economic Indicators And Trading

Adopting Short-Term Methods

To read this post, please login.

A few thoughts to share at mid-week...

Dr. StrangeMarkets (Optionetics)

Federal Reserve declares recession over (Ritholtz)

Is that the correction? (GaryKaltbaum)

What constitutes as a market correction? (dshort)

We're going back to the highs (SamStovall)

Advisors are in a funk and that's a good sign (MarkHulbert)

We are the world (DougKass)

Looking at the Fed's exit strategy (CrossingWallStreet)

Three walls of worry (Jutia)

Deficit hawks want new recession (Ritholtz)

Investors increasingly giving up on hyperinflation bets (BI)

5 trends for a weaker recovery (PragCap)

Expectation ratio hits 2010 low (PragCap)

Updating S&P 500 earnings forecasts (PragCap)

Why the coming recovery will hurt like hell (Newsweek)

The not-so-quiet riot (Minyanville)

The Yin Yang Cycle (TFS)

Where are we in the bubble process? (PragCap)

Cycle-logical (MarketSentiment)

Analyzing four big-cap market leaders (Minyanville)

Indicators to watch (DisciplinedInvestor)

Three black crows (AIQ)

Trusty chart pattern indicator turns bullish (Bulkowski)

Put this kiss on your list (TradeKing)

Think austerity (ReformedBroker)

Housing lobbyists roll out their heavy artillery (MillionaireNowBook)

5 million more foreclosures? (Ritholtz)

Restaurant stocks serving up tasty gains (Barrons)

Just what is the real level of government debt in Europe? (FistfulOfEuros)

Which countries have the biggest problems? (ETFdesk)

Citi's CEO should go undercover (TheStreet)

Everyone wants to know what David Einhorn is up to (MarketFolly)

As well as Mohnish Pabrai (MarketFolly)

The best bank stocks (TFS)

The new safe havens (FT)

6 charts showing bullish signals (WildInvestor)

4 bargains emerge (Dorfman)

Top magic formula stocks by dividends, price-to-sales, & price-to-book (MagicDigilence)

Best and worst performing stocks YTD (Bespoke)

Backtesting Graham screens (OldSchoolValue)

Free online tools help to sift wheat from the chaff (GlobeAdvisor)

Listen up - a lesson in inventory analysis (MarkMinervini)

Using technical indicators vs trading based purely on price and volume (Tischendorf)

Evaluation of momentum oscillators (TradingTheOdds)

Follow the flow through channels (Esignal)

Applying Black Jack principles to intraday trading (TradingMarkets)

What can traders learn from Olympians (CSSAnalytics)

Trading to win vs Trading to NOT lose (TraderFeed)

Testing the vortex indicator (ATS)

Do you use practice drills to improve your trading? (TraderFeed)

An interesting review of Lussenheide's Basic Timing Strategy (CXO)

If it sounds too good to be true - it probably is (EconompicData)

The top 25 ETFs on U.S. markets (IntelligentSpeculator)

5 little known secrets of ultra-popular ETFs (ETFdb)

ETF price & volume changes (PrudentTrader)

Weekly TCA-ETF Rankings (DashOfInsight)

Duh. Bad market timing eats away at returns (Morningstar)

Clark Howard's investing guide (ClarkHoward)

An automatic asset builder (TRowePrice)

Morningstar lifetime allocation indexes (MyMoneyBlog)

Some mutual fund fees higher than thought (NewRulesOfInvesting)

7 financial moves to make in your 20s (MoneyNing)

Tips on teaching kids about money (TreesFullOfMoney)

Trade better with Feng Shui? (AbundanceTapestry)

Five ways to make change easier (Open)

It's about time. Find a doctor and book online (ZocDoc)

Hawaii tops Utah for nation's best in well-being (Gallup)

A trader who retired early (MeatballEffect)

What it really takes to be great (Fortune)

"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong." - Bernard Baruch

We now know the answer to how many days it would take to reclaim the 20 day moving average in the S&P 500:

Last Wednesday I started a contest asking for people to submit their best guess to how many days longer the S&P would stay below its 20 day moving average. With today's strong advance, we totaled 18 days which is well within Jeff Saut's "selling stampede" concept and one day before I thought we would do it (I guessed 19 days last Wednesday).

As such, it turns out I was the winner in the contest as I was the closest among 28 people who submitted their best guess with the median guess coming in at 32 days below the 20 day ma. Clearly, this up move was not something the majority expected last week which is also why we saw it happen.

Please login to read the rest of tonight's report.

Earlier this week I asked members to submit the name of the stock that they thought would be the largest heartbreaker between this year's Valentine's Day and the next.

As typical with prior years, I received fewer responses in this poll than any other I do throughout the year. My guess it has something to do with the fact that this is the only time of the year I ask for names of stocks that members think will go down and lose money for their shareholders.

If that doesn't say something about the general tendency for people to only think in terms of what is going to go up, I don't know what will. In fact, in casual conversations I have with others (especially those who don't know what I do for a living) I enjoy asking people to tell me their favorite short sell idea. More often than not I receive a blank stare while those same people are always more than happy to share the name of a stock they think is going to be the next Google! When the market comes up in conversation with friends and relatives, try doing the same thing as I do and see what happens!

For this year, 42 "heartbreaker" stocks were submitted. They are Apple (AAPL), Accelrys (ACCL), Agnico-Eagle Mines Ltd (AEM), AIG (AIG), Amag Pharmaceuticals (AMAG), Amazon.com (AMZN), Aeropostale (ARO), Boeing (BA), Baidu (BIDU), Coeur D'alene Mines (CDE), Concur Technologies (CNQR), Capital One (COF), Cree (CREE), Dex One (DEXO), New Oriental Edu And Tech (EDU), Green Mountain Coffee Roasters (GMCR), Google (GOOG), Garmin (GRMN), Goldman Sachs (GS), Hsbc Holdings (HBC), Internet Gold-Golden (IGLD), Isramco (ISRL), JPMorgan Chase (JPM), Kimco Realty (KIM), China Life (LFC), Elong (LONG), Medivation (MDVN), OncoGenex Pharmaceuticals (OGXI), Overstock.com (OSTK), Pfizer (PFE), Pinnacle Airlines (PNCL), Radian Group (RDN), Research In Motion (RIMM), Solarfun Power (SOLF), SunPower (SPWRA), Terex (TEX), Tenet Healthcare (THC), Toyota(TM), Trina Solar (TSL), Vertex Pharmaceuticals (VRTX), W Holding Company (WHI) & Wynn Resorts (WYNN).

However, please note there were 6 stocks that received more than one vote: both Apple (AAPL) and Baidu (BIDU) received 4 votes, AIG (AIG) received 3 votes, and Green Mountain Coffee Roasters (GMCR), Medivation (MDVN), & Toyota (TM) received 2 votes each. I also removed three stocks submitted that were trading under $5 per share (Sirius Xm Radio (SIRI), Zale (ZLC) & Western Refining (WNR)) from the entire list.

A couple of points here. First, it is interesting to see Toyota in this list primarily because of any company has already broken the hearts of many customers and shareholders. From a contrarian standpoint, it will be interesting to see how the company does over the coming year and whether members are correct that this will continue to be a major heartbreak. Second, also interesting to see both Baidu & Apple on this year's list again. Both of these stocks also were in last year's heartbreaker list and certainly didn't cause much heartbreak as they were both up quite a lot since last year's Valentine's Day. Perhaps this is the year, or not. We'll find out!

As always, I'll create two watchlists from this year's survey - one watchlist of the stocks receiving more than one vote (which in the past tends to outperform, or in this case, hopefully underperform) and one watchlist containing the entire list. In a year from now we'll take a look at how all of these perform and I will award a nice prize to those who submitted the worst performer.

Good luck to the members who submitted their favorite heartbreak stock this year!

I love the scene in the television show The Office when a woman standing in a long line asks Dwight Schrute to hold her place behind him because she has to go and use the restroom. "No!" he replied. "Did you grow up in a household without consequences?" After looking back at him with a mixture of both disbelief and disgust, Dwight then explained to her that he had taken enough time to go to the restroom BEFORE getting in to the long line and she should have done the same.

Those of us who follow the rules whether it be in life or trading, can sympathize with Dwight, especially when dealing with other people who don't follow the same rules you think are important and who impact you in some negative way.

I was thinking about that this morning after a few things happened this week that illustrate again that not only do most people break the rules (even the ones they set for themselves in trading) but that most don't spend a single moment thinking about and considering the potential consequences that could follow BEFORE those rules are broken. And, I think that's an important point.

The truth is that as traders and investors, we all set rules for ourselves to follow whether we are conscious of it or not. Most of us in fact do a pretty good job of following those rules and, of course there are rare times the rules must be broken. No rule will work perfectly in every type of environment which is why some of the best traders out there are those who learn to be flexible when the environment demands it. A combination of skill and experience will help you know when those rules are not working to your advantage.

But, in those traders who are flexible and successful, you'll often see something very different which is that they also make absolutely sure that when they do violate their own rules, that they've taken enough time and have properly considered all of the most probable consequences both good and bad that could follow before violating that rule. They don't simply say, I'm not going to follow my trading rule today and at the same time not fully understand the potential consequences that could follow from doing so. As many of you have already discovered, that's a terrific way to get into a lot of trouble.

I've learned over time that when I am contemplating breaking one of my own rules (like chasing a stock that doesn't fit my low/risk high/reward strategy for example) I also require myself as a matter of habit to stop, think, and quickly outline the probabilities of what could follow if I break or abandon my rule. In doing so, more often than not, by considering those consequences, I'm reminded why I set the rule in the first place and just simply follow the rule. In fact, it is often much easier that way. But, there are rare occasions, where after I go through and outline the consequences that when I consider everything, I think the rule should still be broken in that particular situation.

Learning when that is the case is an important element of being a successful trader. In fact, it is often in the rule breaking and subsequent tracking of the consequences that follow from it that you learn more about who you really are and how to become more successful in the market.

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Yesterday was a session of divergence among the major indices, as the Nasdaq cruised to a solid gain, but the Dow spun its wheels.  read more »