The Helicopter Economics Investing Guide: September 2009

Wednesday, September 30, 2009

Unwinding the Fantasy Trade

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:

Stocks plunged after the open today on the Chicago Purchasing Managers report which indicated contraction in the largest manufacturing region of the U.S. Also this morning, commercial lender CIT, one of the largest sources of loans in the U.S. for small and midsized business, is on the verge of collapse. The company has received $5.3 billion in federal bailout money so far... and even after that, it is still having trouble staying afloat (it will be the fifth biggest bankruptcy in U.S. history if it goes under). Yesterday's September Consumer Confidence number fell instead of going up as economists predicted. Added to all this, the FDIC board voted to ask solvent banks to pre-pay the next three years of their insurance premiums so its deposit insurance fund won't run out of money. Just more evidence of how well the banking system has been 'stabilized' and how well the economic 'recovery' is doing.

The 4th quarter begins tomorrow and the first four trading days should give us a good indication about whether or not the big money will be selling stocks. A net drop in stock prices during this period will be negative going forward. The rally that has taken place since March has a typical bear market pattern to it. In the case of the Dow and S&P 500 it just shot straight up without any basing pattern forming. The rally that followed the 2000 to 2002 sell off, had a ten-month base and this is what allowed it to continue for several years. Stocks have also reached historically overbought levels based on the percentage of stocks trading above their 200-day moving average (the definition of a rally). This reached 95% on the NYSE. Previously a number in the low 70's would have been enough to create a top. While stocks have skyrocketed, Nasdaq up 68%, S&P 500 up 57% and the Dow up nearly 50%, volume has not. Volume on the Dow has continually declined during the entire rally - a very bearish pattern. Even worse a handful of junk financials, traded mostly by computer, have accounted for a large percentage of overall NYSE volume.

Stocks, and bonds as well, have had spectacular rallies because the monetary authorities have pumped an unprecedented amount of money (a lot of it newly printed) into the financial system. The U.S. government additionally changed its accounting rules and this magically made the close to worthless subprime debt held by financial companies worth a lot more overnight. The rising prices of stocks and bonds that followed have been used as evidence that the economy is recovering and along with the accounting rule changes allowed banks and brokers to report significant, but illusory, profits last quarter. The IMF has helped perpetuate this financial fantasy in a just released report that estimates that bank's losses from the Credit Crisis will only be $3.4 trillion now instead of a previously estimated $4 trillion. The logic behind their reasoning? Stock and bond prices have gone up! The IMF is still willing to admit however that U.S. banks have yet to recognize 40% of their losses and UK and euro zone banks 60% of their losses from the Credit Crisis. It warned that monetary policy makers had better consider this before deciding to withdraw the massive stimulus programs that are currently in place.

Government stimulus can only work so long in keeping stock prices up. The Japanese found this out in the 1990s and early 2000s. The Nikkei had more than one spectacular rally, but each time the rally failed because stimulus programs ended or were eventually cut back. New stimulus programs were then created and the cycle began all over again. The one thing the Japanese didn't do was fix the underlying problems with their banking system. The U.S. has not done so either and until this happens, the government can produce all the economic 'recoveries' it wants to, but they won't last. What will last is the inflation caused by all the money printing needed to produce the recoveries.

NEXT: If You Ignore the Facts, Things Are Good

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, September 29, 2009

The Longer Term U.S. Interest Rate Picture

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 is a debate going on in Wall Street about whether or not interest rates will be rising sharply in the next year or two. As usual the mainstream media is obscuring the most important facts that the individual investor needs to make an accurate determination. Articles frequently wave the deflation straw man argument and cite 'robust demand' for U.S. bonds. They usually don't mention that the robust demand is coming from the U.S. Fed and has only been made possible through massive printing of new money. The picture is quite different once these significant extra pieces of information are added to the puzzle.

According to a report from Barclay's, the U.S. has sold $1.517 trillion in debt securities prior to September of this year compared to $585 billion up to the same point in 2008. Barclay's estimated that only $50 billion a month of new supply was purchased in the market, which would be $400 billion in total up to the end of August. That would leave over $500 billion in new debt having been purchased directly by the Fed or approximately 56% - yes most of the new U.S. government debt issued in 2009 is being purchased by the Federal Reserve... and a lot more debt issuance is coming. Barclay's estimates that total U.S. government debt issuance will be $2.1 trillion this year versus $0.892 trillion in 2008. Estimates for 2010 are even higher at $2.5 trillion.

The Fed is supposed to stop its purchases of treasuries by the end of October. Only $300 billion has officially been set aside for this program and they have spent most of that budget. If they do indeed do this, U.S. interest rates will skyrocket overnight. So, don't hold your breath. Somehow this program will be extended perhaps under another guise if not directly. The Fed announced at its last meeting that it was extending its program to purchase agency debt (mostly Fannie Mae and Freddie Mac) to the end of the first quarter in 2010 (it was originally slated to terminate at the end of this year).

While figures are published about who holds U.S. debt and how much each party holds, these are updated at different points in time and how recent or accurate they are is open to question. The biggest holder of U.S. debt by far is the U.S. Fed. As of the end of March of this year, the Fed owned almost $4.9 trillion worth of federal debt (you can think of this number as an approximation of the amount of excess money that has been printed over time). The total U.S. National Debt is currently $11.8 trillion. State and Local governments are the 5th largest holders with a total of about $520 billion of U.S. government paper (can you see a need for them to be bailed out?). The fastest growing category this year has been the 7th biggest one, "Other Investors". Between just April and August of this year, holdings in this category went up over 50%. This includes GSEs (like Fannie Mae and Freddie Mac) and broker-dealers, who sell the bonds. This category is a great place for 'indirect' Fed purchases to take place and to remain hidden. There are also researchers who claim the Fed has been hiding purchases through off-shore money havens, such as the Caribbean Islands and Luxembourg, which are the 10th and 15th biggest holders respectively of U.S. debt.

As long as the Federal Reserve continues to purchase a huge percentage of U.S. government debt, interest rates can remain low. While supply of debt has increased tremendously, the Fed has increased demand for the debt by an even greater amount by printing a lot of new money and this holds price up and interest rates down. Excess money printing leads to inflation .. and there are no exceptions to this ever. Creating artificially low interest rates also feeds inflation. Inflation eventually leads to higher interest rates. The key determinate of when this is going to take place now is the amount of money printing that the Fed is engaging in. When this goes down (proportionately), interest rates will go up.

NEXT: Unwinding the Fantasy Trade

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, September 28, 2009

Precious Metals Watch

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 Fed and G20 meetings from last week both had a consensus that government generated stimulus of the U.S. and global economies should continue. The U.S. and UK and are printing substantial amounts of new money in order to engage in this stimulus. This should have been bearish for the dollar and pound and bullish for the precious metals. While the pound did indeed slide, the dollar went up and precious metals went down. These counter intuitive market reactions, common since the beginning of the Credit Crisis, should end soon.

Spot gold fell as low as $987 in overnight trading. Spot silver was as low as $15.73. The U.S. trade-weighted dollar traded between 77.12 and 77.26 on Friday. It was trading at 76.87 around the opening today. After hitting a yearly low of 75.83 four days ago, the dollar bounced of its support at 76.00. It is trying to head toward 78.00, where it has strong resistance from its 50-day moving average. Stronger resistance is just above that at 78.33, the low from the dollar sell off in the late 1980s and early 1990s.

The Fed reiterated in its post-meeting statement that it "expects that inflation will remain subdued for some time." The mainstream media is filled with commentary about how inflation isn't a problem. Comments like "many economists argue that inflation is only an issue when the economy is humming along" are common. Someone should have told Zimbabwe with its 94% unemployment rate (if that economy was humming, it was tone deaf) that it was impossible that it was having sextillion percent inflation. When discussing all the money printing the U.S. Fed is doing, media articles invariably state that it "isn't so clear whether this will create an inflation headache down the road for the Fed". No article has yet to cite one case in the entire economic history of the world where excess money creation didn't lead to major inflation. Somehow by magic it might not happen in the contemporary U.S. though. Indeed magic is the operative word because that it the only thing that will prevent inflation going forward.

The idea that too much currency creation leads to price rises is not new. The 'quantity theory of money' originated with Copernicus, better known for his 'earth revolves around the sun' theory, in the early 1500s. It was further developed in the following centuries by at least half a dozen other economic thinkers long before Milton Friedman repackaged it as a new idea and won a noble prize for his 'original' thinking. Governments always claim that printing too much money isn't a problem and the lesson that it is needs to be learned over and over and over again. Buying gold and silver has always been the protection from excess government money creation. Smart investors only need to learn this lesson once.

NEXT: The Longer Term U.S. Interest Rate 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.

Friday, September 25, 2009

So Much for That Recovery

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 G20 meeting ends today and precious metals should be under pressure and the dollar should continue to rally. Traders are worried that some rumblings about supporting the U.S. dollar may come out of the meeting, although the Japanese Finance minister recently said he was uninterested in intervening to drive the Yen down. While something could be said, the likelihood that anything would be done in the near-term is less than nil. Currency intervention is expensive and the printing presses of the major central banks are already booked full-time to support government economic stimulus programs.

The much ballyhooed impending U.S. economic recovery seems to be crumbling. While this only means more government stimulus and money printing, gold and silver are selling off instead of skyrocketing on the news (no that doesn't make any sense). The U.S. Durable Goods report came out this morning and it was down 2.4% in August. A drop of 48% in highly volatile aircraft orders was mostly responsible for the decline , as was the 98% increase in aircraft orders last month that lead to the rise in July. Autos were still up 0.4% last month with the impact of the Cash for Clunkers program waning. Core capital goods, which are the key to what is really going on in the economy, were down 0.4% in August. They dropped by 1.3% in July. So far, there doesn't seem to be any solid evidence of a sustainable recovery in manufacturing.

The bad durable goods numbers followed a 2.7% drop in existing home sales in August that was announced yesterday. That report indicated that 31% of U.S. house sales were 'distressed' (foreclosures for example) and that sales were concentrated in the low end of the market. Well that sounds like a description of a healthy housing market doesn't it? As if the banking system didn't have enough trouble from residential real estate, worse news today came from a report on large bank loans (these are loans over $20 million). Of these, 22.3% are 'troubled'. That is up from 13.4% last year. As a reminder, the U.S. banking system is supposed to have been 'stabilized' according to the Federal Reserve.

While things may look bad in the U.S., they seem to be worse in Japan. Japan is an export based economy and exports there fell 36% in August. Car shipments were down 50% and steel down 43%. GDP was positive last quarter and Japan supposedly exited its most recent recession (one of many in the last two decades)...well, maybe not. The stock of Japan's largest brokerage house, Nomura, plunged 16% last night on the news that it was issuing more stock. This is the second new stock issue in 6 months. Japan has been 'stabilizing' it financial sector for 19 years now. The U.S. looks like it is heading toward long-term 'stabilization' as well.

NEXT: Precious Metals Watch

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, September 24, 2009

Market Sells Off as Dollar Rallies...As Usual

Wednesday, September 23, 2009

Fed Decision Today; Dollar, Bonds and Gold

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 FOMC concludes its two-day meeting today and will issue a statement around 2:00PM New York time. There is no chance the Fed will be tightening its zero interest rate easy money policy, although it may announce some vague longer term liquidity reduction that will take place at some indeterminate future date (like the IMF gold sale that was announced over and over again for more than two years before it actually happened). The Fed knows that without its super low interest rates the economy would go into a tailspin and the stock market would tank. Don't expect the Feds quantitative easing (aka money printing) policy, which is slated to be terminated at the end of October, to be stopped either. Interest rates would skyrocket overnight (treasury bond prices would plummet) and the U.S. wouldn't be able to fund its massive budget deficits. It is not likely there will be an announcement about this today however.

While easy money leads to stock rallies (and higher precious metals prices), it undermines a nations currency. The trade-weighted dollar hit a new yearly low in pre-market trading this morning. The ETF DXY had an ugly gap down yesterday. It was as low as 76.00 on Tuesday (a key support level) and fell to 75.89 in pre-market trading today. Ironically, this was the low one year and one day ago. Perhaps less ironically, I constantly see headlines cross my computer screen about the dollar rallying, but every time I look at the price it has gone down. Can the dollar hold its support in here? There are rumblings from the central banks in a number of countries about supporting the dollar in order to lower the value of their currencies. Look for some possible hints of this from the G20 meeting tomorrow, but don't expect action.

The approximately zero short-term interest rates in the U.S. has led to a carry trade. Traders sell U.S. dollars to buy high yielding currencies like the Australian and New Zealand dollar. This is one reason that Australian and New Zealand dollars have been going up in value. Currencies from countries with upgraded credit also benefit. Brazil just had its sovereign debt rating raised to investment grade. Don't expect the credit rating agencies to ever lower the U.S. sovereign debt rating to junk status though. This should have already been done.

Gold has continued to perform admirably. It has closed above its breakout level of $1003.50 for eight days in a row as of yesterday. The close on Tuesday was $1015.50. Silver closed at $17.16. There can still be some overhang on the precious metals market until the G20 meeting is over. Gold still needs to trade intraday above $1033.90 to finish its breakout. Hopefully soon.

NEXT: Market Sells Off as Dollar Rallies ... As Usual

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, September 22, 2009

Manipulation Fails, Gold Rallies Back

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 old tricks of the authorities to game the gold market and support the U.S. dollar are no longer working. The IMF gold sale, used at least half a dozen times in the last two years, barely dented the price of gold yesterday and gold is rallying nicely this morning and trying to push above its high from last week. The U.S. dollar is dropping and is at 76.05 at the moment. If it drops below 76.00, it could fall all the way to 71.50 this fall. The inability of the dollar to rally during the Fed meeting this time is a sign of extreme weakness and an indication that the usual behind the scenes manipulation supporting the dollar is no longer working.

While the U.S. mass-media repeatedly publishes stories about there being no inflation, there can't be any inflation and even if there is inflation, it won't show up for years, gold is telling a different story. Just yesterday this quote could be found in the Wall Street Journal, "Still observers say many buyers believe inflation will remain low for years to come." The financial press is filled with similar remarks on a daily basis. Insiders don't believe this for moment, which is why gold is hitting record highs. These stories are meant to keep the public uninformed about what is really going on in the economy and financial system.

The source of inflation is the U.S. government's huge deficits and the need to continually print new money to cover them. This is constantly covered up by mainstream press reporting as well. Just this morning a story from a major online service about the huge bond auctions this week had the following quote, "Solid demand at auctions of different maturities this summer suggest today's two-year sale should be fairly well received." Media coverage has been filled with stories citing solid demand for U.S. treasuries in the last many months. Just where is this solid demand coming from?

In the second quarter, the U.S. Fed directly bought 48% of the new treasuries sold. It is quite likely that it 'influenced' the purchases of much of the rest. One mainstream financial paper stated U.S. households increased their holdings of treasuries by 2.5 times during 2009 so far (and this wasn't a comedy piece). The statistics that includes household holdings of treasuries also include hedge fund purchases however. Hedge funds are much more likely to have purchased massive amounts of treasuries, but somehow this logical conclusion couldn't be reached, perhaps because it would lead right back to the Fed. The large U.S. banks, all of whom have connections to the Fed, have also increased their purchases of treasuries significantly. There have also been reports from alternative Internet sources about how the Fed has been faking foreign purchases of treasuries by funneling them through off-shore money havens.

Whatever the actual percentage of new treasury purchases by the Fed is, and you can assume that it is well above 48%, it is all being done with printed money... lots of printed money. There has been no case in history of massive money printing by a government that didn't subsequently result in a lot of inflation. I have yet to see this mentioned in mainstream media coverage. It looks like the truth will soon be told by gold and the U.S. dollar. Gold is on the verge of a massive breakout and the U.S. dollar on the verge of a massive breakdown. The next few weeks could be quite interesting.

NEXT: Fed Decision Today; Dollar, Bonds and Gold

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, September 21, 2009

IMF Selling Gold to Dampen Rally

Friday, September 18, 2009

Quadruple Witching Today; Market Update

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:

Once every three months there is a quadruple witching day. This is when market index futures, market index options, stock options, and stock futures all expire on the same day. Volatility can result, but that is more likely to take place a few days before. In general, prices will move to minimize the profits of the buyers of most outstanding options. Reversals of price movements can take place the following week or two and you need to watch out for these.

The trade-weighted U.S. dollar is the key to many market movements currently. It has been selling off as U.S. stocks have rallied since March. A dollar rally should cause market weakness at this point. This dollar/stock relationship is abnormal and would make much more sense for gold. The dollar/gold relationship has actually been much weaker than might be expected. The trade-weighted dollar ETF DXY traded as low as 76.01 yesterday. There is chart support at this level, since there is a sharp low at 75.89 that was made almost exactly one year ago from today. Any break of last years low could cause the dollar to test its all time low of 71.50. A short term rally might be in the offering first however because the dollar is well below its falling 50-day moving average and it tends to move back toward that line when it gets too extended.

A dollar rise could affect both stocks and gold. Spot gold closed at $1013.30 yesterday, its fifth day above the key breakout point of $1004. Gold has made three all time closing highs in the last 5 trading days and this is very bullish. It still needs to break the $1033 intraday high before a longer term rise to the $1200/$1300 area is possible. Gold stocks have been selling off the last two days and may be volatile for several more. Large drops should be considered buying opportunities. Look for gaps to be touched or filled. The most profitable buying is done either on major breakouts or at bottoms (buying after a long run up is a good way to lose your money). Gold is at the cusp of a major breakout.

The current bottoms in the inflation trade are in natural gas, food commodities and possibly long-term interest rates. Buying natural gas on any day with a big drop looks like a good strategy. Food commodities have been trading around their lows since last December, which is a long time. The chart for RJA is quite bullish and it looks like it wants to rally soon. I have started buying it. The food related ETFs are generally much less volatile than precious metal and energy ETFs, so you are not likely to make money as quickly from them. Long term interest rates bottomed last December,with the 10-year bond hitting 2%. The 10-year rate was around 4% in June. Since then, long-term rates have declined. TBT, the leveraged short ETF for bonds of 20+ years duration has sold off a third since June. I have started slowly accumulating it. Long-term rates may not have bottomed just yet, but they are likely to be going much, much higher in the future.

NEXT: IMF Selling Gold to Dampen Rally

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

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

Thursday, September 17, 2009

The Inflation Trade

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:

Gold had another record close yesterday, the third one in four days. The near term futures contract closed at $1018.90 and was as high as $1023.30 intraday. The breakout level is $1004 and above. Gold still needs to take out its all-time intraday high of $1033. Silver closed at $17.33 and traded as high as $17.50. The New York Investing meetup mentioned gold was a good buy at $740 and silver in the the $9 to $10 range. We have also discussed in our meeting the ETF's DGP and AGQ that are 100% leveraged and move twice as much up and down as gold and silver do. These highly volatile ETFs are not appropriate for risk-adverse investors. For those who want to broaden their investments to include gold and silver miners , we proposed the ETF GDX. Our favorite gold stock is NovaGold (NG) which was first mentioned in this blog when it was just above $3.

The precious metals are going up for the same reason as global stock markets. Governments throughout the world are pumping massive amounts of liquidity into the financial system. This shows up in stock prices first and in consumer inflation later (it can take many years before the full impact is felt). The statistics indicating economic 'recovery' are usually not adjusted for inflation and what is being touted as economic growth by the mainstream media has a significant component of rising prices to it. This is only the beginning however. In a few years inflation is going to get incredibly ugly. When it becomes apparent that there is no 'real' growth, the stock market rally will fizzle - and the government will print even more money to stimulate the economy. The stock market is currently historically overbought based on some criteria. Over 90% of stocks on the NYSE are trading above their 200 day moving averages. A number in the 70% range is usually enough for a top.

Gold and silver are the ultimate protections against inflation and anyone concerned about inflation should make them the cornerstone of their investing strategy. I will hold as much as 50% of my portfolio in these metals and their miners during their bullish periods. The other two major inflation hedges are energy and agricultural commodities. Oil is seasonally weak in the fall and usually best bought early in the year and sold in the summer (as the New York Investing meetup did with DXO). Its seasonal pattern is almost the exact opposite of gold and silver's. Natural gas is the energy commodity of choice at the moment since it is seasonally strong in the fall. Agricultural commodities are dependent on weather as well as inflation. Good weather during the U.S. summer has driven many of their prices to very low levels. It might be worth taking a look at RJA or DBA (RJA is more diversified) and start putting a little of them away for a non-rainy day.

The other inflation trades include industrial metals and shorting long-term U.S. bonds. The New York Investing meetup mentioned FCX in the winter and Alcoa (AA), UYM and XME in the spring (as well as Harry Winston - HWD). These stocks have already had major rallies. They are partially dependent on inflation and partially dependent on the economy doing well going forward, so they are not the major bargains they once were. The short bond trade did well between December and June (bond prices went down and interest rates went up), but there has been some give back during the summer. TBT is a leveraged ETF that allows the average investor to short long-term bonds. When the economy heats up, interest rates go up. During bouts of inflation interest rates go through the roof. TBT works if either or both take place and it is currently at a reasonable price.

NEXT: Quadruple Witching Today; Market Update

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, September 16, 2009

Precious Metals Becoming More Precious

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:

Gold had another all-time closing high yesterday in New York, the second in three days. It is trying to rally to an all-time intraday high and complete its long awaited breakout. Gold traded as high as $1020 in the overnight markets. The all-time intraday high, also hit in the overnight markets, is $1033. There is gold's third time trading in the over $1000 area (and there were two more times close to $1000) in the last 18 months. Unlike the first two times, which were sharp spikes up, this time gold has stayed in the $1000 area for several days. The other two times were also in February and March, times when gold tends to peak for the year. This time gold is hitting $1000 at the beginning of its seasonally strong period. The gold charts are extremely bullish looking and gold has put in an 18-month base. Conditions for a strong , powerful breakout look good.

Gold leads the precious metals. The other precious metals are not even near their all-time highs, although silver is much closer than platinum or palladium. All three have industrial uses. Silver is the only one of the three with a history of monetary use. Silver already became overbought on the daily charts in early September and has continued to go up since then. It was as high as $17.33 overnight. Gold has not yet become overbought on the dailies. In strong rallies a stock or commodity will get overbought and stay overbought for months.

While the precious metals are rallying, the U.S. trade-weighted dollar is slowly crumbling. As of this writing, it is trading at 76.38, but has been as low as 76.19. The yearly low is 75.89 and this was hit 11 months and 3 weeks ago. A new yearly low could be hit at any time from today onward. There are a lot of traders that automatically short yearly lows and this is seen as technical weakness. The U.S. dollar has already hit multiple yearly lows against the euro in the last several days.

Buying into a gold rally is a lot better deal than buying into the current stock rally. The gold charts are technically very strong, while the stock index charts have shown a great deal of weakness, yet the rally somehow continues. The premise behind the stock rally, the reviving economy, is also false. The premise behind the gold rally, rising inflation, is quite solid however. Both rallies are fueled by the money printing quantitative easing that the U.S. Fed is engaging in. This has always caused inflation in the past and gold is telling us this is happening again.

A correction to yesterday's blog: the ticker symbol for the natural gas ETF mentioned is HZBBF.

NEXT: The Inflation Trade

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, September 15, 2009

Gas Takes Gas

Monday, September 14, 2009

Gold Closes at Record High

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:

Gold closed at a record high in New York on Friday. The settlement price of $1004.90 broke the previous record of $1003.20 set on March 18, 2008. The daily intraday high was $1011.90. This is gold's third serious attempt at trying to break to new all time highs. The $1000 level has been tested 5 times so far. A basic rule of technical analysis is that when a price is repeatedly tested, it will eventually break.

A yearly high is bullish and a record high is extremely bullish for any stock or commodity. You would never know it from reading the media reports on gold however. I have seen one article after another warning about how dangerous it is to buy gold at these prices, how a pullback is likely, how the small investor had better stay away, etc., etc. This is actually very bullish for gold. If the media liked it and was saying how great it was, it would probably be time to sell.

Negative media reports all focus on lack of physical gold demand at the moment, particularly in India (Indian consumers own 20% of the world's gold - at least as much as all central banks combined). While this is likely a temporary phenomenon based on when Indians consider it a propitious time to buy gold, you don't usually see that mentioned in articles. You frequently don't see inflation mentioned either and that the demand for investment gold is skyrocketing. This type of demand will eventually overwhelm all other forms of demand. You can also find many articles that report that the ETF GLD isn't buying gold and how negative this is for the market. What is not mentioned is that there are 10 ETFs on world markets that buy physical gold. Overall, there has been net buying recently. Only one of the ten ETFs had decreased holdings and that was GLD. Long gold futures positions have increased by 17% in the last week to 10 days and many investors are likely moving away from physical metal to more leveraged plays.

Gold's recent performance has been helped by the U.S. dollar. The trade-weighted dollar was as low as 76.46 on Friday, well below its breakdown level of 78.33. It is up slightly this morning and gold is hoovering around $1000. The dollar is in danger of hitting a yearly low soon (75.89 at the moment) and if that happens it could fall to its all time low below 72. Some short term rally is likely because the dollar is trading below its falling 50-day moving average. This could in turn cause a short-term drop in gold prices. This would just be another buying opportunity however.

We will be discussing the gold and silver markets at the New York Investing meetup's 'Technical Analysis - Chart Patterns' class this Tuesday night at PS 41 (116 West 11th Street). The class will be held from 6:45-8:45PM.

NEXT: Gas Takes 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.

Friday, September 11, 2009

The Cash From Clunk-Heads Program

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. Cash for Clunkers program seems to be working quite well in reviving the economy - not the U.S. economy, but the Japanese economy. The U.S. government program that uses taxpayer money to let people who foolishly bought gas-guzzling cars trade them in for newer energy efficient models is just another reward the losers, from the losers Credit Crisis program. Yesterday's trade deficit figures tell the story. The July deficit widened by a whopping 16.3% in one month. The reason for this huge increase? Auto and auto part imports increased by 21.5%.

A widening trade deficit is negative for GDP. Yesterday's figures knock down one of the three pillars of economic recovery that mainstream economists have cited for their prediction that the U.S. recession is over (almost 100% agree that the economy is recovering). Actually, they specifically said exports were increasing, which indeed was the case in yesterday's report (thanks to highly volatile civilian aircraft shipments). Unfortunately, imports increased much more. Even though this subtracts from GDP, the press managed to put a positive spin on it. One well known economist stated "This was a positive report in that it provides further evidence that both the U.S. and foreign economies are coming back." Something that makes GDP decline is good news for the U.S. economy? Since when? There is obviously no absurdity that the mainstream media won't publish.

Of course the stock market went up on this 'good' news. Cash for Clunkers is indeed reviving manufacturing activity within the U.S (manufacturing is only 20% of the commercial economy versus 80% for services). You can see the figures have improved the most in industries related to automobiles. What one hand giveth, the other is taking away however (as seems typical of Obama administration initiatives). Toyota and Honda have been the two biggest beneficiaries of the program. Once the program stops though, you can expect manufacturing to decline again until the U.S. government comes up with another stimulus program (and another ... and another). The third pillar of the economic recovery, rising homes sales and prices, is just not believable. Foreclosures keep rising, housing inventory keeps rising, consumer credit and income keep falling, yet people are rushing to buy homes and paying more for them? It's only likely in the fantasy land known as manipulated statistics.

The U.S. is not the only country engaging in economic stimulus, it's a global phenomenon (the British also have something they call a 'Car Scrappage Scheme' by the way - at least they used the word scheme so people know what is actually going on). The Chinese market had a big rally last night after China said industrial output, investment, loans and retail sales remained strong in August, "supported by colossal stimulus measures" (a quote from one of the news services). The world's economies seem to be following the Japanese model. In the last two decades, Japan tried to repeatedly revive its economy through stimulus programs. In some cases, quarterly GDP growth exceeded 10% on an annual basis (an enormous number). However, every time the stimulus was removed, the economy sooner or later sank back into recession. There is one major difference however. Japan entered its stimulus period in a strong financial condition, whereas the U.S. and Britain were extremely overextended at the beginning of the Credit Crisis. Our stimulus plans will have to be paid for by printing money.

NEXT: Gold Closes at Record High

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, September 10, 2009

CFTC Kills Off DXO

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:

DXO no longer exists. Deutsche Bank announced on September 1st that it would redeem all shares after the market closed on September 9th. DXO was started in June 2008 and had $600 million in assets. It was a investment vehicle that offered hundreds of thousands of small investors a leveraged oil play. Many members of the New York Investing meetup bought it in March and sold it in June of this year and made a 165% profit on this trade. We will not be able to do so again in the future.

The CFTC (Commodities Futures Trading Commission) has been holding hearings this summer to investigate 'speculation' in the oil market. It has specifically targeted ETFs and ETNs in this regard. Deutsche Bank did not directly mention the CFTC in its announcement but said this redemption is the result of “limitations imposed by the exchange” causing a “regulatory event”. How much behind the scenes pressure was put on Deutsche Bank is not known. Deutsche Bank is a holder of U.S. mortgage debt. While it doesn't seem to be on the list of TARP recipients, it did receive approximately $11.8 billion from AIG as a result of the government's nationalization of the company. It can also be assumed that Deutsche Bank benefits from other Fed programs that take junky assets off bank's books and replaces them with higher quality bonds. When the government 'owns you', you are likely to give it what it wants.

It is interesting that the CFTC is concentrating its efforts on 'speculation' from investment entities that are used by small investors. Like the SEC, it hears no evil and sees no evil when it comes to the large players. For years there have been two large banks that have held large short positions in Silver futures (and Deutsche Bank may be one of those banks). It took years of complaints before the CFTC agreed to investigate, just as the SEC continually ignored complaints about Bernie Madoff and his obvious $65 billion Ponzi scheme. So far, the CFTC has found nothing, just as the SEC never at any point found any wrongdoing on Madoff's part (his Ponzi scheme collapsed on its own accord). If the federal government wanted to limit speculation in the commodities market it could easily have done so, by forcing Goldman Sachs and Morgan Stanley to close down their commodity trading operations. Federal law prohibits banks from speculating in commodities and both Goldman Sachs and Morgan Stanley became banks in 2008. The government gave both firms a special five-year dispensation however. If you are a big player, you don't have to worry about 'the rules'.

The government's action in the energy market should be seen for what it is - an attempt at imposing price controls on oil and gas. Price controls never work and almost always lead to shortages and much higher prices. ETFs will not disappear either as a result of the CFTC's action, but will turn into closed-end funds. There will be an attempt to launch more of them. Each one will be smaller, less liquid and have a much higher expense ratio. More will move to overseas markets that are less restrictive. While it is just oil and gas this summer, expect other markets (particularly agricultural) to be affected in the future.

NEXT: The Cash From Clunk-Heads Program

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, September 9, 2009

Inflation Versus Recession

Gold hit its second highest price ever yesterday. Interestingly, the U.S. dollar is not close to its all time low. For any given dollar level, gold prices have been rising over time. Inflation is when a currency decreases in value and this has been happening for the dollar when measured against gold. Looking at the value of one currency versus another can obfuscate that inflation is taking place. All fiat currencies are declining in value against gold and this indicates that a widespread global inflation is taking place.

The trade-weighted dollar fell as low as 77.02, but closed at 77.19 yesterday. This is well below the 78.33 breakdown level. The dollar is at an 11 month low and even if it stays at current levels or rises somewhat will hit a yearly low within 3 weeks. This will be very bearish. The U.S. dollar is already at a yearly low against the euro and Australian dollar, both of which hit new highs yesterday.

While inflation is taking place, the same thing can't be said about an economic recovery. Consumer spending accounts for 72% of U.S. economic activity and under current conditions can not improve in the foreseeable future. Consumer Credit for July was released yesterday and it fell by $21.55 billion or at a 10.4% annual rate. Credit card debt fell at an 8.5% annual rate. It was the 11th straight monthly drop. While consumer credit is contracting, so is consumer income. At the same time, the savings rate is rising. All three indicate less consumer spending and ongoing contraction in almost three-quarters of the U.S. economy.

The one-month drop in consumer credit in July was four times greater than the entire consumer debt in the U.S. in 1944. The 60 plus year post World War II expansion was fueled by ever increasing consumer credit. Like all expansions inevitably do, this one has come to an end. Initially, there was real growth that went along with the expansion, but in the last three decades U.S. growth has been based on increased spending made possible through excess credit. Going forward inflation is going to make this impossible.

NEXT: CFTC Kills Off DXO

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, September 8, 2009

Gold Breaks $1000!

Friday, September 4, 2009

No Recovery in Jobs

Thursday, September 3, 2009

Inflation News Sends Gold Soaring

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 ISM Services Index was released this morning and it came in at 48.4, which indicates only a slight contraction. While the mainstream media put the usual bullish spin on the news, it was actually nothing short of disastrous. One component was overwhelmingly responsible for the improvement from last month - Prices Paid. Prices Paid is a measure of inflation. It came in at an eye popping 63.1 in August versus 41.3 in July. The biggest increase in the Manufacturing Index yesterday was also Prices Paid (new orders was a very close second though, there were no close second in today's Service report). In the manufacturing report, prices paid was 65.0 in August versus 55.0 in July. None of the ISM reports are adjusted for inflation, just like most of the government's economic reports. In both cases, higher inflation as opposed to better economic activity can make the numbers look better. Financial media usually fails to mention this.

Spot gold reached $987 this morning. It is approaching once again the key $1000 breakout level. Spot silver almost reached $15.80, just below important resistance at $16. Gold has traded just over $1000 twice. The first time was in March 2008 and the second time in February 2009. This key level was reached at the end of gold's bullish seasonal period which ranges from August to February. This time the $1000 level will be reached at the beginning of the strong seasonal period. Expect silver to follow gold up. Once it breaks above $16, it will head toward $21.

While you would think that the U.S. dollar would nosedive on this news, it was down only slightly from yesterday's close of 78.38. After dipping just below the 78.33 breakdown level, it started rallying and is now up. This illogical trading of the dollar has been common since the Credit Crisis began. Why would traders rush to buy it, when the currency is constantly being debased by the central bank? They wouldn't, at least not voluntarily. Nations, including the United States, have a long history of trying to maintain the value of their weakening currencies by manipulating the market. The manipulation always fails in the end however.

Fed chair Ben Bernanke has said over and over again that there can't be inflation because there is spare capacity and slack in economic production. While he may be an expert in the U.S Depression, he apparently never studied hyperinflation where just such a scenario is common.
Bernanke has also been repeatedly wrong in everything he has said and done. For those who would like a video review of Bernanke's appalling record, click on the link below:
http://www.youtube.com/watch?v=HQ79Pt2GNJo

NEXT: No Recovery in Jobs

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, September 2, 2009

Global Stock Markets Weaken

Tuesday, September 1, 2009

Next Five Days Critical for Stock Rally

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

Our Video Related to this Blog:

In a healthy market the first four trading days of the month should be up in the aggregate. This month, it's the first five trading days in the U.S. because Friday is the day before a major holiday and stocks usually go up on those days. The seasonals are negative for stocks, with September historically being the weakest month. U.S. money supply has been contracting lately and investor sentiment has turned sharply down, both also negatives for the market. Whether this can outweigh the U.S. government's invisible (and not so invisible) hand in the keeping the market rally going remains to be seen.

The Chinese markets had a dead cat bounce last night, being up only a fraction of a percent after dropping around 10% in the previous two days. European markets are weak this morning. Unemployment is increasing in the Eurozone even though France and Germany supposedly pulled out of the recession with their positive recent GDP reports. In the UK, the manufacturing sector went back into contraction in August after being positive for one whole month in July (there was much celebrating about how UK manufacturing had recovered when those numbers came out). Even more problematical for the British economy is that consuming lending in the UK dropped last month for the first time since records have been kept. Like the U.S., the UK is highly dependent on consumer spending to keep its economy going. Also like the U.S., their solution to produce economic recovery is money printing.

In the U.S. auto sales are predicted to be the best since last September thanks to the Cash for Clunkers program - just one of many U.S. government programs that reward people who engaged in irresponsible and stupid economic behavior (and paid for by those who didn't). The ISM manufacturing report out this morning is predicted to turn positive because of the improvement in the auto industry. Unless the U.S. government has some new program every month to buck up the manufacturing sector, it might quickly turn negative again as happened in the UK. The biggest beneficiaries of the Cash for Clunkers program have been Toyota and Honda (Why doesn't the federal government just shoot the American auto manufacturers and put them out of their misery?). Interestingly, Japanese auto sales were reported up for the first time in a year last night.

Manufacturing activity has been up for the last 5 or 6 months in China (depending on which report you read). While internal demand was cited as one reason, exports are supposed to be up. Who is buying more of their exports? The major economies are all in bad shape and despite a positive economic statistic here and there thanks to government stimulus programs and jiggling of the figures, they will remain in bad shape for some time. Eventually, global stock markets will figure this out.

NEXT: Global Stock Markets Weaken

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.