Short-Covering Rallies, Explosive and Brief

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Monday night New York time, the Nikkei in Japan hit a new intraday low dipping into the high 6000s (it was almost 40,000 at its peak in early 1990). An hour or two of sharp trading in either direction means very little in current market conditions though and the Nikkei reversed and closed up 6.4%. South Korea had the opposite trading pattern, being up 8% during the session, but closing down 3%. The Shanghai deposit had a similar loss and Singapore and Taiwan were flat. The sharp drops, which have been going on for some time in stock markets throughout the world, indicate increasing short positions. Eventually, the shorts become so large they create an unstable situation that can lead to sudden and explosive rallies.

This was no more clearly illustrated than when trading in Asia was winding down and Europe opened. A short squeeze in Volkswagen caused by Porsche announcing it was increasing its stake in the company caused a 348% rally in Volkswagen stock in only two days. Volkswagen briefly became the largest company in the world based on market capitalization (this would be a nonsensical claim by any other criteria). Volkswagen is part of the the DAX in Germany and its weighting in the 30 stock index rose to 27% creating a massive move up in the DAX as well. It was soon announced that Volkswagen's weighting in the DAX would be adjusted down to 10% in order to create a more realistic pricing situation. A number of major U.S. hedge funds and Goldman Sachs were caught on the wrong side of this melt up. While some media reported that Volkswagen experiencied the largest short squeeze ever, its price move pales in comparison to one that took place in Northern Pacific stock in the U.S. during 1901.

On Tuesday, the U.S markets opened with a strong bullish tilt, but at least at one point it looked like they would turn negative. A rumor in the afternoon that the Fed would cut rates to zero caused an explosive end of the day rally (neither truth, nor realistic claims are necessary preconditions for short squeezes). The S&P 500 ended up the most rising 92 points or 10.8%. The Dow was up 889 or 9.8%, the Nasdaq 144 or 9.5%, and the Russell 2000 trailed with a rise of 34 or 7.6%. The financials (the most shorted of all stock groups for good reason and despite the recent ban) had their biggest rally in history. Equally massive rallies took place that evening in the beaten down Asian indices, with Japan up 10% and South Korea 12%.

The U.S. Fed then announced at the close of its two-day meeting on Wednesday that it was cutting interest rates 50 basis points to 1% (the same interest rate that gave rise to the current credit crisis). Since this cut was expected and some traders were obviously looking for a lot more, it should have been more than fully priced into the market. Nevertheless U.S. markets rallied initially, but sold off at the very end of the day. On Thursday evening Japan followed up with its own rate cut of 20 basis points, leaving interests rates at just 0.30% (they've been lower there). The U.S. Fed will probably be getting close to that level soon enough. Japanese stocks fell 5% on the news because apparently the market wanted more. Technically speaking this was a stock market crash, but a drop of this magnitude has become so common in the last two months that no one pays particular attention anymore.

NEXT: U.S. Election's Impact on the Market

Daryl Montgomery

Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Start Looking for Capitulation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Another market bloodbath took place in Asia last night. The Nikkei fell a further 6.4% and took out its 2003 low of 7603 to close at 7162. This is now a 26 year low and it's not clear that even 18 years of selling has been enough to establish a long-term stock market bottom in Japan. The surging Yen is crushing exporters there. Drops were even bigger elsewhere, with the Hang Seng in Hong Kong falling 12.7% to close at 11,016. The 10,000 support level, broken during the Asian financial crisis in 1997, seems to be acting as a magnet for the index. The Philippines market, after dropping 12.3%, halted trading. Only Korea was up slightly after it cut interest rates three-quarters of a point, the largest cut ever there. The U.S. Fed, which is meeting this week, almost certainly took notice.

While the Yen is going up against the dollar, the euro continues its fall and hit 1.2461 in overnight trading. Oil hit 62.20 and is now down 57% from its mid-July high. The drop has been so sharp and so quick that gas prices in the U.S. have fallen 53 cents in only two weeks - just in time for the November election, where the high cost of fuel was a major issue eroding voter support for the Republican party. The U.S. dollar's strong rally against almost all currencies other than the Yen, engineered by central banks acting in concert starting this summer, is partially responsible for the fall in oil prices. Their dollar support activities have been so 'successful' that the trade weighted dollar was above 87.50 early this morning. If the rally continues, this could cause U.S. exports to drop off a cliff, as they did in the early stages of the Great Depression, and take the economy with them. The American financial media, which published one story after another about the beneficial effects of a falling dollar when the U.S. currency was sliding, has so far ignored the flip side of this story.

European markets, down in the 4% to 6% range in early trading, started paring their losses by mid-day. The U.S. markets did not open down that much, but it's the close that will be important. The Treasury announced today that it would begin distributing it gift bags of money from the Wall Street bailout bill to banks and this may be helping to limit selling. The U.S. Fed will be meeting this Tuesday and Wednesday and a 50 basis point rate cut is expected - more is possible and that would rally the market if it occurs. The New York Investing meetup predicted in fall 2007 that the Fed would move rates close to zero and this prediction seems to be coming to fruition.

Stocks are extremely oversold and resistance to further selling has been evident for the last few days of trading. Buying on any major drop should now be considered. It is likely that soon some event will take place that will rally the market and its beaten down segments. While the financials may still be overpriced (doesn't mean they can't rally substantially in the short term), sectors like the precious metal miners have been fallen to truly bargain level prices. Buying at a real discount is always a good way to make money in any market.

NEXT: Short Covering Rallies, Explosive and Brief

Daryl Montgomery

Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Landslide Elections and the U.S. Stock Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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There seem to be only two things that Americans voters will not forgive their politicians for. In the case of the President it is a failed economy, which led to a Democratic landslide in 1932 and a Republican landslide in 1980. While congressional voting is strongly affected by the economy as well, there is an additional factor of failing to deliver on a political party's core promises. When the Democrats couldn't pass a health care bill (something they had campaigned on for almost 50 years) in 1993, the voters turned on them en mass. This year, there is not only economic turmoil going into the election, but many Republicans in congress abandoned one of their party's most fundamental principals, fiscal conservatism, by supporting the Wall Street bailout bill. Conditions are ripe for a major political shift.

Presidential landslides are usually preceded by shifts in Congress two years earlier. In 1930, the Republicans, who had totally controlled Washington for the proceeding 10 years, lost 52 House seats and 8 Senate seats as the economy started to fall headlong into the Depression. Even with these losses, Republicans still had slight control of the U.S. senate and only lost their majority in the House after further defeats in special elections. While the U.S. economy was allegedly in good shape in 2006 (at least according to the official highly manipulated government figures), Republicans lost 30 House seats and 6 Senate seats in the election that year. This gave Democrats solid control of the House and a bare majority in the senate.

As bad as 1930 was for the Republicans, it was nothing like the political bloodbath that followed in 1932 when they lost 101 seats in the House and 12 seats in the senate. Best guesstimates as of now is that Democrats will pick up another 30 House seats this November. Interestingly, as many as 12 senate seats could also shift from Republican to Democratic hands this year, although the Democrats would only need 9 seats to have a filibuster proof majority. There is probably a slightly less than 50% chance of this happening, so it isn't a done deal yet. Wall Street would not react positively to this outcome and it has almost certainly not been factored into stock prices as of yet.

As for the Presidential election, Obama is clearly ahead of McCain and some perennial Republican strongholds like Indiana, North Carolina, North Dakota, and Virginia may go his way in addition to almost every swing state. Obama has the advantage in ad spending and field operations. Most polls show him way ahead in the race. While there are a few that don't, closer examination of them reveal that they are as statistically suspect as the U.S. governments inflation and GDP figures.

So what has a major political shift said about the prospects for the U.S. stock market in the past? The stock market actually bottomed before the 1932 election and entered a multi-year rally period after FDR's inauguration in March. In 1980, Regan was elected while a recession was already underway (as is the case in 2008) and another recession immediately followed that one.
Two years later though, U.S. stocks started an 18 year secular bull market. Generally, things have to be very bad economically for there to be a large change in the previous U.S. political balance. By the time this happens, the worst is likely to be over soon thereafter.

NEXT: Start Looking for Capitulation

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Black Friday Panic Grips World Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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As I write this before the trading day begins in the U.S. markets, S&P500 futures are limit down. After having fallen 60 points, regulators will not let them trade lower until the market opens. Dow futures were down 546 points and Nasdaq 100 futures 83 points when the trading floor was established on the S&P. U.S. stock futures began sinking during the bloodbath that took place in Asia overnight and dropped further on bad news in Europe. Selling exhaustion, necessary for the market to bottom, is now a real possibility sometime between today and next Tuesday morning - assuming the U.S. authorities don't close the markets.

Even though the U.S. financial media reported yesterday's market action as positive, evidence of possible problems today could be seen in how stocks traded. Volatility, never a sign of a healthy market, was even more off the charts than it has been recently. The Dow sold off in the beginning of trading and then rallied approximately 400 points in a little more than an hour. Then in the next three hours it fell 600 points. In the last hour and a half it rallied almost 500 points to close up 172 points. Anyone of these moves is extreme for an entire day, let alone an intraday move. The VIX (the volatility index) hit a new high of 96.40 even further above the 55 reached in 2002, but still not at the 150 level in the 1987 meltdown. Watch this indicator for a sign of a possible bottom.

Overnight the Nikkei in Japan fell 9.6%, closing at 7649 or just above the 2003 low of 7603. The Nikkei has sold off for 18 years and counting as of last night. Double digit losses hit Korea, down 10.6% on the day and 20% for the week, and India, down 11%. The Hang Seng in Hong Kong and the Straight Times in Singapore were both down 8.3%. Australia was the only bright spot in the region and experienced only a modest loss. Oil fell to $64.58 despite OPEC announcing a cut in production. Selling of the U.S. dollar against the Yen was described by commentators as 'relentless'. The Yen reached 92.76, a thirteen year high.

Europe opened to Britain reporting a 0.5% drop in GDP (not nearly as bad as what is happening in the U.S. economy, just more honest). The FTSE 100 was down down in the 7% range in mid-day trading and the DAX and CAC-40 had fallen more than 8%. The pound was getting hammered, trading at 1.54 to the dollar and the euro was trading around 128. Denmark had to raise rates to defend its currency, as Hungary did earlier in the week. Hungary, along with the Ukraine and Pakistan are seeking help from the IMF. As usual , emerging and smaller markets are likely to experience the biggest losses when global selling hits.

At the moment, look for support on the Dow and S&P 500 at their 2002 lows, around 7200 and 775 respectively.

NEXT: Landslide Elections and the U.S. Stock Market

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The House of Cards Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Housing continues to deteriorate. There are now 12 million homes in the U.S. with mortgages that exceed their value. This pool of houses which is particularly vulnerable to abandonment and foreclosure represents almost a quarter of all mortgaged residential properties . By the end of 2008, it is estimated that there will be a million bank owned properties for sale, which would represent a third of homes on the market. The situation is already much worse in trend leader California, where over 50% of existing home sales were foreclosed properties last month. Median prices there have dropped 34% from the high so far. The rest of the U.S. could follow California, although increased government efforts to prop up the housing market are trying to prevent further erosion.

Last quarter 766,000 U.S. home owners received at least one foreclosure notice. Only six states accounted for a majority of foreclosure activity - Arizona, California, Florida, Michigan, Nevada, and Ohio. The last four of these states are battlegrounds in the presidential election and Arizona would be too if McCain didn't represent it in the senate (nevertheless McCain's lead in the polls there is surprisingly small even though Arizona is one of the states most likely to support a Republican candidate for president). Foreclosures were worse in the beginning of the quarter and the rate even declined by 12% in September. While it looks like the number of foreclosure notices will be lower in the future, this won't be taking place because of improvements in the housing market.

The rate is being lowered by new laws have been enacted in a number of states to delay the repossession process and the FHA is attempting to renegotiate loan terms for a number of mortgage holders at risk. Foreclosure statistics are indeed very much affected by the ease of foreclosure which varies by state and should not be considered as an absolute indication of the strength of a state's housing market. New York for instance currently has a low foreclosure rate because it is necessary to go to court first and this means a foreclosure can take well over a year, longer if the judge doesn't wish to be cooperative. The FDIC is also trying to delay or prevent foreclosures. The first thing they did when they took over IndyMac was to stop all foreclosures and they are continuing to do so.

Delay does not mean preventing the inevitable however, it usually only means it only takes more time to get there. U.S. housing was in a bubble and prices became way extended on the upside. They are going to have to come down at least to the long-term mean - and we still have a long way to go to get there - before a sustainable recovery in real estate is possible. This will be an important precondition to a healthy economy as well. A look at the past suggests this linkage. Housing prices fell approximately 50% nationally in the U.S. between 1930 and 1940. The economy wasn't in such great shape then either.

NEXT: Black Friday Panic Grips World Markets

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stock Market Enters Bermuda Triangle

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.


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In technical analysis, a symmetrical triangle pattern usually indicates a continuation of a trend. The U.S. market indices look like they are making such a pattern on the charts. Triangles aren't the most reliable of chart patterns however and a break on both to the upside and downside is possible. If a downside break occurs, and this has not happened yet, then look for a test of the intraday lows of of around 7850 on the Dow, 840 on the S&P 500 and 1542 on Nasdaq. If successful, this could put in a double bottom and make a rally possible. A break of these levels would indicate a test of the 2002 lows on the Dow and S&P, at 7200 and 775, would likely take place.

While Monday was a good rally day in the U.S. markets, the action took place on below average volume indicating a lack of conviction in the buying. On Tuesday, the Dow was up an hour before the close and then experienced approximately a 250 point drop to end down 232 or 2.5% (It's volatility like this that is preventing the the market from getting anywhere on the upside). The Nasdaq was the hardest hit of all the indices because of bad tech earnings. It dropped 73 points or 4.1% to close below 1700 at 1696. The selling continued overnight in Asia, with Japan, Hong Kong and Korea experiencing another crash day. The Nikkei was down 6.8% or 632 points, but was still well above its 2003 low. Financials bore the brunt of the selling in Japan. The Hang Seng and KOSPI were down 5.2% and 5.1% respectively. Oil fell below $70 a barrel in Asian trading.

Things were a little better in European trading this morning, but not much. The 3 major indices, the FTSE, DAX and CAC-40 managed to hold their losses at the 4% level, just below the criteria for a crash. In a surprise move, Hungary raised interest rates 3% to protect the collapsing Forint. Surprisingly, despite all the global negativity, U.S. stock futures were up early on in pre-market trade. Wachovia's announcement of a $24 billion quarterly loss, the biggest for any U.S. financial company ever, seemed to have turned sentiment highly negative.

By a number of technical criteria, the U.S. markets should have bottomed by now. There has of course been a short-term rally, but the market is having trouble holding it. Not that the monetary and fiscal authorities haven't been trying to assist it, with one new program after another - and you can expect another 50 basis point rate cut from the Fed next week as well, with Fed funds returning to the 1.0% rate that caused the credit crisis in the first place. Right now bad earnings and negative outlooks are causing stocks to sell off. None of the major problems with the financial system have been permanently solved however. Expect them to continue showing up again and again, just when you least expect it.

NEXT: The House of Cards Economy

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Fed Should be Careful What It Wishes For

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Volatility is still the predominant feature of the U.S. stock market, with multi-hundred point moves being a daily occurrence on the Dow. For the moment, a Monday rally pattern seems to have replaced the Monday crash pattern that began in mid-September. The media reported yesterday's big move up in stocks as the market's approval of Fed chair Bernanke's endorsement of a new economic stimulus package. This of course makes no sense. The number of stimulus packages, special Fed lending facilities, special Fed asset purchasing programs, bailouts, bailout bills and government loans since the credit crisis began is now somewhere in the double digits - there have been so many, I've lost count. The need for more is just an admission of failure for all of the other initiatives, many of which were claimed to be just what was needed to turn things around. Apparently, the turning hasn't taken place yet.

The Fed announced even another new program this morning (for $540 billion this time). It will start buying commercial paper and dollar denominated CDs directly from money market funds. If you have been following this blog, you may have thought this was already being done. However, what was taking place is the Fed has been lending banks, a $123 billion so far, the money for this type of purchase. However, $341 billion has been withdrawn from money market funds by institutional investors since that program began. So the Fed has decided to eliminate the middleman (or more appropriately the middle-bank) and put an increased amount of funding behind this operation. This new program should not be confused with the one that begins on October 27th when the Fed will begin buying up to a trillion plus of commercial paper from an array of companies. The security of U.S. money market funds was supposed to have been assured about a month ago with the (legally questionable) establishment of a $50 billion dollar government insurance fund. It looks like things aren't exactly working as planned.

Today's country to announce the latest multi-billion dollar injection into its banking system is France. The French government will provide $14 billion in funding to the nations six largest banks. This appears to be part of their half a trillion bank rescue package announced several days ago. Between these two bailout announcements, French authorities were embarrassed once again with another bank trading scandal. Caisse d'Epargne announced an $800 million loss from derivative trading that allegedly took place because of rogue traders. It makes you wonder if there are there any controls on trading operations in French banks. Regardless, the biggest banks in France, just as in other advanced economies, will be assured of survival. Smaller and medium sized banks will be the ones taking the hit from the credit crisis.

The close to infinite liquidity being poured into the world's financial system is having the immediate desired effect of lowering interbank lending rates, which fell to their lowest level in a month yesterday. While the liquidity tsunami is good in the short-term, if successful it could lead to a very ugly long-term. Examination of a U.S. Adjusted Monetary Base chart shows a line going straight up (http://research.stlouisfed.org/fred2/series/BASE). This figure is currency in circulation, plus bank reserves and a massive increase in bank reserves is what is causing its vertical rise. Since banks are not lending at the moment, the inflationary effects will be muted from these additional reserves as long as the economy remains weak. A roaring economy where banks are lending out their reserves full stop would translate to an annual U.S. inflation rate somewhere around 2000% if the current rate of increase was maintained - and that would certainly make the stock market go up.

NEXT: Stock Market Enters the Bermuda Triangle

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

When the Lender of Last Resort Becomes the Only Resort

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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In the current credit crisis, central banks and governments in the U.S. and Europe are making the transition from supporting the financial system to becoming the financial system. There seems to be no ruined financial company that governments won't bail out (at least if its large enough or if the impact of its failure would have some significance), nor any limit to the amount of money that central banks will lend. The complete dependency relationship on governments that now exists among financial institutions is the ultimate outcome of Moral Hazard - banks have repeatedly been bailed out in the past, so they take on greater and greater risks until a total systemic failure takes place requiring a government takeover.

The latest bank bailouts include UBS last week and ING this weekend. After UBS declared a surprise profit, the Swiss government announced it would be injecting up to $60 billion into the bank and would get a 9% stake in return (apparently the Swiss government doesn't even believe their accounting figures). The UBS bailout was predicted long ago by the New York Investing meetup. The Dutch government today announced it would be giving ING Groep NV $13.4 billion in exchange for non-voting preferred stock, but would nevertheless be getting two seats on the board. Yesterday, the Korean government announced a blanket $100 billion backing for its bank's foreign currency debts.

As for cash injections into the financial system, these hit a record last week in the U.S. with banks and dealers direct borrowing from the Fed reaching $438 billion per day. This was up from the $420 billion per day the week before. The only Fed program that had less lending last week was the one that allows banks to purchase asset backed securities ($123 billion versus $139 billion the previous week). The U.S. Treasury sold $499 billion in T-bills for the Fed's Supplementary Finance Account to support all of this lending. Meanwhile, the Bank of England started implementing a new framework to provide emergency funds to banks. The new facility cuts the penalty for banks borrowing funds directly from it overnight. Why go elsewhere under those conditions? Ditto in the U.S. where funds from the Fed are plentiful and cheaper than can be gotten elsewhere.

If only one government was engaging in increased lending, a case could be made that it could borrow the money from other more financially sound countries. However, in the current crisis, all the developed countries are increasing available funds substantially. They do so by selling bonds. But if everyone is selling more bonds, who's left to buy them? Only an increase in the supply of the world's major currencies can make this possible, which means they are all being devalued in this crisis. By how much, only time will tell.

NEXT: The Fed Should Be Careful What It Wishes For

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Economy Slides Deeper Into Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

As you go back in time until the mid-1970s, you will find that each U.S. recession was worse than the previous one. The 1973 to 1975 recession was the biggest economic downturn in the U.S. since the Great Depression in the 1930s. Next was the 1980/82 recession (actually a double dip recession) and then the 1990/91 recession. The 2001 recession was the mildest on record and the only recession in history without a drop in consumer spending (only possible because the Fed dropped interest rates to 1% and financial companies were willing to provide almost unlimited amounts of credit to U.S. households at slightly above zero interest rates). To get a grasp of what is going on in the U.S. economy now, it is helpful to note statistical comparisons to time periods when past recessions existed and this will give you some sense of how badly the U.S. economy is currently functioning.

One thing that will most certainly not give you a sense of how the economy is functioning is the official GDP figures from the U.S. government. According to these, economic growth in the second quarter was robust at 3.3.% (final revision has since reduced this number to 2.8%). The first GDP figures for the third quarter will be released in late October. Anything indicating less than a sharp decline should be considered to be just as fictional as the second quarter report. No matter where you look, current economic reports are dismal and levels being reported are similar to those reached in one of the previous U.S. recessions.

Retail sales, Employment and Housing Starts are each indicating that we are in a significant economic downturn. Consumer spending represents over 70% of the U.S. economy and has likely fallen for the first time since the 1991 recession based on retail sales dropping 1.2% in September and 1.0% in August. Private economists have extrapolated the retail sales figures to an estimated 3.4% drop in consumer spending in the third quarter. Considering the employment situation, don't expect consumer spending to improve any time soon either. There have been job losses every month in 2008, with the official total being 760,000 (the actual figure is much higher). Even this number would be much worse, except the 2008 employment reports indicate continual hiring in the categories 'government' and 'education' , which in itself is mostly government employment. As of September, there were 2.2 million more unemployed in the U.S. than there were a year earlier and this number keeps rising. Housing, which is dependent on both jobs and credit availability, has continued to fall off a cliff. Housing starts fell a further 6.3% in September to an annualized rate of 817,000 units (this figure was around 1.7 million at the top of the bubble). Once again this was the lowest rate since the 1991 recession.

Industrial production provides an even worse case scenario for the economy than the consumer related reports. Industrial production, which represents the output of U.S. factories, mines, and utilities, fell 2.8% in September, after a 1% drop in August. The September drop was the worse since December 1974. Like consumer spending, industrial production is not adjusted for inflation, so this should be taken into account. According to the September PPI eport there was a price drop of 0.4%, although the core rate went up 0.4% in producer prices (consumer prices were flat for the month). Almost all of this price drop took place because of falling oil prices. Since oil has already fallen over 50% since its July high, continual drops should not be counted on. Examining some components of the PPI report also indicate drops bigger than even those of 1974 - a time of deep recession combined with high inflation, which is very much like the current U.S. economic picture.

NEXT:

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dr. Evil and Mini Me Loot the U.S. Treasury

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Monday, U.S Treasury Secretary Henry Paulson and his look-alike Interim Assistant Secretary for Financial Stability, Neel Kashkari (both originally from Goldman Sachs and participants in helping to create the credit crisis) came up with a plan to stabilize U.S banks without nationalizing them. The U.S. will be saved from socialism by pilfering its treasury and giving the money to the U.S. banks and brokers that are considered 'too big to fail' the many teetering regional banks will have to wait and if still in business, might get a share of the government's succor sometime in the future). Pilfering was their intent, along with helping out their other well-placed friends from the beginning (Kashkari drafted the Treasury department's three-page constitutionally questionable, unworkable, and politically inept power grab that was the original Wall Street bailout bill). Interestingly, every major American news outlet seems to have missed the real story about what is taking place.

The story universally reported by the U.S. media, frequently in blaring headlines, was that the government was going to distribute funds to banks in exchange for ownership stakes. No such thing is occurring. In reality, the Treasury is injecting liquidity by buying preferred stock. Preferred stock is loan in perpetuity, it does not represent any ownership rights in a company. Preferred stock is supposed to pay interest (if it doesn't, like all other permanent loans it's a gift). No interest rate was cited in the Treasury announcements, although anything less than the 10% that Warren Buffett got on his recently purchased preferred from Goldman Sachs (along with warrants) or Mitsubishi got on its purchase of Morgan Stanley preferred (backed by a U.S. guarantee), is a government subsidy. No major media source seems to have pointed this out. Instead, they all reported that if rescue plan works, the U.S. taxpayer will benefit because these preferred shares will be sold for a profit. Since preferred share prices fluctuate with interest rates and not the fortunes of a company (as long as it's a viable enterprise), they would go down, not up, if higher interest rates result from the government's inflationary policies. No common share price increases, as happens when a company does better, will benefit preferred share holders. It is of course almost 100% certain the government also overpaid substantially for this preferred stock as well (in the case of AIG, the U.S. government paid ten times the market price for the equity it purchased). The U.S. taxpayer is going to lose somewhere between a little and everything on this deal. There is no chance is will be profitable.

This looting of the treasury is also not going to be terribly effective either. With it, the government has officially established a 'too big to fail' policy. Only big banks intitally get any money. These include J.P. Morgan Chase, Bank of America, Citigroup., Wells Fargo, Bank of New York, State Street, Merrill Lynch, Morgan Stanley and Goldman Sachs Group Inc. Citigroup, Wells Fargo, and JP Morgan will get $25 billion each (even though it doesn't appear that JP Morgan, nor Wells Fargo are in trouble and need the money). Another $25 billion will be split between Bank of America, and Merrill Lynch, which are merging. Goldman Sachs and Morgan Stanley will each get $10 billion, while State Street Bank and Bank of New York (which also doesn't appear to need the money) will get roughly $3 billion each.

This latest move by the Treasury will not only help to continue to put another major dent in the U.S. government's stretched finances, but is helping to create a dangerous concentration of banking power. For 200 years, U.S. policy has promoted a large number of small banks, but now we will be getting a small number of large banks. The thinking behind America's historical approach to banking was to prevent the concentration of too much economic power in too few hands, which could threaten the capitalist and democratic systems. Based on what is happening now, these fears were obviously well justified.

NEXT:

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

So Much for That Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday, U.S. Markets returned to the level of last Friday's close, with the big rally gains of Monday being wiped out after only two trading days. If you measure a crash by a closing drop of 5% or more, it was the fourth market crash day for U.S. stocks in a little over two weeks. The drop started in Europe, with mining stocks and financials being particularly hard hit, but Europe had closed before the worse selling hit the U.S. at the end of its trading day. In Asia, the Japanese and Korean markets were pummeled, but the Hang Seng managed a partial recovery. As bad as things were, no world market could even come close to 77% total meltdown experienced in Iceland when its market was reopened on Tuesday.

Wednesday's trading pattern was somewhat unusual with the S&P 500 dropping more than the Nasdaq and much more than the Dow -the S&P is filled with both financial and energy stocks (light sweet crude dropped to $74.54 during the day and fell even further to $72.66 in Asian trading). While the Dow lost 7.9% or 733 points, the Nasdaq was down 8.5% or 151 points, the S&P fell 9.0% or 90 points. Only the Russell 2000 was off more, falling 9.5% (also representing a change, until recently small caps were outperforming big caps). The Dow broke 9000 again to close at 8578, although the S&P held above the 900 level to close at 908 and Nasdaq hasn't yet returned to the 1500s, closing at 1628. While at least one major news outlet reported this was the biggest drop in the U.S. since the 1987 crash (they were presumably taking about the S&P),it was actually only the biggest drop on the Dow since this September 29th.

Asia markets were more mixed than the U.S. The Nikkei in Japan was down over 1000 points again, dropping 11.4% or 1089 points. The close of 8458 was still above the 2002 bottom. Although, Korea dropped 9.3%, the Hang Seng rallied off a greater than 8% drop to close down only 4.8%. Surprisingly, Australia was off just 6.7%. Considering the concentration of natural resource stocks in this market and that miners had started selling down in Europe because of falling demand for commodities from China, this was a relatively good performance. Problems in Asia were followed on Thursday morning with European markets experiencing further selling so that combined with their trading on Wednesday, they experienced similar drops to those that had taken place in the U.S. The Russian market, actually opened for a change, was the worst hit Thursday with an almost 9% drop.

The U.S. markets are testing the lows from last Friday and need to hold at this level if a multi-week or longer rally is to take place. If the lows are broken more than a small amount, the next stop will be the 2002 bottom for the Dow and S&P 500 or around 7200 and 775 respectively and 1500 for the Nasdaq.

NEXT: Dr. Evil and MiniMe Loot the U.S. Treasury

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stock Market Rallies Like It's 1932

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Increases in liquidity show up in the stock market immediately and in the economy months later, but are not fully reflected in the inflation rate until years later. Yesterday's promise of UNLIMITED liquidity for the banking system in Europe (backed up by the U.S. Fed) along with the announcement of several trillion dollars in financial company bailout programs created the biggest global stock market rally ever. The future effects on the global economy remain to be seen. The likely biggest global inflation ever will not be showing up for awhile.

The Dow was up 936 points yesterday or 11.1% to close at 9387. The S&P500 was up 104 points or 11.6% and reclaimed the 1000 level by closing at 1003. Nasdaq rose 195 points to 1844 and was up 11.8%. Small caps, which have held up better than any of the other indices saw the smallest rise, with the Russell 2000 up 48 points or 9.3%. Before the rally, the Dow had fallen 40.3% from the high that it had reached on October 9, 2007 (a bigger percentage loss than in the 2000 to 2002 bear market) and had fallen eight consecutive days for a loss of 22.1%. While the points gains were impressive on Monday, the volume was nothing to write home about. Nasdaq only managed to break just above its average daily volume level at the close. Volume on the Dow was more enthusiastic, but not spectacular. Although yesterday's point rally in U.S. stocks was the biggest ever, in percentage terms it was not. Comparable and even bigger rallies took place in the U.S. during the 1930s Great Depression, but have not been seen since.

A rally of similar magnitude to the one in the U.S. took place in the world's other bourses as well. In Europe, the FTSE 100 in the UK was up 8.3%, the CAC-40 in France up 11.2% and the DAX in Germany was up 11.4%. The Hang Seng in Hong Kong rallied 10.2%. Japan was closed on Monday, but got two days of rallying in by rising 14.2% when it reopened on Tuesday. The Nikkei was trying to test test its 2003 low (which took 12 years of selling for it to reach) of just above 7600 last week. If it can manage not to break it in the next few months, the Japanese stock market may finally have bottomed after almost two decades.

Options expire this Friday and the current rally is likely to be sustained until this support for the market runs out (since August 2007, options expiration week has been the time for major stock rallies in the U.S). Today is already starting out as another big day for stocks, but be ready for any possibility. Extremely big rallies, which are typical of bear markets, are not necessarily good news. They certainly weren't during the Great Depression.

NEXT: So Much for That Rally

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Unlimited Liquidity Today, Unlimited Inflation Tomorrow

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. Federal Reserve, the ECB, and the central banks of England and Switzerland agreed over the weekend to "provide unlimited U.S. dollar funds to financial institutions" to support inter-bank lending. The Euro-zone will also guarantee bank debt until the end of 2009 and will assist its countries in buying preferred shares in failing banks in order to help recapitalize them. As this agreement was being worked out, Britain nationalized three of its major banks to prevent their failures. Meanwhile, the United States has altered the focus of its Wall Street bailout plan to concentrate on the purchase of non-voting bank shares and it looks like the American taxpayer won't be getting any equity in return (as the bill supposedly guaranteed).

The Euro-zone is essentially following the lead of Great Britain (the country that sold half of its gold in 1999 at the market bottom and which has a worse housing crisis than even the United States). Britain is now injecting $438 billion in loans to its banking sector - a sum that is proportionately much larger than the $700 billion U.S. bailout, but probably still not nearly enough. Its three bank nationalizations this weekend include the Royal Bank of Scotland (on the New York Investing meetup's likely bank failure list in September) where the taxpayers will get a majority 60% stake. Lloyds TSB and HBS were also merged by the government, which then bought a 40% ownership position in the new combined bank.

As the British banking system is being rapidly nationalized, the U.S. seems to be backing away from this socialist model. Instead of buying bad debt with the Wall Street bailout money, it now appears that preferred stock will be purchased (although media reports in this regard are garbled to say the least). Preferred stock is non-voting and represents no ownership rights in a company. It is merely a loan in perpetuity. Europe in general seems to be trying to adopt this approach as well. If there is any profit made on the government's money pumping (and there always is), none of it will be going to the respective taxpayers of any country that handles the banking crisis this way.

Where all the money is going to come from to pay for the 'unlimited' liquidity injections into the collapsing American/European financial system has not been stated. It is highly unlikely that it will dropping from the sky attached to a big balloon. Printing more money is the only possible option. This makes the inflation hedges gold and silver even better investment possibilities going forward. Amazingly they are both at particularly low prices - at least in the futures markets. While both had severe sell offs in the U.S. markets on Friday (sell offs for gold and silver that take place only in U.S trading have happened many times), anecdotal reports indicate that people were rushing coin shops and bullion dealers to purchase them.

NEXT: Stock Market Rallies Like It's 1932

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Do the Markets Indicate a Depression?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

In 1931, the Dow fell below it's 200-month moving average and didn't consistently trade above it again until 1944. Following this event were the worse two years of the Great Depression in 1932 and 1933. Long term trading of the major indices below the 200-month has not reappeared in the U.S. markets since that time. Despite the huge drop in 1987, none of the indices even touched this line. In the recent 2002 market drop when the Nasdaq lost close to 80% of its value, it pierced its 200-month moving average slightly for only one month. The Dow and S&P500 were way above their 200-month averages at the 2002 bottom. Things are worse in this market sell off however and we may be entering the Depression era trading pattern once again.

This week the Dow, S&P, and Nasdaq all fell below their 200-month moving averages. The violations weren't exactly minimal either. At its low, the Dow was about 600 points below this line, the S&P more than 150 points and Nasdaq around 250 points. We will have to wait until the 31st to see if October is the first month where the indices close below this level. We will need to see a few monthly closes below the 200-month to confirm that the market is telegraphing the first economic depression in the U.S. since the 1930s. All we can say for certain now is that things are worse now than have been in many decades and we are in an ugly secular (long-term) bear market.

There are a number of other indicators indicating greater problems in the market than existed in the early 2000s and during the 1987 mega crash as well. In 2000 to 2002 sell off, intermediate market bottoms could be determined when the number of stocks on the NYSE trading below their 200-day (not month) moving averages fell to around 20%. On Friday, the figure dropped to 3%, indicating almost every U.S. stock was in a bear trading pattern. This seems to be unprecedented (once again with the possible exception of the 1930s). The TED spread, a measure of confidence in the financial system (the higher the number, the less the confidence), hit a new record high of 4.13 on Friday morning, further distancing itself from the slightly above 3.00 reading during the 1987 market route. The VIX, a measure of volatility, reached 76.94 on Friday, way above its high of 55 in 2002, but still below the total meltdown level of 150 that it got to in 1987.

It is not surprising that U.S. stocks attempted a rally on Friday. They are about as oversold as they could possibly get. Nevertheless, the Dow and S&P still couldn't close up on the day. And the Dow has now managed to close down over 100 points for seven days in a row. It dropped 18% on the week (still not as bad as many overseas markets, the FTSE in the UK was down 20% and the Nikkei in Japan was down 24%). If the market manages to continue the rally it started on Friday afternoon, some test of Friday's lows should take place within four to nine trading days - and then we may have a rally that lasts at least for several weeks. Of course, the market could still go lower sooner rather than later. Strong support levels around 7200 for the Dow, 775 for the S&P (approximately their 2002 lows) and somewhat less strong support of 1500 for Nasdaq have yet to be reached. And even after five crashes (based on intraday drops) in two weeks, another crash day still can't be ruled out.

NEXT: Unlimited Liquidity Today, Unlimited Inflation Tomorrow

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Will Double Digit Crashes Follow Triple Digit Losses?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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In the last nine trading days the Dow has lost 2271 points or 20.9% of its value. Within this nine days there have been three or four days (depending on your definition) with market crashes. As of yesterday, there have been an unprecedented 6 trading days in a row with triple digit losses. The market meltdown is by no means limited to the U.S., but is global. As bad as the short-term picture is, the long-term could be much worse. Last night in Japan, the Nikkei began testing its 2002 low in a sell off that has lasted 18 years so far. If the U.S. markets follow this pattern, they will not bottom before 2225.

If you define a crash as a closing drop of 5% or more on the major indices, Thursday was the third crash day in less than two weeks (it was the fourth, if you just consider intraday drops). In an unusual trading pattern, the Dow and S&P were down more than the Nasdaq. This was caused by the SEC lifting the short selling ban on financials, which included Dow stocks GE and GM, and of which the Nasdaq has few. While the Nasdaq dropped 95 points or 5.5% to 1645, the Dow dropped 679 points or 7.3% to 8579 and the S&P dropped 75 points or 7.6% to 909. This was the first Dow close below 9000 in five years. The Russell 2000 dropped the most of all, losing 47 points or 8.7%. Trading volume was above average, but not at the spectacular level that indicates a wash out bottom. The VIX, the volatility index, hit 64.92 - way above its top of 55 in 2002, but still considerably below the historic 150 high during the 1987 crash.

As bad as it was in the U.S., worse things happened in overseas markets. The Nikkei dropped 1042 points or 11.4% to close at 8115. Drops greater than 8% took place in Australia, Hong Kong, India, the Philippines and Singapore. Indonesia closed its markets and suspended trading indefinitely. Russia did the same - again. Austria closed it market for half a day when stocks dropped 10% on the open. The major European indices were down 5% to 8% in mid-day trading. Light sweet crude fell below $82, but gold and silver both held up in the drop.

Markets don't go down forever and an explosive bounce will be taking place some time soon. Today, the Dow decisively broke its 200-month moving average (around 8470) on the open. Nasdaq and the S&P 500 broke this level several days ago. While a test of the 2002 lows for the S&P 500 and the Dow is now likely, Nasdaq may fare a little better. Look for support for the Dow around 7200/7300, S&P around 800, and Nasdaq around 1500. While it looks like we could be getting there today, market bottoms on Fridays are an unusual event.

NEXT: Do the Markets Indicate a Depression?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Meltdown Microcosm - U.S Future Can be Seen in Iceland Today

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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What happens when you create an economy based on the shaky foundation of foreign debt? While this sounds like a question about the U.S. economy, it is actually something that has been asked recently about Iceland. While the U.S economy has been built on foreign borrowing for about 25 years, Iceland only pursued this course of action after the mid-1990s and it is already experiencing a financial meltdown. Things are so bad that the country itself risks bankruptcy. In response to the crisis, draconian emergency powers, which would be the envy of any totalitarian state, have been granted to the authorities. The currency no longer floats, some stock trading has been suspended and banks are closed. Want to get access to your money or get it out of the country? Lot's of luck.

The rot in Iceland's financial system that has built up over the years was hardly a secret. The top four banks in Iceland have liabilities greater than $100 billion, while the entire GDP is only $14 billion. However, unlike much of the rest of Europe and the United States, Iceland banks do not own toxic mortgage securities. The problem instead is simply one of too much leverage (the U.S. also has this problem). Heavily exposed banks are collapsing under the weight of debts incurred during the 2000's lending boom, which artificially increased the average citizens wealth 45% in only five years. While all highly leveraged enterprises will inevitably fail, the Icelandic government still refuses to admit this is the cause of the country's problems. The prime minister has claimed that the "banks were victims of external circumstances". Governments throughout history have of course always blamed external (and frequently internal) forces for economic calamities and never their own policy failures and mistakes. Iceland is no different, nor is the U.S.

While the financial bubble developed over many years in Iceland, the final decline has been sudden. The surprise nationalization of Glitnir, the nation's third largest bank, a week ago precipitated a large drop in stocks prices and a plummeting currency. It order to stabilize the krona, the government stopped its convertibility and fixed the exchange rate to 175 per dollar. Stock trading was also suspended. To avoid capital flight, banks were closed down. Emergency powers were given to the government that allows it to take over any company, limit the authority of boards of directors, and to call shareholder meetings at will. If this sounds like communism, that's because it is. And all this is happening in a country with a democratic history going back to 930 when the national parliament, the Althing, was established.

Any American that thinks that similar things can't happen in the United States is being naive. In desperate times, governments take desperate actions. The U.S. government after all confiscated gold and closed down all the banks in the 1930s to help stabilize the economy. This time around, AIG Fannie Mae, and Freddie Mac have already been nationalized by the formerly capitalist U.S. government. Treasury Secretary Paulson stated only yesterday that partial nationalization of banks was an option under the Wall Street bailout bill. Just like in Iceland, governments shut banks, stock trading is suspended, and currency is frozen during a financial crisis. Democratic states can become totalitarian and capitalism can transform overnight to socialism. If you haven't prepared for these developments beforehand, it will be too late to do so once they actually occur.

NEXT: Will Double Digit Crashes Follow Triple Digit Losses?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Third Crash is the Charm - Fed to the Rescue

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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As predicted in earlier entries to this blog, there was a coordinated global interest rate this morning. The only mystery is why it didn't happen yesterday morning instead. Apparently two crash days in a row in the U.S. markets were needed to expedite this action. A G7 meeting is scheduled for this Friday in Washington and it was likely that the world central banks were waiting for the meeting to be over to show that it had resulted in them taking bold, decisive rate cutting action. The U.S. Fed also probably thought that its Monday/ Tuesday announcements of $900 billion increased lending from it various credit facilities and that it would buy up to a trilion plus dollars of commercail paper would be enough to bull the market up. Instead, U.S. stocks crashed again on Tuesday. So now the ever reliable 'cut interest rates to juice up the stock market' is being tried, not just in the U.S., but globally. Instead of bold, decisive action, it smacks of bold, decisive desperation.

Tuesday's market behavior in the U.S. indicated that the monetary authorities were losing their ability to impact stock prices with their usual bag of tricks. While the announcement of the Fed's massive liquidity injections did cause a major intraday rally on Monday and a strong opening on Tuesday morning, it didn't last. At the Monday low, the Dow, S&P500, and Nasdaq were down over 8.0% and because of the Fed's announcements they closed down only in the 3% to 4% range (still a pretty bad day). If you measure a crash by intraday action, there was most certainly a market crash on Monday. If you measure it only by a closing price drop of over 5.0% on the indices there was only a crash on Tuesday (as well as Monday a week ago). While stocks were up a good bit on Tuesday morning and everything looked like it was going according to plan, the market nevertheless quickly faded and selling accelerated toward the end of the day. By the close, the Dow had dropped 508 points or 5.1%, the S&P 500 61 points or 5.7%, the Nasdaq 108 points or 5.8%, and the Russell 2000 37 points or 6.2%.

So this morning the Fed has turned to more interest rate cuts to save the market. The funds rate was lowered by half a point to 1.5% and the discount rate by the same amount to 1.75%. The ECB also dropped rates by half a point, to 3.75%, as did the Bank of England, to 4.5% (the UK recently passed an $87 billion rescue package for its banks similar to the U.S. Wall Street bailout plan). Canada, Sweden and Switzerland also joined the rate cutting party (noticeably absent, at least so far, is Japan). China lowered a key interest rate for the second time in a month. Australia had cut rates a full percentage point on Monday. This was the U.S. Fed's second intermeeting rate cut this year (the next Fed meeting is October 28, 29th), following the large cuts that took place to prevent a market meltdown in January.

The reason that central banks have avoided rate cutting recently is because of the inflationary implications. The Fed itself has stated in the minutes from it recent meetings that it sees entrenched inflation as a danger in the current economic environment. It avoided lowering rates at its September 16th meeting because of this. The stock market which had been conditioned to expect automatic rate cuts during its bouts of weakness, starting selling off and entered a crash period. Like all addictive processes, if you don't keep feeding the addict the drug, painful withdrawal follows. Supplies of the rate cut drug are almost gone however.

NEXT: Meltdown Microcosm - U.S. Future Can be Seen in Iceland Today

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The New Crash Monday Phenomenon

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Three weeks ago, Monday was an ugly day in the U.S stock markets. The Dow was down around 500 points. The drop two weeks later on Monday was even worse, the Dow was down 778 points. At the bottom yesterday, another Monday, the Dow was off 822 points (it closed down only 370 or 3.6% however). The other indices were hit even harder. The bank failures, bailouts, and sometimes lack of bailouts that are taking place over the weekend are the cause of these Monday downward spirals. When the major bank failures end or the market hits a definitive bottom, Monday will once again be a safe day to be long in the market.

Unlike the previous Monday routes, significant intraday buying came in during the afternoon to lift the stock indices off their lows. It was reported that the shadowy U.S. government operation known as the plunge protection team had met in the morning and just before noon, a number of new Fed money pumping operations were announced (a lot more of the same things that haven't worked in the past). This didn't immediately reassure the market, which kept dropping until approximately 2:45. At the lows, the Dow hit 9503, the S&P 500 1008 and the Nasdaq 1777. The S&P and Nasdaq lows were in areas of strong chart support (mentioned in last Saturday's posting), the Dow's low was not. A strong rally followed and the Dow managed to close at 9955 (the first close below 10,000 since 2004), the S&P at 1057 and the Nasdaq at 1863. Europe though having closed before the rally period began lost heavily. The Euro Stoxx 600 index was down 7.6% on the day. As usual in times of market crisis, gold rallied closing up $33 and oil tanked closing down $6.07 at 87.81.

While yesterday's market action didn't feel like a definitive bottom, a number of indicators reached levels that have previously signaled bottoms. New Lows reached 1078 toward the close and anything over 1000 is typical of major bottoms. The VIX, a measure of market volatility, hit 58 during the day, it's high during 2002 was only 55 (however, it rose to 150 during the 1987 market meltdown and this could happen again). The TED spread, a measure of perceived credit risk in the economy, which had already blown past it's 1987 highs of around 3.00 in September, reached 3.91. Market breadth, with 15 to 1 declining stocks to advancing stocks on the NYSE was also indicative of a bottom. However, it was even worse last Monday. Volume was high on the Nasdaq, but not outrageously so, and only somewhat above average on the Dow - not signs of a washout. A successful test of yesterdays lows would create some reassurance that the market has indeed bottomed (at least for now).

Crash Mondays seem to always be followed by rally Tuesdays (although today may be an exception). The panicky authorities pull out all the stops to get the market going back up again. The Fed first announced that it's TAF auctions would now be for $150 billion each (they started at $20 billion last December). Funding limits for its other operations were raised as well. Last night Australia lowered rates a full percentage point, jumping the gun on a possible coordinated world-wide central bank interest rate cut. This morning the U.S. Fed announced that it will buy worthless commercial paper on the open market to unclog the credit system. Let me assure you that the stock market will eventually succumb to these manipulations and rise appropriately. Unfortunately, so will the price of everything else. You may have to sell some of those higher priced stocks in the future to pay for your $100 hamburgers.

NEXT: The Third Crash is the Charm - Fed to the Rescue

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Today's Global Stock Market Meltdown

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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A market sell off spread around the globe last night and is about to reach U.S shores as this is being written. This current round of selling was precipitated by a banking crisis in a number of European countries and in Korea over the weekend. Several Eurozone states moved to guarantee bank deposits and large bank bailouts from last week had to be restructured to make them work. The Asian bourses and Israel was the first to open after this news and the pronounced selling took place from the get go, with a number of exchanges recording crash level drops.

The trouble started on Saturday when the a plan for a coordinated bailout of the European banking system fell apart. Sunday, Germany moved to guarantee all bank deposits (Ireland was the first to do so last week). Austria and Denmark quickly followed suit and then so did Sweden . At the same time, Euro governments moved to shore up a number of troubled banks to prevent the problem from spreading. Germany had to restructure the rescue deal for lender Hypo Real Estate (after only one week), BNP Paribas agreed to buy a majority stake in Fortis which had been partially nationalized by Belgium and the Netherlands last Monday, and UniCredit, Italy's second-biggest bank, announced that it needed to raise capital. Tiny Iceland looked like it was about to become the first country with a banking system that completely collapsed. Across the world in Asia, South Korea's finance minister said Korean banks were having trouble securing funds in foreign currencies and that the government would offer loans from its reserves.

When markets resumed trading, the results were ugly. Israel was down 7% at one point, as was Russia. The Hang Seng in Hong Kong and the mainland Shanghai index experienced crash level drops of 5.0% and 5.4% respectively. Indonesia was the worst hit market with a 10% drop. Australia, India, Singapore, South Korea and Thailand were hard hit as well. The Nikkei in Japan was in slightly better shape than China, falling only 4.25% to 10,473 (well below the low of 14,000 plus bottom that it hit in 1992).

Europe, which is still trading as this is being written, followed Asia's lead. The major stock indices - the DAX in Germany, the FTSE in England, and the CAC-40 in France all fell between 4% and 5% after trading opened. Smaller countries were fairing worse with Norway down 6% and Austria down more than 8%. Oil fell to just over $90 a barrel, but gold and silver were rallying as is usually the case during financial crises. As happened last Monday morning, the precious metal rallies were taking place even though the U.S. dollar was up (the euro was down two cents against it).

As has been the case ad nauseum, central banks in Europe were pumping huge amounts of liquidity into the financial system to control the crisis. None of the previous moves have had any lasting effects, nor will this one. The next likely government action is a coordinated global interest rate cut, which we should be seeing soon. When this doesn't work, you should assume that trading bans (such as no short selling at all) will be extended and then no selling at all will be allowed because the stock markets themselves will be closed down for a day or two or even a week or more.

The U.S. markets have just opened with the Dow down almost 300 points and the Nasdaq down more than 50. It should be an interesting day.

NEXT: The New Crash Monday Phenomenon

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The House Caves in, but it's the Market that Collapses

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Friday, the House of Representatives took up the Wall Street bailout bill in a second time do-over and passed it by a comfortable margin of 263 to 171 (the party breakdown was 172 Democrats and 91 Republican yes votes). What made the difference wasn't that any of the horrendous provisions that looted the U.S. treasury on behalf of Wall Street were removed, but more costly measures, at least $110 more billion, were added! These pork runneth over items were for programs that had particular appeal in a number of districts where Congressman had previously voted no. The penny for your district, a dollar for Wall Street game worked like a charm. So did the lobbying efforts of those who benefited from the bill. One representative who switched his vote, said he never talked to so many bank presidents in his life (calls coming into the capital from just regular people were up to 100 to 1 against the bill). The U.S. congress proved once again that like every other regime in history that had created hyperinflation, it deems restraints on government spending to be unnecessary. Both presidential candidates showed their 'lemming to the sea' leadership abilities by not only supporting this legislation, but by helping to round up votes in their respective parties. It was reported that Obama alone helped switch 22 votes.

The passage of this bailout bill represents the third key policy blunder of the financial and monetary authorities in handling the credit crisis. The first was the rate lowering campaign by the Fed that started in August 2007, which flooded the financial system with a tsunami of liquidity. The second was the Bear Stearns bailout, which established a policy that would inevitably lead to bailouts for almost any failing financial institution. Now with this Wall Street rescue bill , the bailouts have gone from individual companies to the entire financial industry. Just as Bear Stearns was not the only bank/broker bailout, nor will this bill be the only industry bailout for the financials (Warren Buffet promptly stated that this bailout isn't big enough to work). The fourth key decision that will lead us down the road toward hyperinflation will be to expand the bailouts outside the financial system. The auto industry has already received its second government loan, expect more to come. This new phase for bailouts though will not be limited just to industry. The Federal government will also have to turn on its money spigot to save state and local governments from going under. Governor Schwarzenegger has already requested $7 billion in assistance for California.

In a little more than two months, the national debt ceiling has been raised $1.5 trillion because of the Fannie Mae and Freddie Mac bailouts (add another $5.3 trillion for their government takeover) and the Wall Street rescue legislation. A national debt of a little over $9 trillion will soon be exceeding $16 trillion, around $2 trillion more than the official overstated GDP figures. It looks like the U.S. government intends on borrowing from foreign governments to pay for this (both the Fannie Mae/Freddie Mac and Wall Street bailouts are sending a lot of money overseas). However, it is more realistic to think the printing presses will have to be scheduled for 24/7 operation.

The stock market spoke very clearly in its reaction to the the bailout bill. It started tanking immediately. The Nasdaq, S&P 500 and the small cap Russell 2000 all closed at new lows for the year - below the crash bottom on Monday. Only the Dow held above this level. Key support around 2000 was broken on the Nasdaq on Monday and this break was confirmed on Friday. The next major support level for Nasdaq is around 1800 and for the S&P around 1000. Expect a visit to these levels some time in the future. Although I suspect the government will try to interrupt this journey - perhaps instead of banning just short-selling, they'll try to ban all selling of stocks.

NEXT: Today's Global Stock Market Meltdown

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

No Assurance in Insurance; Wachovia's Deal is Not a Deal

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Apparently you can't rely on anything that U.S. government officials say, whether it comes from politicians or federal agencies. As is the case for those with severe psychological disturbances, reality has no permanence, but can change from moment to moment. Today's illustration of this 'Washington psychosis' comes from the Democratic leader of the Senate, Harry Reid, and the FDIC, the people who are supposed to be protecting your bank deposits. Reid publicly stated that a major insurance company was about to go under and then later backtracked (apparently the amnesia drugs had kicked in by that time). The FDIC announced on September 29th that Wachovia had been purchased by Citibank and provided detailed terms of the transaction. This morning, Wells Fargo announced that it was taking over Wachovia in an all stock deal. This leads to the immediate question of who paid whom a bigger bribe to make this happen.

Reid's statement was, " We don't have a lot of leeway on time. One of the individuals in the caucus today talked about a major insurance company. A major insurance company -one with a name that everyone knows that's on the verge of going bankrupt". Insurance stocks were already down before this comment because of exposure to AIG, Lehman, and Washington Mutual debt, not to mention derivatives. The selling accelerated after Reid spoke. In a very carefully worded statement (note the italics), a spokesman for Reid later stated, "Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy], nor has he talked to any insurance company officials." There were four insurance companies, which might be considered household names, that had double digit sell offs on Thursday - Hartford Financial Services (down 32%), MetLife (down 15%), Prudential (down 11%), and Lowes (down 10%). Both Met Life and Hartford released statements that they were not on the verge of bankruptcy (one wonders why they felt a need to do so).

Below is all the U.S. listed insurance companies with a market cap over one billion that had 10% or greater sell offs on Thursday:

Hartford Financial Services (HIG) - down 32%
Principal Financial Group (PFG) - down 16%
MetLife (MET)- down 15%
AXA (AXA) - down 12%
State Auto Financial Corp (STFC) - down 12%
Delphi Financial Corp (DFG) - down 12%
Prudential Financial (PRU) - down 11%
Unitrin (UTR) - down 11%
Everest Real Estate Group (RE) - down 11%
Loews (L) - down 10%
Cincinnati Financial Corp (CINF) - down 10%

The Reid insurance bankruptcy comments were just a moment of truth accidentally slipping out. The takeover of Wachovia by Wells Fargo after there was a done deal with Citibank is far more serious however. This represents a fracturing of the capitalist system in the U.S. Such niceties as contract and property rights no longer seem to be necessary, as indeed is the case in backward, undeveloped economies (which remain backward and undeveloped because these underpinnings for successfully doing business are missing). Of course, things may not actually that bad. This could merely be a case of the FDIC publishing completely false information about its activities and what is going on in the banking system. Well, that's certainly a reassuring thought.

NEXT: The House Caves in, but it's the Market that Collapses

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.