Friday, August 28, 2009

Commodities, the Dollar and More Government Fantasy

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 Natural Gas storage report was released yesterday morning and storage was up 54 BCFs versus expectations of a rise of 51 BCFs. Within a few minutes the near term futures contract dropped at least to $2.705 (it may have gone lower). The about to expire contract closed at $2.843 down 6.7 cents from the previous day. The oil storage report was mixed on Wednesday and Nymex oil dropped below $70 a barrel subsequently, but has poked above $73 this morning. The oil/natural gas price ratio has gotten as high as 26 (if they were completely interchangeable, the ratio would be 6, it has averaged 8+ over the long term), well above the last peak of 22 in 1990. Oil is about to enter its seasonally weak period and natural gas its seasonally strong period. Regression to the mean should start taking place this fall.

The calendar should be creating a bullish environment for gold and silver as well. They tend to be strong between August and February. Gold was trading around $960 this morning on Comex and silver around $14.75. Gold has been hoovering just under the key breakout level of $1000 for some time now. Watch it closely. Once this breakout takes place, the short term target price is somewhere between $1200 and $1300.

Gold historically trades counter to the U.S. dollar, but they can become decoupled. In a global inflationary environment, decoupling will eventually occur. For the moment, the U.S. dollar is weak . For the last 6 days, the dollar has traded at least part of the day below its key breakdown level of 78.33. This is the second time so far that the dollar has stayed below this level for several days. When the stock market rallies, the dollar has been selling off and this has been going on since last March (it's not a normal pattern). If stocks rally further, it should kill the dollar. The dollar may tank regardless since the technical picture is weak. The powers that be will want to save it however. So we will have to wait to see what happens.

The stock rally has been explained as taking place because the U.S. economy is recovering. At least in some cases, valuations are as ridiculous as they were at the top of the tech bubble in 2000. Take a look at the Dow's PE for instance. This morning, the government released more 'good news' that seems to fall into the 'that can't possibly happen' category. Personal spending was up 0.2% last month, but incomes were unchanged. Even though incomes were unchanged, total wage income went up (during a time of increasing unemployment). Spending has supposedly been rising for the last three months, well ahead of income, even though the savings rate is 4.2%. Separate reports indicate that available consumer credit has been cut drastically. So even though U.S. consumers don't have the income and don't have access to credit, they are somehow spending more. I really think the U.S. government should release its statistical reports on stationary that has pictures of pigs flying in the background. That way the public would know how much credibility the numbers have.

NEXT: A Break in the Bull and China Stops Shopping

Daryl Montgomery
Organizer,New York Investing meetup

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.

1 comment:

Anonymous said...

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