It looks to me that we have had our dip and like several dips before it, the S&P 500 will return to the 1,150 level, which should happen sometime next week. Right now after six straight up days all three averages are overbought and prices are extended but that condition can last for some time. As I’ve said before, if the markets do pull back and you have money to invest, invest it.

Friday’s better than expected job report was the trigger that sent investors back into the market with renewed conviction that the economic recovery is on course. In addition, the Federal Reserve’s policy of low interest rates continues to provide a floor under the markets. In the meantime, debt-ridden Greece survived a crucial test when it raised $6.85 billion in a bond sale this week. Although analysts still believe there may be difficulties ahead, the successful bond auction puts much of the risk of sovereign debt default behind us.

Clearly, the good news on the economy continues to mount. Consumer spending has been the lynchpin of economic growth in this country since WWII. Given the drubbing the Man from Main Street has taken over the past two years, I am surprised that the consumer is managing to both save while beginning to spend a little in 2010. In the first two months of the year the consumer has begun to shop, despite February’s terrible snow storms, and from the data, appears willing to buy spring merchandise at almost full price. So after spending most of 2009 in the trenches, the consumer appears to be returning to a more normal spending pattern.

Given the data and this week’s market action, my overly-cautious stance that the markets might resume their decline and test the 1015 -1,035 range on the S&P was just plain wrong. I will bow to the tape every time and let the realities of the market dictate my next move. My mistake was not recognizing that the 10% decline we’ve had since the beginning of the year was about as deep a correction as we were going to get right now.

Still, better safe then sorry, I always say, especially after a 60% rise in the stock markets over the last year.
So now what? Obviously, we march higher, at least to 1,150 where the markets began their latest dip. That’s only 16 points away. It would appear logical that we have a bit of profit taking at that point. The S&P should continue higher after that, toward my next target of 1,200 on the Index. We may experience yet another dip that may be even deeper at that point. But we’ll worry about that when the time comes. For now, don’t fight the tape.

Specifically, the program provides incentives for homeowners to make energy-saving improvements, like winterizing, and receive point-of-sale rebates when purchasing insulation materials at hardware stores and dealers. Up to $1,500 is available in these so-called ‘Silver Star’ rebates for piecemeal home improvements. The Obama administration is hoping that this will provide enough of an incentive for me to insulate my attic, replace a water heater and fix or replace several drafty windows and doors that I’ve been meaning to fix.

For those who plan a more comprehensive retrofit of their homes, the government will provide up to $3,000 (and potentially more) for a home energy audit, insulation materials and installation. The incentives are tied to overall reductions in energy usage. Additional rebates for energy savings in excess of 20% could also be available. For example, a 20% reduction in energy output could be eligible for as much as $3,500 in rebates, with each 5% of additional energy savings adding $1,500 in incentives.

But the government would fund no more than 50% of any project’s total cost. Naturally, the government is not just going to take your word for it when it comes to these energy savings rebates and what you spent.
“We suspect there may be some kind of requirement that will require contractors or energy auditors to have the technological skills and qualifications to do this work,” says Alan Silverstein, Co-Director of CET, the Center for Ecological Technology, the Pittsfield-based, non-profit organization that also has offices in Northampton and Springfield.

CET carries out most of MASS SAVE’s energy services in western Massachusetts. It conducts energy audits for over 5,000 homes a year in this area as just one of their services.
MASS SAVE is an energy resource organization consisting of the state’s utilities, energy efficiency service providers and state organizations that provide a wide range of services, incentives, training and information to promote energy efficiency. It should be your ‘Go To’ site whenever you are planning an energy saving move.

In the real world, the Gold Star program of home energy improvements would work something like this:
You the homeowner would hire a local energy auditor to figure out how much energy your home wastes. Auditors use a giant fan in the doorway that sucks in outside air into the house, high lightening all the leaks in the windows, walls and doors. Then they test your appliances to see how much energy they draw. They will also check the thickness of your insulation and windows.

Once that’s done, the auditor inputs their data into a computer model that generates a checklist with everything that could be replaced, how much it will cost and how much energy savings can be expected out of replacing the old equipment or materials. If her company does all that replacement work then you decide how much work you want done and negotiate a price.

After the work is done, you pay the contractor directly. She then submits paperwork to the government agency that runs the program and you get a reimbursement check for up to $3,000 or more.

Energy retrofitting is a much bigger deal than trading in your old auto clunker. By retrofitting the nation’s homes we can reduce energy use by up to 40% per home and reduce energy bills in this country by $21 billion a year. On an individual basis it could save you $200-$500 a year. Many of our homes were built in the first half of the last century or earlier and use 50% more energy than homes built today. And in this area, energy conservation can mean big savings due to our cold winters and not-so-cool summers.

“This program will be great for adding new jobs in green energy,” says Laura Dubester, co-director of the CET.

She is right. The HOMESTAR program could also help in alleviating the unemployment rate, especially around here. You may not realize that the jobless rate in the construction sector nationwide is close to 25% and construction workers are a big part of our regional work force As I look out my office window, a swarm of Hard Hats are busily installing a new roof on a residential property across the street. Several of the laborers are part-time and hoping that this program will increase demand for new roofs within our community. Even if roofing doesn’t take off, it is not a big leap for someone handy with their hands to learn how to install energy efficient cooling and heating systems, solar panels and insulation.

So whether you’re a do-it-your-selfer or in the market for some professional help to increase the energy efficiency of your home, while at the same time cutting costs, tell your congressman that this program is just as important as bailing out yet another set of banks and tell him now.

Last Friday the Obama Administration, through the Labor Department, proposed new regulations aimed at protecting workers’ retirement savings from conflicts of interest among unethical financial advisers. The new regs would require retirement investment advisers, financial planners, consultants and money managers to either base their advice on objective computer models certified by independent experts, or refrain from steering workers into funds they are affiliated with or from which they are receiving a fee or commission.

I have written several columns lately revealing these practices which are wide-spread in this community. Most of your money managers are involved in receiving kick backs from mutual funds for investing your life savings in these instruments that have earned you little or nothing over the past decade.

This is how it works in layman’s terms. Your company hires a financial adviser to manage its retirement savings plan for a fee. That advisor will create a menu of mutual fund choices for the plan. Your company agrees and then you, the employee, will be required to select one or more funds on the menu. Then each month or quarter your 401 (k) or equivalent contributions will be funneled into these investments. What you don’t know is that the adviser usually gets a hefty kick back from the mutual funds they have selected for you and many times these funds’ performance is mediocre at best.

A recent statement from two congressman George Miller, D-CA., Chairman of the House Education and Labor Committee, and Rob Andrews, D-NJ., chairman of the pensions subcommittee, summed it up better than I could.

“All too often, the worst-performing products with the highest fees and best commissions for financial service firms have been pushed by Wall Street on our nation’s workers.”

The only negative in this proposal is that it does not go far enough in my opinion. If passed, this regulation would only apply to your company’s tax-deferred retirement plan and still allow money mangers, planners and brokers to continue to use and benefit from this same kick back scheme when managing your individual accounts and IRAs. Remember too that this kickback is in addition to what they are already charging you in fees and commissions. You will never see this additional fee, called 12b-1 in your statement either. It comes right out of the price of your investments.

“But my company doesn’t charge me anything for my 401 (K),” protested a local woman who retired two years ago from a large area employer. “That’s why I haven’t rolled it over into my IRA.”

After analyzing her performance and the implicit fees involved in holding her particular set of investments, I gave her the bad news.

“You are paying an average of slightly over one percent in hidden fees to those mutual funds each year,” I explained, “and in return for that fee, those same funds lost you 35% of your retirement savings over twenty years.”

Needless to say this information was a shock to her. I know many of my readers out there are in the same boat. Hopefully, this proposal will pass, although I can tell you right now, many financial services firm in the country will be spending as much as they can to kill this bill before it sees the light of day. Don’t let them!

That does not make me a bear, just short term cautious, and I still think that a further decline to the 1,015-1,030 range of the S&P presents readers with a buying opportunity. Once we reach that level, I think the markets rally to a new yearly high around the 1,200 level.

For long-term investors, these mini-corrections should not matter at all, unless you have some cash to invest. For example, I have had the good fortune of closing several new clients over the last two months. The short-term market top at 1,150 on the S&P and this subsequent correction has allowed me to sell some stinkers in their portfolios and hold the cash on the sidelines. If the market declines from here, I will begin to deploy that cash in sectors I believe will lead the markets higher into the spring.

The fundamentals of the economy are improving but that does not mean investors can expect a continual stream of upbeat numbers every week. Recovery, as I have often said, is a process with positive numbers (like this week’s revised fourth quarter GDP growth of 5.9%) followed by disappointment, such as home sales in January which fell 7.2%. In any given week, we will see these kinds of contradictions until the recovery kicks into over drive. Right now we are still changing gears and you should expect some starts and stops during that process.

At the company level, over seventy percent of earnings reports beat estimates but those results were discounted going into earnings season. It will be several weeks before traders begin to focus on first quarter earnings. In the meantime, there are enough unknowns out there (Greece, the Euro, China, the direction of interest rates, etc.) to maintain downside pressure on the averages. It appears that we are in a trading range with the top of that range around 1,112 on the S&P 500 and, so far, the bottom around 1050 with a bias to move lower.

This digestion period, in my opinion, will be good for stocks. It will take some of the froth out of equities, allow investors and traders alike to regroup and square valuations with fundamentals. It will also allow future economic data to catch up to the lofty level of the market.

Let me first recognize the economic benefits of snowfall to our winter resort businesses. As a former snow board and ski instructor, I noticed that when it snowed during the week in the Northeast, the slopes were packed on the weekends. The ripple effect on lodging, restaurants, gas stations, convenience stores, sport shops and countless other enterprises is well-documented in the region. The only issue is when it snows too much and visitors can’t get to our ski slopes. That might happen this weekend.

Most experts tally the expense of snowstorms by calculating the cost of snow removal. For us up here in the Snow Belt, those costs are low compared to Washington, D.C. or Manhattan, where labor costs are much higher. In Massachusetts, upstate New York and Connecticut our entire infrastructures are built around the removal of snow. Our costs begin to increase when storms are especially destructive like this one.

By some miracle our power is still on, although all around us trees are down and so are the power lines. Work crews can’t even get to the problem areas because of the snow -choked roads. Repairing those lines, removing trees and other obstacles is going to take a lot of work and even more overtime. That is going to hurt local budgets and increase costs. As roads, bridges, roofs and other structures collapse under the weight of the snow or are blown down due to high winds, insurance costs will also mount. The blizzards of 2010 could cost the nation close to $2 billion. Locally that number could be in the millions.

Much has been written about the cost of lost productivity as people are forced to stay home or simply use the weather as an excuse to take a “snow day.’ One enterprising analyst at the Financial Forecast Center figured out that in February the nation’s daily GDP averages about $646.27 billion a day. The 17 states that were hardest hit by these storms account for 38% of the U.S. population. He assumes that if just 20% of workers don’t show up for work today it will cost America $48.8 billion in lost productivity.

The author admits that number is high because of people like me. Just because I couldn’t make the commute to the office in Pittsfield doesn’t mean I’m not working. I’m sitting here writing a column. If I have time after this, I will continue working on a proposal to a non-profit organization that is interested in our money management services. At the same time, I am monitoring every move in the stock markets via computer. In fact, there is no pressing need for someone like me to actually go to an office in order to work as long as the internet is working and I have power. Here in the Berkshires, a large number of small businesses and individuals work from home. As a result, the weather is less of a factor in terms of productivity.

There is even an argument that blizzards like this provide some modest positives for the economy. Think of all the money small businesses like snow plow entrepreneurs are making right now. The added overtime and additional part-time work local governments provide workers in times like this are like mini-stimulus packages. Some of this sudden worker wind-fall money is surely going to be spent tonight for a few beers and maybe dinner at the local bar or restaurant. In fact, most of this extra money will quickly find its way back into the local economy.

If it makes you feel any better, we handle severe snowstorms far better than many other countries, take China for example. Last month, winter storms in southern and central China lasted several days. At least 50 people were killed, economic losses were well above $3 billion, more than 100,000 houses collapsed and 400,000 more were damaged. The roads werein shambles with one 40 kilometer stretch of highway clogged with 11,000 vehicles. The railroad system was not better. At one train station in Guangdong Province, 600,000 passengers were stranded and 2,500 police were dispatched to prevent riots.

So on the bright side, the Berkshires is better situated than most to weather these storms economically, which, I must admit, gives me little comfort as I shovel my deck for the third time today.

Let’s face it, thanks to the 2008 financial crisis and bail-out on top of two continuing wars in the Middle East, plus Congress’ refusal to curb spending other than in lip service, raising taxes is the only way out of our dilemma. It would have already happened, were it not for the recession and double digit unemployment. But as soon as the economic numbers start to perk up consistently and employment starts to rise, watch out.

If you have been reading the data, you know that the federal deficit hit $1.4 trillion in 2009, the highest since WW II (9.9% of GDP) and will be even higher than that this year. Economists are predicting that the nation’s debt will account for a whopping 10.6% of GDP in 2010.

Historically, large deficits are reduced to more manageable proportions (3% of GDP) fairly quickly once the economy begins to recover since tax collections rise as businesses return to profitability and our incomes rise. The problem this time around is that no one is predicting the usual robust growth experienced in past recoveries. Instead, economists are predicting sub-par growth for the next several quarters, if not years, as consumers repair their own balance sheets and the financial sector deleverages.

Just today President Obama signed an order to establish a bipartisan commission to find ways of reducing our burgeoning deficit. Last month, he attempted to convince Congress to do the same thing but they rejected the idea out of hand. Most members of Congress saw right through the president’s tactic and wanted nothing to do with it. Republicans calling it a Trojan horse and a ploy to enlist their party in acquiescing to a tax hike in an election year. Democrats, although usually labeled the “tax and spend: party,” are wise enough to know that if you plan to raise taxes you don’t do it in an election year.

The timing is also interesting since the recommendations, which are non-binding, won’t be released until the end of the year, well-after the November elections and won’t even be discussed until the new members of Congress are in place in 2011. By then, Congress, if they go along with the sure-to-be recommended tax hikes, will have two years to justify the increase before re-elections.

Clearly, the deficit is just too big. It would be unrealistic to hope that lawmakers will suddenly find religion and cut spending to the point where it would have a serious impact on our national debt. Sadly, there are just too many ‘sacred cows’ in the spending side of our national budget to rely on the spending route. Raising taxes is the easier, more expedient method, one that our country has always used to balance the budget. It will also be a risky maneuver, since taxes have a way of dampening economic growth. If the economists are correct in predicting a slower, more moderate recovery, raising taxes at the wrong time could short circuit the recovery. That would be a big negative for everyone involved.

The short answer is because I can afford to be. Since advising a defensive posture prior to the drop from 1,150 to 1,044, I had the luxury of buying at lower prices as the markets declined. I still have some cash available in case the market suddenly decides it wants to go lower. In truth, I expected the S&P to bottom out somewhere between 1,015-1035. So maybe I was a bit too bearish but better safe then sorry. And I still have some lingering concerns. Hopefully, they will be put to rest once China opens for business after its week-long Lunar New Year.

Over the last few weeks, China has been implementing various actions to slow the growth of its over-heating economy. It has not played well on global markets since many countries are depending on Chinese demand to boast prices of various materials and other commodities. There is also talk that at some point this year, China may allow its currency to strengthen. So I’m going to wait just a bit longer and see what happens in China next week before I give the all clear. In the meantime, regardless of whether there is more or less short-term downside, the next upside target for the S&P 500 is around the 1,200 to 1,235 level. The growth in the economy appears to justify that move up.

“Í think 2010 will be better than many people expect,” said Ron Insana, the CNBC senior analyst and commentator, who spoke at the Berkshire Job Summit on Friday at the Crowne Plaza Hotel in Pittsfield.
Insana, who spent 22 years as a veteran anchor at CNBC, believes that all those who are waiting for the other shoe to drop in the stock market are going to be disappointed.

“We have had our correction,” he contends and also thinks that residential real estate, especially distressed property, such as condos in Florida, are at an once-in-a-lifetime buy right now.

The Federal Reserve’s decision to increase the discount rate by 25 basis points on Thursday evening surprised investors at first but Insana believes, as do many investors (including this writer), that it is a positive sign that the economy is healthy enough to begin taking the punch bowl away from the banks.

“It’s a move to discourage financial institutions from borrowing from the Fed, which is the lender of last resort, and instead borrow from the money markets.”

What investors should take away from this Fed action is that the money markets are back to normal. There is now no further need for a lender of last resort, which is the role that the Fed has provided for the last year.

Sure, the long-term implications are that interest rate will begin to rise but not immediately. At some point, probably at the end of this year, interest rates should rise anyway. It is a natural course of events when the economy begins to recover. Remember too that rates are at historical lows with no where to go but up. That means mortgage rates as well so if you have been toying with the idea of buying a piece of real estate now is the time.

The potential rescue of Greece from itself has been in the headlines of just about every financial journal in the world this week. This off -again, on -again bail-out by the European Community’s wealthier members has roiled the U.S. markets across the board. I believe that ultimately the Greek debt crisis, as well as the problems in the other PIGS nations (Portugal, Italy and Spain), will be resolved, but probably not in the way we Americans would choose to do it.

Europeans, in my experience, are more often behind-the-scenes problem solvers, especially when it comes to the proud and extremely independent –minded members of its community. The EU is not a group of states united under one constitution. It is a community whose common basis is commerce, not politics. Readers should remember that and not expect a U.S.-type bail-out where the banks basically became wards of the state for several months. Greece is not going to stand for any strong-arm tactics by France, Germany or anyone else. You may not agree with that, but I guess that’s why you live here and only vacation once in a while in Greece.

At the same time, China is also causing waves that are battering the shores of stock markets worldwide, including our own. Whether you like it or not, China, and not the U.S., is the economic locomotive that is pulling the world out of recession. This is the first time the U.S. has relinquished this role since WW II. China’s huge population, coupled with its enormous export prowess, has increased demand for everything from fertilizer to diamond bracelets. Its factories are consuming, on the margin, millions of additional tons of coal, iron ore, copper, oil and other materials. That has pumped up prices of everything including the stock markets.

Recently, however, China’s Central Bank, at the direction of the Chinese Government, has been tightening credit to banks in an effort to head off inflation as well as avert a possible bubble in China’s stock and property markets. Those moves in Beijing are having immediate repercussions in the trading pits of downtown Manhattan, half a world away. In some ways, when China sneezes now, the U.S. catches a cold.
That is another reason that U.S. stocks, bonds, commodities and even interest rates are chopping up and down recently. Traders are making decisions here based on the next predicted move out of the Chinese Central Bank.

I do believe that markets are over-reacting to these foreign events to some extent, but I understand that this is a fairly new development in the U.S. investment community. We, not them, have been the Big Dog in determining where world markets are going. Now that we might have to share that role, it will take some time to adjust.

As for the markets, I believe we still have some downside ahead before the markets are ready to resume their upward movement. I would use any dips to slowly add to positions and not worry too much about what happens in China or Greece. Focus instead on values presented by further declines in the market. My target remains 1,015-1,030 on the S& P 500.

In my column last week “No Pain, No Gain” I made a guesstimate of how low the S&P could go before bottoming out. That range was 1025-1035. I will widen that range a bit this week to 1015-1030. For long-term investors, that range should not matter too much since I believe that once we finish this overdue correction, the S&P 500 could rally back to above 1200 or more. That could give the astute investor another 20% return for 2010.

“But what about Europe, I hear Spain, Greece and Portugal are all bankrupt,” said a worried investor from Great Barrington, MA this week.

He was convinced that these countries’ on-going sovereign debt problems would have severe repercussions in Europe overall and usher in the demise of the European Union. And in a domino-effect, Europe’s problems would drag down our already-weakened U.S. system and before we know it—2008 all over again.
Although I agree that the so-called “PIGS” of Europe –Portugal, Italy, Greece and Spain—are having a difficult time, so are many other countries. They are grappling with a global economy barely out of recession, a history of too much debt and not enough revenue (taxes) to handle their interest payments.

At the same time, their citizens continue to demand policies and follow behaviors that further impoverish their counties. The Greek government, for example, estimates that less than one third of their citizens pay taxes. The point is that rather than bringing down Europe, if push comes to shove, countries like Germany would simply shove a PIG or two out of the EU if necessary, at least temporarily. Yet, investors are nervous and are starting to sell emerging markets across the board fearing that they too may have hidden debt issues.

Remember last Thanksgiving weekend when Dubai, one of the oil-rich United Arab Emirates, had admitted to some issues with $80 billion in debt? Both Asia and Europe experienced sharp sell-offs totaling 4-5%. By the time the U.S. market opened for business that Monday the crisis was largely averted. European leaders will do what is necessary to resolve this crisis of confidence but it sure gives traders and hedge funds a great excuse to knock the markets down and make a lot of money in the process.

You see, my dear reader, I am not the only one who believed 1,150 on the S&P 500 would trigger a correction. Those who did “went short,” meaning they placed bets on the market’s decline. Every percentage point decline in a stock, index, commodity or whatever means profit and a lot of it. So they definitely have a lot at stake in pushing the markets down 10-12%. Think about it. In 13 days a short position has garnered 8%. Not a bad two weeks worth of work if you can get it.

So how do you, the little guy, profit from this? You buy when the blood is running in the streets as a certain Baron once said a century or two ago. If you have been waiting for just that right moment to get back in the market, now’s the time, for those who have been following my advice and have cash put aside for just this buy on the dip opportunity, then get to work. Just don’t try to call the bottom. Buy selectively and bit by bit over time.

“Are you nuts,” demanded one caller, who I advised to start averaging down this week.
“The markets are dropping like a stone. Who says it will stop at your level?”

And that my dear reader is the crux of the matter. I don’t know if it will bottom at 1,015 and I really don’t care. What I am looking at is value. Value is just starting to show its lovely head. The economy is improving, companies are beginning to make real money again, or it appears so from studying fourth quarter earnings results and equity prices are on sale. What’s not to like about that? All it takes is courage to buy.

“In 2008 we did better than the S&P by about 8% and were up almost 29% in 2009,” says Bob Millen, Chairman of Jensen Investment Management and Vice president of the Jensen Portfolio.

This large cap growth fund is rated five stars by Morningstar, has a low turnover rate and an expense ratio under one percent according to the fund’s prospectus. Millen argues that like the turtle, the Jensen Portfolio will always trounce the hare when it comes to long term performance. His four man investment team is methodical, currying through countless companies in search of that perfect investment: a value-creating business, with at least ten years of 15% or more return on equity that is shareholder friendly and has a proven management track record in weathering whatever the economy and business cycle can throw at it.

“We are hands-on and management is a critical variable for us. Visiting with management,” he says, “is important; once we have made the investment we periodically return to take the temperature of the company and its management.”

Millen knows better than most how to size up a company and its management, thanks to his background.

“I don’t come from Wall Street, have never been a broker or a sell-side analyst,” he explains,” but I’ve started, ran and sold businesses in my career and when you have that kind of background you approach industry differently. We don’t buy stocks. We try to buy businesses at a discount that generate excess cash flow consistently.”

What, I asked, was the secret to successful long-term investment?

“Patience,” he assured me, “and we find very little of that among the investment community these days. People tend to chase stocks up and down and most often they make the wrong decisions.”

Some of the stocks the fund holds in size are 3m, Microsoft, Johnson and Johnson, Medtronic, Emerson Electrics, Pepsi Cola, Abbot Labs, Omnicom, Cognizant Technologies and Colgate Palmolive.

What is his typical holding period for a stock?

“Around seven years,” he says, “although if we could find a company that meets our standards and doesn’t become overpriced, we would hold it for a lot longer.”

Unfortunately, most investments do become overpriced or, in some cases, the fundamentals deteriorate and the managers are forced to sell it.

Millen contends that they are still finding good companies at reasonable prices despite the markets gains. He believes that 2003 through 2007 was largely a low-quality stock market rally based on excess leverage and cheap credit.

“In 2009 we saw a similar pattern, since the low quality companies went down the most in ’08, they have climbed the most in 2009.”

However, Millen and his team believe we are facing a very slow economic recovery over several years as a result of deleveraging and anemic consumer spending.

“It will look more like a hockey stick then a W or U,” he argues.

The management of the Jensen Portfolio is betting that the high quality, growth companies in its portfolio will do far better in that kind of domestic environment while much of their businesses are exposed to higher growth economies outside of the U.S. That sounds like a reasonable game plan to me.