Friday, October 30, 2009

The Long and the Short of It

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

In the short term the market can trade on fantasy, it the long term it always trades on reality. So we can state that at some point in the future, the current U.S. stock rally based on economic 'recovery' will eventually fade. It probably will not happen all at once, but in succession with small cap stocks turning down first and big caps last. The Russell 2000 chart looks awful, while the Dow Jones chart looks OK. There seems to be little if anything left to push stock prices higher. Short-term interest rates are already around zero and have been at that level since last December. The Feds only option to push stocks higher after a drop is to buy government bills, notes and bonds in the market with newly printed money. The Fed is supposed to stop its quantitative easing program for treasuries today however (this decision can be reversed in a heartbeat). The employment report next Friday is the next big test for stocks.

The stock market rally yesterday didn't evenly undo the damage from Wednesday. The Russell 2000 was up 2.5%, less than its 3.5% drop the day before, while the Dow was up 2.1%, more than its previous 1.2% drop. Nasdaq was the laggard, rising only 1.8%, also less than its 2.7% drop on Wednesday. The S&P did better, going up 2.3% after falling 2.0%. Spot gold rose as high as $1049.10 (there is resistance at $1050) after bouncing off support at $1025 the day before. Silver rose to $16.69. The dollar fell and closed at 75.94, below the key 76.00 level. Bonds had a significant sell off, with the 10-year treasury interest rate rising to 3.50% and the 30-year rising to 4.35%. For people who want to short long-term treasuries (the same as going long on interest rates), there is a leveraged 200% ETF, TBT and a leveraged 300% ETF, TMV. These are very aggressive trades.

News was out overnight on inflation and employment in the Eurozone. Year over year CPI is down 0.1%. While there is much hand wringing about deflation and this being caused by a weak economy, this is not what is actually keeping prices flat. Just as falling currencies are inflationary, rising currencies are deflationary. The euro has rallied from the 1.25 to the U.S. dollar range in early March to a high of 1.5020 on Oct 23rd. Since all commodities are priced in U.S. dollars, this has kept their costs from rising as much in Eurozone countries as they have in the U.S. This factor was even mentioned in news coverage in relationship to oil prices. When inflation is defined as a currency losing its value, everything else falls into falls into place. Mainstream economists rarely use this definition however - and their economic predictions are almost always wrong.

The current party line in the mainstream media on inflation is that it is going to happen, but not for three or four years, basically at some distant time in the future (so no one should be worrying about it). Admitting that inflation is going to be a problem at any point is actually a big switch in the tone of coverage. Deflation was the key theme in the news for most of the last two years. Inflation is going to start picking up by the CPI report for December. Why? Because oil prices are the key swing factor. Oil fell as low as $33 last December and gasoline was below $2 a gallon in the U.S. Oil closed yesterday at $79.87 and gasoline prices are closer to $3 a gallon. Oil's price this December is going to a lot higher than last year's and that is going raise the CPI number. While this is totally predictable, the mainstream financial media seems incapable of seeing what is coming. Even though they can't see the obvious that will take place 3-months ahead, they will quote predictions for 3-years from now. My impression is that most financial reporters haven't the slightest idea what is going on in the markets, but then again I don't like getting my investing advice from English majors. Anyone who gets their financial information from the mainstream media is doing just that.

NEXT: Bank Banruptcy Bonanza

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, October 29, 2009

Mark to Model GDP

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The 3rd quarter U.S. GDP figures were out this morning and they came in slightly above expectations. GDP was supposedly up 3.5%. Almost half of this, 1.7%, was accounted for by increases in auto production. This in turn can be traced to the Cash for Clunkers program and government spending. Overall spending on durable goods was up 22.3%. Housing investment was up even more at 23.4%, also thanks to government tax breaks and FHA mortgage insurance backing loans that a subprime lender wouldn't have touched at the height of the housing bubble. Federal government spending was up 7.9%. On the flip side, business investment fell, net exports fell and inventories fell. In other words, any part of the economy not manipulated by government spending is still declining. Even though they went down, inventories still added 0.9% to GDP growth, because they didn't go down as much as they did previously (no that doesn't make any sense to anyone except a government statistician).

An economy that is only robust because of government spending is essentially dead in the water. This is the same picture as Japan in the 1990s and first decade of the 2000s. The headlines this morning trumpeted that the U.S. is out of recession. Those headlines were common in Japan during the last two decades as well. The U.S. can only avoid this fate by coming up with one Cash for Clunkheads program after another. After all why have only a trillion dollar yearly budget deficit when you can have a two trillion dollar yearly budget deficit? Just as a reference, the Dow Jones Industrial Average was at 2753 the day the Nikkei peaked at just under 40,000 at the end of 1989. Both averages are around 10,000 at the moment.

How long the stock market continues to buy the current U.S. econo-fantasy remains to be seen. There is serious technical damage in the stock charts. The Russell 2000 (small cap stocks) has made a confirmed double top as of yesterday. The usual sell off scenario is small caps go down first, the Nasdaq next and the big cap Dow the last. This pattern was writ large in yesterdays action. The Russell 2000 dropped 3.5%, the Nasdaq 2.7%, the S&P 500 2.0% and the Dow 1.2%. Of the indices, only the Dow has held above its 50-day average. We have seen this picture before in July by the way. The market was significantly technically damaged, but managed to rise from the ashes and rally for the following few months. Things may not be so rosy this time. If there is a rally on low volume that fails to get the indices to a new high, the current rally is likely over and a good shorting opportunity is presenting itself.

There are two assets that have experienced no change in their technical pictures - the U.S. dollar and gold. The dollar is just as bearish as it has been for months and gold is just as bullish. Even with its recent small rally the dollar didn't even go up enough to reach its 50-day moving average. It's 50-day moving average is trading well below its 200-day moving average in an extremely bearish pattern. The gold chart is almost the mirror image of the dollar's chart. It is trading above its 50-day moving average, which in turn is well above its 200-day moving average in a very bullish pattern. Spot gold bounced off its breakout point of $1025 yesterday (a normal action which takes place about 50% of the time) and has traded as high as $1040.40 this morning. Spot silver has also tested its breakout level at $16 and has stayed in its $16 to $18 trading range. So far, so good.

NEXT: The Long and the Short of It

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, October 28, 2009

Markets Enter Danger Zone

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Almost all markets are at critical points right now. The 50-day moving averages have been broken in all the major stock indices, except for the Dow. SLV has also broken its 50-day. Gold is holding above its 50-day and hit key support at $1025 earlier. There is about a $5 gap under that level that could be filled. The RSI picture is highly negative as well. All major stock indices have broken the key 50 level, as have SLV and GLD. Long term interest rates have not only started heading up, but are trying to break a 29-year downtrend line (this would mean a many year period of rising rates). The only thing that is rallying is the U.S. trade-weighted dollar. It bounced off of the 75 level - a place where there is no technical support. The dollar rally has mostly been orchestrated by the European Central Bank, which is desperately trying to keep the euro under 1.50.

The 3rd quarter U.S. GDP figures are out this Thursday. Consensus is for a 3.2% rise. A much lower number could tank stocks. A larger number would be bullish. Regardless of what happens, the false message of economic recovery that has been repeated continually by the U.S. government will be shown up to be the fantasy that it is at some point and the pretense that the stock market rally has been based on will evaporate. It will soon become obvious though that the only way for the U.S. government to handle our ongoing economic problems will be to print more money... and more money .... and more money. At that point, stocks and the inflation trade (precious metal, energy, and agriculture) will decouple. These have been mostly moving together since March. As of now, it is not possible to say when this separation will take place.

At the moment, it is necessary to worry about everything going down. Gold and silver miners have been particularly hard hit, with small cap stocks next on the list. Some mining stocks had two and sometimes three gaps on their charts, with only one gap having been filled so far. Watch out for prices returning to levels where there is a gap. Miners are affected by the price movement of gold and by the overall stock market, so they are getting a double whammy right now. These are also highly volatile stocks prone to sharp drops and rallies. You need to buy on the dips and either hold on or sell every time there is a peak.

The struggle between the U.S. dollar and the markets is likely to continue for some time. The stock market is essentially a house of cards that can start to wobble even with a small dollar rally. A sharp drop in stocks will invariably be met by a new flood of liquidity from the Fed., which will in turn make the dollar go back down. The Fed learned that this was necessary based on last fall's market meltdown and will now repeat this action every time there is a threat to the markets. Any sharp drop will therefore likely be followed by a sharp rise. This is typical of secular bear markets. Over many years they go up and down a lot, but ultimately get nowhere. The Dow was 10,000 in 1999 and is around 10,000 right now. Gold on the other was around $250 in 1999 and is over $1000 right now. The long term trends determine where the money can be made.

NEXT: Mark to Model GDP

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, October 26, 2009

Central Banks Support the Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The U.S trade-weighted dollar had an explosive rally on Monday. The rally was by no means even during the day, but consisted of a few sharp rises that lasted only minutes. Not much happened in between. Only central banks have enough capital to account for this type of trading pattern. Not all currencies moved equally against the dollar either lending further credence to central bank intervention having taken place. Only the euro and Canadian dollar had significant moves down with the Australian dollar having a lesser drop. The Yen hardly budged. The British pound actually rose slightly on the day. Care to guess which central banks might have been involved?

Gold and silver had sharp sell offs in reaction. However this was not the only reason that accounted for their movement down. There is an options and futures contract expiration tomorrow. The same expiration affects natural gas, which also had a sharp sell off, but this was only tangentially related to movements in the U.S. dollar. The dollar intervention was clearly timed to get maximum bang for the buck (so to speak) and drive down the price of gold as much as possible. There was no technical damage on the gold and silver metals charts though. Silver partially filled a gap from the breakout earlier in the month and probably needs to trade to the bottom of the gap before it can resume its movement upward.

A number of gold and silver miners also filled their equivalent gaps from the same day in early October. GDX, the precious metal mining ETF did so and traded down to its 50-day moving average. Technical problems are showing up on a number of miner's chart however, so this sell off is probably not over. Novagold (NG) has serious problems on its 15-minute chart which indicate a lower low is quite possible in eight to ten days. A rally in the middle is likely. You might want to consider a tight stop. Buying on the dip is another option. Silver stocks like Hecla (HL) and Coeur d'Alene (CDE) are interesting possibilities. Hecla still has an unfilled gap lower down (as do a few other mining stocks). Look for the gaps and keep an eye on them before deciding to buy.

While currency intervention is keeping the U.S. dollar from collapsing, it will have a high cost over time. Everything sold off yesterday and that includes U.S. treasury bonds. When bonds go down, interest rates go up. There was a minor breakout in the 10 and 30 year bond interest rate charts Monday. The stock market is exceedingly vulnerable in here as well. The rally has been based on liquidity and the movement of that liquidy out of stocks into the dollar could damage stock prices considerably. This is the choice the monetary authorities are facing - save the U.S. dollar or save the stock market and keep interest rates low. Knowing how competent Ben Bernanke is, it will probably be none of the above.

NEXT: Markets Enter Danger Zone

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.






Interest Rates Break Out

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Almost everything went down last Friday, everything except the U.S. dollar of course. Continuing the pattern that has been very noticeable since this March, stocks and commodities both retreated as the dollar went up. Looking back at a 10-year chart, you will notice that the stock market and the U.S. dollar used to move together. Somewhere between 2003 and 2005, the pattern changed and they started moving in opposite directions. The pattern actually only became more exaggerated this spring. 2003 was when the Fed lowered interest rates to one percent, which in turn made the real estate bubble take off.

Liquidity is driving this pattern. Liquidity has also made it possible for interest rates to remain low during the last several years. During 2009 however bond prices have only been kept high because the Fed is buying a boatload of treasuries with freshly printed money (note: interest rates go down when bond prices go up and vice versa) while keeping overnight rates around zero. While the Fed has extended its purchase of Agency debt (mostly Fannie Mae and Freddie Mac) until March 31st, it is supposed to stop its quantitative easing program for treasuries on Oct 31st. It remains to be seen how long they will be able to stay out of the bond market. My guess is the printing presses will not remain idle for too long.

Bonds also sold off on Friday. Interest rates bottomed last December, with rates for the 10-year bond falling to around 2.00% and on the 30-year bond to 2.50%. By June, interest rates had approximately doubled to 4.00% and 5.00% respectively. Bonds rallied since then (and interest rates came down). Early this month both the 10-year and 30-year interest rates (not prices) bounced off their respective 200-day moving averages. This was the buy point, although some market watchers claim that 3.48% and 4.30% are the key rates that need to be broken for the 10 and 30-year bonds to be shorted. The 10-year yield closed at 3.48% and the 30-year at 4.29% on Friday, but were at 3.52% and 4.32% this morning - both above their key resistance. To see the interest rates charts on Big Charts (http://www.bigcharts.com/) use $TNX and $TNY for the ticker symbols.

I have already been buying TBT, the 200% leveraged short 20 to 30 year bonds ETF, for awhile now. This has a place at the moment in inflation sensitive portfolios, but should not be a huge position. Silver is my biggest holding and its strength on Friday was impressive. Almost by itself silver managed to buck the selling tide and punch higher. Gold is my next largest holding and I have 200% long silver and 200% long gold in an approximately 60/40 ratio. Mining stocks and the ETF GDX are next. I am trying to move agricultural commodities to become my 4th largest positions and hope to accumulate more GRU on a sell off this week (I already have all the RJA I wish to hold). TBT may wind up in the 6th or 7th place. All of this is likely to change early next year, when I anticipate exchanging a certain amount of my precious metals holdings for oil positions and other portfolio revisions will need to be made.

NEXT: Central Banks Support the Dollar

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

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






Friday, October 23, 2009

In for a Penny, In for a Pound

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The third quarter GDP figures for Great Britain were released last night and GDP fell 0.4%. I particular liked the headline "UK Still in Recession After Surprise Contraction" announcing the drop. This was the sixth quarter in a row that GDP was down in the UK. So who exactly was surprised by this? Probably just mainstream economists and anyone who reads the drivel published in their reports. One survey indicated that 100% of economic analysts had predicted that British GDP would go up this quarter - and they were all wrong. This is not uncommon. Mainstream economists frequently all ere on the wrong side of a number and are the last to know what is really going on in the economy. There is probably no profession as prone to group think and making errors in its predictions.

Once the GDP numbers were released there was immediate speculation that the Bank of England would increase its quantitative easing (aka money printing) program. The British pound fell by a penny almost immediately. This helped the trade-weighted dollar rally, since the pound is one of its components. The dollar rally was most noticeable when U.S. trading opened however. Gold and silver which reacted bullishly in overnight trading to this potentially inflationary news, dropped straight down after the U.S. markets opened. We have seen this pattern over and over again. A knowledgeable cynic would claim only blatant manipulation of the dollar and the precious metals markets backed by the U.S. government could account for it.

It's only a matter of time though before gold breaks out from its current trading range between $1050 and $1070. Indians spent $2.15 billion buying gold last week during their festival period. Gold sales were 5.7% higher than last years. India has accounted for 20% of global gold demand for many years now. There were a number of reports released by the gold bears in September about how the high price of gold would severely damage gold demand in the subcontinent this fall. It is now clear that that's not going to happen. Gold has traditionally been the way to store wealth in India and this habit goes back at least 2000 years. The Indians have never trusted paper currencies and over time have accumulated massive hoards of the precious metal. This deeply ingrained preference for gold is not going to disappear any time soon.

While Indian demand for gold is likely to remain high, it will probably be overwhelmed at some point by investment demand from ETFs and other sources thanks to the quantitative easing programs in the U.S. and UK. Jewelry has accounted for a majority of gold demand in the past. In India and other developing countries jewelry is purchased as an investment (the gold is frequently almost pure 22 caret as opposed to the diluted 14 caret gold used in jewelry in the U.S.), not as a luxury item as is the case in developed economies. Eventually, Westerners will find that the ancient habits of the East are just as good today as they were long ago.

NEXT: Interest Rates Break Out

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, October 22, 2009

Dance of the Declining Dollar Continues

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The trade-weighted dollar fell below 75.00 yesterday, only seven trading days after it decisively broke 76.00. It is up above 75.00 this morning and should have a short rally at some point soon because it is too far below its 50-day moving average. Any recovery will only be temporary however. Selling pressure seems to never be far away. The short-term rallies have the signature of some form of government intervention. They are sharp, sudden and tend to take place after some support level has been broken and when trading in the U.S begins. Once the intervention money runs out however the dollar just continues its downward drift.

Manipulating a major currency is an expensive undertaking and requires a lot of resources. The size of currency markets is huge compared to the bond market, which in turn is huge compared to the stock market. Direct intervention requires using foreign exchange reserves. The U.S. has almost none of these. Late July figures from the Treasury website indicate that the U.S. has only a net $7 billion in reserves (foreign currency holdings minus short positions). This would be appropriate for a small developing economy, not a superpower. In contrast, China has approximately $2000 billion in foreign reserves. All the big holders of foreign reserves hold large amounts of U.S. dollars. Their intervention in the currency markets would require they buy even more dollars with their other more desirable reserves in euros, yen, pounds or other currencies. This would not be a good deal for them.

Significant intervention to hold up the dollar will be occurring probably next year. There has been a history of such interventions in the post World War II era. Their effect is only short-lived unless the underlying condition that caused the currency weakness in the first place is corrected. In the current case, the U.S. needs to raise interest rates to attract dollar investments. The actual condition of the U.S economy (not the phony PR about the recovery) makes this impossible for the next many months. It is possible though that an extreme drop in the dollar may force the Fed's hand next spring.

Whether the dollar just continues its slow agonizing fall, which has become a fixture since the U.S. left the gold standard in 1971, or whether there are some serious short term declines (this happened through devaluations in the 1970s) remains to be seen. This fall may be the first time one of these sharp, sudden drops takes place.

NEXT: In for a Penny, In for a Pound

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, October 21, 2009

What Earnings Are Telling Us

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

In general, company earnings are coming in ahead of extremely lowered expectations this quarter. This is a typical Wall Street game of setting the bar low enough so things look good, no matter how bad they are. The big success stories this quarter are technology firms, such as Intel, Apple, Yahoo and Sandisk. Tech earnings are cyclical however and the big traders tend to sell when earnings look the best. It is not clear yet if we are at that point his quarter. The large majority of tech company earnings come from outside the U.S. and their business picking up says more about the state of the economy in East Asia than it does about the U.S. economy.

In contrast to tech, banks are in increasingly bad shape, even in the cases where they are reporting good earnings. Wells Fargo's earnings were out today. Well Fargo said credit losses rose to $5.1 billion, up from $2 billion a year ago and $4.4 billion in the second quarter. Even though this is the bank's core business, it reported a profit of 56 cents per share last quarter, higher than the 49 cents reported a year ago. Wells is the fourth largest bank in the U.S. The pattern of deteriorating loan portfolios was also seen in Bank of America, Citigroup, and JP Morgan. Loan losses also increased in the second quarter. These numbers don't indicate that U.S. consumers and businesses are in good financial shape, nor that any economic recovery is taking place.

As for the the banking system having been saved, we will have to wait to see what happens when the unlimited flow of federal funds is cut off. TARP is supposed to expire at the end of this year. Today, however, President Obama is going to announce a $5 billion program to bail out community banks. Obama will tout the new program as funding to help these banks increase loans. TARP was supposed to accomplish this goal as well. Available U.S. consumer credit has taken a nosedive in the last year since TARP was implemented. There is obviously no lie too outrageous that Washington won't keep repeating it and the U.S. mainstream media won't print it.

It should also be kept in mind that many large cap firms other than tech get a lot of their earnings overseas. As the dollar falls, earnings made in other currencies increase proportionately. Once again this is not an indication of any U.S. economic recovery, but of U.S. economic weakness. The falling dollar is at least finally getting some coverage in the financial press. Business Week had a story on it in its latest issue. This is going to continue to be a big story for many years to come.

NEXT: Dance of the Declining Dollar Continues

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, October 20, 2009

U.S. Dollar Down, Everything Else Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The trade-weighted dollar hit a new yearly low overnight falling to 75.10 at one point. It only decisively broke important support at 76.00 six trading days ago (there were short breaks before that signaling what was coming). While there is minor support at 74.00, this is not likely to hold very long. A test of the all time low of 71.50 is almost inevitable at this point. It may take a couple of months before this happens. Expect a bounce when it does. How long the U.S. dollar will be able to hold at that level remains to be seen. Eventually, new all time lows will be reached.

The decline in the dollar is causing almost everything else to rise. This includes gold, silver, the stock market, food commodities and now oil. All of these price movements can be traced to the huge money printing operations of the U.S. central bank. Markets move first, then consumer prices second. Expect noticeably rising CPI starting with the report for December. The current rise in oil, which hit $80.05 a barrel for light sweet crude early this morning, has insured the inflation numbers are going to start perking up soon. The rally in grains currently taking place is also going to start impacting food prices sometime next year.

Oil's performance is impressive considering it is taking place against seasonal headwinds and the interference with energy trading that the CFTC conducted this summer. While the CFTC drove 200% long oil ETF DXO out of business, it left the 200% short oil ETF DTO alone. It seems that only leveraged long positions cause excess volatility in energy trading, but leveraged short positions don't. U.S. investors are left with non-leveraged ETFs such as OIL and USO as their only means to invest in oil at the moment. How long the oil rally lasts is still an open question. Higher priced oil definitely upsets the authorities and now that their summer attempt at price controls has failed, you should assume that plan B will appear at some point in the future. Also watch natural gas prices, just as silver usually moves after gold, natural gas can follow oil. Their price ratios are still incredibly out of whack (in theory oil should be 6 times the price of natural gas, it was priced well over 20 times during the summer).

Oil is still far away from its all time high of $147 a barrel (although it will be getting back to that level), while gold keeps hitting new highs. The close of spot gold at the end of the afternoon session of Globex yesterday was $1064.50. To hit another all time high, $1070.40 has to be taken out. Spot silver closed at $17.86 yesterday and needs to break and close above important resistance at 18.00. It has been above $18.00 briefly twice so far (the inverse pattern of the U.S. dollar breaking 76 twice briefly before a major break took place). Once it breaks this level, silver will test its 2008 high around $21. It is only a matter of time.

NEXT: What Earnings Are Telling Us

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, October 19, 2009

Big Bust on Wall Street

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

It's not everyday that a billionaire hedge fund manager gets busted for insider trading as happened last Friday. This is not because Wall Street isn't permeated with criminal insider trading activity at the very top, but because the SEC has turned a blind eye to it for a long, long time. In a celebrated case from just a few years ago, an SEC employee who tried to investigate a well-known hedge fund manager was promptly fired for his efforts. The SEC has claimed in the past that since hedge funds and big brokers trade continually it isn't possible to prove that they are engaging in insider trading. It was possible this time however because instead of just examining trading records, wiretapping was used.

Wiretapping was first legally permitted in 1928 by a U.S. Supreme Court decision, several years before the SEC was created. Left to its own devices the SEC would probably never have decided to use any law enforcement technology not available to the Amish, but the FBI was involved in this case. The insider trading investigation against Raj Rajaratnam apparently began in 2007. Rajaratnam runs the Galleon Group which has $3 billion under management. He has been charged with conspiracy and securities fraud. Reports indicate that he is at the center of an insider trading ring and more arrests are coming.

Where did Rajaratnam get his inside information? Other than sources that worked directly for the companies involved, Internet sources indicate that Rajaratnam seemed to have at least one informant at the rating agency Moody's, the consulting firm McKinsey & Company, and Intel Capital (the venture capital arm of the technology giant). These are all top firms. You should ask yourself how many other firms have employees involved in providing insider information, how many employees are involved and to how many hedge funds is this information provided? My guess is the answers to these questions is a lot, a lot and a lot. Why aren't there stricter controls within these firms that prevent this from happening? The public has a right to know.

At least some progress is being made in reigning in the Wall Street criminal operations. The biggest Ponzi schemer of all time, Bernie Madoff, is behind bars, not because the SEC caught on to his obvious $50 billion scam after numerous investigations, but because it finally blew up on its own accord. At least the SEC did finally close down the $8 billion 'investment fraud' run by Allen Stanford. The head of a top New York law firm, Marc Drier, has been sentenced to 20 years in jail for fraudulent activity. All of these cases were beyond outrageous and extreme examples of criminality. What about all the other criminal activity on Wall Street that is being done with at least a grain of discretion? Rajaratnam is merely the tip of that very massive iceberg.

NEXT: U.S. Dollar Down, Everything Else Up

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, October 16, 2009

Bank Earnings Reveal True State of Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Consumer spending represented 72% of the U.S. economy before the Credit Crisis hit. During the 2000s, that spending was fueled by easy credit and free money thanks to Federal Reserve and legislative policy. The borrowing binge hid a deteriorating economy for years and alternative economic statistics indicate that the U.S. has really been in a recession almost the entire last nine years. The bill has now come due and it is going to take many years to pay it off. The economy can not have a sustainable recovery under such circumstances no matter how many times Ben Bernanke and mainstream economists say this is happening. Wishing just doesn't make it so.

Bernanke has repeatedly told the world how he and the other central bankers saved the financial system from disaster (modesty along with good reality perception are not his strong points). It would be more accurate to state that they postponed disaster with their actions. It addition to an almost unlimited amount of money pumped into the global financial system (much of it freshly off the proverbial printing press), the U.S. changed its accounting rules on the toxic debt held by the big banks so massive losses could suddenly disappear into thin air. Big bank earnings rose spectacularly last quarter as a result. This blog pointed out at that time that losses for the lending operations - the reason banks are in business - were deteriorating however. This deterioration was being hidden by big 'gains' in bank's trading operations (thanks to the change in accounting rules). Those losses have continued to grow this quarter and for many banks are now outpacing the phantom gains from accounting tricks.

The two biggest U.S. banks at the beginning of the Credit Crisis were Citigroup and Bank of America. Last quarter Citi lost 27 cents per share versus a 61 cents loss in Q3 in 2008. Citi had $8 billion in net credit losses and increased its net loan loss reserves by $802 million between July and September. Bank of America lost 26 cents in Q3 versus a gain of 39 cents a year ago. Bank of America's credit losses last quarter were almost $10 billion ( a billion higher than in Q2) and it added a whopping $2.1 billion to its loan loss reserves. Credit card losses for Bank of America were $1.04 billion last quarter versus only $167 million a year earlier.Supposed 'gains' from trading operations kept the top line numbers from being much worse.

Does this look like a banking system that has been saved? Does this look like what would happen in a recovering economy? If the government took back the $45 billion in TARP funds from Citigroup would it be in business the next day? If not, it is insolvent. Ditto for Bank of America. As long as these banks (and others) are in the too big to fail category, money printing is going to be necessary to pay for the continued bailouts that they'll need. Government largess is the reason the stocks of these banks have not collapsed back to last years levels. The same can be said for the stock market overall.

NEXT: Big Bust on Wall Street

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, October 15, 2009

The Dollar, the Fed, Housing and the Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The U.S. dollar was in free-fall last night in Asia. The trade-weighted basket fell as low as 75.21 (another new yearly low), well below the significant support level of 76.00 and approaching the next weak support level of 74.00. Some form of intervention took place after European markets opened and the dollar was saved from oblivion (at least for now) and shot straight up. Gold, and silver to an even greater extent, declined sharply on the dollar reversal. The pattern of gold and silver being strong in Asian trading and weakest in the U.S., which has been going on for several days now, continues. Oil remains strong this morning because unlike gold and silver it is difficult to manipulate on a daily basis.

The high price of oil has inflationary implications that will soon be manifested. Expect CPI figures to start jumping up significantly starting at the end of the year. Oil fell as low as $33 last December and it is going to be way above that level this year. Energy prices are the most important swing factor in the inflation numbers. Long-term bond prices are likely to rise on the news. The Fed will still keep short-term rates at zero however and Ben Bernanke will have an increasingly pained look on his face. The Fed released the minutes of its September meeting yesterday and little noticed was a statement that it was reserving the option of continuing any of its current programs. The most important one of those for bond investors is the money printing being used to buy U.S. treasuries. This is supposed to expire on October 31st. It's not likely to happen, at least not for long. The Fed has concentrated these purchases in the 7 to 10 year range of the yield curve, which keeps interest rates for mortgages and other loans down. Foreign governments have moved their buying to even shorter durations. The long end of the curve between 20 and 30 years is being left unsupported. Double short long bond ETF TBT should benefit from this situation.

How can we be so sure that the Fed's money printing extravaganza will continue? Housing, the ground zero of the Credit Crisis, remains troubled for one. Almost one million U.S. properties were involved at some stage of the foreclosure process in the third quarter (the summer). This number has been reached even though there are a number of federal programs to prevent foreclosure (and there have been a number of state programs that have put a moratorium on foreclosures). Anecdotal reports indicate that there are mortgages that haven't been paid for 18 months or more that still haven't entered even the first stage of foreclosure, let alone repossession. Banks don't want these properties on their books and the federal programs (plus a lot of bailout money) lets the banks avoid taking them back. A new wave of mortgage resets to higher interest rates is also just beginning and will last through next year. It will only add to the problem.

The second motivation for more Fed money printing will be the consumer economy. Constant stimulus is needed to keep it going. Retail sales figures were down 1.5% in September and revised down to 2.2% from 2.7% in August. The Cash for Clunkers program caused the August spike, but once it was over retail sales went negative again. Retail sales figures are not adjusted for inflation and this accounts for much of any 'growth' outside of stimulus programs that is being seen in this area. While almost every mainstream U.S. economists thinks the recession is over, they will all admit that unemployment is likely to get worse for at least another 6 months if not a year or longer. Consumer credit is also dropping sharply. So how is the consumer going to spend? More stimulus from the government will be the answer. Don't expect the printing press to be mothballed any time in the near future.

NEXT: Bank Earnings Reveal True State of Economy

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, October 14, 2009

Dollar Breaks Down; NovaGold Breaks Out

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 had a serious technical breakdown last night. The trade-weighted dollar traded as low as 75.44 in the pre-market this morning, well below important support at 76.00. Almost every currency on earth is rising against the greenback in a global orgy of dollar dumping. Behind the scenes buying efforts of central banks to prop up the U.S. currency have failed so far. They have yet to bring out the big guns, although they have little ammunition to put in them if they do. Even under the best of circumstances holding up a collapsing currency is like trying to stop a tsunami.

Gold and silver have become the collateral damage of the central bank efforts, but this is only evident in U.S. trading. Gold hit another record high last night in Hong Kong, selling for over $1070 at one point. It traded in the mid $1050s in early New York trading. Silver hit $18.09 in Hong Kong, another yearly high, but was $17.71 shortly after U.S markets opened. You can expect the battle for gold and silver pricing will eventually be won in Asia.

The best performing mining stock in North America yesterday was NovaGold (NG). This has been the favorite mining stock of the New York Investing meetup for a few months now and members have been encouraged to accumulate it at $4 and under this summer. Nova closed at $6.02, a new yearly high, yesterday and broke out of the handle of a cup and handle formation. While earnings were released yesterday, current income is not the relevant factor in NovaGold's stock price. It owns probably the biggest untapped gold deposit in the world. This asset only becomes more valuable as the price of gold goes up. The bears have been trashing Nova all the way from its recent low around $3.30 to the current $6.00 price telling everyone to sell the stock. Expect them to come out of the woodwork now that the breakout has taken place and they are really getting killed in their short positions.

The falling dollar is helping to prop up other commodities (all of which are priced in U.S.dollars). Light sweet crude oil almost hit $74 this morning and looks like it might finally reach an important Fibonacci retracement around $77. Seasonal weakness is likely to restrain oil prices this fall and early winter however. There may be more follow through today in the big rally in grains that started Monday (GRU is the ETF for this investment). There should be a pull back within the next couple of weeks or so that provides another entry point however. Long term bonds were also selling off this morning and interest rates rising. Double short ETF TBT, which rallied strongly off a bottom last Thursday and Friday should be watched. Holding a country's paper assets when its currency is declining is never a good idea.

NEXT: The Dollar, the Fed, Housing and the Economy

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, October 13, 2009

Dollar Breaks Support ... 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:

The U.S. dollar fell below important support at 76.00 this morning. This is the third break of this level. The low yesterday was 76.02. So far today the trade-weighted dollar has been as low as 75.74 in the pre-market. This is another new yearly low. It will probably be the low for today because it certainly looks like some form of intervention took place to support the dollar when U.S. trading opened. Some weak chart support exists for the dollar at 74.00 and much stronger support around 72.00. The all time low is 71.50.

Market intervention in the U.S. can be seen in the trading of the precious metals as well. Gold was as high as $1068 (a new all time high) in London and then dropped around $10 shortly after trading in New York started. Silver reached a high of $18.02 in London and then dropped a whopping 40 cents after the New York open. Precious metals falling when trading in New York opens is not uncommon. It is in fact a recognized phenomenon that has been going on for decades. Academics studying the issue have concluded that the probability of this long term pattern taking place by chance is essentially zero and that only manipulation in the U.S. markets can explain what is going on. The CFTC, the U.S. regulatory body that is supposed to keep trading on the up and up, of course sees nothing, knows nothing and apparently reads nothing.

Platinum and palladium are less affected by U.S. government dollar manipulation than the monetary precious metals. They are mostly industrial metals which have extensive use in the auto industry. Palladium has been the best performer the last few days, but there is no ETF available in the U.S. to trade it (there is one that trades in London), even though one was announced last April. While the U.S. auto industry is collapsing again after the Cash for Clunkers program expired, this is not the case in China. Auto sales are up almost 84% there year over year. The rapidly growing Chinese car market is now bigger than the faltering U.S. car market. Think about that.

Meanwhile grains have been rallying nicely. Both RJA and GRU were up in the 4% range yesterday. GRU is more volatile and consists only of grains, with beaten down wheat the largest component. RJA is a basket of 20 different agricultural commodities. GRU confirmed a double bottom as a result of yesterday's trading action. Oil was trading around $74 this morning, not much different from the price in late June when we recommended selling DXO. Oil is seasonally weak in the fall and early winter when the precious metals are at their strongest. In the long term, uranium prices are connected to the price of oil, but the correlation can be very loose in the short and intermediate term. Dennison Mines (DNN) had some peculiar price movement Monday with a sharp rise at the close that appeared on the daily charts, but not the intraday charts until this morning. Trading volume was heavy yesterday. This definitely bears watching.

NEXT: Dollar Breaks Down; Nova Gold Breaks Out

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, October 12, 2009

Subprime Crisis #2 Coming Soon

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:

It constantly amazes me that the people running the government and reporters who cover the government seem incapable of doing arithmetic at the first grade level. This is usually all that is necessary to foresee a disastrous outcome in the future. This is certainly the case with the impending FHA (Federal Housing Administration) crisis which will be blowing up soon. The FHA insures mortgages that have less than a 20% down payment. It is currently insuring four times as many mortgages daily as it did in 2006 at the height of the last subprime crisis and has 5.4 million loans on its books. A prominent congresswomen recently stated, "without the FHA there would be no mortgage market" right now.

In congressional testimony the head of this government agency recently stated that the FHA's finances were sound. Oh really? The FHA claims to have $30 billion in cash reserves. How long will that last considering that there are $675 billion in loans on the books and 24% of the loans from 2007 are troubled and 20% of the 2008 loans are troubled so far (these numbers can rise). Those percentages could be worse in 2009 and after. If more than 4.4% of the loans insured by the FHA go bad, it could be out of money, assuming (probably foolishly) that the $30 billion they claim in cash is unencumbered. If not, the percentage could be much, much less than 4.4%.

How is it possible that there be even more problem loans on the FHA books from this year and in the future? Anecdotal reports from some areas of the country say that as much as 100% of recent housing purchases are insured by the FHA. All you need to get this insurance is apparently a 3.5% down payment. A spotty employment record doesn't disqualify you, nor does having filed for bankruptcy in the past. Even more eye popping, having a previous mortgage that went into foreclosure does not keep you from getting a new loan insured by the FHA! The FHA business model is roughly equivalent to a company offering $100,000 life insurance policies for $100 to hospital patients who are on life support. Yet, the head of the agency claims that their finances are in good shape.

The FHA is only one of many new bailouts coming. A number of state and local governments are falling deeper into the red. Tax receipts are coming it at even lower levels than anything previously thought possible (another mystery of the 'recovering' economy). Small and midsized banks are falling like dominoes because of their commercial loans going sour. The FDIC insurance fund is already insolvent and the government will have to step in to prop it up. The Credit Crisis is by no means over, we have simply finished phase one and are about to enter phase two. But don't worry, the U.S. government has a printing press and can print all the money necessary to solve these upcoming problems.

NEXT: Dollar Breaks Support ... 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.






Friday, October 9, 2009

Fed Hits Dollar Panic Button

RThe '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 very first headline I saw this morning was "Bernanke Boosts Dollar, Commodities Down" (stock futures were also down, but this wasn't emphasized). As pointed out in this blog yesterday, the invisible hand of the Treasury looked like it was active in supporting the dollar in market trading after the opening and there were rumors that smaller central banks in Asia were buying dollars to try to push down their own currencies (new reports today confirm that South Korea, Hong Kong, Taiwan, Thailand, the Philippines have indeed done this and Indonesia probably has as well). Russia bought dollars overnight and has been doing so all week. The U.S trade-weighted dollar actually fell through critical support at 76.00 first thing in the morning on Thursday and closed just below that level in the afternoon. It fell to a new intraday yearly low of 75.77 and yearly closing low of 75.97.

PR support from the Fed to try to jawbone the dollar up was inevitable. You can expect a lot more of this in the future as well. Bernanke's remarks were essentially meaningless, but the mainstream media gave this non-news item major coverage (you should ask yourself why). Specifically, Bernanke said that the Fed will tighten monetary policy "when the economic outlook improves sufficiently," "the time will come when we have to tighten", "at some point" and "we will look at the broad outlook to decide". There is certainly a lot of new information in those statements ... at least for people who thought the Fed would not raise rates during an economic expansion on until the year 3000. What would investors do if we didn't have the media to keep us informed?

In the statement from its most recent meeting a couple of weeks ago, the Fed said that its accommodative policies will likely be warranted for an extended period. This was a blatant admission that they don't really believe the economy is recovering. The Fed has also continually assured the public that there is no danger of inflation. In his remarks though Bernanke admitted that the Fed can't keep monetary policy accommodative indefinitely for fear of triggering an inflationary surge. The gold breakout this week has already made the market's opinion on this matter quite clear - it's already too late.

So far this morning the trade-weighted dollar is at 76.33, having gapped up to 76.25 on the open from the below 76.00 close yesterday. The monetary authorities are clearly worried about the dollar falling and staying below 76.00. A test of the old low at 71.50 is almost inevitable if this happens... and they know it. Gold, which was began selling off last night, before the Fed news appeared, is trading at $1052 as I write this. $1050 is a minor resistance level for gold and it is trading just above and below this level so far today. Expect the gold dollar struggle to continue for some time.

NEXT: Subprime Crisis #2 Coming Soon

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, October 8, 2009

Desperation Time for the Dollar

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

Our Video Related to this Blog:

The U.S. dollar gapped down this morning to 75.90, falling below the critical support level of 76.00 (for the second time). It quickly shot up to just above 76. Gold and silver were up nicely overnight with gold reaching $1059.60, another all time high. Silver traded as high as $17.86. Both dropped sharply when futures trading began in New York on COMEX. The not so invisible hand of the U.S. Treasury is evident in both precious metal and dollar trading this morning. The bill for the money printing free lunch may be coming due sooner than U.S. officials thought.

Rumors are that central banks in smaller Asian countries are buying dollars in a desperate attempt to keep their currencies from rising and damaging their export businesses. Central bank buying of a currency indicates downward market pressure has gotten out of hand. The tipping point may have come when Australia raised its interest rates a few days ago. A carry trade already existed for the U.S. dollar and the Australian central bank action may have opened the floodgates. A carry trade is when traders borrow money in a lower interest rate currency and use that money to buy a higher interest rate currency. Money is made on the interest rate spread. So traders borrow in dollars at short-term rates around zero and buy Australian dollar denominated short-term debt at 3.25%. The carry trade can become a bubble feed back mechanism that causes the low interest rate currency to continually spiral downward and the high interest rate currency to spiral upward. With the exception of Japan, almost every country in the world has higher interest rates than the U.S.

Any central bank intervention will only pause this problem however, it won't solve it. The only viable solution is for the U.S. to stop printing money and raise interest rates substantially. If a real economic recovery is taking place in the American economy that is actually what would be happening. If the U.S. government is lying about the recovery, interest rates will not be raised for some time. The latest statements from the Federal Reserves is that its low interest rate policy will be maintained for quite awhile... and for good reason. Australia can raise interest rates because its commodity-based economy is actually getting better. Australian unemployment is 5.7% and falling compared to the U.S. rate of 9.8% (17% in the alternate figure the government publishes) and rising. You should ask yourself, "how come unemployment goes down when the Australian economy recovers, but not when the U.S. economy 'recovers'?"

The lie was further put to the U.S. 'recovery' claims by the Consumer Credit statistics yesterday. U.S. consumer credit fell by $12 billion in August, after a $19 billion drop (revised downward) in July. This represents an annual decline of 5.9% and 9.1% respectively. Approximately three-quarters of the drop was accounted for by lower revolving debt (credit cards). So U.S. consumers have a lot less credit than they used to. At the same time, less consumers are working, the average weekly hours worked reached a record low in the September Employment Report and the savings rate is up. Nevertheless, I am fairly sure that when the third quarter GDP comes out, consumer spending will have risen during the quarter ... even though based on the previous information, this is impossible. The mainstream media will not question this statistical inconsistency at all. The market however might, by continuing to dump U.S. dollars.

The reserve currency status of the dollar has saved the U.S from decades of financial profligacy so far. It won't last forever. Small countries just collapse when they do what the U.S. is doing. Latvia is the latest example (Iceland was the first). An attempt by the government to fund its debt there earlier this week was the ultimate example of a failed bond auction. There were no bidders! Too bad they can't just print the money and buy their bonds the way the U.S. does.

NEXT: Fed Hits Dollar Panic Button

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, October 7, 2009

Gold Makes History

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

Our Video Related to this Blog:

Yesterday, gold finally broke its intraday high of $1033.90 set in March 2008. Not only did it break it, but it closed above it. The COMEX close was $1039.70 and at 4:00PM New York time gold was trading at $1042.70. The breakout was text book perfect - a gap out of a long base to all time highs on high volume. The technical indicators were extremely bullish as well with the RSI above 50 and rising after having bounced off 50; the MACD above zero after having just made a positive cross and the DMI trend line announcing a new up move (see a daily chart of the major gold ETF GLD as a reference)

Yesterday's move in gold will be mentioned in financial history books well into the future. It will be seen as a significant turning point announcing a long period of inflation and the early phase of a huge bull market in gold and silver. There are analogies to the Dow breaking above the 1,000 level in 1982 and rallying over 10 times in the following 18 years. Gold may indeed rally that much and possibly considerably more, but it is not likely to take nearly as long. For those who have not been following the blog, the New York Investing meetup first recommended gold at $740 in September 2007 and we recommended selling it at $1000 in March 2008. We then recommended buying gold again when it fell back to $740 (gold traded as low as the very high $600s). We did not recommend selling gold again last spring when gold hit a $1000 again with the idea that the following drop would be considerably less this time. This trade did indeed remain continually profitable. We have been anticipating the current breakout for the last few months and telling people to position their portfolios for it.

What should investors do now assuming you already have your full positions in precious metals and their miners? You can consider taking profits some time around next March. Gold tends to peak in the spring. However, the peak this time may be either shallow or short. It is possible that this gold rally will last for around the time length of the base, which is 18 months. This would mean a significant peak could take place around March 2011. So if you sell gold in March 2010, you may have to be nimble about buying it back. It is likely that it will be worthwhile taking some profits in precious metals and buying oil with them some time early next year, so keep this trade in mind.

As for price points, there are two areas of significant resistance on the upside. The first is in the $1300 area and the next one in the $1600 area. If gold is selling at one of these points by next March, that's the time to sell some of your holdings. The $1300 resistance comes from the top line of a channel that gold prices are moving in. Some forecasters have this number below $1300 at the moment while others have it as high as $1370. This number continually moves up over time and it will be much higher next March. You can also project a rally move as being at least the depth of the base, which is around $340. Add this to $1034 and you get about $1370. However, this is likely to be much too conservative in this case. The base for gold is quite long and should be good for a rally that is at least double the depth of the base. This would take gold to around $1700. There is also a Fibonacci extension at $1673. Some pause will be needed around $1300 before gold can move up to this higher target. If gold can get to the $1300 area by the end of this year, the $1600 area is a highly likely by next March.

As for a high in 2011, this could be anywhere between $2,000 and $2,600. We will revisit this in the future. New York Investing meetup's long term projection for the peak price of gold is between $5,000 and $10,000 (we made this in March 2008) and this assumes that hyperinflation will not take place... not necessarily a good assumption any longer. We do not currently anticipate a high for precious metals until around 2017, so there will lots of profitable opportunity in these assets for many years to come.

The New York Investing meetup will be having a class on Commodity Investing at PS 41, 116 West 11th Street (at 6th Avenue) on Thursday, October 8th. I will be reviewing the gold and silver markets at the beginning. The class will run from 6:45PM to 8:45PM. If you haven't preregistered just show up and you can register and pay at the door ($20) Please see our website for more details (http://investing.meetup.com/21).

NEXT: Desperation Time for the Dollar

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


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






Tuesday, October 6, 2009

Gold! Record High Knocking on Heaven's Door

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:

So far this morning gold has reached $1035.00 in New York trading. This is an all time record high! The previous all time high that gold made was $1033.90 in March 2008. GLD and DGP also hit record highs in pre-market trading this morning. Silver has traded as high as $17.20 so far. While yearly highs are bullish, records highs are mega-bullish, especially for a commodity. It indicates an entire new trading range is being established with limited upside resistance.

The current move up in gold began around noon yesterday New York time. It started when the G7 meeting, which took place over the weekend, made no comments about supporting the U.S. dollar in the communique they released after the meeting. Even if they had, it would only have been talk. None of the countries have the funds to engage in currency intervention since it is very expensive. Their money is already committed for government stimulus efforts. Gold is telling us these stimulus efforts are causing inflation. The U.S. dollar traded as low as 76.22 yesterday, just above important support at 76.00. Any significant break of this level means that 74.00 and then 72.00 will be tested... and then a new all time low is possible.

The gold rally was further juiced by explosive coverage coming from the Independent in London. The paper reported that secret talks between the Gulf Oil States, China, Russia, Japan, and France were taking place with the objective of repricing oil in a basket of currencies instead of U.S. dollars. With the exception of France, all of these countries are major holders of U.S. debt. Saudi and Russian sources later denied the reports. Gold continued to push up after the denials. The implementation of such a plan would be devastating for the dollar. The emerging economic powers, lead by China, are determined to topple the reserve currency status of the U.S. dollar and they will eventually be successful even though it may take several years for them to accomplish this goal.

Meanwhile, in a surprise overnight move, Australia was the first country to raise interest rates. The Australian dollar, probably the best currency for the next several years, hit a new yearly high against the U.S. dollar. Australia's economy is in much better shape than Americas because it is commodity-based. Almost all commodities are priced in U.S. dollars and they go up in price if the dollar weakens. Gold today is telling us that the huge money-printing effort by the U.S. Federal Reserve has weakened the dollar considerably already, even though the dollar has yet to hit a new all-time low against other paper currencies. It did this morning however against the world's most solid currency...gold.

NEXT: Gold Makes History

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, October 5, 2009

Recovery? Don't Bank on It

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

Our Video Related to this Blog:

As of Friday, 98 U.S. banks have failed this year and the FDIC Deposit Insurance fund is on the brink of insolvency. The fund now covers only 0.22% of U.S. bank deposits, whereas a 1.15% minimum is mandated by law. At the end of second quarter 416 banks were on the FDIC's troubled list (this number should be updated in about another month), so the steady drip of money leaking out of the fund could turn into a torrent. Commercial loan defaults are the current crisis hitting the system and this problem has just begun. While you may be surprised that this could be happening after Fed Chair Ben Bernanke has repeatedly told us that the banking system was saved last year, a government report released today indicated that the public had been lied to about just this very subject.

A special inspector general investigating the handling of the bank rescue program TARP in the fall of 2008 found that then Treasury Secretary Paulson and other officials falsely claimed that the first 9 institutions getting funds were sound. Paulson specifically stated, "These are healthy institutions ...". At the time, Merrill Lynch was actually collapsing. Citibank and Bank of America subsequently required significant additional funds to stay afloat. The report was criticized by Assistant Treasury Secretary Herbert Allison Jr., who now heads the bailout program for the government. Allison maintains that any critique of the announcements made a year ago should take into consideration the unprecedented circumstances facing financial regulators at the time. In other words, the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me repeat that: the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me follow that up by pointing out that there is both a credit and economic crisis still taking place.

The FDIC itself has given us more than enough reason to think the U.S. banking system has not actually been rescued. Other than the domino like collapse of smaller and midsized banks that is now occuring, the FDIC's figures state that in aggregate U.S banks lost $3.7 billion in the second quarter, even though almost every large U.S. bank reported major profits. Of course the major banks have received massive injections of government aid, while the smaller banks have not. This is a move afoot to try to inject TARP funds into smaller banks to prevent defaults on a mass scale.

At the risk of sounding like a broken record, what is taking place in the U.S. now is very similar to what took place in Japan in the 1990s. Japan had a banking system dominated by a small number of large institutions. The first 9 recipients of TARP funds controlled 75% of the assets in the U.S. banking system. In both cases, banks were allowed to become so large that a failure of even one of them endangered the entire financial system. Japan has propped up its banking system for two decades now and the cost has been an economy unable to grow unless there is government stimulus. Personally, I am waiting to see what the U.S. government is going to do to rev up the economy next quarter now that the Cash for Clunkers program has expired.

NEXT: Gold! Record High Knocking on Heaven's Door

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, October 2, 2009

Unemployment Rises as Car Sales Collapse

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. jobs report this morning didn't indicate an economic recovery, it looked more like an economy mired in severe recession - and this is after more than $4 trillion dollars spent on bailouts and stimulus so far. The latest government stimulus program that was supposed to be saving the economy (as were all the others), Cash for Clunkers, seems to have had no residual effect on the auto industry. Data out yesterday indicate that sales fell right back to the worse levels of the recession the moment the program ended. The ISM Manufacturing report yesterday showed a drop in U.S. manufacturing activity from August to September. There is still some glow from the Clunkers program however and a bigger drop will likely be seen next month. If this is economic recovery, who needs a deep recession?

The jobs report can only be described as ugly all around. While the headline unemployment rate rose to 9.8%, the alternative measure which includes discouraged workers and forced part-timers reached 17.0% (that's the U.S. government's official number). Hours worked dropped to an all time low. The number or workers unemployed for over 6 months is also at a record. The number of job losses for July and August were revised upward by 13,000. The government further stated it might raise the total number of unemployed in its year end revision. The number of job losses this month was 263,000. Economists, almost all of whom think the recession is over, had expected only 180,000. Nothing, and I mean nothing, in the employment numbers indicates a recovering economy.

Auto sales in August and September illustrate quite clearly the impotence of government stimulus in reviving an economy with major structural weakness (Japan in the 1990s and 2000s had one stimulus program after another and is still recessionary). U.S. auto sales reached about the 14 million annual rate in August. The Clunker program ended on August 31st. September auto sales now look like they will be a bit over 9 million at an annual rate. This is as low as the lowest sales figures recorded last February and April. So once the stimulus was removed auto sales slipped right back to the bottom. Economic 'recovery' that only takes place if there is government stimulus is no recovery whatsoever.

The ISM manufacturing index was still above 50 (the point that divides expansion and contraction) this month, even though it fell from August. The index declined 18 months in a row before last month. Cash for Clunkers juiced up the numbers considerably in August. They could easily fall back into negative territory in October. Production, new orders, exports, and employment were all down in September. The item in the report that is expanding most rapidly? It's prices paid, which is a measure of inflation.

While continued massive government stimulus will not revive a structurally damaged economy, it can be very effective in creating out of control inflation. The more the economy doesn't budge, the more stimulus the government implements. In the current state of affairs in the U.S. that also means more money printing (the Japanese did not have to resort to this). Gold closed at $1004.30 today in New York - above its key breakout level of $1003.50. Some years from now, we will probably look back and wonder how gold could ever have been so cheap.

NEXT: Recovery? Don't Bank on It

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.