A rally in the face of negative press is bullish. The optimism could be short lived, but the bullish momentum remains despite gloomy news reports.

The three top-performing small-cap stocks of 2011.

The Berkshire Hathaway (NYSE: BRK.A) of 30 years ago is long gone, but this company reminds me of that great value-centric Berkshire in its glory days.  

After Warren Buffett made his IBM (Nasdaq: IBM) purchase public this week, technology stocks have seen strong gains, with the big cap American technology stocks leading the charge.

Warren Buffett and technology stocks are typically like oil and water. Or whiskey and pineapple juice. Or Kim Kardashian and wedding rings. They generally don’t belong together.

Investors had expected the worst from the banks, which is why the financial index was down 30% since May. The market will not be able to break 1250 resistance and rally higher without the bank stocks.

Apple's (Nasdaq:AAPL) quarter wasn't horrible. The tech company reported earnings of $6.62 billion, or $7.05 a share, on $28.27 billion in revenue. For comparison's sake, Apple earned $4.31 billion, or $4.64 a share last year, and that was a blowout.

Germany and France say they will continue to support Greece with bailout money. Greece says austerity measures will be implemented to get that bailout money.

For the first time in over two weeks, the U.S. economy is back in focus. First we got 2Q earnings reports from Dell (Nasdaq:DELL) and Target (NYSE:TGT). Dell missed revenues slightly and offered a weak revenue forecast.

There was a time when Dell was an important measure of consumer and corporate spending. (It's sales mix is roughly 75% consumer and corporate, 25% government.)

And while the company did say the economic environment was challenging, Dell has also missed important trends, like data storage and tablets. We have to think some of the weakness in Dell's numbers are a direct result of Apple's (Nasdaq:AAPL) success...

It's probably no surprise that Apple (Nasdaq:AAPL) beat earnings expectations last night. After all, Steve Jobs is an egomaniac who reportedly always under-promises so he can enjoy the attention when he over-delivers. It's good showmanship, and good for a pop in the stock.

Still, the results were impressive. Net earnings beat by nearly $2 a share ($7.79 vs. $5.87 expected) and sales came in $3.6 billion better than expected at $28.6 billion. Apple sold 20.3 million iPhones and 9.3 million iPads.

Perhaps even more amazing, Apple added $10 billion to its cash hoard during the quarter. It now has $76 billion.

The market pulled back last week and volume started to creep back up. It was an options expiration week which typically will be a higher volume week. Despite the 2% decline, all indices held their must hold support levels: SPX 1301, Nasdaq 2700 and Russell 800.

 The bulls will need to protect those support levels through a barrage of data that is scheduled for this week. First, the U.S. debt ceiling talks will intensify as the deadline for default gets nearer. In fact, Treasury Secretary Tim Geithner was on CNBC talking the debt ceiling this morning. Additionally, U.S. earnings season hits full stride this week. Major blue chips like Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT), GE (NYSE: GE), IBM (NYSE: IBM), Intel (Nasdaq: INTC) and McDonald's (NYSE: MCD) report second quarter earnings results this week. Along with the U.S. debt ceiling debate - and earnings results - will be the usual heap of economic data and the daily dose of European debt woes.

The market severely and unexpectedly dipped yesterday. Especially in the Nasdaq, which was down nearly 2%.

Volume also raced higher as the indices transitioned from gains following positive employment, inflation and sales data; and then quickly turned negative by noon.

In addition to the great economic data JPM blew away analyst estimates. The positive news from JPM had most big banks up 1% to start the session, but by midday the financial index was down 1%.

The market rallied nicely on Monday. Volume dried up, but a weaker dollar and strong gains from financials boosted most indices 1%.

The banks were up mainly because over the weekend global regulators decided that certain new requirement imposed on banks would be less severe than previously thought.

And why shouldn't bank regulation be less stringent, it's not like loose financial policy related to capital requirements has gone wrong before?

Although the market was able to move higher yesterday, the bulls didn't accomplish much. Volume was low and 1301 was not taken back. Additionally, the bulls closed the indices right at 1280, which has switched between resistance and support far too many times during the month of June.

Buyers need to slide back into the market today and reclaim 1280. And if volume can pick up, the SPX might be able to do something crazy like break out past 1301 and actually move in a new direction.

Remarkably, aside from the first few days of the month, SPX has been stuck in a 3% range for June. Summer is known to be a slow paced period for the market. But this year seems extra lethargic.

There is a budding divergence between economic data and corporate forecasts. We’ve seen a stark deterioration of economic data across the board. Manufacturing surveys have weakened, auto sales were down in May and then, of course, we got the icing on the cake with the pitiful employment numbers last week.

 

Economists and strategists have been falling all over each other as they lower their 2011 GDP estimates. (Of course, Daily Profit readers had a heads up, as we noted the change in the Fed’s outlook after the last FOMC meeting.)

Yesterday, we talked about bubbles and tech stocks. While it's possible to argue that certain sub-sectors of the Nasdaq may have some bubble-like valuations, technology blue chips are definitely not in bubble territory.

As I noted, the Nasdaq 100 (NDX), which is comprised of the 100 largest companies on the Nasdaq, is currently trading with a trailing P/E of 12.5, according to the Wall Street Journal.

We’re not yet in the mania stage for gold. We could be as close as a year, or as far as 5 years, but we’re just not there yet. Take a look at the chart below, which shows gold compared to two of the last, biggest asset bubbles.

What kind of performance can we realistically expect for gold companies to see when we do enter the mania phase?

It’s tough to find historical data on gold companies during the 1970s. Most of them are gone. The rest have been gobbled up or sliced apart into completely different companies.

We do have a frame of reference for the internet bubble. You might remember that time as a period when everyone had a hot stock tip. Everyone was up hundreds of percent, or more, on companies like Cisco and Intel.

It was somewhat lost in the shuffle in Wednesday. Investors were so stunned at Fed Chief Ben Bernanke's admission that commodity inflation might accelerate over the next few months before the Fed is forced to act on interest rates, they missed the part where the Fed lowered its 2011 GDP growth estimates from a range between 3.4% -- 3.9% to 3.1%.

For anyone pinning his or her hopes on 3.9%, that's got to be disappointing.

But after yesterday's first read of Q1 2011 GDP growth -- a measly 1.8% -- investors are likely to take another look at the total message delivered by the Fed.

The end of QE2 is perhaps the biggest question mark right now. It might be the perfect ironic outcome if Treasury bonds rally after the Fed let's its Treasury buying program end.

The Fed was deliberately attempting to prop up the stock market with QE2, driving money out of bonds and into stocks. That's the "risk on" trade, appropriate for when the Fed is backstopping assets.

If you look at "pretax, pre-provision profits", which excludes taxes, loan loss reserves and one-time items, profits fell 40% year over year. That's clearly not a good trend for the banks. So how did banks post such good "headline" profits? Loan loss reserves, as we have discussed. Banks have been aggressively moving loan loss reserves back to the asset side of the balance sheet. And that's accounted for the lion's share of 1Q earnings. It also leaves the banks less protected if the economy tanks again...

Corporate America kicked it up a notch last week. And the S&P 500 appears to be taking out resistance at 1,335.

Bloomberg reports that 71% of the 188 MSCI World Index companies that have reported Q1 earnings have beaten earnings. Earnings from this group of companies are beating expectations by 8.8%. And I’m sure when similar data is available for the S&P 500, we’ll see similar statistics.

The market began to gather steam yesterday to make a run towards 1335 resistance. Volume was suitable during the climb higher and energy stocks led the way. However, the indices appeared somewhat

Only 20 companies from the S&P 500 have reported earnings so far. 15 of them beaten expectations by 0.7%. The pace of reporting for S&P 500 companies picks up today.

Goldman Sachs (NYSE:GS) beat expectations this morning. After the bell today, we’ll hear from IBM (NYSE:IBM) and Intel (Nasdaq:INTC). Then, tomorrow, we get results from Apple (Nasdaq:AAPL).

The market tumbled out of the gate yesterday and volume was elevated. Additionally, the rampant selling impacted nearly all asset classes and sectors. Notable exceptions were the dollar and precious

The market moved painfully sideways last week. Volume was dismal and the news was dreadfully boring. But the week ended on a positive note. The market rallied off its lows on Friday to get back to

Richmond Fed president Lacker is out today saying he expects GDP growth to approach 4% this year, and as a result of stronger than expected growth, the Fed must re-evaluate its QE2 policy.

 

I am very curious to see how investors will react to the possibility that QE2 may be ending. The policy is set to conclude in June, anyway. And I would suspect that the Fed will continue until then, regardless of growth.

The correction we’ve been monitoring certainly picked up some steam on Friday. The rioting in Egypt gave investors an easy excuse to drive stocks sharply lower. And there should be no surprise that tech stocks and the Nasdaq bore the brunt of the selling.

Tech stocks were strong momentum trades in the last couple of months of 2010 and the first weeks of 2011. Then earnings seasons started. I can’t say that earnings expectations were too high – many of the top tech stocks, like Apple (Nasdaq:AAPL), IBM (NYSE:IBM), Intel (Nasdaq:INTC) and Qualcomm (Nasdaq:QCOM) beat expectations and offered solid guidance going forward.

So far this earnings season, we are seeing a clear separation between two of the stock markets leading sectors Starting with Intel (Nasdaq:INTC) and continuing with Apple (Nasdaq:AAPL) and IBM (NYSE:IBM), technology earnings were fantastic in the fourth quarter.

But it should be clear that banks are still grappling with the loss of mortgage business and the fallout from the financial crisis. And quite simply, while the climate for banks has certainly improved, as a group, they are not going to return to the growth they enjoyed in the last decade anytime soon.

Yesterday, both the U.S. dollar and stock prices moved lower. That’s pretty unusual. Also yesterday, Intel (Nasdaq:INTC) posted an absolutely blowout quarter. This morning, in pre-market, the stock is up just a nickel.

Now, Intel has sold off on positive earnings reports over the last few quarters. But this time, Intel beat all expectations. Earnings were up 48% over last year. And yet the stock appears unable to move higher. I will call that unusual, as well.

Stocks finished lower yesterday, but off their lows of the day. The Dow Jones Industrial index finished lower for a third straight day. The advance may have slowed in recent days, but we’ve seen buyers step in at intra-day lows and it will likely be up to earnings whether the dip-buyers will make any money on recent purchases.

I reported yesterday that earnings estimates for the fourth quarter have barely budged higher, even as the economy has improved and spending has picked up.

Rare earth element (REE) stocks have been surging lately. Once unknown to the general investing public, shares in companies that mine these special resources are now being snatched up without pause. There are few of them that are public, and even fewer that are currently making money.

It's a high risk - high reward sector to invest in. But if you have the risk-capital to utilize, it's worth rolling the dice when the table is tilted in your favor. Knowing when that is, well, is anybody's guess. This kind of high-risk, high-reward scenario is the nature of speculation.

Rare earths - a group of 17 chemical elements that you can find in the periodic table - are used in everything from wind turbines to televisions, iPods, and hybrid cars. Almost all technology devices utilize them in some way, so you can see why demand for shares in companies that can bring rare earths to market is so rampant.

The S&P 500 got within a few points of resistance yesterday. And it looks as though we will see some profit taking today. Both oil and gold are lower in the pre-market.

Oil and gold are very sensitive to the U.S. dollar. These assets rallied on speculation that the Fed was going to enter a new phase of monetary easing that would push the U.S. dollar lower.

In difficult economic environments, when the stock market seems to move with little rhyme or reason, investors will sometimes say "it's a stock pickers market."

The idea of a "stock picker's market" is that of a trendless market, but one where you can still buy quality, undervalued stocks and make money.

But according to the Wall Street Journal, that's not what we have right now. And investors who are relying simply on a company's fundamentals to invest are not being rewarded with profits.

Despite a nice rally on Friday after Fed Chief Ben Bernanke assured us that he can save the U.S. economy if it deteriorates further, some economists are still forecasting a "double-dip" of recession.

Now, after what we've been through over the past couple of years, it's easy to believe that the sky is still falling. After all, unemployment is still high, the housing market is in terrible shape, debt at the Federal and the state level, especially, is at record highs and the banks still have too many bad loans on their books.

And to make matters worse, none of these toxic conditions appear to be improving. In fact, they seem to be getting worse. We are still losing around 500,000 jobs a month. Also, there's a year's worth of housing inventory. And if you include the "shadow" inventory of homes that seem likely hit the market, it's more like two years.

First, I must start with an apology. Due to a crashed email server, you did not receive your Daily Profit yesterday. Obviously, the server is up and running today, but still my apologies for yesterday's failure. In the future, you can always check the Wyatt Research website for the Daily Profit. Now on to today's business...

Stocks were unable to hold onto the enthusiasm from better than expected new jobless claims yesterday. This probably didn't come as much of a surprise. After all, the jobless claims number was still poor, and with the 2Q GDP revision and Fed statement today, there was still plenty of uncertainty in the air.

TradeMaster Daily Stock Alerts trading strategist Jason Cimpl expressed his disappointment in today's morning advisory to his members thusly:

Our discussion of the GM IPO has been timely: the company filed with the SEC for its IPO yesterday. Now, we can answer some of the looming questions.

First of all, it sounds as though GM will not issue new shares, but rather simply sell more of the existing ones. That means the current common shareholders will not be wiped out. It also means that individual investors will be able to buy GM shares on the first day they are available.

Positive results for second quarter earnings have pushed the S&P 500 to the support/resistance point at 1,115 yesterday. And it looks as though that level will fall easily today.

FedEx (NYSE:FDX) doesn't report until September 16, but the company was kind enough to raise its earnings guidance yesterday, and that helped encourage investors that the global economy is improving.

Shipping stocks are always a good measure of economic activity. When business is growing, more packages are sent and shippers do well. And so, along with recent positive results from UPS (NYSE:UPS), FedEx's preannouncement is great news.

The latest round of earnings reports are taking stock prices lower. 2Q earnings started off good with a glowing report from Intel (Nasdaq:INTC), but have taken a turn for the worst.

The issue is revenues. IBM (NYSE:IBM), Texas Instruments (NYSE:TXI) and Goldman Sachs (NYSE:GS) all came in a little light on revenues. Companies are meeting or exceeding earnings estimates, overall S&P 500 earnings have been 17% above expectations, according to Bloomberg.

But revenues have beaten expectations by only 3.5% so far, and some big names like IBM have come in below revenue estimates.

It's hard to be disappointed with JP Morgan's (NYSE:JPM) $1.09 a share earnings for the second quarter. After all, analysts were looking for just $0.74 a share. But still, JP Morgan's 47% earnings beat isn't being called a "blowout."

If this has you scratching your head a little, don't worry, I suspect you're not alone.

One of the big reasons that JP Morgan beat earnings expectations so handily is that it had to set aside less loss reserves for bad loans. That's a good indication that the company is working its way out of the problems created by the housing bubble

Intel's blowout earnings report last night is certainly making it look as though earnings estimates were revised too low for corporations. And so the overwhelmingly pessimism that drove stocks lower since early May seems to be shifting to optimism that maybe things aren't that bad after all.

Intel's second quarter EPS were $0.51 on revenue of $10.8 billion. Those numbers crushed the analyst expectations. Analysts wanted $0.43 with $10.3 billion in sales. Guidance was also way above expectations. Intel's management expects third quarter revenue of $11.6 billion from $11 billion.

CEO Paul Otellini made sure to let analyst know during the conference call that this quarter was the best quarter in the company's 42 year corporate history.

After last week's strong recovery rally, we will find out soon if the fundamentals will support higher prices. Yes, after I've discussed it for the last three weeks, 2Q earnings season is finally here.

Today, we hear from Alcoa (NYSE:AA), chipmaker Novellus and railroad company CSX (NYSE:CSX). Tomorrow, Intel (Nasdaq:INTC) is up. Thursday brings us Google (Nasdaq:GOOG) and JP Morgan (NYSE:JPM). And then we'll wrap up the week with Citigroup (NYSE:C) and GE (NYSE:GE) on Friday.

We should get a pretty good feel for how earnings will be after this week.

Intel (Nasdaq:INTC) reported excellent earnings last night, as I expected. The chip-maker beat on revenues and earnings per share. The stock is up close to 3% in the early going. That's because Intel's results weren't exactly a surprise. During its mid-quarter update, Intel said the quarter was looking good. And the stock ran from $19 to $20.50 over the last few days. And as of press time it's at $21.00.

Intel's earnings are especially important because the company beat revenue expectations. As we know, investors want to see revenue growth. Costs have been cut, and if the economy is truly turning around, sales should grow.

*****JP Morgan (NYSE:JPM) destroyed expectations, posting $0.82 in per share earnings when analysts were expecting $0.52. Investment banking was the biggest contributor to JP Morgan's result. But I'm impressed by the gains the company made in bond trading. Revenues for fixed income went form $800 million last year to $5 billion this year.

Banks have to find new ways to make money, and JP Morgan is doing it...

Stocks close up today after most of today's trading was tightly range bound. The Dow soared to 8,730 from 8,607 around 1:30 p.m. eastern to settle on the day up 95 points to 8,711.

 

The Nasdaq showed an even greater percentage gain (1.19% v. 1.11%) to close up 22 points and finish the day at 1,885. The S&P 500 closed at 940, up 8 points on the day.

 

The Russell 2000 was 7 points to close at 523. 

The volume leader in the small-cap space include CIT Group (NYSE:CIT) with 415 million shares traded. Investors dumped the stock upon realizing that the U.S. Treasury Department was not going to bail the firm out.

 

Small-cap gainers were lead by ARCA biopharma (Nasdaq:ABIO) up 48%; Angiotech Pharmaceuticals (Nasdaq:ANPI) up 31%; and CDC Corporation (Nasdaq:CHINA) up 29%.

That was a terrific rally yesterday. Intel's (Nasdaq:INTC) earnings truly were a surprise. We've now seen the two biggest up days in 6 weeks come on consecutive days. The major indices had been looking weak, but not anymore. 

JP Morgan (NYSE:JPM) is the latest company to beat earnings expectations. But let's not forget that it's widely believed that analysts really low-balled the company earnings estimates across the board for the 2nd Quarter, so companies should be besting them. 

What matters is guidance going forward. That's why Intel's news was so surprising. 

*****China's 2nd Quarter GDP number is out. The country grew at 7.9%, and may hit 10% by the 4th Quarter. Industrial production and fixed asset investment grew strongly. 

Several banks upped their growth forecasts for China today. 

I've seen some concern that lending is getting too loose in China and that a disaster is waiting to happen. But I'm not worried about that right now. China's government has showed in the past that it's pretty good at clamping down on lending standards when the economy gets too hot.

(If you're interested in tapping into the run-up in China stocks, check out my new report. Click here for your copy.)

*****Despite all the good news this morning, the chinks in the armor are clear to see. The number of households facing foreclosure was up 15% in the first half of the year. As many 336,000 homeowners received a foreclosure notice in June.  

Year over year, foreclosure filings were up 33% in June. And they were up 5% just since May.

Foreclosures are on the rise despite the government's $50 billion program to assist loan modifications for troubled mortgage holders.  

This will no doubt weigh heavily on banks that still have outsized exposure to the sub-prime market and reinforces our strategy of looking for investment opportunity outside the housing and financial sectors, JPM and GS notwithstanding.  

Ian Wyatt
Editor

P.S.-Just yesterday I released the updated Predictions Issue for Top Stock Insights readers. Find out which sectors and stocks will be hot over the next six months and which ones to stay far, far away from. Click here for more

Stocks jumped today after consecutively back to back good reports from Goldman Sachs (NYSE:GS) and Intel (Nasdaq:INTC) as well as a surprise from Gannett (NYSE:GCI) that it beat profit estimates by 9 cents, driving shares up 28%.

 

Good news kept flowing as investors were treated to revisions from the Federal Reserve Open Market Committee that the economy will shrink from 1% to 1.5% in 2009 as opposed to its earlier prognostication of 1.3% to 2%. The committee raised its inflation projection for 2010 to a range of 1.2% to 1.8%.

 

The Dow was up sharply by 256 points to close at 8,616, the highest its been in a month. The Nasdaq closed up 63 points to 1,863 and the S&P 500 roared to 933, up 27 points from yesterday's close at 906.

 

Small-cap stocks fared well with the Russell 2000 closing at 509, up 15 points. 
 

Today's volume leaders in the small-cap space include yesterday's leader, CIT Group (NYSE:CIT) with over 74 million shares traded, although trading was halted before the close on impending news concerning discussion with the federal government. Other small-cap volume leaders include Huntington Bancshares (Nasdaq:HBAN), and Sirius XM Radio (Nasdaq:SIRI).

 

Small-cap gainers were lead by Targacept (Nasdaq:TRGT) up 137% after news broke that its depression treatment drug candidate, currently called TC-5214, was able to significantly outperform a placebo drug in testing on patients with major depression disorders. The company announced that it expects to start late-stage trials of the drug in Q2 2010 and is in talks with several potential partners to help complete the drug's development.

 

Other small-cap gainers include a one-time holding with SmallCapInvestor PRO, Brigham Exploration (Nasdaq:BEXP) up 23%; Ferro Corporation (NYSE:FOE) up 35%; and beleaguered newspaper giant Gannett (NYSE:GCI) up 30%.

*****If you've ever wondered what it's like to be Warren Buffett and have more cash than you can spend or invest, just ask China. China just announced that it has over $2 trillion in foreign reserves.  

That is an unbelievable amount of cash to have accumulated. Bloomberg reports that China's reserves doubled in less than 3 years.  

This much money means two things: China can support it's GDP growth as long as it chooses to; and, China will continue to buy Treasuries. 
Sherman Chan, a Moody's economist in Australia said, "China has the strongest prospects out of all major economies, so it is not surprising that hot money is flowing back…China has certainly recovered from the downturn, and it is on a strong footing now." 

That's why we've been loading up on Chinese stocks in SmallCapInvestor Pro. It's not too late to profit from our top Chinese stocks. Click here for details.  

*****Yesterday morning it was Goldman Sachs (NYSE:GS). Then last night, it was Intel (Nasdaq:INTC). The world's biggest chip maker crushed earnings, but then did the unthinkable and offered a 3rd quarter revenue forecast that is as much as 14% higher than what analysts were expecting.  

Between Goldman and Intel, I'll take Intel. Intel is selling a product. And apparently, consumer demand for Intel's product is stronger than anyone imagined. Sure, much of the strength is coming from Asia (back to my China comment above), but, so what? Revenue is revenue. 

Other semiconductor companies were rallying in after hours, including Texas Instruments (NYSE:TXN) and Advanced Micro Devices (NYSE:AMD).   
As for Goldman, I didn't think that stock will stay over $150. Not that it matters. TradeMaster's Jason Cimpl has made money shorting Goldman. But as for me, Goldman is on the "Never Short" list along with Google (Nasdaq:GOOG) and Apple (Nasdaq:AAPL). They may have bad days, their stocks may get a beat-down once in a while, but these are solid companies with a penchant for finding profits no matter what the economy is doing. 

*****Government actions are currently filling in for an actual economy. That's how it is in our new "Managed America." Most expect the heavy hand of government to be temporary, and that Managed America can end sooner than later. We'll see… 

I expect the conditions of Managed America - high unemployment, sluggish growth, more regulations, higher taxes, and inflation to last years instead of months. And I've outlined my expectations for investing under these conditions in my new Special Issue of Top Stock Insights. The article is titled Managed America: The New Economic Reality. It's being released this morning. You can sign up for Top Stock Insights and get my blueprint for profiting in Managed America. Click here for your copy now.  

*****Now, as you know, it's Newsletter Advisors Wednesday. And by coincidence we're going to be speaking with Andy Obermueller about profiting from government-driven investing. It's essentially the flip side of the Managed America. Enjoy.

Best regards,

Ian Wyatt
Chief Investment Strategist
SmallCapInvestor.com

Newsletter Advisors Wednesday

This week's NewsletterAdvisors.com investment expert is Andy Obermueller, Chief Investment Strategist and editor for StreetAuthority's Government-Driven Opportunities.

Andy was a journalist before joining StreetAuthority. He worked for the business desks of the Philadelphia Inquirer and the Star-Ledger, New Jersey's largest paper, before going on to lead business coverage for a Texas daily. Andy briefly left the industry to get an inside look at corporate finance as a commercial lender for Wells Fargo's business banking group. He lives in Austin.

Andy, thanks for joining us today, now let's get started.   

Can you explain your investment process and criteria for investments?

I keep a very close watch on the executive branch of the government, including each cabinet department, as well as Congressional action. This gives me a pretty good sense of what Washington is up to. I study the legislation and regulatory proposals and track all the data I can -- there's a lot of it. I then look at which companies will be affected by government action and what that's likely to mean for them.

For instance, the FDA is part of the Department of Health and Human Services. I have a database of every drug in the approval process. For some giant drugmakers -- a Merck, say, or a Pfizer -- a new drug might not have much impact on the bottom line. But when the government approves a drug for a smaller drugmaker, the effect is huge. Those small drugmakers can be extremely lucrative investments -- all because of a government action.

What do you believe gives the government-driven investment style an edge over other investment styles?

Two words: Billion and trillion. These are the dollar terms of the government programs that the newsletter deals with. The U.S. federal government is gargantuan. It's the most powerful financial force on the planet. Every time a public dollar is spent, a private sector profit is realized. That has enormous implications, especially in light of the bailout, the stimulus bill and the administration's willingness to expand the role and reach of government.

Look, I'm passionate about this topic for one reason: it works. I've personally invested using a number of strategies over the years. Like you, I've tried various combinations of value, income and growth strategies. However, I'm not sure I've ever seen anything with as much potential as the government-driven stocks I'm finding.

What sectors do you think offer the most opportunities to profit from government action today?

I like energy and finance. Mr. Obama's move toward a green-collar economy, that is, merging the environmental movement with the gross domestic product, has far-reaching implications for every industry. And the banking system offers vast possibility: Though most large banks have entered a post-bailout phase, many small and midsize financial institutions are still struggling. They will come back -- they are as vital to the national economy as the large banks are too big to fail -- and their stock will follow suit. These two areas are outstanding for investors seeking large returns over the long term.

Ok, let's look at energy. Tell me about a government-driven stock you've dug up in this area.

Well, everyone knows that clean energy is a major part of the Obama agenda.  He hasn't even been in office a year yet and his green initiatives are already playing out.  On June 28th the House passed the "cap-and-trade" bill - which calls for a dramatic reduction in the amount of CO2 that industry can emit. This is historic.

The problem is, 35% of America's carbon emissions come from coal-fired power plants. Why? Because coal is both abundant and cheap in the U.S. -- we're sitting on enough of the stuff to power every home in America for the next 400 years. And at the same time, these coal plants are simply too expensive to replace. It would take $672 billion and several years.

But 'cap and trade' is a major thorn in the side of coal. The only solution I see is to find a way to burn coal without producing CO2. A handful of companies have actually figured out how to do this. Their method, called oxy-coal, is recognized as being perhaps the most promising environmentally-friendly technology on the planet. My favorite pick in this area is Praxair (NYSE:PX). It owns more than 200 patents related to oxy-coal.

What are your top three stock recommendations, and what attracts you to each?
I like Verenium Corporation (Nasdaq:VRNM). It's a small company that has engineered the leading biofuel process. It can make ethanol using cellulose, which is in all plant material found on earth. The government has put a ceiling on corn-based ethanol while at the same time mandating a +15,900% increase in the production of these "advanced biofuels" by 2022. What sets this company apart is that the government just gave it the nod to build the world's first commercial-scale cellulosic ethanol plant. There's no reason the explosive growth in this biofuel won't be mirrored by Verenium's stock.

Next I like Energy Recovery (Nasdaq:ERII). It makes a device that's critical to the efficiency of large desalinization plants, which are typically owned by governments. Without its equipment, desalinization is cost-prohibitive. ERII has 70% of the worldwide market, which is expected to double in the next ten years as water becomes ever scarcer. This issue is a lot closer to home than most people realize: Water supplies aren't just critical in the Middle East, they're increasingly important in places like California.

Finally, I like several players in the digital medical records space. The stimulus bill provides for $19 billion for these companies to upgrade the way the health-case system stores patient information. Storing these files digitally will improve physician access to information and not only improve the quality of care but reduce its cost, such as by eliminating unnecessary and potentially redundant medical tests. Among my recommendations here is Quadramed (NYSE:QDHC), which helped the Veterans Administration develop its VistA Program, the first and most successful large-scale electronic medical records system.  

Andy, thanks for the insights on how to profit from government spending and for the recommendations you're following. I'm sure readers will want to follow-up on those. This is certainly an exciting time to invest in companies making billions off the federal government.

Andy Obermueller is the Chief Investment Strategist for StreetAuthority's Government-Driven Investing newsletter. Andy invites you to follow his Government-Driven Investing blog, where he publishes his investing insights for free, at http://www.Government-DrivenInvesting.com

Stocks closed higher today as Meredith Whitney's comments on Goldman Sachs (NYSE:GS) helped to lift financials, including Bank of America (NYSE:BAC), which she indicated as being inexpensive. Previously she'd been down on financials and very accurate with her assessment concerning their exposure to sub-prime mortgages.

The Dow closed up 185 points today to end at 8,332. The Nasdaq and S&P 500 followed suit to close at 1,793 and 901, respectively.

The Russell 2000 closed at 492, up 11 points.

Small-cap stocks showed leadership behind Territorial Bancorp (Nasdaq:TBNK) of Honolulu, Hawaii, which was up 49% to close at $14.94. Shares in TBNK started trading today as part of an initial public offering with the opening price set at $10.

Other small-cap gainers include PMI Group (NYSE:PMI) up 31%; iBasis (Nasdaq:IBAS) up 28% on news that Dutch telecommunications firm Koninklijke KPN issued an offer of $1.55 per share or roughly $48.2 million to acquire 44 percent of the shares outstanding in iBasis; and American International Group (NYSE:AIG) up 24%.

Decliners were lead by China-based baby formula producer American Dairy (NYSE:ADY) down 44% after issuing news that it had reduced guidance by stating that Q2 revenue would be increase only 10% against the year-prior period.

American Dairy had previously grown by nearly 200% after the company was untainted by the scandals surrounding other Chinese dairy producers over contaminated baby formula that left six infants dead and millions of gallons of milk considered suspect and destroyed.

Other decliners include CardioNET (Nasdaq:BEAT) down 34%; Sinclair Broadcast Group (Nasdaq:SBGI) down 21%; and American Axle & Manufacturing (NYSE:AXL) down 15%.

*****A few weeks ago, Treasury Secretary Geithner had to go to China to assure our largest creditor that their investment in the U.S. dollar was safe. Now he's off to Saudi Arabia and United Arab Emirates for another round of "strong dollar" propaganda.  
Of course, it's not an easy task to convince foreign governments that the U.S. wants a strong dollar when interest rates are at zero and we're selling tens of billions in Treasury bills virtually every week. You may recall Geithner's assurances elicited laughter from a group of Chinese college students when he made the strong dollar pledge there.  

If college students know the score, you can bet everyone else does, too.  But Treasury auctions have been met with plenty of demand, and that's a good thing.

*****Fed Chief Bernanke is expected to reveal to Congress just how he plans to reverse his stimulative monetary policy next week. The Fed has expanded the money supply by about $1 trillion, cut rates to zero and doubled the assets on its balance sheet.  

In normal times, this would be highly inflationary. But these aren't normal times. Were it not for the Fed's action, the U.S. economy would be broken even more than it already is.  

Now, normal times will return. And how the Fed plans to reel in liquidity when the economy starts to grow again is critical. The potential for runaway inflation is real, and the Fed will have to be just as diligent at fighting inflation as it was fighting deflation.  

*****Goldman Sachs (NYSE:GS) received an upgrade from the very same banking analyst that predicted collapse of mortgage-backed securities, Meredith Whitney.  
Upgrading Goldman is easy. The bank is practically a subsidiary of the U.S. government. But the timing is interesting, given that Goldman reports earnings before the bell tomorrow.  

And speaking of earnings, this is a big week for some important companies. In addition to Goldman, we get Intel (Nasdaq:INTC) after the bell tomorrow. Thursday, we'll hear from JP Morgan (NYSE:JPM), Google (Nasdaq:GOOG) and IBM (NYSE:IBM). Then Friday, we get General Electric (NYSE:GE), Bank of America (NYSE:BAC).  

Tech and financials - the anchors for the U.S. economy will be reporting this week. Investors will be watching these early earnings reports closely. Much of the rally of the past few months can be attributed to investors' faith in companies meeting Q2 earnings, even if expectations were substantially lowered. Any bad news from these bellwether companies and the market could turn. We'll be watching closely. 

*****As if earnings weren't enough, there's a full slate of economic data coming out this week, too. Tuesday, it's the Producer Price Index (PPI) along with retail sales and business inventories. 

Wednesday, we get the Consumer Price Index (CPI), the Empire Manufacturing Survey from New York state, capacity utilization, industrial production, crude inventories and the minutes from the last FOMC meeting. 

Thursday, it's initial unemployment claims and the Philadelphia Fed. 
And finally, on Friday, we get building permits and housing starts for June.   
Whew! That's going to be a lot of data to review.  

*****On January 15, my Top Stock Insights advisory service released its Predictions 2009 special issue. This issue was our blueprint for profits with mid- and large-cap stocks as we headed into the new year.  

In that issue, I outlined the case for oil, gold, commodities and biotech/healthcare stocks. And we took 51% profits on an oil stock, 25% on a gold stock, another 25% on a commodity stock and we're still holding three biotech/healthcare double-digit winners in the portfolio. 

In other words, our expectations for the year led my readers to some nice gains this year, and there's more to come... 

Now, I'm all set to release an update to that special Predictions issue that will get us through the rest of this year with more solid gains. It comes out on Wednesday, and if you'd like to get my blueprint for profits for the rest of 2009, please click here. Or go to topstockinsights.com. 

*****Also, if you missed TradeMaster Daily Stock Alerts technical analyst Jason Cimpl's weekly video chart analysis, here's that link again. 

Software developer Wind River (Nasdaq:WIND) is the small cap leader today posting a 44% gain as of press time, 1:15 P.M. Eastern, on news of its acquisition by industry giant Intel (Nasdaq:INTC).

With the deal expected to close during the summer, Intel has committed to a price of $11.50 per share. As of this writing, shares of Wind River are going for $11.53. This certainly follows my thesis of technology, in addition to healthcare and energy, leading small caps for the foreseeable future.

Another big small cap gainer for today includes investment banker Cowen Group (Nasdaq:COWN) up 28.5% on news of its impending merger with Ramius, LLC, a privately held asset management firm. The new company will retain the Cowen name and is expected to continue trading on the Nasdaq.

Other small cap gainers include First Industrial Realty Trust (NYSE:FR) up 37.9% on news of closing three secured financial transactions for $154 million; Atlas Pipeline (NYSE:APL) up 16.1% to $7.57 (you'll recall Atlas was a big winner yesterday after announcing it's joint venture with Williams (NYSE:WMB). Since Friday's close, Atlas has rewarded investors with a 44% gain.

Small cap decliners include Abercrombie (NYSE:ANF), maker of popular clothing directed to the youth market, posting a loss of 10.6% in today's trading after reporting same store sales had fallen 28%; Northeast Bancorp (Nasdaq:NBN) of Lewiston, Maine, down 14.7%; and The Gap (NYSE:GPS) down 7.9% on reporting that sales fell 6% versus one year ago.

All major indices are reporting positive gains as of press time with the Russell 2000 Index up 1.12% to 528.56, the Dow up 0.70% to 8,735.80, the S&P 500 up 0.96% to 940.74, and the Nasdaq up 1.07% to 1,845.37. Analysts attribute much of this to reports showing that the number of unemployed still receiving benefits dropped unexpectedly for the first time in nearly five months.

Also big in today's news was crude oil hitting another high for 2009. New York Mercantile Exchange oil hit $69.56 in earlier trading today, meaning that crude oil is now nearly twice as expensive as it was in February.

Note: I've recently released a report on three small cap oil plays that will take advantage of crude oil's drive to even higher prices this year. In fact, one of these stocks has already given investors a nice 148% gain since we added it on March 30th. And there's still more action with this and the other two stocks. You can request your copy of the report HERE.

*****Yesterday, Ben Bernanke told the House Budget Committee:

"In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen…[t]hese increases appear to reflect concerns about large federal deficits…"

Hmmm. I would swear that Treasury Secretary Geithner just told China that rising interest rates were a sign of optimism for the U.S. economy. Can rising rates be both good and bad? All I know is that if you listen to government long enough, anything and everything is possible.

Rising interest rates on Treasury bonds mean that prices are falling. Whether you're talking dollars or doughnuts, prices tend to fall when there's oversupply. And right now, with the Federal government raising trillions to fund stimulus spending and budget deficits, there's a more-than-adequate supply of T-bills.

Competition also affects interest rates, or yields, on T-bills. If the arcane valuation formulas running on server banks in the basement of some hedge fund say that the stock market is likely to post an 8% gain, few managers will get too excited about the 5% return on long bonds. That 5% yield must rise (with the price of the bond falling) to entice buyers.

So when Geithner says that rising yields indicate optimism, he's telling the truth to a degree. Yes, now that the economy is recovering a bit, investors believe that stocks are a better investment than bonds. And that's good. But one reason stocks are attractive is because bonds are so unattractive.

*****I suspect the Chinese know all this. They probably also know that they benefit by lending us money. Heck, if Chinese money delays the hard choices long enough, they may ascend to the throne of world's largest economy sooner than expected. 

*****Bernanke also took the opportunity to warn Congress about rising deficits. He said "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

Let's not forget Bernanke has supported the policies that got us where we are. Now let's see what he proposes to help get us out of this mess.

*****The last time I made the observation that the news cycle was turning negative, we saw stocks consolidate their recent gains, instead of turning lower.

Well, it seems to me that the news cycle is starting to turn negative again. 

Bernanke repeated his belief that the recession is ending, but the financial media chose to latch on to his statement that recovery will be slow. Improving manufacturing data was deemed "not-as-good-as-expected."

Will this lead to a sell-off, another period of consolidation, or will more positive data emerge to keep the markets moving higher? I don't know, but I am on alert…

That's it for today.

P.S. One way to help insulate your portfolio (particularly if you're retired or even if it's a few years off) from the government's loose monetary policy is by holding dividend stocks. These stocks give you a regular payout and have tremendous upside. Be sure to check out my new research report with five such winning stocks right now. You can get it HERE.

Here’s what’s going in stocks:

Stocks were higher at midday Thursday as the Obama administration increased efforts to aid browbeaten banks in the weary financial sector.

At 11:51 am ET, the Russell 2000 (NYSE:IWM) is up 1.96, or 0.49%, to 403.40, while the Dow is up 0.78% to 7,327.68 and the S&P 500 is up 0.55% to 770.67.

Though Congress has already set aside $700 billion for embattled banks, President Obama has now proposed a $3.55 trillion budget that will allot $750 billion more to struggling financial firms. The plan, which is being sent to Congress today for approval, predicts that the U.S. government’s 2009 deficit will be $1.75 trillion.

Earlier today, investors analyzed tepid news out on the data front. This morning the Commerce Department released a consumer report that showed orders for big-ticket goods plunged by a larger-than-expected 5.2% in January as global economic troubles continue to cut into demand from U.S. and global customers. The report showed that orders have fallen for six straight months, and that orders for autos, metal products, machinery, computers and electrical equipment and household appliances predominantly posted declines.

The Commerce Department also released new-home sales numbers, which fell to a record low pace — 10.2% — in January to 309,000. This is the worst number on record since 1963. Prior to the release, the all-time low had been set in September 1981.

In other data out this morning, the Labor Department said continuing jobless claims hit a new record in the second week of February, increasing 114,000 to 5.113 million, over the forecast for 5 million.

SXC Health Systems

While Bernanke’s testimony before Congress on Monday was far more significant than any specifics Obama mentioned Wednesday night, neither event seems to be affecting stocks much. Except for HMO stocks. They’ve been killed this week as Obama makes a push for healthcare reform.

Medical insurers could be hurt by healthcare reform, though I doubt anyone feels particularly bad for these companies. I do think, though, that regardless of potential reform, there’s still some phenomenal upside for certain healthcare and biotech stocks.

My current favorite is SXC Health Systems (Nasdaq:SXCI). This small cap helps process prescription transactions. And its technology was involved in nearly 25% of the 3.5 billion prescriptions processed last year. Obama’s push to digitize . . .

Battered stocks limped to a dismal Monday close, with the Dow and S&P 500 falling to levels seen in 1997 as investors continue to pull money out on decreased confidence.

“People left and right are throwing in the towel," Keith Springer, president of Capital Financial Advisory Services, told the Associated Press.

The Russell 2000 (NYSE:IWM) closed down 16.38, or 3.99%, to $394.58, while the Dow fell 3.4% to close at a staggering 7,114.94, and the S&P 500 tumbled 3.47% to end the day at 743.33. For the year, the Russell is now down 21%, the Dow is down 18.93% and the S&P 500 is down 17.7%.

News out today that the Treasury Department would start a new, revamped bank bailout program that would include the option of allowing the government to increase its ownership in financial institutions did little to support investor confidence.

Although the Obama administration doused rumors last week of a potential plan to nationalize banks, the Treasury said today that beginning on Wednesday, the 20 largest U.S. banks will be required to undergo a new “stress test.” The government test will determine whether each institution has enough capital to survive any further economic spirals. More details surrounding the stress test will be released on Wednesday by the Treasury, though it did divulge today that if any . . .

U.S. stocks are expected to open lower, extending Wednesday’s downside rout as tech stocks were on the defensive overnight and banking shares remain on wobbly footing despite decent results from JP Morgan. A fresh batch of economic data on jobless claims and inflation was basically in line with expectations and appeared to be somewhat supportive to stocks. The Dow is expected to open down 50 points, while the Russell 2000 (NYSE:IWM) is seen down 0.6%, near 450.50.

The weekly claims report came in at 524,000, which was near the projection of 520,000. Meanwhile, the PPI number was at minus 1.9%, also reasonably close to the consensus guess of minus 2.0%. In addition, the NY Manufacturing survey was at -22, slightly better than the forecast of -25. Stock index futures initially moved moderately higher off the economic headlines.

Technology bellwether Apple Inc. (Nasdaq:AAPL) was off some 7% in pre-market trading amid reports that CEO Steve Jobs would take a medical leave of absence. Elsewhere on the tech front, Intel Corp. (Nasdaq:INTC) is slated to release results today and the stock was off about 1% in European trading.

JP Morgan Chase and Co. (NYSE:JPM) reported better-than-expected earnings results, and the stock took turns rallying and retreating in pre-market trading. Despite the bullish JPM profit news, bank stocks in general were a major drag on the market Wednesday and could trouble again today with Bank of America (NYSE:BAC) saying they need more capital to absorb the Merrill Lynch operation.

In overseas action, Europe shares were off, with the U.K. small-cap index down about 1.3% despite a 50-bp rate cut from the European Central Bank, which . . .