Monday, August 31, 2009

A Break in the Bull and China Stops Shopping

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:

August has not been a good month for Chinese stocks. In mid-month, the markets were down 20%, but some recovery took place and it looked like the bull market which had moved stocks up 80% or more was holding. The month ended badly last night though. After dropping 3% on Friday, Shanghai was down 6.7% and Shenzhen down 7.1% last night. Volatility, and Chinese stocks have certainly been volatile in August, is classic sign of a bubble top. The market's plunge last night took place because of concern about a drop in bank lending. Like every other major government in the world, China has been pumping massive stimulus into the economy. Even the threat that the stimulus might be reduced is enough to tank the markets. What would happen if it actually was reduced?

There was no China contagion in the other Asian markets last night. They all had relatively minor drops. The Nikkei in Japan was even up strongly in the morning, but closed down slightly.
Initial bullishness was because of the election news. The ruling party, which has been in power almost continuously since 1955, was crushed at the polls. After approximately half a dozen recessions in the last 19 years, the Japanese electorate finally became fed up enough to try something else. The U.S. electorate is not likely to be so understanding for so long.

There are lessons for what has just happened in Japan for the U.S. Japan has been producing much better economic statistics lately. GDP turned strongly positive last quarter. Industrial production figures out last night were up for the fifth month in a row. Exports have been rising (thanks mostly to China - anything happens to the Chinese economy and the GDP will go right back in the tank in a number of countries). The real estate market turn up last year (after a 15 year drop) Despite the 'improving economy' unemployment is up and retail sales are very weak. The average Japanese citizen sees his or her personal situation deteriorating. Based on how the vote went, they obviously no longer believe the government's upbeat reports on the economy.

The picture in the U.S. right now is remarkably similar to Japan's. Economists predict 3% U.S. GDP growth this quarter. Industrial production is up. Real estate prices are supposedly going up (well, that's the claim at least). Exports are supposedly doing better. However, just like in Japan, unemployment is up and retail sales are in bad shape. The economy the average person sees is deteriorating. Without massive government stimulus, it would look like the 1930s depression. Government stimulus was also the key component in improving the Japanese economy, as has been the case over and over again since 1990. Keeping the U.S. economy out of recession, will require ongoing stimulus as well and in our case this means massive money printing. When governments are forced to chose between recession and inflation, inflation always wins out. No government can risk ongoing recession and survive - even in Japan apparently.

NEXT: Next Five Days Critical for Stock 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.






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.

Our Video Related to this Blog:

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
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, August 27, 2009

Enron Accounting and GDP; FDIC's Money Shortage

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:

Second quarter GDP revisions were out this morning and they were unchanged from the down 1.0% in the first reporting. The government claims that while some components of the GDP numbers declined, increases in other components offset the losses. Components revised upward included government spending (what a surprise). State and local government spending was supposedly up 3.6% (federal spending up 11%) even though over 30 state governments are now considered to be in serious financial trouble. In a separate report, the FDIC is once again about to run out of money because of the increasing rate of bank failures that are taking place even though Fed Chair Bernanke has told us repeatedly that the financial system has been fixed.

While the state and local government spending numbers are suspicious to say the least, far more suspicious is the corporate profits component of the GDP report. Before-tax corporate profits supposedly increased $67.6 billion or by 5.7% quarterly. This was the biggest increase in four years and even larger than the 5.3% gain in the first quarter. You may be wondering how can corporate profits increase by large amounts during the worst recession since the 1930s? Quite simply, they can't. Even worse, proof of the inaccuracy of these numbers is supported by the net cash flow figures in the GDP report. These fell by $26.9 billion. Companies that are actually making money generate cash. Those who are lying about making money don't. This is what happened with Enron. It claimed to have substantial profits, but its cash flow indicated that it didn't. While this smoking gun was right there is the published figures, Wall Street and the mainstream financial media talked up the stock almost to the day that the company declared bankruptcy.

Other components from the report indicate an economy that is in extremely bad shape. Amazingly, even though corporations are making those huge profits, business investment fell 10.9% after plunging at a record depression level 39.2% annual rate in the first quarter. Another impossible statistic in the report is disposable income for consumers. The GDP report claims this went up 3.8% despite the severe recession. However, according to the report the savings rate rose 5.0%, which means that this increased fantasy income wasn't flowing into the economy. Exports, which the Fed and economists have pointed to as one of the cornerstones of the 'resurgent' economy, fell 5%. Imports fell 15.1%. Collapsing trade is a sign of a sick economy. Even though we have heard repeatedly from the media and the Fed that the U.S. real estate market has bottomed, investments in housing fell for the 14th consecutive quarter, dropping at a 22.8% annual rate -that's some recovery all right.

Also contradicting the government's 'economy is getting better' PR blitz, is the continuing failures of U.S. banks. This problem hasn't been solved, it has merely been swept under the rug. The FDIC's deposit fund will be running out of money sometime later this year. It would have run out of money last year if it had to pay off for either the Washington Mutual or Wachovia failures. Both were handled outside the system with the U.S. Treasury making guarantees for the acquiring banks. So far 81 banks have failed this year and the number of banks on the FDIC's troubled list is now 416 (up from 305 at the end of the first quarter). This is the largest number since the Savings and Loan Crisis. Banks insured by the FDIC swung to a total quarterly loss of $3.7 billion in Q2. It looks like we can expect a lot more bank failures in the future.

NEXT: Commodities, the Dollar and More Government Fantasy

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, August 26, 2009

Consumer Confidence Game and Housing's False Bottom

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:

Signs of a "resurgent economy" are everywhere - at least if you believe the reporting of the mainstream media. The "recession appears to be over" and "the U.S. economic ship is finally righting itself" according to one 'expert' after another quoted in news articles. Examination of the data backing up these claims indicates the truth might be quite different. While there was supposedly 'good news' on consumer confidence and housing prices yesterday (as long as you didn't look too closely at the numbers), it was little noticed that the White House raised its projected budget deficits to a total $9 trillion between 2010 and 2019. The budget deficits for the next decade will only be this good as long as the economy is growing at a robust pace and inflation remains unusually low. This is the most optimistic possibility imaginable, with imagine being the key concept here.

The Conference Board released its monthly consumer confidence survey yesterday. It came in at 54.1 and was up from 47.4 in July. The results are very different form the University of Michigan survey which had consumer confidence plummeting only a couple of weeks ago. What caused the big rise? Consumer's view of the current economy are still highly negative, but they see a rosier future - especially after hearing how the economy is recovering every time the turn on the TV or open a newspaper. Surprisingly after being bombarded (perhaps brainwashed is a better term) with news about an improving economy, more survey respondents when questioned whether they thought the economy was going to get better said yes. To put the 54.1 number in context, the average number over time is 95. A robust economy has a number well over 100, so we are about at half that level.

According to Case-Shiller, U.S. housing prices have now gone up two months in a row - May and June. This got huge coverage in the mainstream media yesterday. Did this actually happen? Well, not exactly, if you're a stickler for details. The Case-Shiller numbers are not seasonally adjusted and late spring is usually the strongest part of the year for home sales. If you seasonally adjust the numbers, it turns out May was actually negative. June was still positive, but you would need a magnifying glass to see the number it was so small. Suppose you adjusted the numbers for the $8000 tax credit the federal government was giving first time buyers? Well, the June number would sort of be negative too. What about year over year numbers? Well for the entire U.S. they're down 15%. From the peak there has been a 30% drop so far. The 20-city index, which is the one that was up in May and June has fallen 45.3% since the 2006 top. Yeah, those numbers really scream recovery.

The underpinnings for a housing recovery are also just not there. Colonial BancGroup just filed for bankruptcy. It was closed down by the FDIC about two weeks ago and was the sixth largest failure in U.S. bank history. A lot of bad mortgages did it in. The bank is under criminal investigation for accounting irregularities (you should wonder how many other banks may have engaged in similar behavior, but have not yet been found out). Bank of New York is its biggest creditor. Yes, the big banks have exposure to these medium and small banks. Taylor, Bean & Whitaker Mortgage Corp., one of the largest independent mortgage companies in the U.S. was also forced into bankruptcy as well because it relied on Colonial for its funding. Bank failures can have a lot of collateral damage. So far this year we are at 81 and counting. Despite the 'resurgent' economy and 'bottomed' real estate market, I have a feeling there's going to be a lot more.

NEXT: Enron Accounting and GDP; FDIC's Money Shortage

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, August 25, 2009

Bernanke Reappointed, Court Order and FDIC

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 going to be reappointed for another 4 year term. Obama decided to reappoint Bernanke because he wanted to keep together the team that had weathered the Credit Crisis, an administration official said. This is of course like reappointing the team that did such a 'good job' handling Hurricane Katrina. Just as Bush praised those incompetents, 'change you can believe in' Obama praised Bernanke for preventing another depression. Bernanke was first appointed by Bush and didn't foresee the Credit Crisis coming, nor did he respond appropriately once it did. There is of course also no evidence that another depression has been prevented . So far, it is just some fantasy that politicians inside the Beltway keep repeating to each other.

In other Fed related news, a federal court in New York has ordered the Fed make available information from 11 of its Credit Crisis programs to the public. The court ruled that the Fed improperly withheld records under the Freedom of Information law. Bloomberg News sued (kudos to them) and is trying to find out how much money was given to which banks. In its defense of the case, the Fed (which I would like to remind you is only a quasi-governmental entity - the big banks own stock in it and have their representatives sit on the Fed's regional board of directors) essentially maintained that it was above the law. Undermining our democratic system - just another example of the 'good job' that Ben Bernanke has been doing.

The FDIC is also in the news again. For some reason, even though the Credit Crisis is supposedly over and the economy is recovering U.S. bank failures are skyrocketing. The agency needs new bidders for failed banks because existing banks are now avoiding purchasing them. The FDIC's deposit insurance funds are also getting depleted. The FDIC is proposing a rule change that will allow private equity firms to buy failed banks and maintain capital ratios of 10% instead of 15%. This will of course make the failed banks likely to fail again - and I bet the private equity firms will scream for a government bailout when this happens. Indy Mac and Bank United were already sold to private equity firms earlier this year. Based on this news, we can presume that the FDIC is not using the Bernanke approach of threatening to fire any bank president that doesn't agree to the government's proposed takeover demands, as happened with Bank America. Since these banks are NOT too big to fail, they are not being directly nationalized as was AIG or indirectly nationalized as was the case with most of the big U.S. commercial banks and brokers. Undermining our capitalist system - just another example of the 'good job' that Ben Bernanke has done.

The biggest danger in any crisis is leadership that is oblivious and is in denial. The crisis only gets worse under such circumstances. Bernanke has been a disaster as a federal reserve chair by any criteria that you wish to measure his tenure by. Obama is not only totally ignorant of basic economics and devoid of any ideas for handling our current situation, but is even oblivious to what the current situation is. His actions remind me of Herbert Hoover's famous June 1930 press conference stating the Depression was over. Hoover was more than a decade early.

NEXT: Consumer Confidence Game and Housing's False Bottom

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, August 24, 2009

U.S. Dollar,Stocks,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:

The U.S. dollar fell below its breakdown point again on Friday. DXY, the ETF for the trade-weighted dollar, closed at 78.01 and spent much of the day trading in the 77 range. This is the second time the dollar has traded below the key breakdown point of 78.33. Last time it was below this price for 5 days. It's inability to stay above this level is a sign of weakness. Gold of course rallied and was as high as $957 during the day. It is once again trying to get back to the important $1000 breakout level.

As the dollar fell, stocks rallied. This has been a typical pattern since this March. In the larger scheme of things it is unusual however. For the first time since this phase of the rally began in July, volume was noticeably above average (average volume has been declining during the entire rally however). The rally has looked sickly so far because volume started out light and continually fell - a very negative pattern. It seems that if stocks rally, the U.S. dollar has to sell off and vice-a-versa. Something has to give soon.

What fueled the rally on Friday was existing home sales supposedly being up 7% and bullish comments by Ben Bernanke about how the recession is ending. The home sales figures are of course suspicious, but no amount of fantasy has managed to disturb the market rally so far. Bernanke, who has continually been wrong in his pronouncements on the Credit Crisis and recession is also being believed by the market for no apparent reason. Bernanke was incredibly self-congratulatory in his speech, giving the major central bankers full credit for saving the world from global recession. The proof that this has happened is minimal to say the least and exists mostly in manipulated government statistics that lack any credibility. Lost in the coverage was the failure of four more U.S. banks on Friday, including one with $13 billion in assets. So far this year 81 U.S. banks have failed, compared to 3 in 2007.

Natural gas is staying at its impossible price levels. The near-term futures contract fell as low as $2.75 toward the close on Friday. UNG was down 1.4%, while GAZ was up 1.3%. Their price movements should be almost identical and certainly they shouldn't move in opposite directions. But that is only true in reality, something which the market has become completely detached from.

NEXT: Bernanke Reappointed, Court Order and FDIC

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, August 21, 2009

Natural Gas Deconstructed

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:

If you think logically, what is happening in the natural gas market will be difficult for you to understand. Markets actually always act rationally however, if you have all the facts available. When they don't seem to be doing so, it is because there is additional information that needs to be considered in order to fully understand what is taking place. In these circumstances you need to think about what could be taking place behind the scenes that could explain what is going on.

The natural gas storage report was released yesterday and it was bullish. Storage went up 52 BCFs and expectations were they would go up 55 BCFs. Natural gas has been declining for the last 11 days and is a heavily shorted market. So did it go up on bullish news? No, it sold off! The near term futures contract closed at $2.95. This in and of itself makes absolutely no sense and defies all rules in how markets operate. Even more surprising is that the cost of production for natural gas in the U.S. is somewhere around $4 to $5 depending on the source. It was already noted two months ago that 50% of U.S. gas wells had already been shut down because of low prices. Production should be close to collapse at this point.

The natural gas futures market is also in extreme contango (distant future prices much higher than the current futures contract), certainly the most extreme of any market in recent history. And the contango is getting even worse. The average price for natural gas futures between November and March is $5.32. Moreover, the oil/natural gas price ratio went over 24 yesterday. It peaked around 22 in 1990. This is also an historical extreme. When something gets way above (or below) its long term average, it invariably reverts back to the mean over time.

So who's making money off of this? This statement, which I found in an article for futures traders explains it all: "Traders on the future market are able to lock in the difference of over $2 per MMBTUs and cover their risk exposure by storing supplies until next winter." This is a particular boon to the large users of natural gas and these are the people profiting handsomely from the seemingly irrational behavior in the market. Furthermore, all of this has been made possible because of the CFTC (Commodity Futures Trading Commission), the government regulatory body which is supposed to be keeping the markets honest (and is doing as good a job as the proverbial fox guarding the hen house).

The CFTC announced in June they were planning on reigning in speculation in the market and have been holding hearings this summer. They specifically targeted the UNG ETF as a major source of speculation, even though it is a passive investment vehicle that only buys more natural gas futures in response to investor demand. UNG is also an investment vehicle used by small investors. Along with the SEC, which prevented UNG from issuing news shares for awhile and functioning as an ETF should, the CFTC has tried to cripple UNG's operations. This has allowed the big users of the commodity to drive near term natural gas prices to theoretically impossible levels - and make a killing. Like the SEC and its handling of $65 billion Ponzi Schemer Bernie Madoff (who was investigated several times over a many year period, but no dishonest behavior was ever found), the CFTC hears no evil and sees no evil when it comes to the big players.

As mentioned in yesterday's blog, there is an alternative to UNG. The ETN GAZ also represents the price of natural gas. While UNG lost 50 cents yesterday, GAZ was up 81 cents at one point, although it closed up only 16 cents. The trading volume on GAZ yesterday was enormous reaching almost 17 times the 200-day average. It looked like investors were dumping UNG to buy GAZ, which as an ETN is not affected by the CFTC's investigations. In theory, an ETF and ETN investing in the same commodity should move not only with the commodity, but by the same percentage amount. GAZ actually went up (and by a lot at one point) when natural gas futures were selling off and UNG was down. Just another indication that all rules of reality have temporarily been suspended in the natural gas market.

NEXT: U.S. Dollar, Stocks, 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.






Thursday, August 20, 2009

Oil Up; Retail, Economy and Deficit Down

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

Our Video Related to this Blog:

Oil had a huge rally yesterday, going up more than 4% on a bullish storage report. It is still over $72 this morning. The oil/natural gas ratio is over 20 and is at the same high that it was in 1990 when it last peaked. There is about a 20 year cycle to this ratio and it should be falling for the next 10 years or so. We shall see. In the shorter term the natural gas storage report is out at 10:30 this morning (New York time). Natural gas can be bought either with the ETF UNG (which is being harassed by the regulatory authorities) or with the ETN GAZ. Natural gas futures are in extreme contango.

The stock market is trying to maintain its rally, which is supposedly dependent on the coming economic recovery. Sears Holdings, which released its Q2 earnings this morning, is going to be a drag on the rally today. The company lost 17 cents last quarter. Analysts expected a gain of 35 cents. Revenue fell 10.3% and was also below expectations. The company's credit rating, which was already in junk territory, was lowered further today by Moody's. Although the financial picture of this major retailer is nothing short of disastrous, the stock has risen 80% this year as of yesterday. At least it is down this morning. This company typifies the market rally - a huge rise in the midst of really bad fundamentals. Who would buy under such circumstances and why?

Weekly job claims also rose this morning to 576,000. This is still deep in recession territory. The rule of thumb for years has been weekly claims at or above 400,000 indicates the U.S. economy is in recession. A healthy economy has weekly claims around 300,000. The market had a good rally a couple of weeks ago when claims fell to 550,000. The "better numbers" were heralded in the press and claimed to be an indication of the waning recession. The press should have waited until claims fall and stay below 400,000 before publishing that story (but that would be responsible reporting, so of course that didn't happen). The press also never mentions that a large percentage of the U.S. workforce isn't eligible to collect unemployment, so when these people become unemployed they don't show up in the weekly claims figures.

The "good news" out this morning is that the Obama administration is predicting the federal budget deficit will be only $1.58 trillion this year. This is still almost 4 times bigger than the previous record budget deficit. Some contingency bailout funds for the big banks won't have to be spent (at least by September 30th of this year). Before you trust any numbers from the White House, consider that their argument for the current stimulus package was it would keep the unemployment rate at 8% or lower. Without it they claimed that unemployment could rise as high as 9%! So the stimulus package was passed early this year and so far unemployment has gotten as high as 9.5% - and that is with a lot of manipulation of the numbers to make them look better. You should assume that all the other numbers coming from the administration are just as reliable.

NEXT: Natural Gas Deconstructed

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, August 19, 2009

Stock Market Gappy, Inflation Worries Surface

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:

Global market weakness started again in Asia last night. At one point, the Shanghai market was down more than 5%, but recovered slightly to close down 4.3%. So far this month Shanghai is down almost 20%. Hong Kong was down 1.7% and the Nikkei in Japan was down 0.8%. This was a greater amount that their dead cat bounces on Tuesday. Europe was down strongly this morning and the U.S. markets gapped down again, just like they did on Monday. Strong buying came in immediately to fill the gap. The gap on Monday was partially filled in Tuesday's trading.

Since the market has had a long rise and has been flat for a few weeks now, a gap down where the gap is not filled would be a breakaway gap (or more appropriately a breakdown gap). This is the only type of gap that doesn't have to be filled. The breakdown gap establishes a new ceiling for trading and indicates the beginning of a longer sell off. This hasn't happened yet, but there were two almosts in the last three days. The VIX (volatility index) had its third spike up on the open in three days. When the VIX goes up, stocks go down. The dollar was just above 79.00 recently, still keeping above its 78.33 breakdown level.

A survey of fund managers by Merrill Lynch indicates fund manager optimism is at its highest level in 6 years. This is a contrary indicator. Fund managers love buying at the top and selling at the bottom, which is why as much as 85% of mutual funds fail to beat the S&P 500 in any given year. This doesn't mean the market is going down next week however. Within the next few months though is quite possible.

There are some important articles out today about inflation. One states the Fed has no exit strategy from its stimulus programs (in fact, it is extending them). The one getting the most attention though is an Op-Ed piece by Warren Buffet in the New York Times, entitled "The Greenback Effect". Buffett very gently points out that printing money can cause inflation and there could be trouble on the horizon for the U.S. While the New York Investing meetup has been pointing this out for the last two years, this reality-based view is not supported by the government, Wall Street or the mainstream media. Buffet deserves credit for stating the obvious.

NEXT: Oil Up; Retail, Employment and Economy Down

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, August 18, 2009

Monday's Ugly Market Action

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 selling began in the U.S. on Friday, it didn't have a lot of momentum until the Asian markets opened Sunday night. Japan, Hong Kong and China were down between 3% to 5%. Last night the recovery in the East was anemic. The Nikkei was barely up and the Hang Sang was up less than 1%. The major Euro markets were all up around half a percent today. U.S. stocks are rallying as of now, but how they close is the key. The U.S. dollar is selling off and nothing significant has changed for it . It is still in a precarious state.

Basically the only thing that rallied yesterday was the U.S. dollar. Everything else sold off. This has been the common pattern since March. It doesn't make any sense based on the media story of what is going on in the markets and the economy. U.S. stocks should rally if the dollar is rallying. The opposite only occurs in inflationary environments.

The technicals on the index charts have weakened considerably in the last few weeks. The RSI on the daily charts even fell below 50 for the Nasdaq yesterday. The S&P hit 50. The Dow stayed just above it. Bouncing off this level and rallying is an almost automatic market reaction and this is happening today. We will have to see how long this lasts. The MACD is still relatively strong, so this will probably keep the market from falling apart at the moment. The DMI patterns can only be described as twisted looking. They are indicating that the uptrend is endangered.

The market seems to be in a topping pattern, but this can last awhile. As we head into the seasonal week period of September and October, the risk of a major sell off for stocks becomes greater.

NEXT: Stock Market Gappy, Inflation Worries Surface

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, August 17, 2009

Japan Climbs Out of Recession...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:

Japan's second quarter GDP figures were released last night and indicated the economy grew by 3.6% on an annual basis. This was after a 14.2% decline in the first quarter. What caused the turnaround? 'Government stimulus measures' as usual were cited and a big increase in export growth. Internal demand remains incredibly weak. Japan joins Germany and France, which also climbed out of recession thanks to government stimulus measures. The United States, the king of government stimulus measures, is predicted to join them in the third quarter.

This is not the first time Japan has 'recovered' from or avoided recession thanks to government stimulus measures. This also happened in 1993, 1997, 1998, 1999, 2001, 2004 and now after the 2008/2009 recession. Japan is very good at recovering from recession. The only problem is that it is even better at falling into recession. Insolvency of the banking system - the current problem in the U.S. is almost identical - is what has caused the two-decade economic nightmare. Residential real estate in Tokyo lost 90% of its value from the bubble top. Top A level commercial properties declined 99%. So far the stock market had a 18 year sell-off there after bottoming last October (assuming it doesn't go lower again). The Nikkei fell 3.1% last night. Hong Kong was down 3.6% and Shanghai down 5.8%. Apparently the good news wasn't good enough.

Problems in the market began last Friday, when U.S. Consumer Confidence suddenly dropped. Economists had predicted it would be going up. Imagine, consumers are becoming less confident even though unemployment is likely to be a major problem for at least another year (by economists own admission) and their income is likely to continue to fall. Who could have predicted that not having a job or money would make consumers less confident? Certainly not U.S. economists. And how are consumers going to increase their spending under such circumstances? Obviously they aren't going to. So much for the 72% of the U.S. GDP (based on 2008) that consumer spending is responsible for getting better. Nevertheless, I have little doubt that U.S. GDP will be positive next quarter - although people who insist on dealing with reality will have trouble understanding how this occurred.

The stock market was buoyed when second quarter U.S. GDP was released a couple of weeks ago. It was a major surprise that the decline was only 1.0%. What caused this better performance? Nothing involved with consumer spending or industrial production (although there were claims that the auto industry was doing better - try not to laugh). Government stimulus measures were the key. Federal government expenditures were up 10.9% in the quarter and state expenditures were up 2.4%. How state expenditures were up when at least 20 states are facing major budgetary problems is not clear. Like Japan though, as long as the U.S. keeps up the government stimulus measures, it will be good at climbing out of recession. It will probably be able to do so over and over and over again in the next decade or two.

NEXT: Monday's Ugly Market Action

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, August 14, 2009

A Recovery Reminscent of 1990s Japan

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:

Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... 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.






Thursday, August 13, 2009

Fed's Actions Speak Louder Than Words

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 adage that 'actions speak louder than words' is something everyone learns as a young child because it is one of the most important things to know. In its press release from its meeting yesterday, the Fed's words were very upbeat and said the recession appears to be ending. However, they then followed this up with they would be keeping interest rates at zero for "an extended period." Zero interest rates are an extreme policy action only justified in the most dire economic circumstances and bear a high risk of causing massive inflation. So if the economy is doing much better why do they need to keep interest rates this low?

The stock market of course rallied on the Fed's positive outlook on the economy, even though the Fed's outlook has been completely wrong for the last two years. The Fed didn't see the Credit Crisis coming even one month before it blew up. Even in the spring of 2008, they were releasing statements that a recession could be prevented, even though a recession had already started in December 2007. This time the Fed has said that "economic activity is leveling out" and conditions in financial markets "have improved further." And what are the signs of the improving economy? They are increased factory activity, homes sales picking up and companies firing less workers. It should be immediately obvious that less firings are not a sign of a growing economy. As for factory activity, it is not adjusted for inflation, so rising prices can make it look better. If you check you will see that petroleum products are at the top of the list and not because there was a huge increase in their use, but because prices went up. Nevertheless, once again the Fed assured us in their statement that there will be no inflation.

As for the improving real estate market, in the last two days we have covered why that's not likely for years to come. News out today had foreclosures up 7% from June to July and 32% year over year. In the month of July, 360,000 U.S. households received a foreclosure notice raising the total for 2009 to 2.3 million. July was the third month out of the last five when foreclosures hit a new record high (that certainly looks like a recovering housing market doesn't it?). The huge rise in foreclosures is taking place even though there are a number of federal and state programs to prevent foreclosures including Obama's housing rescue plan (about as effective as the federal government's post hurricane Katrina rescue plan in New Orleans). Several states have even put moratoriums on foreclosures to temporarily stop them altogether. Foreclosures are still rising at a break neck clip however. Yet the Fed and the media are telling us that real estate is recovering.

The Fed also said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities and claims it will shut down this program at the end of October, a month later than previously scheduled. Mainstream media reports state that this program is aimed at lowering rates on mortgages and other consumer debt, but admit that some people think that it looks like the Fed is printing money to pay for the exploding federal budget deficit. Who are these people who insist on dealing with reality? Next they'll be claiming that this will be causing massive inflation like it has every other time in history when it's been done. Imagine believing history repeats itself instead of believing Ben Bernanke, who has apparently been wrong in every prediction he has ever made. Fortunately, we have the mainstream media to tell us that words speak louder than actions.

NEXT: A Recovery Reminscent of 1990s Japan

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, August 12, 2009

More on the Real Estate '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 bubble in real estate caused the Credit Crisis and cleaning up the mess in real estate is the key to getting the financial system and ultimately the economy back to normal functioning. Articles have appeared in the mainstream press stating that residential real estate has bottomed and prices are headed up. You would have to ignore the overwhelming amount of bad news coming out of the real estate sector in order to believe this.

The Mortgage Banker's Association recent numbers for mortgage applications for home purchases are falling. The four-week moving average is down 0.7%. So demand is down during the heavy buying summer season. So prices are supposedly going up, even though demand is falling. Well that could happen if supply was falling even faster as is the case with oil. Don't hold your breadth though. The worse form of real estate supply is still rising rapidly. Mortgage defaults are expected to come in at 3.85 million this year compared to 2.7 million last year according to Moody's.com.

It is estimated that 14 million (out of a total of 52 million) mortgage holders in the U.S. had negative equity in their homes by the end of the first quarter of this year. Moody's predicts that that number will rise to 17.5 million by the first quarter of 2010. In a recent report, Deutsche bank estimates that nearly half of U.S. mortgage holders will have negative equity in their homes by the first quarter of 2011. By the first quarter of this year, 50% of subprime borrowers were underwater as were 77% of Option-ARM mortgage. Mortgages on homes with negative equity are where defaults and foreclosures come from. There seems to be a potentially unlimited supply of these in the next few years.

Home builder Toll Brothers earnings report today illustrates quite clearly how the mainstream media is handling real estate coverage. The report was described as upbeat. Toll said that signed contracts were up 44% and only 9% of buyers backed out. While the percentages look good, the total number of homes sold were only 792. Toll also stated that demand was so strong that it scaled back on incentives. Revenue was down 44% however because of much lower prices charged for their houses. Slashing prices at that level seems like one giant incentive to me. The market is also so 'good' that Toll is writing down its land and house inventory by $90 to $160 million. The stock of course went up on the upbeat news of collapsing revenue and massive write downs. You should assume that the overall U.S. real estate market is just as 'upbeat' as the Toll Brothers earnings report.

NEXT: Fed's Actions Speak Louder Than Words

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, August 11, 2009

Inconsistencies of the Economic '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:

What created the Credit Crisis and the current 20 month recession (the longest since World War II) was the collapse in price of all the worthless real estate paper the was issued during the bubble years. As this blog mentioned yesterday, this problem has recently gotten 'better' because the accounting rules that determine the value this paper were changed. While playing make-believe is appropriate for five year old children, it's not a good idea for running financial system and just leads to bigger disasters later on.

The support for the real estate 'recovery' is thin to say the least. U.S. house prices supposedly went up during the last three months. This occurred even though home loans are hard to get and U.S. wages and salaries were down 4.7% year over year in June. This was the largest drop since records began in 1960. Employment is also down. As was mentioned last Friday, the unemployment rate dropped by 0.1% because a large number of people left the labor force. No matter how you look at it fewer people have a job. So who are these people who are paying higher prices for houses and what banks are lending them the money? All in all is seems highly unlikely that house prices could actually be going up given such conditions. If not, this set of numbers wouldn't be the only ones that have been altered recently to make them look better.

The other inconsistency in the real estate is getting better is that this was a drag on the big banks and brokers earnings in the second quarter. Many of them were increasing loan loss provisions. Fannie Mae, whose business is purely real estate related, illustrates the current state of affairs quite clearly. Fannie Mae lost $14.8 billion in the second quarter. Provisions for credit losses were $18.8 billion. The company stated in its earnings "We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers."In other words, all types of loans are going down the tubes including the prime ones. Total non-performing loans increased to $171 billion in the second quarter. They were up from $149.9 billion in the first quarter of this year and that was up from $119.2 billion in the last quarter of 2008. Well, that certainly looks like a recovery pattern, doesn't it?

Fannie Mae has requested an additional $10.7 billion from the U.S. Treasury to keep afloat. That it can get by this quarter with only an additional $10.7 billion cash infusion from the government seems optimistic. The company is essentially a bottomless pit for bailout funds. Both Fannie Mae and Freddie Mac's criteria for non-performing loans were changed around the beginning of the Credit Crisis to make it more difficult for a loan to be considered non-performing. Even with this fantasy, things still are getting worse. Somehow reality always seems to always get in the way of the government's best plans.

NEXT: More on the Real Estate 'Recovery'

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, August 10, 2009

The Smoking Gun of the Economic Recovery Scam

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 Economic recovery that is supposedly taking place has been carefully arranged by the U.S. government. Unfortunately, the 'recovery' will be far more evident in the published statistics than in the economy itself. After all, it is a lot easier to change the numbers that to actually fix the economy. Apparently, the hope is that with enough cheer leading, businesses and the public will get on the bandwagon and start spending again. I can picture Bernanke, Geithner and Obama clicking their heels together and trying to wish hard enough to make it so.

The AIG earnings report came in as positive as expected on Friday. How did a company that is beyond bankrupt manage to show positive earnings? The key statement in the report about what happened was "resulting from the adoption of new accounting guidelines". These new guidelines were set by the U.S. government and probably benefited every big bank and brokerage house as well, most of which had surprisingly good earnings - even though their lending operations (the core business of any bank) were continuing to deteriorate during the quarter. So the mystery has been solved. If your earnings are disastrous, just change the accounting rules and like waving a magic wand, suddenly you're earning gobs of money. Happy days are here again!

If you want to know how well this approach works, you can take a look at Enron and GM. Enron's earnings were phony for years and then it imploded overnight. GM changed its accounting in the mid-2000s after the recession and suddenly one quarter it was earning big bucks instead of losing big bucks. To its credit, CNBC News actually reported that the big 'improvement' was merely an accounting gimmick. The stock still rallied strongly on the news (so much for the Efficient Market Hypothesis). Even though the government started pouring money into GM starting in 2007, it still went bankrupt in 2009. Now the government is supporting it to the tune of $4500 per car with the Cash for Clunkers program. Reports out today predict that autos are going to be the next big recovery area of the economy, improving both the industrial production numbers (which fell at a depression level 19% in the first quarter) and retail sales (which went up in May and June because of higher gas prices - they're not adjusted for inflation).

If the government pours huge amounts of money into any industry, the numbers will of course improve. This doesn't indicate economic recovery though, even though it is being sold that way. Will the government keep doing this every quarter? It may have to in order to keep the 'recovery' going. If you want to know how well that approach works, see Weimar Germany and Zimbabwe.

NEXT: Inconsistencies of the Economic 'Recovery'

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, August 7, 2009

Non-Farm Payrolls and Its 'Statistical Quirks'

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:

When deciding how credible this mornings jobs reports is, you only have to look at one number. According to the Bureau of Labor Statistics, employment in the auto industry went UP by 28,000 last month. Nobody believes this, and I mean nobody, not even the biggest government boot licking financial reporters. Even the mainstream media cautioned that this could be a 'statistical quirk', the polite term in the numbers industry for lying. You should assume that finding one 'statistical quirk' in a report is similar to finding one roach in your apartment. In both cases, there's a lot more that you're not seeing.

The headline number for the report was a loss of 247,000 jobs, which is bad enough as is. July was the 19th consecutive month for job losses. Since the recession has began in December 2007, the government admits that 6.7 million jobs have been lost. Goods-producing industries shed 128,000 jobs, and service-producing industries cut 119,000 jobs, including 44,000 in retail and 38,000 in professional and business services. Unemployment in retail (the largest individual private sector employer) seems to be accelerating. After the 'robust' auto industry gains, health care was the biggest job gainer. Government also added about 7 thousand jobs, but this information was left out of the BLS press release even though it is always reported (when information that has always been available suddenly disappears watch out).

According to the government, the unemployment rate declined to 9.4% (actually 16.3% if you include discouraged workers and involuntary temp workers). You may ask how is it possible for there to be a significant job loss and for unemployment to improve at the same time (could it be another 'statistical quirk')? It's simple - 422,000 people 'conveniently' left the labor force. Even though the O'bama, Bernanke, and Geithner and the BLS in its press release tell us that the economy is improving, large numbers of people are giving up looking for jobs because they think there is no chance of finding one. Somehow, I don't think both of these contradictory views are possible. One of them seems to be a lie - pardon me, I meant 'statistical quirk'.

If you listen carefully to what Obama and Bernanke have been saying for the last several months, you will notice that 'things are getting less worse' is the gist of their statements. The Obama litany is: the financial meltdown has ended (which happened during the Bush administration, but he still takes credit for it), the rate of job loss is slowing, and the stock market is doing better. Bernanke also concentrates on the stock market is getting better theme (and I am sure this is not taking place without some government assistance). The recession is indeed getting 'less worse', although not as much as the government claims. There is also a huge gaping chasm between getting less worse and getting better. However, the government may be able to solve this problem in the future with bigger 'statistical quirks'.

NEXT: The Smoking Gun of the Economic Recovery Scam

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, August 6, 2009

The Latest from Fantasy Land

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:

AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

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, August 5, 2009

Gold Shining, Silver Lustrous

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 traded as high as $970 in the futures markets yesterday. It is once again getting close to that magic $1000 level. Silver traded as high as $14.73, well above important resistance of $14.50. Meanwhile, the trade-weight U.S. dollar closed at 77.77. Tuesday was the second day below its breakdown level of 78.33. So far this morning it's trading lower.

A basic idea in technical analysis is that if a resistance point is tested enough, it will eventually be broken. Gold's all time high so far is $1032.70 set in European trading in March 2008. It broke 1000 again this February. It almost got back to 1000 again in early June. The end of the year starting in August is when gold is strongest seasonally. So, things look promising for the breakout from 1000 at some point fairly soon. A breakout after several tests is usually very bullish.

The fly in the ointment is of course the U.S. dollar. The key 78.33 level is the low during the late 1980s, early 1990s sell off. It was THE low for the trade-weighted dollar until it was broken in September 2007. The new low established after that sell off was under 72 when the dollar made a multi-month low between March and July 2008. While this is major support, there is some lesser support at 76.00. If gold is knocked down from the 1000 area again, that is where the dollar is likely to be trading when this happens.

In the long-term silver will do even better than gold. First though it has to break resistance as 16.00, which is bounced down from in the last rally and then it will head toward 21.00. Silver is both a monetary metal and an industrial metal. Economic recovery will increase demand (silver has been in a chronic shortage situation on and off for years as is). Inflationary worries will also increase demand. While silver ultimately outperforms gold, gold always moves first. Watch the yellow metal closely in the next few weeks.

NEXT: The Latest From Fantasy Land

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, August 4, 2009

Dollar Break Downs

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 trade-weighted dollar closed below its break down point of 78.33 yesterday. Intraday the dollar traded as low as 77.45 and it closed at 77.57. As has been the pattern for months now, everything else rallied as the dollar sold off. While stocks continued their long move up and the S&P 500 reached 1000 (a major resistance point), commodities were the star players in the rally. The CRB index, a broad basket of commodities, was up 3.48%. The ISM manufacturing Report supposedly set off the rally.

According to the media, the promise of economic revival was responsible for the big commodity rally. So what commodity is doing best recently? Sugar! - which was trading at a three year high yesterday. Sugar is not economically sensitive at all (people don't go into sugar eating frenzies when a recession ends), but is instead a strong mover in the early stages of inflation. The biggest winner on the day was natural gas (the chart is very bullish and UNG closed above the 50-day moving average), with the near term futures contract up 10%. Copper, which is perhaps the most economically sensitive of all commodities was up 4.4%. Copper, zinc, lead and nickle are all trading at 10-month highs. Aluminum is at an 8-month high.

The rallies in gold and silver, which are the commodities most sensitive to movements in the U.S. dollar, were somewhat muted. Gold was as high as $963 intraday. A report released yesterday stated that net sales of gold by central banks fell to 39 metric tons during the first half of this year. This was down 73% from last year. If total sales for the year come in under 140 metric tons (highly likely), they will be the lowest in decades. Central bank gold selling was a major factor keeping gold prices low in the 1980s and 1990s and it looks like it is now completely exhausted.

As for the ISM report PMI came in at 48.9 (under 50 means contraction). This was above expectations and a few components were up decently, including production, new orders, and prices paid -which is an indication of inflation. Inventories were the most negative component of the report and they have been contracting for 39 months so far. According to the ISM, six industries are now expanding - Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Transportation Equipment; and Chemical Products.

As I have stated many times in this blog, economic revival is going to mean a lot of inflation.
The dollar break down is an indication of this and the powers that be are going to have to do something soon to try to hold up the dollar. My guess is that this will happen when gold hits the $1000 area. This is the inflation marquee for the economically savvy. The Fed can deny that inflation exists all it wants, but if gold soars past 1000, only the naive and gullible will listen. Since there is usually a lot of buying pressure for gold in August, the next few weeks should be interesting.

NEXT: Gold Shining, Silver Lustrous

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, August 3, 2009

Critical Juncture for Dollar and Stocks

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 dollar began to break down on Friday. Intraday, it fell below the critical 78.33 support level, but managed to close at 78.38. It is hovering just above 78.00 this morning. The next few days should tell whether or not it is making a bottom or just falls apart. This is probably just as important for the stock market because the dollar and stocks have been moving almost perfectly inversely to each other since early March when the dollar peaked and stocks bottomed. A dollar rally should mean a sell off in the stock market.

The close and opposite relationship of the price movements of the dollar and stocks is unusual. The 1990s bull market took place while the dollar was rising, not falling. The same was the case for most of the 1982 to 1987 stock rally. So most of the long secular bull market from 1982 to 2000 was accompanied by a rising dollar. Much of the secular bear market rally that took place between 2002 and 2007 was accompanied by a falling dollar. The dollar dropping to new all-time lows in September 2007 because of the Fed's rate cutting campaign is what finally killed the rally.

A new dollar stock pattern seems to have begun last November when the dollar had a peak and stocks (and a few commodities) made a bottom. The initial relationship was quite jerky however and only smoothed out starting in March. Stocks going up and the dollar going down indicates a trade where people who go long stocks, short the dollar. Only the big banks, brokers and hedge funds are capable of engaging in this trade. It's not mom and pop investor. If the U.S. government is not going to let the dollar break down, this trade is going to have to reverse and stocks are likely to suffer.

While an inverse relationship between stocks and the dollar has taken place, this usual relationship for the dollar and gold has broken down. Gold peaked in late February and the sold off with the dollar until mid-April. It then rallied in early June and sold off again with the dollar until early July. This pattern makes no sense whatsoever. If the dollar rises, there is no reason the decoupling can't continue. August is usually gold's strongest month and gold acted very positively to Friday's GDP Report while the dollar had a vicious sell off. The reaction was so extreme that it looked like dollar traders actually read the report.

NEXT: Dollar Breaks Down

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.