Wednesday, December 31, 2008

Pay Attention to the First Four Trading Days of 2009

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 of today, it looks the Dow will have had its third worst year since its creation in the late 1800s. Only 1931 (the record holder) and 1907 were worse. Both were depression years. There was no central bank in 1907 to prop the market up (J.P. Morgan himself organized the rescue and prevented a complete meltdown of the U.S. financial system) and while the Federal Reserve existed in 1931, it was engaging in restrictive monetary policies instead of the non-stop currency printing that it going on today. The years following 1907 and 1931 had very different outcomes. 1908 was one of the best years for U.S. stocks in the twentieth century, 1932 was closer to one of the worst (but stock prices were volatile to say the least).

So what should we expect for stock in 2009? We don't know yet, but we will be getting some hints in the next few days. Large pools of investing money get shifted at the beginning of the year. It is important to note where money is flowing out of and where it is flowing to. Don't just look at the market overall, but at cap size, industries and individual commodities such as gold, silver, oil and food. Note what is rallying and what is selling off in the first four trading days, especially the biggest moves. This will tell you what investments the money is going out of and going to.

Shifts in buying in certain market sectors don't mean a straight up move however. It is not uncommon for rallies in the first four days to have some pullback later in January and this can provide you with a buying opportunity. There is also no guarantee that the selling won't last longer than that also. You need to be particularly aware of this for commodities with seasonal patterns (such as oil and gas).

You are probably seeing in the mass media "expert" advice for investing in 2009. In general, you should ignore it and pay attention to the ultimate expert - the market itself. The market will soon be giving us some hints about where to find good investments. You should remember that there is always opportunity to make money in the markets and there are a lot of reasons to think that 2009 could be very promising in that regard.

NEXT: The Market Backdrop for 2009 - the Big Picture

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.






Tuesday, December 30, 2008

A Nasty ETF Surprise

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:

While studies generally indicate that ETFs are more tax efficient than mutual funds, there can be isolated exceptions and the ProShare family of short and ultrashort ETFs produced a truly shocking example on December 23rd. While ETF capital gains are usually minimal, in this case some of the funds distributions were closer to astronomical. Traders had no chance to adjust their portfolios to avoid the distributions either (and this was no accident), since the capital gains distribution was announced after the close and trading began ex-distribution the next morning. All holders of these ETFs, but especially short-term traders, will be getting a nasty tax bill because of ProShare's actions.

Ironically, the reason for the huge distributions are the success of the short and ultrashort ETFs. With the big drops in stocks this year, the ultrashort ETFs, which use margin to create a 200% short position, have been the biggest money makers by far. ETFs usually only incur capital gains when the indices or baskets of stocks they represent have bankruptcies, takeovers, or need to be rebalanced for other reasons. Apparently there was a lot more activity in these types or transactions in the short and ultrashort ETFs (all transactions get magnified in the ultrashort portfolios) in 2008 than in previous years.

The ProShae ETFs with the biggest distributions were:

1. $50.35 per share - SJL: Ultrashort Russell Midcap Value
2. $47.85 per share - SIJ: Ultrashort Industrials
3. $47.78 per share - SDK: Ultrashort Russell Midcap Growth
4 $42.35 per share - SSG: Ultrashort Semiconductors
5. $39.74 per share - SKK: Ultrashort Russell 2000 Growth

A full list can be found at: http://www.proshares.com/resources/news/36601289.html

If you were holding these ETFs in a non-taxable retirement account, capital gains distributions mean very little. Traders in taxable accounts however need to be careful in December. Anything ultrashort is not something that is meant to be a buy and hold position. By definition these are short term plays. You may want to take a holiday break from this type of ETF between Thanksgiving and New Years. New positions particularly should be avoided. The same advice will be good for the ultralong ETFs during a bull period.

NEXT: Pay attention to the First Four Trading Days of 2009

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.






Monday, December 29, 2008

The Euro, Oil, Retail bankruptcies, and GMAC

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:

Oil, energy companies, the precious metals and the mining stocks are doing well in European trading this morning (the U.S. markets are not open yet), in a hint of what should be expected next year. The inflation linked investments are doing well as retailers in Britain seem to be crumbling, along with the UK economy. In the U.S., there is a question of whether GMAC actually qualified to become a bank holding company. The Euro turns 10 on January 1, 2009 and its impressive performance against the U.S. dollar in the last couple of years is likely to continue.

The Euro traded around 1.42 against the U.S. dollar last night in Europe, well off its historical low of 0.82. While it didn't do well in its first couple of years and required global central bank intervention to prop it up, that story has reversed in the last couple of years. Global central bank intervention (which the New York Investing meetup documented starting in August 2008) has been needed to hold it down and the U.S. dollar up. The Euro has so far hit an all time high of 1.6038 last summer, but was trading in the mid 120's only recently. Driving it down has led to falling oil prices (oil is priced in U.S. dollars). In the long run, the currency of the inflation avoidant eurozone is likely to be a better bet than the currency of the 'print as many dollars as possible' U.S. Fed.

Nymex oil was as high as $40.27 in electronic trading overnight (and in an unusual price inversion that has been going on for awhile, lower than the Brent contract which hit $41.35) Tensions in the mid-East were cited as the reason for oil rising today. Reading the commentary, many analysts seem to assume that global tensions are a rare exception and are likely to disappear in the future. Any reasonable historical analysis indicates that this is unlikely. Global financial distress tends to translate into higher levels of conflict because governments shift the blame for their own incompetence to 'outside influences' being responsible. Not only does oil pricing benefit in the long run from this, but so does safe haven gold. Gold was up about $15 in Europe until the time the U.S. markets opened and then it was up only around $8. The drop when U.S. trading begins is a common occurrence that has lasted a long time. It has even been documented in academic studies that concluded it could only be the result of market manipulation.

As the inflation-linked trade was doing well in Europe, the retail trade was sliding further toward oblivion in the UK. Children's clothing chain, Adams, filed for a certain type of bankruptcy protection today. This followed the failure of the 99-year old general retailer Woolworth's, tea and coffee seller Whittard and music chain Zawi - all around the height of the holiday buying season. There are predictions that as many as 15 'major' UK retailers will go under early next year. Don't expect retail will be in much better condition in the U.S., it won't. You can expect a wave of failures on this side of the pond as well.

It is not likely that the Federal Reserve will bail out U.S. retailers (but don't rule out this possibility for any big chains with large credit operations) as it is trying to do with GMAC, the credit arm for General Motors. GMAC is trying to convert to a bank holding company as brokers Morgan Stanley and Goldman Sachs did in the fall. It is not clear it successfully did so however. Conversion to a bank holding company is the latest government scam to allow the Federal Reserve to pump money into a failed company. If the company is not a bank, but has anything to do with the credit markets, then turn it into a bank and give it a government bailout. Currently nothing succeeds like failure in the U.S. -the bigger the failure, the bigger the reward. And this is supposed to fix our economy? Right.

NEXT: A Nasty ETF Surprise

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.






Sunday, December 28, 2008

New York Investing meetup members in the Videosphere

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.

Video Related to this Blog: See body of blog.

There are videos online with people from New York Investing that are not produced by us. MSN Money has a series with insightful comments from group members Jason Tilliberg, Bob Rubin, and Steve Cheung. I myself have showed up questioning Bernie Madoff in a controversial You Tube video.

The MSN Money interviews were conducted several months ago before a meeting and what is posted online has changed over time. New York Investing meetup members participating in the interviews did a spectacular job, even obvious in the edited versions, and they deserve kudos. Unfortunately, MSN Money does not. MSN Money misidentified the name of our group, calling us the New York Investors meetup, instead of the New York Investing meetup. Despite this potential slander and requests on my part to fix it, the error persists. MSN Money also misidentified one of the interviewees and misspelled Steve Cheung's name. They have also refused to correct these errors as well. Adding misrepresentation to incompetence, the interviews have also been put into a bigger piece that recommends mutual funds as the way for investors to go - something that New York Investing is very much opposed to. Except for the interviews with Bob, Steve, and Jason, I don't recommend looking at anything on the MSN Money website. To find the interviews, click on 'Getting advice from an investing club' after going to: http://articles.moneycentral.msn.com/learn-how-to-invest/how-to-invest-1000.aspx?GT1=33014.

As for the video with me questioning Madoff, this took place in the fall of 2007. There was at a forum at the non-profit Philoctetes Center (now going bankrupt because it had much if not all of its money with Madoff) on technology in the stock market. Bernie Madoff was on the panel run by Times Magazine writer Justin Fox. In a recent blog of his, Fox admitted to meeting with Madoff at Madoff's request days before the meeting to discuss how the forum should be run. Toward the end, I asked a question about the Asian market bubble that I stated was about to blow up (which it did almost immediately thereafter). At the end of the question, you can see Justin Fox mumbling. Although this video doesn't have the answer, the question was deflected away from Madoff to another panel member. Perhaps just another example of how big media protected Madoff? I'll let you be the judge.

The video can be found on You Tube and is entitled, "Bernie Madoff on the modern stock market". The URL is: http://www.youtube.com/watch?v=auSfaavHDXQ. I am in the last minute or so of the video, so fast forward to around 32 minutes. There is supposed to be a longer version with the answer to the question somewhere on You Tube as well.

NEXT: The Euro, Oil, Retail Bankruptcies, and GMAC

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.






Saturday, December 27, 2008

Changes in Wall Street Firms that Led to the Credit Crisis

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.

Today's Guest Blogger: Dennis Mack, New York Investing meetup member, graduate of Harvard Law '69 and Fulbright scholar.


It is my belief that one of the major factors that has led to the current Wall Street collapse is the loss of internal self-regulation by the financial institutions once they became public companies. When I started practicing law on Wall Street, brokerage firms and investment banks were partnerships. The senior partners (often depicted in movies as miserly, backward thinking and overly demanding) were reluctant to take excessive risks because it was their personal capital that was at stake and the capital of their business partners and, perhaps, family members. When the brokerage firms and the investment banks sold shares to the public, we as a society lost the connection between risk-takers and risk-absorbers. The traders and bankers took on risks, but it was other people's money (the public shareholders) that actually suffered the losses. The traders and bankers were richly rewarded for short term results, but there was always a one-in-ten chance that their bets would result in a wipe-out - not of the traders and bankers but of their shareholders. The traders and bankers could just move to new firms.

In the old days, traders and bankers did not move to new firms. They became part of the firm and would not dream of leaving it. They married into the firm - literally sometimes by marrying the daughter of a partner. That may seem stifling but it also meant that the partners and those traders and bankers knew that their success was tied to the success of the firm. Now, there is a great disconnect. Traders and bankers can make their reputation at a financial institution and demand more or they will walk. Compensation committees award the higher bonuses because it does not come out of their own pockets. When there is a problem (uncovered by management) or an insufficiently generous bonus, the trader/banker could move on to another institution or even set up his own shop and practice his craft. His track record at the old shop would draw in money at 2% and 20%. In an up market with cheap borrowed money from China, they were able to magnify small returns into large returns and demand their big bite. No matter that leverage is a two edged sword that would eventually decimate the client's portfolio while still giving the manager his 2%.

In 1969, when I was assigned the task of organizing my first hedge fund in Panama/Bermuda, I was flabbergasted by the fee structure. I peppered the client with questions about whether people would actually pay such a fee when there was no clawback in later years after the fund would decline. They explained to me that a hedge fund was designed to create positive returns in both up and down markets and therefore the risk I perceived was negligible. They also said that if an investment manager had to give credit for past losses, he would have no incentive to service the fund after the loss and might even leave the management company to get a new start elsewhere. Besides, they argued, it would be unfair for new money coming into the fund to get a free ride up - not having to pay a 20% fee on the gains that they would enjoy.

The extraordinary rise in executive compensation in other corporations is a whole other story, but there are at least two connections. First, there was the rise of finance in business schools. This sent the best students into finance or consulting. It also meant that corporations were valued less on the products that they could turn out for a profit than the profits that could be augmented by adroit maneuvering among the tax, accounting and financial rules. People who could massage the results for the best appearance rose through the ranks. To retain them, you had to pay them like financial managers. Second, in pre-WWII America, individuals and family trusts owned corporations. Insurance companies invested in bonds and mortgages. Mutual funds were tiny. Pension plans were not funded. Individuals and family trusts bought and held. Trading on the stock exchanges was very, very low. There were concentrations of individual money that controlled corporations. Investors with large shareholdings voted their shares as if it were meaningful. They had a long term commitment to the company. Today, most shares are held by financial institutions. Many of them are traders and not investors. Some vote to support their trading strategy - not for the welfare of the company and its shareholders. Some are even able to rent the votes of real shareholders in order to produce a result that will allow them to profit personally. There is a disconnect between shares and corporate decision making.

We learned in law school that shareholders own the corporation and elect the directors to run it on their behalf. Today, management presents to the atomistic community of shareholders a slate of their golf buddies to direct the company pretty much at the behest of the management. Management takes the risks and are paid large bonuses whether they succeed or not while an ever-changing body of shareholders pass their holdings from chump to chump until the music stops in Chapter 11 or 7.

How do we change that? Do we want to require brokerage companies and investment banking houses to return to private partnerships when they have to compete with foreign behemoths? Do we want to impose upon financial institutions fiduciary duties in voting? Should only the very wealthy invest in stock and be incentivized to hold on to it for the long term (e.g., 5 years or longer)? We must start talking about some very fundamental changes, but we must see it within the competition of a global marketplace for financial and management expertise. I wonder whether US regulation alone can resolve our problems.

NEXT: New York Investing meetup members in the Videosphere

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.






Tuesday, December 23, 2008

East Meets West, The Triumph of Communo-Capitalism

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:

China lowered its interest rates last night for the fourth time since September. It's not yet close to zero interest rates like the U.S. and Japan, but will be be continuing to approach that level next year as will Great Britain. In China the government directly owns the banks and meddles in banking policy. While in the U.S. and Britain, it would be more appropriate to say that the banks own the government, or at least the central bank, and can directly meddle in the government policy that impacts them. In the end is there that much difference? The result is a financial system rife with corruption that engages in economically absurd behavior, which the government then has to bail out.

Final figures for third quarter GDP have just been released for the U.K. and the U.S. According to the official figures (take these with a big grain of salt and assume the reality is worse), the U.K. economy declined by 0.6% and the U.S. economy by 0.5% annualized last quarter. In the U.K. this is the biggest decline since the recession of the early 90s and in response the central bank has dropped interest rates to the lowest level since 1951. For the fourth quarter, a decline around 1.0% is expected in the U.K, while in the U.S. the consensus forecast is the economy will fall off a cliff with at least a 6.0% annualized drop - something worthy of a depression. As a reminder, both Federal Reserve chair Ben Bernanke and Treasury Secretary Paulson testified to congress in September that if the $700 billion Wall Street welfare bill, better known as TARP, wasn't passed, the U.S would face a severe recession. At the time, New York Investing said a severe recession was inevitable no matter what.

TARP is an example of fiscal profligacy, and while it is one of the worst examples, it is by no means the only one. Supporting all of the government's spending is the Fed's out of control money printing, which even mainstream economists are now starting to mention (better late than never I guess). Charts from the St. Louis Fed that New York Investing first showed in October are now getting some press attention. One of these charts, the U.S. Monetary Base shows an 86% increase during 2008, but around a 1000% increase annualized in the last 3 months. Another chart, Adjusted Reserves, shows this indicator exploding from $100 billion to $700 billion since mid-September. These charts (and around a dozen others) are so damaging that I am expecting they the numbers will either be 'adjusted' in the future or the Fed will stop making them available altogether as it did with M3 a few years ago.

While deflation is the headline issue today (based on very little reality), some economists are starting to point out that the Fed and the rest of the world's money printing central banks are going to have a lot of trouble draining all of this liquidity once there is economic recovery. History indicates that this indeed does not happen, but a hyperinflationary spiral is much more likely. This is just starting to dawn on some mainstream economists (but by no means all). The New York Investing meetup laid out this scenario in its September 2007 (yes, 2007) meeting -and so far events seem to be unfolding as predicted.

NEXT: Changes in Wall Street Firms That Led to the Credit Crisis

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.







Monday, December 22, 2008

Bailouts: It's Not Just Banks, It's Not Just the U.S.

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 Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs
http://www.youtube.com/watch?v=UQieE8Ryvk0

While Ireland had to inject more capital into its major banks this morning to keep their financial system afloat (Ireland has a bigger subprime mortgage problem than the U.S.), today's bailout news concerns mostly non-financial institutions. Mega memory chip maker Infineon's mostly owned subsidiary Qimonda received government assistance so it could keep operating. Tata Motors had to inject money into its Jaguar Land Rover unit and is looking for bailout money from the UK. On our side of the pond, commercial property developers are requesting bailout money from the federal government. As for the bailout money that the U.S. has already provided to failing financial institutions, a just released AP survey finds many banks don't know where the money went.

The need for a bailout of a memory chip maker in Europe should come as no surprise. This industry has suffered from chronic overcapacity for years. Started in the U.S., the Japanese then dominated the business and they were followed by the South Koreans (and you should assume that China will be the major player sometime in the future). The German state of Saxony, a Portuguese bank and Infineon itself injected money into Qimonda. This is an attempt to save jobs in Saxony and Portugal of course. More money will be needed to keep this uneconomical operation going.

Uneconomical operation would be a good watchword for Jaguar Land Rover as well. Indian car company, Tata Motors, acquired Jaguar from Ford in March (what a brilliant purchase that was) and according to reports has pumped hundreds of millions of working capital into the company. It is now injecting 'tens of millions' to keep Jaguar operating and is looking to the U.K. government for bailout money to save the jobs of British auto workers. President Bush after all has just grudgingly provided U.S. auto makers with minimal bailout money to tide them over to the beginning of next year (when another bailout will be needed). How the inefficient auto producers can survive when even the best operations are struggling - Toyota announced its first loss since World War II last night - is a good question.

Trying to get in on the bailout gravy train, U.S. commercial property developers have sent a letter to Henry Paulson requesting assistance. The industry wants to be included in the government loan program created to prop up the the market for student loans, car loans, and credit card debt. The letter warns of a dire collapse in the commercial real estate market. Indeed this is likely to happen. Why the developers should be saved from their own greed and stupidity is not clear however. Perhaps the need to cancel their country club memberships and sell their private jets would just be too burdensome.

As for the money that has been spent so far in the 700 billion Wall Street welfare program known as TARP, the AP sent out a request to the banks that were recipients of the funds so far and asked them what they did with them. Some banks didn't know, none provided any answers. Should we be surprised? Congress attached nearly no strings on the $700 billion bailout in October and the Treasury Department, which doles out the money, never asked banks how it would be spent. Our stalwart representatives on Capitol Hill did summon bank executives last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But AP admits that there is no process in place to make sure that's happening and there are no consequences for banks who don't comply. New York Investing said all of this would happen before the bailout bill passed. Please see the videos listed at the top of this blog.

NEXT: East Meets West, The Trimuph of Communo-Capitalism

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.









Friday, December 19, 2008

Oil Enters Buy Zone

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:

At the extremes of sentiment, there is nothing more bullish than a bearish commodity. When oil got to around $12.50 a barrel in 1998, surveys showed that only 3% of traders had a positive price outlook . Within days it was trading over $17 a barrel. The turnaround was sudden and explosive. The few contrarians who saw the opportunity made a lot of money in a short period of time. It turned out that $12.50 wasn't the low however, that was in the $10 range and it took a few more months to reach it. Similar behaviour is possible this time around.

Nymex oil fell as low as $33.44 in overnight trading. This represented a sharp drop in 24 hours after more than five long months of steep selling. It is common for markets to have six month sell offs. It is also common for the selling to end with a big drop at the end. Keeping that in mind, I started buying OIL today, even though I do not think oil has hit its low just yet. I suspect that this will be somewhere between $22 and $28. The set up for a good short term trade or the beginning of accumulating a position seems to exist though.

As I have said many times, the bottom price of oil will be determined by the cost of production. This is much higher than it was in 1998 because there is less easy to get to oil available. Much of the oil that has come on line in the last few years is oil that is expensive to produce, such as tar sand oil from Canada. This supply will start disappearing with oil selling in the 30s and the loss of supply will become extreme in the 20s. While you can find any number of news articles about how the demand for oil is going down because of the economy, you will see little about the supply also decreasing, which is the bullish side of the equation. Economic arguments that deal with the demand picture without mentioning supply are meaningless and should always be discounted.

Oil is one of the four pillars of inflationary investing (along with gold, silver, and food commodities). Keep in mind that it is priced in U.S. dollars and the Fed basically said this week that it intends on printing any amount of currency necessary to get the U.S. out of its current depression (my word not theirs). Just last night the BOJ in Japan lowered interest rates to 0.1%. England will likely institute ZIRP sometime in 2009. With the world's central banks engaging in hyperinflationary policies, it is only a matter of time before the price of inflation-linked commodities skyrocket. You just need to time your entry and wait for that to happen.

NEXT: Bailouts: It's Not Just Banks, It's not Just the U.S.

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.






Thursday, December 18, 2008

The Truth About Deflation - A Crude Analysis

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 a carefully orchestrated media campaign to justify its money printing spree, the U.S. government has been trumpeting the need to counteract the threat of deflation. While there has been disinflation (lesser inflation) since this July when a concerted global central bank intervention began to drive up the value of the U.S. dollar, even the highly under reported inflation rates that the U.S. government publishes are still positive. A look inside the figures indicates quite clearly that there is only one major source for dropping prices - oil and its derivative products. If this reverses (and it will), watch out.

The PPI for November fell 2.2% after a record drop of 2.8% in October. The core which excludes food and energy was up 0.1%. Energy prices fell 11.2% after a 12.8% drop in October. Gasoline prices had a second record monthly decline. Home heating fuel fell by a whopping 23.3% (you should note that prices are down the most just as demand it rising substantially, which doesn't make sense if supply is not changing). Food prices were unchanged on the month. For the year, PPI is up 0.4%, but the core is up 4.2%. Overall PPI could indeed be reported as negative for the year when the December figures are released.

The seasonally adjusted CPI fell by 1.7% last month - the biggest drop since 1947 when seasonal adjustments were created. Core prices were unchanged however. Food itself was up. The cost of home ownership was up. The cost of health care was up. Energy prices however were down 17% . Gasoline prices fell an eye-popping 29.5% (gas prices went down at least 75 consecutive days in a row this fall, something which has never happened before). For the year, CPI was up 1.1% and the core is up 2.0%.

This morning the NYMEX light sweet crude contract hit $38.16 even though OPEC just said it would cut daily production 2.2. million barrels (the market is sceptical that this will actually happen). This is approximately a 75% drop from the early July high. This amount of drop is too much too fast. While I do not have exact figures, oil appears to be getting close to its cost of production. Could that level be as low as $35 or even $30? Yes it could. Whatever the bottom price is, the threat of deflation will likely disappear once it is reached .. and that should be soon.

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.






Wednesday, December 17, 2008

Welcome to Hyperinflation

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:

Yesterday ZIRP (zero interest rate policy) became a reality in the United States. The Fed cut its overnight funds rate to a range of zero to 0.25 percent. The New York Investing meetup predicted such a possibility in the fall of 2007, when I first said that if things became bad enough the Fed would lower interest rates to zero. In our December 4th meeting two weeks ago, we predicted that 2009 would be the year of ZIRP with the Fed lowering interest rates to around zero and keeping them there. Things apparently have become bad enough.

Yesterday, the Fed bluntly announced that it would print as much money as necessary to deal with the current economic contraction (read depression). And this has allowed the American press to finally acknowledge in its articles that the Fed has been printing money to cope with the credit crisis - something that I have been repeating like an obsessive-compulsive parrot for more than a year. Since this September alone the Fed's balance sheet has more than doubled (that's in only 3 months... think about that) from around $900 billion to more than $2 trillion. With its new programs to buy up worthless mortgage-backed securities that number will be up to $3 trillion. You may safely assume it will go much higher after that.

The authorities and their allies in the mass media assure us that we needn't worry about the obvious (hyper)inflationary implications of the Fed's moves. It is claimed that deflation is the big problem facing us (and War is Peace and Hate is Love, etc. see Orwell's novel 1984 for similar government assertions). The facts, as well as simple common sense, indicate otherwise. The government's own highly manipulated numbers which grossly understate inflation, still indicate prices are going up. The big drop in price increases can be traced to falling oil prices and literally nothing else. Since commodities can only fall to their cost of production, oil is not likely to fall much further and the 'deflation' threat could disappear overnight. The market will then have to deal with a mountain of government printed money instead.

Apparently we needn't worry about that either. While the economic establishment admits that the Fed's actions are potentially dangerous, former Fed Vice Chair Alan Blinder himself said yesterday "If that much money is left in the monetary base, it would be extremely inflationary", it claims the money can be withdrawn as the economy recovers and then everything will be fine. The German authorities said the same thing about their money printing in the early 1920s. But every time they tried to stop it, there was an immediate negative reaction in the economy, so they restarted it again immediately. The U.S. Fed in the 2000s will be no different. Money printing is a form of addiction and addicts will do anything to maintain their high until they hit bottom.

NEXT: The Truth About Deflation - A Crude Analysis

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.


Tuesday, December 16, 2008

Excess Liquidity to Solve Excess Liquidity Problem

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:

Almost everyone expects the U.S. Fed to lower interest rates by 50 basis points to 50 basis points today. Soon we will find out what will happen when there are no more rate cuts left as I asked rhetorically long ago in one of the New York Investing meetup's You Tube videos. We do know what has happened in the past because of excess liquidity with one bubble inflated after another because of fed policy. Each bubble leaves a trail of victims, many of whom should have known better. The list for the Madoff scandal keeps growing and the similarity to suspended belief that made Enron possible should be noted. While there were a few lone voices saying the emperor had no clothes, the top Wall Street players supported both and questioning from the media just didn't exist.

Hedge funds were one of the many beneficiaries of U.S. government easy money in the 1990s and 2000s. In 1990, there were only 610 of them in the U.S, by the end of 2006, there 9462. Assets under management went from $38.9 billion in 1990 to $1.9 trillion in June of 2008, when according to Bloomberg they peaked. As of November 24th (long before the Madoff scandal) U.S hedge funds returns were down 22% on the year - some protection from the Bear Market! A number of hedge funds themselves invested with Madoff and their clients were generally charged 20% of profits and a one and half percent maintenance fee to get them in on the biggest Ponzi scheme in American history. Just another of example of Wall Street being filled with people who know other people, but know little about investing.

While hedge funds still remain beyond the reach of the average investor (and in many cases this is fortunate), the other big beneficiary of the credit bubble, mutual funds, are also suffering. In the six months between May and October, U.S. mutual funds had a decline of $2.5 trillion in assets. Much, but not all of this, was the result of the declining stock market. Money seems to be flowing into money market funds which hit a record $3.7 trillion last week and have hit records highs for the last 11 consecutive weeks. There also seems to be some shift of funds toward ETFs. Despite the declining market, ETF assets have grown by $104 billion in the first nine months of 2008. Perhaps the American public is slowly realizing that the mutual fund industry is obsolete and does little except take a slice of their investing money in exchange for lower than average market returns?

The New York Investing meetup continually points out that there is no free lunch and much of our investing predictions are based on this simple premise which is why they are so accurate. Don't think we don't get a lot of flack because of this because we do. Most people want to believe in the too good to be true premise (and the Madoff scandal makes it clear that the rich and well-connected are just as susceptible to this as everyone else) and the U.S. government through its interest rate policy, the Treasury through its bailouts and the mass media that refuses to question, all keep the illusion going. Most people of course also don't make money with their investments either. Instead they wind up eating the free lunch and invariably go hungry later on.

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.





Monday, December 15, 2008

Indecent Exposure: Madoff Caught Swimming Naked

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:

Warren Buffett's famous remark that you only know who's swimming naked when the tide goes out is particularly relevant at the moment with the ultimate Wall Street insider Bernard Madoff accused of operating a $50 billion Ponzi scheme (with an additional $17 billion just 'missing'). The hear no evil, see no evil SEC gets no credit for unmasking this multi-decade fraud, with Madoff confessing to his sons as his scheme fell apart and they in turn notifying the FBI. There are even reports of in-the-know Wall Streeters having invested with Madoff knowing his operation was fraudulent, but they had assumed that it was based on an insider trading scam - it being common knowledge on the Street that the SEC rarely investigates citizens above suspicion (one SEC employee was recently fired for trying to open just such a case) for this behavior.

Madoff is the former chairman of the Nasdaq and the founder of Bernard L. Madoff Investment Securities, a closely-held market-making firm that has operated since 1960. He also ran a hedge fund, which is the source of the supposed $50 billion in fraudulent losses (sustained during the time that former Fed chair Alan Greenspan repeatedly said there was no need to regulate hedge funds). Madoff's hedge fund business didn't register with the SEC until September 2006. What took it so long to do so is a good question. An even better question is, did they investigate the hedge fund since that date and if so why couldn't they uncover the largest fraud in American financial history? Madoff's Investment Securities is also market maker on Nasdaq and huge amounts of funds pass through that operation. Are those funds safe or have some of them been pilfered too?

Investors in Madoff's hedge fund are a who's who of big money people, banks and other hedge funds who should have known better. These include banks Santander, Royal Bank of Scotland, BNP Paribas, HSBC, Nomura and hedge funds Man Group, Tremont Capital Management and Fairfield Greenwich Group. Some big names that have surfaced so far as Madoff investors are Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services (49% owned by looking for a government bailout GM). A number of charities also entrusted their money to Madoff, Senator Frank Lautenberg's family charitable trust among them, and at least one has already closed down as a result.

The revelations of the Madoff fraud are somewhat reminiscent of Richard Whitney scandal during the Great Depression. Whitney was the president of the New York stock exchange from 1930 to 1935 and was also a citizen above suspicion just like Madoff. He was assumed to be a brilliant financier, but this image was also false. He turned to embezzlement to cover up his mounting business losses and to maintain his extravagant lifestyle. The authorities eventually caught up with him, although it didn't take nearly as long as it has with Madoff, and he wound up in Sing Sing. Revelations of financial misdeeds indeed became commonplace in the 1930s as the economy fell apart and you should assume that this will be the happening once again.

NEXT: Excess Liquidity to Solve Excess Liquidity Problem

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.






Friday, December 12, 2008

Herbert Hoover Policy - Working Just as Well Today as in the 1930s

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:

Congressional Republicans got in touch with their Herbert Hoover roots last night when they defeated the proposed $14 billion auto bailout. Republicans wanted wage concessions from union workers, even though they failed to be as specific in reigning in multi-million dollar banker and broker salaries when the $700 billion Wall Street welfare bill (TARP) was passed. Fiscal conservative when it is convenient, Republican Senator Grassley, stated "I think it would appear that the people who voted against this are carrying out the will of the voters as expressed through the phone calls to our offices". While calls against TARP to congressional offices ran up to 100 to 1 against the bill, a large number of Senate Republicans saw no need to carry out the will of the people in that case. Senator Grassley was among that group.

While I am generally opposed to bailouts, I am 100% opposed to hypocrisy and governmental stupidity. You can make a case for bailing out no one and you can make a case for bailing out everyone, but bailing out some companies and industries and not others produces the worst results at the highest taxpayer cost. Ultimately the U.S auto companies will be bailed out, either immediately through funds released from TARP by President Bush (the White House released a statement this morning saying it was thinking about it) or when the new congress meets in January. The justification for putting Wall Street on the dole for $700 billion and refusing $14 billion dollars for the car makers is simply not going to fly.

Ironically, the most negative reaction to the failed auto bailout bill took place in Asia overnight. Both the Nikkei in Japan and the Hang Seng in Hong Kong had crash level drops of 5.6% and 5.4% respectively. Japanese and Korean auto stocks were the most pummelled, falling around 10%. The Yen rallied strongly against the dollar reaching 88 to 1 range at one point. Oil (light sweet crude) fell to the $46 range, still well above its low of $40.50 reached several days ago. European indices was spared the full carnage because an announcement of a new $267 billion economic stimulus plan for the 27 country eurozone was released in the morning their time. While U.S. stock futures were way down before the opening, the selling was muted (not accidentally I might point out) by the White House's conveniently timed statement on the possible use of TARP funds to bail out the auto makers.

While the Herbert Hoover administration actually implemented a number of programs to deal with the collapsing U.S. economy in the early 1930s, these programs were spotty and inconsistent. Hoover himself frequently chose denial over reality in dealing with the unfolding depression, even going so far as to give a press conference in June 1930 announcing that the depression was over (it was actually just beginning). The U.S. congress seems determined to follow in his footsteps.

NEXT: Indecent Exposure - Madoff Caught Swimming Naked

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.






Thursday, December 11, 2008

Unemployment - Truth Worse than Even Government Reports

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:

Today's weekly jobless claims came in at 573,000, well above the cut off of 400,000 level which is usually considered recessionary. The four-week moving average, which is considered more important because it is assumed that the errors in each weekly report will cancel each other out, came in at 540,500. Continuing claims, all the people who are collecting unemployment, reached 4.43 million. Both numbers are the highest level since the deep recession of 1982 when official unemployment reached double digits. The increase in people on the unemployment rolls was the biggest since 1974, another year of major recession and a major bear market.

While no one could argue that these numbers aren't bad news, the truth is actually much worse. Somewhat less than half of the American labor force is eligible for unemployment. This part of the population never shows up in the official numbers cited above. This does not mean however that you can just double all the government figures to get at the true numbers. You would have to assume that the half of the U.S. labor force not eligible for unemployment is equally likely to be unemployed as the half that is and this is certianly not true. On the other hand, it is also certainly true that the ignored half or the labor force does not have an unemployment rate of zero.

The monthly unemployment figures published by the BLS also underestimate unemployment, but do so in a different way. People who are "no longer looking for work" also known as discouraged workers are not counted. The underemployed or people who have worked even a minimal amount part-time are counted as employed. The Labor Department does publish an alternate measure of unemployment, which counts part-time workers who want full-time work, as well as anyone who has looked for work in the last year. This number which still cuts out a number of people indicates that the current U.S. unemployment rate is closer to 13%, not the 6.7% officially reported in last months employment report (almost double, but not quite).

In times of great economic calamity for developed economies, unemployment can reach a quarter of the labor force. It was estimated to be 25% at the bottom of the U.S. Great Depression in the 1930s and almost that same number during the hyperinflationary collapse in Germany in the early 1920s. If the alternative unemployment figures reach 20% or more this time around, it can safely be said that the current economic crisis has gone beyond recession and has become a depression.

NEXT: Herbert Hoover Policy - Working Just as Well Today as in the 1930s

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.









Wednesday, December 10, 2008

China's Trade Gap and the Global Economic Future

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:

China's import/export figures for November were released today. Both had significant declines. Year over year exports fell 2.2%, while only last month they were up 19.2%. Imports fell even more, declining 17.9% after being up 15.6% on the year in October. The Trade Surplus swelled. The turnaround was dramatic to say the least and gives the appearance of an economy falling off a cliff. The last time China's exports fell was in February 2002.

The sharp fall in imports is perhaps more worrisome than the export drop, even though the Chinese economy is export driven with internal demand being weak and an undeveloped component. As a manufacturing economy which imports a lot of the raw materials that it needs to produce the items it exports, large drops in imports can mean a lot less will be produced in the future. Falling prices of commodities could account for much of this drop however. Regardless, lower imports imply significant weakening is taking place in the commodity producing economies that supply China. On the other hand, lower exports imply weakening is accelerating in the world's developed economies that buy China's finished goods.

In case you might find these figures worrisome, the Wall Street hype machine has been out in full force this week to bull up expectations about the U.S. economy and stock market (you should always worry when this happens). Headlines like, "Worst of the recession upon us, forecasters say" and "Stocks most undervalued since 1974" are just some of the many examples that I have seen lately. The optimistic forecasters all work for Wall Street firms of course and even the top ranked are pretty sure that things will be getting better soon (by the way, being a top ranked Wall Street economist is an honor similar to having the best vision in the school for the blind). I particularly liked the article I read quoting a well-known investor about how it was a good time to get into the stock market. You had to look toward the end of the article to see that he was down 58% for the year and his judgment about the market had obviously been completely wrong lately.

All of the recent press also shows that Wall Street is universally in favor of the Fed lowering interest rates further (which would make the New York Investing's prediction of ZIRP - zero interest rate policy - a reality) and "flooding the economy with money". This of course would benefit the big Wall Street banks and brokers by lowering their costs and increasing their profits. And, yes the economy would likely recover for a short time before it drowned in the wave of inflation that will inevitably followed these actions.

NEXT: Unemployment - Truth Worse than Even Government Reports

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.






Tuesday, December 9, 2008

The Latest Washington Free Lunches

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:

The U.S. stock market rally continued yesterday, with metals, steels and other infrastructure plays frequently having double digit rallies from usually extreme oversold conditions. What set off the rally was president-elect Obama's announcement over the weekend of the largest infrastructure-spending package since the 1950s to stimulate the U.S economy. The plan to upgrade America's deteriorating bridges and roads, increase energy efficiency in buildings, computerize health records, and increase use of broadband is certainly laudable and economically constructive unlike the visionless money-wasting programs of the historically incompetent Bush administration. While this lunch may be a lot tastier than what has been dished out in the last 8 years, the bill is still going to have to be paid one way or the other however.

An examination of the federal government's record so far in handling the housing crisis (which I would like to remind you that it helped to create and encourage) indicates that government action in that arena has so far been ineffective. Before the credit crisis U.S. foreclosures were running around a million a year. It looks like they will be about 2.25 million this year even after several government programs were instituted to limit the problem. A study just released by the Comptroller of the Currency indicates that over half of borrowers risk losing their homes again only six months after their loans have been renegotiated to lower monthly payments. Even worse, the government through the FHA is once again encouraging lenders to provide these same type of 'bound to default no matter what' loans. A recent Business Week cover story, "Subprime Wolves are Back" reveals that the FHA is supporting 100% insured loans (the government picks up the tab when they go bad) through mortgage lenders with spotty and even criminal records.

Meanwhile the Auto bailout proceeds in Washington. The current figure being discussed is $15 billion, which should stave off bankruptcy for the big three until sometime in the Spring of 2009. After that of course, another bailout will be needed and probably another and even another as well. The idea of a Car Czar is catching on adding another bureaucratic layer to an industry that is drowning because of its own bureaucratic sludge. Expect the auto bailout figures to rise next year, just as the banking/broker bailouts will. Add these figures to the up to one trillion dollars in the Obama proposed infrastructure spending - or at least that's the initial figure (pick whatever multiple you like to come up with the actual one).

It is my belief that all of these government programs and the ones that follow will indeed save the economy and once again make it robust, at least for awhile. It is not possible to spend almost unlimited amounts of money without causing inflation. When the spending is coming from essentially printing the money being spent, you can add major currency devaluation and the possibility of hyperinflation. Yes, we will get out of the frying pan, but we will wind up in the fire.

NEXT: China's Trade Gap and the Global Economic Future

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.






Monday, December 8, 2008

Tribune Bankruptcy Has it All

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:

Only minutes ago the Tribune filed for bankruptcy. The failure of the Tribune contains within it a multiplicity of elements from the credit crisis, the economy, and the failure of mass media to adequately inform the public of both. According to its filings, the owner of the Chicago Tribune and the Los Angeles Times has $13 billion in debt, but only $7.6 billion in assets. Under such circumstances, it is not surprising that it sought bankruptcy protection, but that it managed to avoid doing so for so long. This leads to the obvious question of just how many other U.S. companies have similar finances that are so precarious that it is inevitable that they will go under? Probably quite a few.

The Tribune was taken private under one of the many private equity deals that took place during the low interest rate fueled credit bubble. Just like subprime borrowers for homes, the company was loaded up with debt that could never be successfully paid back if future circumstances proved to be anything less than rosy. And less than rosy certainly describes the recent history of events impacting the Tribune. The current recession, denied until this month by the U.S. government, has caused a dramatic decline during the last year in all of the Tribune's advertising categories (the source of most income for mass media outlets in the U.S.). The credit crisis makes it impossible for the Tribune, as well as all other companies in similar circumstances, to get out from under the stranglehold of debt that it took on earlier in the decade.

Who are the financial geniuses that are the Tribune's creditors? The usual list of Wall Street's who's who of course. The Tribune's biggest unsecured creditors are its lenders, JPMorgan Chase and Merrill Lynch. Others include Deutsche Bank, New York-based investment management firm Angelo Gordon, hedge fund Highland Capital Management and Goldman Sachs Group. Barclays Capital., which bought key assets from bankrupt Lehman Brothers, is also among Tribune's creditors, with about $142.9 million in interest rate swaps (boy, it was a real bargain picking up those assets). Other outlets in the incestuous mass media business are also on the hook, including Warner Bros. Television, Twentieth Television, Buena Vista Entertainment, and NBC Universal Domestic Television. It can not be ruled out that the Tribune's failure will set off a chain reaction of bankruptcies in the industry.

In a broader sense, there is much more of an object lesson from the Tribune's financial difficulties than that dubious lending practices permeated Wall Street (not exactly a new idea at this point). The lack of responsible reporting on the events that led to the credit crisis, giving an outlet to the Wall Street Pollyanna chorus that denied that the problems were serious and which claimed over and over again that they would soon go away, and not looking into the U.S. government's cover up of the current recession with manipulated economic statistics are how the big news outlet have handled things of late. The tribune itself seems to have been victimized by the web of denial that the U.S. mass media fostered on the American public. Poetic justice perhaps?

NEXT: The Latest Washington Free Lunches

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.






Friday, December 5, 2008

Brother, Can You Spare a Job?

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:

The employment report was released this morning and the news can only be described as devastating. There was a loss of 533,000 jobs in November, the most this year so far. This was also the biggest drop in 34 years, when 602,000 jobs were lost in December 1974. On top of November's reduction in jobs, September and October was revised sharply downward with losses those months much worse than initially reported. Despite the large drop in jobs, the official unemployment rate rose only to 6.7% last month from 6.5% the month before. Unemployment would have been even higher if government statisticians hadn't decided that 422,000 people had left the labor force. Still, even this 'modified' figure is at a 15-year high.

The unusually low reported unemployment rate isn't the only thing in the report that should make you suspicious either. It is obvious that the government grossly and conveniently underestimated job losses before the presidential election where the state of the economy was a major issue damaging Republican electoral prospects. The September figures were the last ones reported before the election. Initially, there was a loss of 159,000 jobs, which is pretty bad, but not nearly as bad as what really happened. Right after the election, this number was revised downward to a loss of 284,000 jobs. In today's report it was revised downward further to a loss of 403,000 jobs. Total yearly jobs losses reported before the election were 760,000. Today that number is being reported as 1.9 million - a rather steep increase and much more dismal picture than voters were given just one month ago when they went to the polls.

Job losses last month were widespread, hitting factories, construction companies, financial firms, retailers, leisure and hospitality, and others industries. Nevertheless, there were job gains in government, education (mostly government as well) and health care. Every bad employment report this year has in fact shown an increase in government employment, even though many states, local governments, and school districts are severely strapped financially. If you extrapolated these increases out, you would also see that they indicate in the long-term we will all be government employees. For some reason, I have trouble finding them credible.

All in all it can be said that the deteriorating employment picture is the result of two factors. First, the U.S. economy is indeed falling apart and already in deep recession. Secondly, a lot of deterioration in the employment picture that is being reported now, has actually taken place over the last several months. The U.S. government is just admitting the truth. Of course, the past figures may be somewhat worse than even what we have been told so far.

NEXT: Tribune Bankruptcy Has it All

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.






Economic Predictions for 2009

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:


Last night in its December 4th meeting, the New York Investing meetup released its economic predictions for 2009. The talk began with a review of the 2008 predictions made at the Dec 12, 2007 meeting and published on the website that day (can be found in the file section in the file, "Japan 1992, U.S. 2007", see: http://investing.meetup.com/21/files). All the predictions made for 2008 were accurate at least to some degree, with the prediction of recession and and government bailouts for financial institutions being particularly spot on. If the 2009 predictions are equally accurate, it's going to be a very rough year.

It is our belief that the economy next year will descend from recession to depression (this is no official declaration for depressions as there is for recessions). As part of that scenario, unemployment is likely to rise toward and possibly into the double digits (depends on how much the government fudges the figures). Bankruptcies will increase dramatically, particularly for retailers, auto related companies (suppliers, dealers, etc.), home builders, and small businesses and individuals. Shrinking consumer credit and rising defaults on credits cards will continue to damage the economy. The real estate sector will not recover and the commercial component will suffer more than the residential. The bailout for banks and brokers will continue and additional money will be have to pumped into the failing institutions that have already received government money. Bailouts are likely to be needed for big players, like Morgan Stanley, Goldman Sachs, Bank America, and General Electric. Failures of small and medium banks will rise.

The U.S. government will react to this economic deterioration in 2009 by lowering interest rates even further, essentially instituting ZIRP (zero interest rate policy), and by ballooning the deficit and the national debt. Bailouts will expand beyond companies to states and municipalities. Some municipal bonds are likely to default if not propped up as well. The feds are going to have to support money market funds again next year, just as they have done twice so far in 2008. They may have to bail out the market system itself with the possibility of an exchange failing (there have been rumors of trouble at COMEX for some time now). In general, there will be some shift toward bailouts being focused on programs that help individuals rather than corporations, which received over 95% of bailout money in 2008.

Things don't look any better on the International front either. 2009 will be the year of global recession, with simultaneous recessions in the U.S., the Eurozone, Great Britain, Japan, Australia and a number of emerging economies. China will be in danger of political instability because of contraction in its manufacturing sector. Countries that export a lot to China, such as Japan and Korea and commodity producers such as Brazil will see damage to their own economics because of China's problems. In Europe, it looks like Great Britain will be the hardest hit of the major countries. Some smaller countries, such as the Ukraine, Hungary, Romania, Latvia and Estonia could see their economies implode just as happened in Iceland this fall. Overall, the rest of the world will react to the economic crisis by lowering interest rates and 'printing' large amounts of money just as we will be doing in the U.S.

While things look dire on a number of fronts, that doesn't mean there aren't many ways to make money in the current environment. People tend to focus too much on the risks in such scenarios, instead of the opportunities. The bigger the crisis, the bigger the opportunity should always be kept in mind. Winners always keep both in balance and keep an eye out for profitable investments when others are too worried or too fearful to do so.

The notes for the talk can be found at: http://investing.newyork.com/21/files in the file, "Economic Predictions for 2009".

NEXT: Brother, Can You Spare a Job?

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.





Wednesday, December 3, 2008

Bailout Cost: $8.5 Trillion so far ... and Counting

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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One analysis has calculated that so far the bailout efforts of the U.S. government are up to $8.5 trillion. This is almost as much as the U.S. National Debt was when the bailout efforts began. So basically in a year the U.S. government has managed to double a debt level than took well over 200 years to accumulate. Don't expect to see all of these bailout costs included in the official National Debt figures however since the U.S. government engages in more off-balance sheet accounting than Enron ever dreamed of.

While these figures would seem alarming to even a casual observer, many mainstream economists don't find them troubling. Recent Nobel winner Paul Krugman claims the U.S. National Debt could be twice GDP (which would be around $28 trillion if you believe the official overstated GDP figures). How this could be a sustainable debt load for the U.S is hard to fathom, especially since we have a huge stream of social security and medicaid payments coming due in the next couple of decades because of retiring Baby Boomers (there is no money in either of these trust funds by the way, all the funds are used to support current government spending the moment they are received). Economists are also not worrying because over 50% of the bailout costs so far have been structured in the form of a loan. Much of those loans are backed by the truly worthless assets though - apparently the hope that sub-prime borrowers (this time companies) will by some magic pay back their loans still lives on and on in the fantasy land of modern economic belief. While up to now over 95% of bailout costs have been in the form of corporate welfare, expect this to change starting next year with a shift toward more support for individuals.

Although the inflation implications of U.S. government bailout profligacy should be ratcheting government bond yields to record levels, this has not happened yet. A flight to safety among desperate investors had kept U.S. bond yields unusually low (corporate bond yields are at a record spread to treasuries however). The drop in yields combined with the plunge in U.S. stocks has actually caused S&P 500 yields to be greater than 10-year U.S. Treasuries for the first time since 1958. Before that date this relationship was the norm. Don't assume that norm is returning however as some pundits are claiming. Stock yields are being kept artificially high by the bailout programs, which have allowed some companies to fund their dividends with U.S. taxpayer money. Stock dividends are going to come down and U.S. bond yields will eventually go up when they adjust to the inflationary realities of government spending.

Meanwhile, the bailout programs are not nearly at an end yet. As we have said in the New York Investing meetup since the credit crisis began, there is no such thing as one bailout for an insolvent financial firm. No firm has been better than Citigroup in proving this point. After five private bailouts earlier in the year, Citi got $25 billion from TARP and only weeks later had to have a much bigger government cash infusion to stay afloat. The auto makers are in Washington hat in hand at the moment with a low entry level bailout request - expect those costs to keep going up next year as well. And of course, their are more bailouts waiting in the wings.


NEXT: Economic Predictions for 2009

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.