Economy is Bad, but GDP Report OK

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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For those who missed it, the cover of the latest issue of Newsweek has a blaring headline, "The Recession is Over". This 'just wishing makes its so' approach to economic forecasting is being pushed by the Fed and some of its compatriots. I have yet to read though of even one industry that is showing growth in the alleged economic rebound that is taking place. Nevertheless, there was a lot of fanfare for the release of today's GDP Report and how it would show things are getting better. I had no doubt that it would considering the GDP figures are probably the most manipulated and unreliable ones that the U.S. government produces.

Yesterday I checked the 2007 and 2008 GDP figures. If you look at the BEA (Bureau of Economic Analysis) website, you will see that during 2008 the U.S. GDP increased over $450 billion. This a rather eyebrow raising figure considering that the U.S. was in the worst recession since the 1930s during all of 2008 and the classic definition of a recession is declining GDP. If only our current batch of government statisticians had been around in the 1930s they could have made the GDP numbers go up and shown conclusively that there was no Depression! Then they could have used the good GDP numbers to show people that they weren't really hungry and unemployed.

The headline number in today's GDP Report was a decline of 1.0%. For the past year the economy has declined 3.9% (or at least that's the not as bad as the real story official number). It also seems that first quarter GDP was revised downward from minus 5.5% to an even worse minus 6.4%. Looking inside the report, there is little that is positive other than the current declines are less than the previous declines. The big improvement in last quarter GDP did not come from either the consumer or business sectors, but from government spending and trade.

Consumer spending which accounts for 70% of GDP can be summarized as: spending on durable goods fell 4.0%, spending on nondurable goods decreased 7.1%, and spending on services was down 2.5%. Business investments fell at an 8.9% annualized rate during the second quarter and Inventories declined by $141.1 billion. Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Investments in housing went down for the 14th consecutive quarter, dropping at a 29.3% annual rate. While the actual economy itself was devastated, good news came from the government sector of GDP. Federal spending rose 10.9%! Imagine how good the GDP Report could be if the federal government printed and spent even more money?

Interestingly, the GDP deflator (the inflation rate used to calculate GDP) was 2.2%. I was amazed the government admitted to so high a number. Last year for the second quarter report it was 1.2% even though this was when oil and food prices were skyrocketing. The government claimed that there was almost no inflation at that time despite the obvious. According to classic economics, inflation can't exist during a recession. Also according to classic economics money printing causes inflation. It's quite obvious which one is winning in this case.


NEXT: Critical Juncture for Dollar and Stocks

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.

Oil Update - EIA, CFTC, and USD

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:

Light sweet crude fell 5.8% yesterday, a crash level one day drop. The EIA weekly storage report set off the selling. Crude closed at $63.35. It was $3.60 below Brent, a lower quality oil. The CFTC has started hearings this week and traders are claiming that they are completely politically motivated. Their evidence? - the CFTC's own reports. Oil was also damaged by a rising dollar. The dollar was rallying on the 'good news' that the U.S. was printing money to buy its own bonds (no that doesn't make any sense). As has been the case since the beginning of June, when the dollar goes up, everything else went down.

The EIA reported that oil storage was up 5.1 million barrels. Distillates were up 2.1 million barrels, but gasoline stocks fell 2.3 million. The mainstream media reported that distillate stocks were at their highest level in 25 years (take that with a grain of salt). Year over year distillate demand is down 10.7% and jet fuel demand dropped 13.3%. Gasoline demand is up by 0.8% however. At his time of year gasoline is the key demand driver for the oil market.

The CFTC has started its hearings this week trying to track down the evil speculators that have been manipulating the oil market. Interestingly, on Monday the Wall Street Journal reported the CFTC "plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices - a reversal of an earlier CFTC position." On Tuesday, the Journal reported that the CFTC is "updating- but not necessarily reversing - a 2008 report that blamed supply and demand, rather than speculators" for last year's spike in oil prices. So let me summarize this news for you. The CFTC already investigated this subject last year and found that the oil market like every other market operates on supply and demand. Not trusting its own work and the basic laws of economics, it has decided to investigate again. To get to the truth, it is holding hearings. However, before the hearings have even begun and data gathered, a decision was already made to blame speculators in the report that will be issued. At this point, you should be smelling a giant rat the size of Washington, D.C.

I actually don't doubt for a moment that there is speculation driving the price of oil to non-market prices. It's not taking place on the trading floors in New York, London or Singapore however, but from government offices on the Potomoc and Thames. To help clarify this picture, it might be a good idea to change Ben Bernanke's title from Fed Chair to Speculator-in-Chief. At least then, the public would know what he is really up to.

NEXT: Economy is Bad, but GDP Report is OK

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.

Durable Damaged Goods

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 June Durable Goods Report was released this morning and the number fell 2.5%. The Bloomberg headline for the report was "U.S. Durable Goods Orders, Excluding Cars and Planes, Unexpectedly Advance". There you have it, once you remove the bad components of some report, it's actually bullish! Unfortunately, things are only bullish in Never Never Land and not in Reality Land where those of us who don't work in government agencies or for the mainstream media have to live. Attempts to mute the stock market reaction to the report obviously came directly from the Federal Reserve. Media articles stated that an unnamed top official (now who could that be) said the U.S. economy is likely to see moderate growth in the second half of 2009, as signs grow that the recent severe contraction is waning. If this happens, it will be one of the Fed's first accurate predictions in over two years.

Too much attention shouldn't be paid to one Durable Goods Report, the numbers are highly volatile and the government has little idea what they really are as is. A fall of 12.8% in transportation damaged the numbers. Surprisingly, car sales were down very little (you should be suspicious of that number). The star component was orders for primary metals, which rose 8.9%. The most important number was shipments, which fell 0.2% for a record eleventh straight monthly decline. Yeah, that certainly looks bullish.

There are still some shoes to drop for the economy with commercial real estate being at the top of the list. Fed Governor Janet Yellen admitted to this in a talk yesterday. She also said, "Concern that the massive federal budget deficit will cause inflation is misplaced, deficits don't cause inflation". But she did admit that they can cause higher interest rates, with the implication that this is somehow not related to higher inflation (it was not reported if the audience was doubled over with laughter by that point). Of course, the U.S. is printing money to pay for the deficits and this unquestionably causes inflation. Yellen didn't discuss that rather unpleasant topic and may have even denied that that was the case as well. She did mention she thought core inflation would under 2% for years to come. Yellen is quite possibly the dullest member of the Fed (the competition is strong, so this would be some honor).

News that just crossed the wires indicates that the Fed bought 2.99 billion in treasuries so far this morning. This is with printed money. By the end of the week, the amount is likely to be a lot higher. But, don't worry, this is not going to cause inflation - in Never Never Land that is, in Reality Land there's going to be a lot of problems.

NEXT: Oil Update - EIA, CFTC, and USD

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.

Bonds, Bernanke and Immoral Hazard

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. is auctioning off $235 billion in debt this week, which surpasses the $104 billion record set in a week in late June. There is some concern among the participants that foreign demand may be weak - and it probably will be. That doesn't mean the the paper won't be sold. The U.S. will simply print the money to buy it. But don't worry, the mainstream media will as usual assure us that this won't be inflationary even though it has been every other time throughout history.

'No inflation' has been the mantra of the U.S. monetary authories since 2007. One reason that has been cited for the last few days of the stock rally is Bernanke's testimony before Congress last week that the economic recovery is widening (where this is happening I don't know) and it won't likely include inflation. Bernanke also said that there would be no subprime crisis one month before it blew up. He then proceeded to continually misjudge the extent of the problem and mishandle it over and over again. So of course, he knows what he's doing now.

Bernanke also has a town hall meeting in Kansas City on Sunday night to get in touch with the people and to help further misinform them. He was repeatedly asked about the Fed's 'too big to fail' doctrine. His response was that he had to "hold his nose" to rescue such institutions during this crisis. Fortunately, Bernanke isn't Pinocchio or his arm would have had to reach out to the planet Neptune. The 'too big to fail' doctrine was actually established in the U.S. in the early 1980s because of the South American Debt Crisis, when the 17 biggest U.S. commercial banks got into trouble because they had lent substantial amounts of money there. Continental Illinois actually failed in 1984 and was essentially nationalized by the government. The other 16 banks were indirectly bailed out. At that point going forward the big banks knew they could do no wrong. A much bigger bailout was necessary during the Savings and Loan Crisis and a now a much, much bigger bailout has been necessary because of the Credit Crisis (something that Moral Hazard theory predicted would happen). Does the deeply concerned Bernanke have any plans to fix this problem? It doesn't appear so.

The trade-weighted dollar ETF was at 78.50 the last time I checked, just above the 78.33 breakdown point. Something is almost certainly going on behind the scenes. Gold was as high as 956 this morning, but had a sharp drop the moment U.S. trading opened - something that happens over and over and over again. An academic study analyzing the pattern concluded that this could only take place because of market manipulation. The regulatory body CFTC is not likely to hold hearings however even though they recently claimed that they were out to stop market manipulation (it's similar to Bernanke being concerned about bailing out the big banks). Apparently though, they can't find it if it is being done by the big players, just as the SEC couldn't realize that Bernie Madoff was a crook.

NEXT: Durable Damaged Goods

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.

Blog Not Available 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.

Our Video Related to this Blog:

The blog will not be published today due to illness. It should be back up soon.

NEXT: Bonds, Bernanke and Immoral Hazard

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.

Is It 1998 All Over Again?

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 some ways the market reminds me of 1998. Energy prices had hit a low in the spring and rebounded, but then dropped off again in the summer. Stocks were deteriorating into the summer, but rallied strongly in July for no really good reason. Low prices caused energy production to be curtailed and this eventually led to higher prices for the next 10 years. That scenario is quite likely to repeat itself. Whether or not the stock market collapses in August as it did in 1998 remains to be seen. Is there a contemporary version of Long-Term Capital out there?

The future of oil and natural gas prices is clearly laid out in Schlumberger's earnings report today. Like Halliburton earlier this week, Schlumberger said a sharp drop in natural-gas drilling in North America caused an earnings decline. Drilling in the U.S. and Canada reached a five-year low in recent months and no rebound is likely to take place in the foreseeable future. The reduction in drilling activity has also effected oil and has done so globally. While energy companies have scaled back oilfield activities worldwide, the number of rigs operating in the U.S. oil patch is off roughly 55 percent from last summer. If you also consider that a number of large-scale multi-year projects to increase productivity from declining fields (many of the world's biggest producers) were cancelled when oil prices were at lows in the winter, the future becomes easy to predict. There will be shortages of oil in a year or two. The U.S. is particularly vulnerable to these shortages because our energy production is dropping precipitously. The authorities will be surprised when this happens and they will blame greedy speculators and scheming by foreign producers for causing energy prices to skyrocket when these shortages appear.

As for the stock market, it has been going up no matter what. There has been a 10-day rally as of yesterday - a long time for an uninterupted rally. There was a big move up yesterday on fairly heavy volume. The Nasdaq has also just closed a gap on the weekly charts made last September. On the daily charts the RSI is about to hit the max. According to the mainstream media all of this is taking place because of good earnings. Even a cursory analysis of the earnings reports indicates that earnings are actually in very bad shape however. The earnings news out last night was uniformly bearish, but the European markets still rallied and U.S. stock futures were up this morning. So, it looks like the market goes up no matter what. This only happens when large amounts of liquidity are being poured into the financial system by the authorities. Why are they doing this now is a good question.

Reports have started to appear about how the Credit Crisis is over and the U.S. housing market is recovering. The worst of the Credit Crisis is indeed over, but this however doesn't mean recovery is taking place, nor that the economy is getting better - it isn't. As for housing recovering, this really strains credulity. Once a bubble collapses, it needs to have a long and severe drop to correct the excesses and housing has not gotten anywhere near that point yet. British GDP statistics were out overnight and the economy there shrank 5.6 percent year over year, the biggest drop since quarterly records began. Yeah, things are getting better all right.

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.

Bernanke and Natural Gas

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:

Fed Chair Ben Bernanke was on Capital Hill for a second day of hearings yesterday. This time he appeared before the Senate. As he did in his testimony before the House, Bernanke spent a great deal of time assuring the Senate that the Fed could "exit" the policy moves of the Fed (including increasing its balance sheet by over a $1 trillion and massive increases in bank reserves) he has made before inflation pressures mount. This is like saying Pandora's Box can be closed again after it was opened. I do not know if our elected representatives burst into hysterical laughter or chuckled in an amused manner when Bernanke made these statements. This was not recorded in the hearing transcripts.

Once again Bernanke also emphasized that "monetary policy remains focused on fostering economic recovery". Apparently the focus isn't working. A number of senators complained that businesses in their states reported that banks were refusing to lend funds because of the crisis. Since nothing in U.S. government policy requires them to do so and the Fed and U.S. Treasury have made it possible for banks to earn riskless money, why should they lend? Bernanke at least admitted that reducing unemployment was "difficult and challenging". So his policies aren't working for anything that they are supposedly 'focused' on fixing. Maybe that's because they are focused on creating inflation instead.

In one of the great hypocritical moments in contemporary American politics, Senator Chris Dodd asked Bernanke, "When can the American people expect the recovery that they have funded?" Dodd himself publicly demanded the policies Bernanke has followed and supported the programs the Treasury has implemented. He also has a history of questionable dealings with Fannie Mae and was an enthusiastic supporter of government policies that led to the Credit Crisis. Now of course he's complaining the Fed and Treasury haven't cleaned up the mess he helped create. For his part, Bernanke said that Congress should try to reign in its spending. This of course would cause the economy to contract and make Bernanke's policies even less effective than they already are.

But the American public can rest assured that the Fed's no interest rate policy will continue no matter what. Bernanke made it clear that interest rates would not be raised any time soon. My guess is that the Fed is also pumping huge amounts of liquidity into the financial system currently (so there would be no complaints from congress about the stock market falling apart). This would explain both the stock rally and the weak dollar (trading just above its breakdown level for the third day in a row). Gold closed at $953 an ounce yesterday, a six-week high.

In presumably unrelated news, the weekly Natural Gas storage report was out this morning. Storage was up 66 bcfs versus an estimate for a rise of 67 bcfs. Stocks are 458 bcfs above the 5-year average. Natural gas futures fell 0.6% after the report was released.


NEXT: Is It 1998 All Over Again?

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.

Dollar Watch; Bad Earnings are Good; Natural Gas

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 no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural Gas

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.

Bernanke Says Don't Worry - You Should Worry

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:

Federal Reserve chair Ben Bernanke is testifying before the U.S. congress today. Expect him to paint the rosiest picture possible and the mainstream media to glom onto the 'good times are coming' scenario. In preparation for his testimony, Bernanke published an opinion piece in the Wall Street Journal today. In it he details all the policy tools the Fed has available to prevent future inflation. Indeed they COULD do all of the things mentioned. Whether they will be able to is quite another story and this is not discussed.

Although Bernanke did not state it specifically, there is one thing and one thing only that is absolutely required to stop inflation - the government has to stop printing excess money (more correctly referred to as currency). As long as this goes on, it doesn't matter what else is taking place. Governments almost without exception follow contradictory policies when inflation starts to get out of control. They will put on price and wage controls. They will try to limit capital outflow. They will try to prevent 'speculation'. They will try to lower the price of gold and silver with market manipulation. They will outlaw hoarding and black markets. They will do almost anything except printing less money and until they do, none of these other measures ever work.

More than once in his 'don't worry, the Fed has everything under control' article, Bernanke stated "economic conditions are not likely to warrant tighter monetary policy for an extended period". So the government doesn't even have the intention of printing less money. Even when it gets to the point that they know there is no other choice, they will either not do it or do it for a short time, realize it is damaging the economy, and then stop. This scenario has played out over and over again in the past. Central Banks always know that their excess money creation is causing inflation, but the economy becomes so addicted to their currency printing drug, it immediately goes into painful withdrawal when it's removed. Every central bank has the option of stopping the printing, just as Bernanke claims in his convoluted manner that the U.S. does now. But they don't do it.

As for claims that the economy is getting better, it is easy to engineer such statistics. Essentially economic activity consists of consumer spending, business spending and government spending. Increasing government spending by printing more money will improve the GDP numbers. If GDP gets better only because the government is spending more, it's highly inflationary. Better economic news is likely to be bad news. This issue wasn't discussed in the Bernanke article. Nor did he mention how he missed seeing the subprime crisis coming and how he subsequently mishandled ever aspect of it after its effects spread through the financial system. But NOW you can trust him. Yeahhhh, right.

NEXT: Dollar Watch; Bad Earnings are Good; Natural Gas

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.

CIT - Last Minute Reprieve

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 last minute development, commercial lender CIT has secured a $3 billion bailout from its bondholders thereby saving the company from filing for bankruptcy protection - at least for the moment. The rescue includes a $3 billion loan which is not due until 2.5 years from now. $2 billion is going to be committed immediately and another billion is to become available within 10 days. The bailout is supposedly taking place without government intervention (and the moon is made of green cheese). The media is trumpeting that this represents a new phase of the financial crisis and indicates how much things are improving. Don't believe it for a moment.

CIT is going to restructure its debt. Lenders are trying to get $825 for each $1000 worth of notes. There is a billion worth of senior notes alone. The company has established a steering committee of bondholders that will work on drawing up a number of debt swap offers designed to alleviate CIT's debt burden and further shore up the company's cash position. A question everyone should be asking is who are the people who are going to put the money up for this and what is their relationship with the Fed and U.S. Treasury.

Meanwhile a report is out that some of the biggest recipients of TARP bailout funds, including Bank of America and Morgan Stanley, increased their spending on lobbying in the second quarter as Congress began to look closely at revamping the rule system for financial institutions. Fortunately, members of congress aren't known to be for sale. Their votes are another story however.

NEXT: Bernanke Says Not to Worry - You Should Worry

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.

Bank Profits Soar Even Though Business is Bad

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 Nasdaq hit a new high yesterday for the rally that began in early March. All the indices have had major rallies in the last several days, rising off a technical picture that indicated extreme weakness. Good earnings news, starting with Goldman Sachs and followed by the other major banks and brokers, bulled the market up. While the headline numbers look good, the rest of the picture indicates business is still deteriorating.

The two poster children of big bank insolvency, Bank of America and Citibank, released earnings today. Both had huge profits, but not because of their lending, which is what they are in business to do. Bank of America claimed a $2.42 billion profit, despite continued losses from failed loans. The bank had to increase its loan loss provisions by $13.4 billion. JP Morgan Chase also had increases in failed loans when it reported earlier. So how did these banks make money? It came from their trading businesses. Goldman also made huge profits from its trading business. It looks like all the big financials are making lots of money from their trading businesses. I wonder where all that money is coming from? Well, I guess it's good to have friends at the Fed and U.S. Treasury.

Citibank reported a profit of $3 billion, but only because it had a $6.7 billion gain on the sale of Smith Barney. As long as it can continue to sell Smith Barney every quarter, it's earnings will hold up. If not, it could be in trouble. Citi also recorded gains on assets that had lost value during the Credit Crisis, but which it claims are gaining back their value. In case you forgot, Washington changed the accounting rules awhile ago to allow the big banks and brokers to create an illusion of prosperity where none really exists. For some reason 'make believe' accounting didn't work for Bear Stearns, which literally went out of business overnight.

The banking system will not be healthy again until banks are lending and making money from their lending operations. This has not happened yet and increases in loan loss provisions indicates things are still getting worse, despite the half a dozen Fed programs to take these bad loans away from the banks. At this point, Bernanke has had two years to deal with this problem and he has yet to show any success with his give-away programs. His efforts have only helped the big banks cover up the existing problems. His side kick Geithner is now busy forcing CIT into bankruptcy, even though it lends money to a million small and medium size businesses. That's certainly going to help get more loan money into the economy. For those of us who want things to get better, 'make believe' seems to be the only option left open. Maybe we should close our eyes and try to wish hard enough.

NEXT: CIT - Last Minute Reprieve

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.

CIT DOA; Liquidity Injections Rally 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.

Our Video Related to this Blog:

The market had a great rally yesterday with almost all asset classes going up. This started a few days ago with the Goldman Sachs (aka Government Sachs) rally. Morgan Stanley beat expectations this morning. The Goldman rally took place BEFORE the good news was released and if yesterday was at least partially a Morgan Stanley rally, it happened before the news came out also. Don't worry though, the government announced many times last week that it was going to crack down on illicit speculation in the markets. If you had trouble not laughing when reading that last sentence, it's not surprising. There is no need to write parody, when you have the mainstream media reporting news like that.

The lack of memory on the markets part seems to be truly amazing. The no longer in existence Bear Stearns was about to announce good earnings in March 2008. The only thing that prevented it from doing so was the company went under before it could tell the world how much money it was making. This would seem to indicate to anyone with even the most minimal thinking ability that the earnings of these big Wall Street firms are meaningless. But hey, this happened last year. Traders, like government officials, don't let themselves get bogged down with the past. After all, it's not like history repeats itself.

It would not be unreasonable to assume that the market is rallying so much in the last few days because a lot of money is being pumped into the financial system. That the U.S. dollar is going down, while everything else is going up (a common pattern in market rallies since the beginning of June) supports this view. Now what could possibly be behind that? Probably the imminent failure of CIT, a lender to one-million small to medium size businesses. After giving CIT $2.3 billion in TARP funds, the U.S. government has decided to pull the plug. CIT is apparently not too big to fail (meaning that it doesn't have a lot of former alumni in highly placed positions in Washington, D.C.). Treasury Secretary Tim Geithner, part of the tweedledum and tweedledumber team of Geithner and Bernanke, is personally handling the situation.

If there is any historical analogy to CIT's failure it is the Bank of United States, actually a local New York City bank despite the name, failure in December 1930. This bank lent to lots of small and medium size business, but only in the New York metro area, whereas CIT lends nationally. The Fed refused to bail out the Bank of the United States and thought the repercussions would be minimal. Instead, the demise of the Bank of the United States set off the first of three major waves of bank failures that lasted more than two years and which wiped out a large part of the U.S banking system. But that was back in the 1930s when U.S. financial officials didn't have the slightest idea what they were doing. Instead today we have ever on the ball Fed Chair Ben Bernanke who in March 2007 said, "the problems in the subprime market would only reduce somewhat the effective demand for housing” and then followed that up in May 2007 with “given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited”. Bernanke saw no potential ill effects on the broader economy right up until June 2007. A few weeks later everything fell apart.

NEXT: Bank Profits Soar Even Though Business is Bad

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 No Inflation

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 monthly PPI and CPI came out yesterday. Even the government's highly manipulated figures indicate that inflation has suddenly resurfaced (you can assume that inflation is actually a lot worse, see http://www.shadowstats.com/ for a more accurate set of numbers). But don't worry, the mainstream media assures us that "inflation is not expected to be a problem any time soon given a severe recession which is keeping a lid on wage pressures". Of course, they also said the same thing last month before inflation zoomed this month. They will probably also still be saying the same thing when you are paying $50 for a loaf of bread.

The PPI yesterday was the real shocker, rising 1.8% month over month (expectations were for it be up by 0.9%). While the media blamed this on a rise in energy prices, the core rate, which excludes food and energy prices, was up a substantial 0.5%. Media reports assured us that this was nothing to worry about though because PPI was down 4.6% year over year. The core PPI however was UP 3.3% year over year. This huge discrepancy indicates that the PPI went down because of falling energy prices. According to the media, a drop in inflation caused by falling energy prices is important, but a rise in inflation because of energy prices increasing is irrelevant. Those of you who are capable of basic logical thought may not think this makes any sense.

The CPI report had consumer prices up 0.7% last month. The core rate was up 0.2%. As with the PPI, the media said it's nothing to worry about because its all because of energy prices going up. However, the price of food, clothing and medical care all went up as well. While the price of almost every necessity went up, some luxury items like airline travel went down in price and this helped moderate the reported inflation rate. CPI was down 1.4% year over year, while the core was up 1.7%. Once again falling energy prices accounted for the drop.

What is causing inflation is that the U.S. government is printing a huge amount of additional currency. Since commodities are priced in dollars, in the long term it is going to take a lot more dollars to buy a given amount of oil, food or any other commodity. Prices have to go up. And it doesn't matter if there is a recession, or excess capacity in the system. This was the case in the U.S. in 1974 and prices zoomed. It has also been the case in every incident of hyperinflation throughout history.

NEXT: CIT DOA; Liquidity Injections Rally 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.

Government Sachs - Earnings and Market Manipulation

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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Goldman Sachs posted earnings today and it made $3.4 billion, or $4.93 a share, in the second quarter, up from $4.58 a share a year earlier. Wall Street's expectation were for $3.54. Excluding TARP expenses, the company would have had a profit of $5.71 a share. Revenue came in at $13.8 billion, way beyond the consensus estimates of $10.7 billion. The stock has been rallying big time the last few days. Certainly it couldn't have been because Wall Street insiders got the good news before it was publicly released. Even if they did and admitted in on a neon sign in Times Square, the SEC still wouldn't investigate.

In case you are wondering how Goldman makes all that money, there are two exposes available that can help clarify it for you. The first is "Inside the Great American Bubble Machine" by Matt Taibbi in Rolling Stone Magazine, which details how Goldman has helped create and profit from every major bubble since the Great Depression. While I consider Taibbi's grasp of economics and market forces to be extremely weak and his article too much in a naive 'the speculator did it' genre, there are things that Goldman has done that are indeed questionable. Taibbi should have concentrated on them. For those who don't recall, it has previously been reported that Goldman shorted subprime bonds while advising its clients to buy them. It made money from client fees on one side and gains from trading against its clients on the other. What must it have been up to last quarter that made it so much money? It may not have been something so benign.

In a truly fascinating story that has gotten almost no media coverage (I wonder why), a former Goldman employee was accused of stealing proprietary software from the company that, according to prosecutors, could be used to manipulate the market in unfair ways if it 'fell into the wrong hands'. This description is from court proceedings. See the You Tube video before it gets censored: http://www.youtube.com/watch?v=lrlQSMCx-aE

The accused former Goldman employee went to work for a group of former Citadel employees who set up their own company, Teza Technologies. Interestingly, Citadel is suing this new company for industrial espionage and this is related to the alleged theft of software from Goldman! “Defendants’ activities, particularly Teza’s decision to hire [xxxxxx], an accused software thief, create a substantial risk that they have stolen, or may be planning to steal, Citadel’s proprietary code,” the hedge fund firm said in court papers. Citadel, like a handful of other big Wall Street firms and hedge funds, also has a long history of making extremely high profits like Goldman Sachs and uses similar sophisticated software involved in the Goldman case. Thank god this software that could be used to 'manipulate the market in unfair ways' is in the hands of these fine upstanding corporate citizens - and we can be assured that the authorities plan on keeping it that way.

NEXT: So Much for No Inflation

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 Non-Stimulating Economic Stimulus Plan

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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President Obama was defending his economic stimulus plan over the weekend in a radio address and in an op-ed piece in the Washington Post. He rejected calls for a new stimulus package. In a really eye popping statement in the Post, Obama stated that his stimulus program "was not expected to return the economy to full health, but to provide a boost that would stop the free fall." Now, that's a real ambitious goal! Left unanswered was, what is being done that is expected to return the economy to full health?

The Obama stimulus plan has a number of components and it is questionable how economically stimulating most of them will be as is. The first phase of $288 billion in tax cuts has mostly been implemented. The result? The U.S. savings rate went up significantly. Those people who didn't save their tax cut money, paid down their personal debt. The money didn't go into the economy. So much for that part of the stimulus plan. Tax cuts for stimulating the economy are more of a Republican idea though. Why they were the cornerstone of a 'change you can believe in' Democratic economic program is a good question.

Other components of the $787 billion stimulus include major increases in Medicaid spending, about $48 billion in highway and bridge construction and billions more to boost energy efficiency, shore up state budgets, and increase educational spending. How increasing Medicaid spending boosts the economy is beyond me. This type of spending is a drag on the economy. Bailing out state governments (the plan is not exactly doing a good job on that one so far based on what is happening in California) also is not going to stimulate the economy. It indeed might keep the economy out of free fall however. As for the alternative energy component of the plan, this is something with long term economic potential, not short term. The Democrats recent attempts to keep energy prices low by having the CFTC manipulate the market are going to undermine this part of the stimulus program because alternative energy will be too relatively expensive to be economically viable. The one component of the plan that would both stimulate the economy in the short term and long term is the money for fixing the U.S. transportation infrastructure. This accounts for only 6% of the plan's spending.

There is also no reason to think that the plan should be having any effect by now anyway. Only $60.4 billion of the non-tax component has been spent so far. As reported in the Wall Street Journal this weekend, the White House isn't changing its goal of spending 70% of the stimulus funds by September 2010 (yes that is 2010, not 2009). And people are wondering why the stimulus plan doesn't seem to be effective so far. I think I have the solution! Money spent next year can't possibly stimulate the economy this year. While this may seem obvious to anyone who isn't in a coma, it seems to have alluded the political establishment in Washington.

We are now in the 20th month of the current recession, which makes it a post World War II record breaker for the U.S. The previous longest recession was 16 months. Based on monthly statistics there is no evidence that the decline is going to stop any time soon. When the negative numbers turn positive is when recovery is taking place, not when they become less negative. Despite this Obama stated in his weekend messages that "unemployment tends to recover more slowly than other measures of economic activity", implying that recovery is taking place overall. This is not happening, things are only get worse at a slower rate. Of course, this is like saying we are sinking into a depression slowly instead of quickly. According to his Washington Post article, this seems to have been Obama's goal. With success like this, who needs failure?

NEXT: Government Sachs - Earnings and Market Manipulation

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.

Energy, Commodities and the U.S. Dollar

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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Light sweet crude fell below 60 this morning in European trading. It has traded as low as 58.86 pre market. Brent seems to be trading higher, which is unusual since it is a poorer quality oil . This type of price inversion was common in February when oil hit its bottom. While a number of commentators claim 60 is strong support for light sweet crude, there is a Fibonacci retracement around 58 and this is a place where the price could hold. We will have to see. There has been too much selling too fast in the oil market and it is has been based on attempts at government manipulation of the market through the CFTC, not because there is an oversupply of oil as the press continually and inaccurately reports (oil in U.S. storage is actually dropping at a precipitous rate).

While the CFTC has regulatory power over all commodity trading in the U.S., it specifically singled out the energy markets for potential trading restrictions. Even though the alleged reason was speculators were causing high prices, it is planning on investigating the natural gas market even though natural gas is trading at a multi-year low (obviously those speculators are incompetent). The real motivation behind the CFTC's action is that the EFT UNG owns 20% of the futures contracts in the market and this is making the big Wall Street players uncomfortable. Issuance of new shares of UNG were suspended on July 7th because regulatory approval wasn't forthcoming. Without the ability to issue new shares with increasing investor demand, an ETF turns into a de facto closed-end fund. Expect this to eventually happen to every ETF. The vested interests are not going to let small investors hone in on their turf.

Every commodity has had a big sell off during July trading and it can all be traced to the CFTC. Fundamentals have nothing to do with it in the case of oil, gold and silver, so you should assume a reversal back to previous values will take place once this is over. While commodities usually trade inversely to the dollar, there has been no dollar rally. The trade-weighted dollar bottomed in early June at 78.40 and has only gotten about 3 cents above the level at its best since then. It closed under 80 again yesterday. Even this morning though the media was reporting 'oil and gold selling off on higher dollar'. They have reported this same story over and over again. One of the news reports today didn't even have any price quote for the dollar, a violation of basic reporting rules. They know their whole story falls apart if people actually have the facts in front of them.

As for the CFTC, will it be investigating manipulation of the silver market by the two big banks with huge short positions? They have been made aware of this, but like the SEC with Bernie Madoff the CFTC is a hear no evil, see no evil operation when it comes to large Wall Street interests manipulating the commodity markets. That is as long as that manipulation supports the government's desire to help prop up the dollar and the economy with lower gold, silver, and oil prices. Short term manipulation eventually leads to long term problems however. Commodity producers just stop producing when the price gets too low and then shortages result if the price is held down too long. Natural gas is probably priced around that level right now.

NEXT: The Non-Stimulating Economic Stimulus Plan

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.

Government Price Controls in the Making

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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British Prime Minster Gordon Brown and French President Nicolas Sarkozy had a article in the Wall Street Journal yesterday entitled, " Oil Prices Need Government Supervision". In this article they recommend that "the Expert Group of the International Energy Forum take the lead in establishing a common long-term view on what price range would be consistent with the fundamentals." They claim at many points in the article that producers and consumers benefit from price stability and the hand of government is needed to assure this. Obviously, their knowledge of history doesn't extend beyond yesterday's lunch.

The Brown/Sarkozy idea was tried on a mass scale in post-war communist Eastern Europe. The government kept prices very stable. That consumers benefited from the chronic shortages that resulted is doubtful. Industrial production was highly inefficient and ultimately fell apart. Some of the worst hyperinflations in history followed in the 1990s. Yes, there is certainly a lot of evidence from the real world that 'government supervision' of markets works well. Brown and Sarkozy hope to bring these benefits to YOU. Note to Brown and Sarkozy: There is already a mechanism for finding the correct long term price for any item - it's called the free market. Just because you don't like that price, doesn't mean it's the wrong price.

Unlike price controls, which is what Brown and Sarkozy are recommending even though they didn't use the term in their article and which NEVER work, there are solutions to the problems they have with the price of oil. Businesses and consumers are paying too high a price in their countries? Well they can cut the extremely high taxes that their governments place on fuel. The price of oil is going up too much. Well, stop letting it be priced in U.S. dollars or tell the U.S to stop running $2 trillion budget deficits and engaging in money printing through quantitative easing. Mr. Brown should follow this advice himself, since Britain is in possibly worse financial shape than the U.S. Don't expect any of these solutions that would actually solve the problem to be implemented though. That would require some real leadership. It is much easier to blame speculators for prices rises and this is the tack the governments have always taken throughout history.

Why should anyone listen to Brown or Sakozy as is? Do either of them have any record of economic success? I don't recall reading about any French 'economic miracle' in the last few years. As for Brown, he was the one that sold half of Britain's gold for $260 an ounce in 1999 and then bought a big chunk of U.S. dollars with the proceeds. The dollars lost a lot of their value subsequently while gold prices were rising to a $1000. The man is obviously an economic 'genius'. Britain also had a worse subprime housing crisis than the U.S. Banks there gave 125% mortgages to people who couldn't pay them back. When someone has done stupid things over and over and over again, it is generally a good idea not to follow their advice.

Nevertheless, you can safely assume that price controls will eventually be implemented because governments that create inflation are governments that try to take the easy way out. You can also safely assume that they will cause shortages. You can also safely assume that prices will subsequently rise much higher than anything previously imagined. You can also safely assume that if Western countries clamp down on free market trading, it will simply move elsewhere (to Dubai, the Far East or possibly any number of offshore money havens). Governments never learn and Brown and Sakozy's article yesterday is just more evidence that things are not going to be any different this time than they have been hundreds of times before in the past.

NEXT: Energy, Commodities and the U.S. Dollar

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.

Commodity Shortage Disaster in the Making

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 government is planning on doing something about those pesky speculators that keep driving up the price of commodities. Even though this has been tried thousands of times previously and has NEVER worked - and even though we have the example of the complete economic collapse in Eastern Europe that this behavior caused - and even though last falls ban on short selling of financial stocks didn't prevent their prices from falling off a cliff - this will not discourage the U.S government from creating a new mess in the commodities markets. It is true that some people never learn and it appears that many of them get elected to political office or work as regulators.

The CFTC (Commodity Futures Trading Commission) announced yesterday that it will hold hearings this month and next to explore the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets (even though natural gas is at a multi-year low and oil is 60% off the high it reached one year ago). The CFTC can also set restrictions for other commodities as well and can change margin requirements for trading (and this is also being bandied about). ETFs, which are used as investing vehicles by small investors, were especially singled out for restrictions.

It has been pointed out that insiders like the floor traders and commodity trading firms in Chicago are unlikely to be impacted by the CFTC proposals that are supposed to be protecting the public and not the industry. For those not paying attention, commodity prices nose-dived before this news was released, not after. Probably just an amazing coincidence and not the insiders getting the word before the public (if you believe that, I have a bridge in Brooklyn that I'd like to sell you). It is quite clear that if anyone gets disadvantaged from changes in CFTC policy, it is meant to be the small investor who relies on ETFs and not the big players.

Political pressure is being put on the CFTC by senators Bernie Sanders, who is a Socialist even though the media describes him as an independent and Bryon Dorgan, the biggest economic ignoramus in congress -and that's really saying something, and congressman Bart Stupak from Michigan who wants lower oil and gas prices to protect the state's auto industry (or what's left of it). Attempts to control oil and gas prices were last tried in the U.S. in the early 1970s when Nixon imposed wage and price controls. Oil producer profits were cut to such an extent that U.S. oil production dropped substantially. The U.S. which had been self-sufficient in oil up to 1969, then became extremely dependent on foreign sources. OPEC was then blamed for the shortages and big price hikes that followed, but it was U.S. policy that made it all possible. Did the government blame itself? Of course not! It was those rapacious speculators and evil foreign forces that made it happen. Historical analysis of past inflations shows very clearly that without exception speculators and foreigners are blamed for inflationary price rises that originate with government printing too much currency and then attempting to limit the mess it engendered with price controls. This scenario has played out hundreds, if not thousands, of times. This time will be no different.

The forces of economics can no more be banned by government action than gravity can be outlawed. So what is likely to happen? Since commodity trading is not limited to the U.S, but large active markets exist in London, Tokyo, Hong Kong, Singapore and up and coming Dubai, expect trading to increasingly move to those places. Dubai in fact wants to capture more commodity trading business. When U.S. policy hands this to them on a silver platter, except to hear how those scheming Arabs stole this activity from the U.S. ETFs also exist in the English, Canadian and Australian markets (and some others), that American small investors can get access to. Investment money will simply move out of the U.S. - at least until the government tries to impose capital flow restrictions to prevent this (expect this at some point in the future).

If prices of oil are held down temporarily (and it will only be temporarily) by CFTC restrictions or other government action (yes, this will be coming) you can expect shortages in gasoline, heating oil and diesel. There were long gas lines in the 1970s for good reason. While people had to wait a long time and sometimes could only gets a limited quantity of gas, they still got some gas. Heating oil was in danger of running out in certain places - like Minnesota - as well. Things could get much worse this time, since shortages are the only thing you can rely on from price controls. Even worse, prices always wind up higher than they would have been if the price controls had never been imposed in the first place.

One more piece of advice. In case the U.S. government does decide to outlaw gravity and some politician tells you it's safe to jump off the capital building. Make sure you reply, "You first".

NEXT: Government Price Controls in the Making

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.

First Four Trading Days Review

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 message from the markets has been quite clear in the last four trading days. The big money is negative and taking its money out. All indices had significant drops today, leaving the first of the quarter indicator highly negative. Technicals deteriorated even further. About the only thing that was up today was the U.S. dollar, although bonds rallied after today's auction was over. The dollar and bonds should be tanking big time. Oil went down even more and the reason for its decline, natural gas and other commodities has now become clear.

The Dow closed down 161 points today, even further below its 50-day and 200-day moving averages. The 50-day is below the 200-day and both are declining, a typical bear pattern. Nasdaq, the strongest of the averages pierced its 50-day today, closing down 41 points. The S&P fell 18 points and broke and closed below its 200-day today after breaking below its 50-day last Thursday. The Russell 2000 fell 10 points and managed to hold just above its 200-day. All and all, a pretty ugly situation.

Light Sweet crude closed at 62.93, but was even lower during the day. Oil has dropped 12% since last Wednesday. While the media is claiming its because it was overpriced and the economy is bad, this is not the reason (as usual, if the press reports it, you should first assume the explanation is wrong). What has happened is CFTC (Commodity Futures Trading Commission) says it wants to crack down on rampant speculation in the energy markets, by imposing position limits for commodities of finite supply (which is every commodity). The commission is planning hearings and is also considering raising margin requirements. One of the major implications of this proposal is that ETFs will have quotas imposed on them. The big money players presumably had the news before the public and shorted into it. Will the CTFC investigate this? Don't hold your breath. The people who are supposed to be stopped from speculating are the small investors like yourself, not the big insiders.

A quote from the CFTC news, "The government's use of free markets via auctions to help find prices for hard-to-sell assets in the financial sector shows how adept supply and demand are at setting values. But when it comes to commodities that people, industries, economies and nations depend on, the susceptibility of free markets to manipulation can prove dangerous". Free markets are indeed dangerous to a government that doesn't like the prices they set because it continually overinflates its currency. So we must save the free markets by destroying them! Huh???

It is interesting that this attempt to control rampant speculation in oil is taking place one year exactly after oil peaked at $147 a barrel and while it is now trading in the 60s. Something doesn't seem to make sense with this picture. This move is effectively an attempt to create price controls on commodities (by a government that is constantly telling us that there is deflation and a big risk of prices falling). The only things price controls are effective in creating is big shortages and black markets. They ultimately cause prices to go higher than they would have. When you can't get any gas for your car two years from now you'll at least know why.

NEXT: Commodity Shortage Disaster in the Making

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.

Does Money Printing Cause Deflation or Inflation?

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:

There were $18 billion in U.S. Treasuries available for sale today and the Fed bought $7 billion of them. Increasing government debt is in and of itself inflationary. Buying that debt with freshly printed money is mega-inflationary. You would never know it from market trading today however. Oil prices dropped 4% after being down 3.5% last week. Gold was at a two week low and the trade-weighted U.S. dollar was up around 80.42 in recent trading (its break down level is 78.33). Commodity prices are supposedly trading on the bad economy and of course there is no need to worry about inflation - at least not for the next few minutes (after that, you had better worry).

The market was down most of the day, but a late day rally let the Dow close up 44 points. The S&P closed up 2, the Nasdaq down 9, and the Russell 2000 was down 3. The S&P 500 bounced off it's 200-day moving average and the Russell 2000 stayed just above its 200-day. The Nasdaq bounced off its 50-day moving average. The Dow traded well below both its 200-day and 50-day moving averages. The RSIs on the daily charts for all the indices are below 50, which is bearish. The other technical indicators don't look much better.

The media claims today's trading is because the economy is bad (so the Dow, the S&P 500 and the dollar go up - that makes a lot of sense). Vice President Biden apparently made some remarks on the weekend talk shows about how the administration didn't realize how weak the economy was. How this is news to anyone is beyond me. The Obama administration has a level of economic obliviousness that is truly astounding. This has been obvious from almost the very beginning when Obama announced the Treasury Secretary Geithner would be detailing a plan the next day to restore the financial system and Geithner then came up with no specifics at all in his press conference. The market tanked that day in case you've forgotten. Obama's plan to give the Federal Reserve more regulatory authority over the banks even though the Fed is only a quasi governmental entity that is partially owned by the banks was another real winning idea. The U.S. economy is basically being run by a bunch of 5-year olds. The only difference from the last administration is that the current 5-year olds are Democrats, while the previous 5-year olds were Republicans.

Oil is selling off for seasonal reasons and look for it to hold at one of the Fibonacci retracements, which are around $58, $53 and $48. It will be a bargain again possibly relatively soon. Oil, gold, silver and all commodities go up when there is inflation. The Fed is buying almost 40% of all treasuries for sale with money just out of the printing presses and there's not going to be inflation? Not on the planet earth. It is only a matter of time. Expect more stimulus and more bailouts from the government as far at the eye can see. Put California at the top of the list, its debt was downgraded to BBB by Fitch just a few minutes ago.

NEXT: First Four Trading Day Review

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.