Is a Head and Shoulders Top Forming in Stocks?

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.


The U.S. markets are trading like some highly volatile emerging market, just as they did during the Credit Crisis in 2008.  Yesterday, the move was up with the small cap Russell 2000 gaining 4.2%, Nasdaq 3.6%, the S&P 500 3.2% and the Dow 2.9%.

While big gains make investors happy, they are not a sign of a healthy market if they alternate with big losses. Stocks opening with big gaps, prices much higher or lower than the previous close, are also not behavior bullish investors would like to see. Nasdaq gapped up approximately 58 points on Thursday - a huge amount. Ironically, Nasdaq traded to fill a gap made on the downside on May 20th (as I predicted would happen in a previous article).

At this point, U.S. investors should be looking for the formation of known topping patterns. These can occur in just one, two, three or all four of the major indices. In the 2009 March low for instance, the Nasdaq made a clear double bottom, whereas the other indices had sloppier action. Right now it looks like the Dow Jones Industrial Average and the S&P 500 are trying to form a nice even head and shoulders top (the pattern would have a somewhat higher right shoulder on Nasdaq). The head would be the market top in late April and the left shoulder the high in January. The bottom of the pattern is the market low in February and the recent market low on May 25th.

Technically, the Dow and S&P 500 are the weakest of the four indices. Even after yesterdays powerful rally, they still closed a tinge below their simple 200-day moving averages. Nasdaq gapped up above its 200-day and the Russell 2000 has yet to close below its 200-day, although it did pierce it intraday. Volume, as usual, was not supportive of the bullish price action. It was slightly above average on the Dow and barely average on Nasdaq. Volume was noticeably higher on both indices during the previous two days of selling.

Investors should also be paying attention to the action in the euro (FXE) and the trade-weighted U.S. dollar (DXY). The euro is putting in a short-term double bottom and the U.S. dollar is putting in a mirror image short-term double top. The techical indicators support the view that the euro will rally and the dollar will sell off at this point. Whether this move becomes something more intermediate-term remains to be seen.

The choppy action that is taking place in the markets is likely central bank driven. This was also the case during the Credit Crisis as well. The results of the liquidity games central banks play are more damaging than helpful in the long run. It is known that the ECB pumped huge amounts of liquidity into the global financial system on Monday, May 10th. A huge rally with a big gap up in stocks consequently took place since liquidity injections show up in trading immediately. The ECB then attempted to drain this extra liquidity several days later. The markets then traded to a lower low. Yesterday's huge move up in prices was almost certainly another liquidity injection from a major central bank. We will have to see how long they can keep the pump going this time.

Disclosure: No positions.

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.

Stocks Continue Volatile Trading

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.


While day traders love it, volatility is never a good sign for investors. Money is made by following the trends and when wild swings up and down occur, there usually is no trend. Even if one is beginning, it's hard to discern.

Right now, stocks are attempting a relief rally to resolve an oversold condition. The market is still in a very vulnerable state. Any piece of news can whipsaw it up or down. Wednesday morning, the 'good' U.S. Durable Goods report helped send the Dow Jones Industrial Average up 135 points in morning trade. The headlines on trading terminals around the globe flashed that durable goods had risen 2.9% in April (excluding the volatile transportation sector, they were actually down 1.0%, but you had to read further to find that not so good news). Morning mania faded late in the afternoon however.

Before the U.S. markets closed, the Financial Times reported that China was reviewing its eurozone debt holdings. The Dow closed down at 9974. For the first time in months it ended below the key 10,000 number. When it went above 10,000 in October 2009, this represented a major breakout on the upside. It looked like the breakout was failing immediately afterwards and then again briefly in February when the Dow spent some time below 10,000 again. In neither case was the index below its 200-day moving average as it is now. We have already taken out the February intraday low of 9822 twice this month. The next step is an intraday number below 9647, the low in November 2009. A break of that level should be considered a sign of extreme market weakness.

Stocks are rallying smartly today however, with the Dow up more than 200 points in morning trade. China denied the Financial Times report and this made the markets jubilant. This is of course nonsensical since there is no way China would admit that it was selling its European debt. Doing so would cause prices to fall and it would lose a lot of money if it acknowledged this. Furthermore, China has a long history of operating in secrecy and admitting what it has done only years after the fact. But somehow traders think the wily Chinese are going to shoot themselves in the foot this time and admit to what they are doing in the markets.

The buoyant mood this morning caused the Nasdaq to gap up approximately 48 points. These large differences from the previous day's close have been common lately. They are also unhealthy. Gaps are usually closed within a few days. Professional traders tend to fade them (trade in the opposite direction). Professional traders also tend to trade heavily around the close as well. This helps explain the typical bear market pattern of strong opens and weak closes. That was certainly the pattern yesterday.

Disclosure: No positions.

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.

Stocks Rally in Short Term Reversal

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.


After hitting a lower low on the open, U.S. stocks reversed their sharp downturn in late afternoon trade yesterday. The rally so far is an expected oversold bounce.  There is no reason yet to think that it will turn into something more significant.

Technicals, not fundamentals are driving stocks at the moment. Tuesday's action was an attempt to resolve an oversold condition from Friday the 14th. Seven trading days later, the major indices - the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 were all substantially lower. They were also well above their respective 200-day moving averages on the 14th, but all were below their 200-days yesterday.

The 200-day is the key dividing line between bullish and bearish behavior. With the exception of the small cap Russell 2000 (which is holding up best in the sell off), the major indices have violated their support at the 200-day twice in the recent sell off. The first time was during the odd crash on May 6th. Many considered the intra-day drop below the 200-day then to be a mere fluke. In the last five trading days though, the Dow, S&P, and Nasdaq have again traded below the key 200-day line at least part of the day. 

Stocks are also trading to try to fill gaps (a price range where no trading took place) in the charts. This usually occurs within a few days, although weeks and even months are possible time frames. There was a large down gap in trading on May 20th and another one before that on May 14th. The market will want to rise in the near term to at least fill the gap on the 20th. Yesterday's gap down was a short-term exhaustion gap (a gap after many down days or up days) and the markets moved up to trade into the empty space that had been left on the charts.

Technical factors are moving the market up at the moment, but once they get resolved, stocks are likely to head down again. The fundamental problems that emanate from the eurozone have not been fixed. For a major bottom to be put in, some dramatic event like a Greek default or Greece being removed from the euro currency union would be a good signal for a bigger rally. A much larger bailout, such as $5 trillion instead of a mere $1 trillion would pump up stocks as well. This is what reversed the markets during the Credit Crisis and the central bankers and treasury departments of the world will almost certainly attempt their tried and true money printing solution again. The only question is when they will do it.

Disclosure: No positions

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.

World Markets Catch PIIGS Flu Virus

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.


The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) markets are now all trading in bear territory. The selling that began there is now spreading around the globe in a financial contagion reminiscent of a number of previous financial crises and market crashes. Major Asian markets were down around 3% last night and the large European markets are lower by similar amounts today. U.S. futures dropped over 2% lower before the opening bell.

Market contagion is a not a new problem. A collapse of the weakest link in the global financial system can bring everything down if there are excesses in the system. This was seen in 1997 with the Asian financial crisis that began in Thailand and which soon engulfed all of East and South Asia. U.S. markets then had a 10.1% drop on October 27th and 28th of that year. A sharp bear market in U.S. stocks followed in August 2008. At the time, the U.S. economy and the global economy were in excellent shape. Today, the contagion that started in Greece and then infected the rest of Europe is occurring during a period when the world financial system is extremely troubled and still suffering from the damage inflicted by the U.S. centric Credit Crisis.

The latest round of selling in Europe is taking place as EU leaders are warning that European governments need to institute major economic reforms to promote growth or their economies will stagnate (stagnate apparently is synonymous with sinking into the sea). How they managed to figure out that it isn't possible for a government to continually spend a lot more money than it takes in is a mystery. Perhaps someone woke them from their naps and gave them an Economics 101 textbook. Hopefully, they will share this important insight with the U.S. and Japan.

EU leaders essentially ignored the Greek debt crisis for six months until the damage had become formidable and global. Only after the U.S. markets had their 9.9% plunge on May 6th did they come up with their almost $1 trillion euro rescue plan.  This amount was more than the U.S. TARP bailout in the fall of 2008. The positive effects from it lasted only a few days and stocks turned down once again. It looks like a trillion dollar bailout just isn't what it used to be. A much larger amount appears to now be needed than was the case only two years ago during the Credit Crisis.

The current handling of the problems with the euro by the EU shows the approach world leaders have taken to the deep and serious problems the financial system is facing. First you ignore the problem, then you try to manage it by public relations instead of taking the difficult decisions, and once a collapse is under way throw unlimited amounts of freshly printed money at it. While PIIGS flu is spreading throughout the markets, it looks like mad cow disease already infected central banks and elected officials of major countries long ago.

Disclosure: No positions.

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.

Gulf Oil Spill: Will BP Survive?

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.


British Petroleum (BP) has lost around a quarter of its value since April 20th, when its blown out well started spewing oil into the Gulf of Mexico. Several efforts to control the leak so far have failed and the damage is rapidly escalating. This is not just shaping up to be the biggest man-made environmental disaster of all time, but it will have ramifications for BP and the oil market for years to come.

The oil spill has already reached shore, stretching 150 miles from Grand Isle, Louisiana to Dauphin Island, Alabama. The ecologically fragile marshlands of Louisiana have already suffered noticeable damage. The oil moving underwater could be even more dangerous that the oil on the surface however. Scientists have found vast underwater plumes emanating from the well, one of which is 10 miles long and a mile wide. An outer edge of the spill has already reached the Gulf of Mexico loop current and that could bring oil to Cuba and both coasts of Florida affecting its beaches and the Everglades.

The size of the oil spill has been continually upgraded. It was originally claimed that the leak was only 5000 thousand gallons a day. Most recently BP admitted to 210,000 gallons a day, at least until it employed a siphoning mechanism (a mile long tube) that took in 210,000 gallons a day at its peak. Even at that rate, a lot of oil was still leaking and not being siphoned. This means the 6-million estimate for the spill in the first 30 or so days is in all likelihood is much too low. The Exxon Valdez tanker spilled 11-billion gallons in 1989. Many scientists believe the leak from BP's Macondo seabed well has already exceeded this figure.

The siphoning approach is only the latest one that BP has tried. It has now failed. While there are a number of possible solutions for containment, none of them have been attempted, let alone perfected in deep water. The leaking wells (there are actually three of them) are 5,000 feet below the surface. BP first attempted to place a dome over the hole, but ice crystals caused the dome to clog up. BP is apparently going to try this again because it thinks it can prevent the ice crystal problem next time. This week though BP will attempt to plug the leak with heavy mud and cement. The U.S. government is starting to get irritated though because it hasn't seen much progress. President Obama at first stated that the leak was "BP's mess", despite its multinational environmental, health, and economic consequences. Presumably, some recent political polls indicate that the American public doesn't buy the 'it's not my job' philosophy of the Obama administration and instead thinks the president should provide leadership during a major crisis.

That it was going to be difficult to control the BP oil spill was obvious from the beginning. There is no precedent for dealing with this problem in deep water. A much smaller spill in 150 feet of water in 1979 (IXOT 1) took nine months to fix. BP's spill is considerably more difficult to handle. The company says that it has already spent $760 million on the spill so far. The final figure will be much, much higher. The costs from lawsuits are completely open ended. While the company may survive, it will be severely financially damaged from this spill for years to come.
Disclosure: None

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.

Gold Rally Fails: Will a Big Drop be Next?

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.


On May 11th, gold closed at a new all-time high above $1200. I was at the Hard Assets Conference in New York that day and I was probably the only person in attendance that was not enthusiastic about the yellow metals short-term investment potential.  Now, only nine days later, it looks like the breakout has failed.

GLD, the largest Gold ETF, had reached a high around $120 in early December of last year. So far in this recent breakout it traded up to only $122.23. GLD closed at $116.63 yesterday, convincingly dropping below the high from late last year.  GLD is now likely to test its 50-day moving average, which is currently a little below $113 and rising. So far, there is no serious damage on the technical indicators, but this could take place in short order as occurred with stocks before the crash on May 6th.

When trying to determine what gold is going to do, it is a good idea to look at mining stocks. These almost always lead the metal both on the way up and the way down. Interestingly, GDX, the gold and silver ETF for the major mining companies, failed to make a new high and break out in the days around May 11th. This non-confirmation was disturbing at the time and is even more disturbing now. GDX almost touched its 50-day moving average in the almost $30 drop in gold prices yesterday. The more volatile GDXJ, the junior miners ETF, convincingly sliced through its 50-day and closed well below it. The technical indicators on GDXJ are starting to look quite sickly. The juniors are clearly breaking down and it makes sense that they should lead the way for the complex. If so, bullion itself could be in a lot of trouble soon.

Investors should remember that gold sold off substantially in the fall of 2008, although not nearly as much as most stocks or other metals. Junior mining stocks were as devastated as the financials and had some of the biggest drops of all. If we are entering into another global financial crisis, gold may once again fail to live up to its safe haven reputation. This situation can arise once again because the central banks cheaply lease their gold to the big banks and hedge funds. When the trading houses are desperate for cash because they are having difficulty selling their assets, they can lease gold and sell in on the open market immediately. This sudden supply being dumped on the market overwhelms safe haven buying and suppresses gold prices. If we have begun global Credit Crisis #2 because of the problems with the euro, investors will once again have access to bargain priced gold.  It's at that point that investors should stock up.

Disclosure: No positions.

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.

Euro Crisis: Starting to Look Like Lehman All Over Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. 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.


The euro fell as low as 121.27 in U.S. trading on Monday. It almost touched that level again before the New York open today. Germany has banned certain types of short selling in order to contain the damage, just as the U.S. did in the fall of 2008 after Lehman's default. Investors should take note that the U.S. ban didn't prevent a market meltdown.

Germany's recently announced ban on short selling is not as extensive as the one that occurred in the U.S. less than two years ago. Germany so far has only banned 'naked' short selling. This type of short selling takes place when the party shorting has not borrowed the security to sell. It is illegal in the United States (and should be everywhere). Nevertheless during the Credit Crisis, U.S. authorities banned naked short selling as well. This was a clear admission on their part that they had not been enforcing the law against hedge funds and the big trading houses, the only market participants who had the ability to engage in this type of trading. Apparently the small trader and investor had to follow the rules, but the big players didn't.

The German ban covers government debt, CDSs (credit default swaps) and shares of a number of financial companies. After Lehman's default, the U.S banned shorting itself for financial companies. This didn't prevent their prices from collapsing somewhat later on. Both Germany and the U.S. justified their actions as an attempt to stabilize markets. There is no reason to believe that Germany's efforts now will be anymore successful than were those in the U.S. during 2008.

The market reaction to the German ban was initially negative, but then the euro started rallying strongly. How long this last remains to be seen. The euro is already extremely oversold, but the technical indicators on the very short-term charts are highly negative. A strong reflex rally could start at any point in time. This happened numerous times for U.S. stocks during the Credit Crisis, but it took months before a bottom could be reached and a sustainable rally could begin. The euro broke key support in the 1.25 area last week and this is an indication the market has lost a certain amount of confidence in the currency. A loss of trust is not something that can be restored overnight.

Disclosure: No positions at all.

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.

Market Continues Choppy Trading

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.


Choppy trading is a sign of a troubled market. Within the last ten days, U.S. stocks have had a great deal of difficulty deciding which way they wish to go. As of today, the Nasdaq has either gapped up or down seven days in a row on the open. Intraday gaps, which are very rare and indicate a great deal of volatility, have also occurred.  This type of trading usually takes place at market tops or bottoms.

The problems in the U.S. stock market began intraday on Thursday, May 6th with the sudden market drop and rise around 3:00PM. In a span of approximately 16 minutes, there were multiple gaps on the downside and then multiple gaps on the upside on the major U.S. market indices on the one-minute chart. The Dow Jones Industrial Average moved 700 points in both directions in that short period. Fewer gaps appear on the five-minute and fifteen minute charts, but they are more pronounced. This was followed by a noticeable intra-day gap on the downside on all the very short-term charts on May 7th. Then there was a massive gap up on the open on Monday, May 10th, with the Nasdaq opening around 100 points higher than its Friday close. The ECB (European Central Bank) has admitted to a massive liquidity injection at that time and this money flowed directly into the stock market. Other central banks were probably involved as well.

Looking at the charts it can be seen that Nasdaq then gapped down on Tuesday, up on Wednesday, and down on Thursday on the open. The gap down on Tuesday was significant, but the other two were relatively minor and not really out of the ordinary. Then last Friday, there was an almost 30-point drop on Nasdaq when stocks began trading. That is very much out of the business as usual range. After that, there was a small gap on Monday and a somewhat larger gap up today. The market suddenly turned around in the middle of the day yesterday while trying to fill the huge gap from May 6th. This is atypical behavior (the gap was only partially filled) and has all the earmarks of central bank interference.

Markets like to trade in continuous patterns. When gaps occur, they almost always get filled (trading takes place in the price range that was skipped because of the gap). This commonly happens within a few days, but it can take weeks, months or even years.  Investors in general don't like choppy markets, although they are a boon to short-term traders. Trending markets tend to have smoother price movements and investors should be on the lookout for a return to this type of less volatile environment.

Disclosure: None

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 Update on the 2nd Global Financial Crisis

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.


It's Monday May 17th and the Euro is heading lower, having broken its low from Friday. The trade-weighted dollar has hit new highs for this move. European stocks are having a mild rally, while U.S. stocks are mostly flat. Asian stocks sold off on Sunday night. The ECB is withdrawing liquidity from the market and this should be a negative for stocks going forward.

If there is to be a near-term recovery in world stock markets, it is important that the euro rallies back to and above the 125 level - its low during the Credit Crisis.  The euro (FXE) traded as low as 123.24 on Friday and today has been as low as 122.71 in New York morning trade. A significant break in support has taken place and this is a major development. In all likelihood it indicates a much lower low in the future. What that low will be and when it will take place are of course the key questions that need to be answered. The euro's next support is at 1.20, and it is now heading to that level. That support is relatively minor however. A number of technicians claim better support around 1.07. The equivalent strong support that existed at 1.25 would be at 1.00 however. What unfolds in the future depend on how the EU continues to handle matters affecting the currency. Up to this point, we have only seen world-class ineptness coming out of Brussels.

For its part the ECB (European Central Bank) announced that it would launch a program on Tuesday to re-absorb the liquidity that it pumped into the market early last week. They intend to withdraw $21 billion (16.5 billion euros) through this operation. If the liquidity injection was good for stocks (the market did indeed have a huge rally coincident with the ECB's move), investors should consider the withdrawal of liquidity should be bad for stocks.

In Asia the Nikkei in Japan was down 2.17% last night and the Hang Seng in Hong Kong fell 2.14%.  European markets had a modest rally today, with the FTSE in England and the DAX in Germany rallying about half a percent. U.S. markets were basically flat in morning trade (they turned down dramatically just around noon). The trade-weighted dollar (DXY) was as high as 87.06.  The U.S. markets had a massive gap up on Monday May 10th. This can be seen most clearly by looking at Nasdaq, where no specialists delay the open to balance buying and selling. Prices fell into the gap on Friday and the very short-term technicals in the day's trading were ugly. The rule of thumb it that once a gap is partially filled, it will be completely filled (prices will go down to the bottom of the gap in this case).

Investors need to realize that the world's central banks are well aware of this crisis. How much comfort this should be to them is open to debate. The central banks all saw the global financial disaster that resulted from Lehman's failure in the fall of 2008. They all know that a small currency crisis in Thailand in 1997 spread throughout Asia and then damaged world stock markets for more than a year thereafter. This knowledge though didn't prevent the ECB from sitting on its hands for more than six months while the situation in Greece escalated into an international problem. The central banks then finally acted with a trillion dollar bailout (likely to be just the beginning). So, we can conclude the central banks haven't learned to react in time to prevent a future crisis, but they do know how to print money - a talent that has some serious downside risks if you don't like inflation.

Disclosure: No positions.

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.

Euro Problems Threaten World Markets

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.


These days a trillion-dollar bailout just doesn't seem to go that far. Spending that amount to rescue the euro made the markets euphoric for only a couple of days. While stocks rose sharply immediately after the announcement, they are now selling off again. The euro itself is testing its low made in the fall of 2008.

The euro is being rattled today because of reports that French president Sarkozy threatened to pull France out of the currency union. This allegedly happened (the French deny that it did) at a May 7th meeting of ministers before the bailout plan had been worked out. If it did happen, it's old news. If you only read the press headlines though, you would think it had just occurred and is a new development. It didn't and it isn't. The source for this news item came from Socialist leaders in Spain. They may wish to see the euro system fall apart to further their own anti-capitalist agenda and to increase their personal power. So can you believe what they are saying?

So far in New York trade this morning, the euro (FXE) has traded as low as 123.24. This takes out the Credit Crisis low of 124.04 on October 27, 2008.  The euro has major technical support around the 125 area. A break of that level is a serious problem. The next step down is to around 120. A nose-diving euro is not just a problem for Europe however. In our globally interconnected economy, it will spread around the world like a financial tsunami. Not only is there a danger of dropping stock markets, but economies will be damaged as well. While the euro was falling this morning so were U.S. stocks. The Dow was down almost 200 points and the Nasdaq 60 points. The trade-weighted dollar (DXY) traded up as high as 86.24.

The euro has gotten to its current troubled state because of a complete lack of planning, an inability to face reality, failure to consider intelligent alternatives and a delay in taking action on the part of the eurozone leadership. Instead of making the hard decisions to handle the problems that began with the Greek debt crisis, they have engaged in stonewalling and dealing with the PR aspects of the problem, instead of solving the problem itself.  Unfortunately, this type of economic leadership is not unique to Europe, but is typical in most of the world today. If the euro blows up, Americans will be very much aware of it because of the big hole it leaves in the U.S. economy.

Disclosure: No euro or dollar postions.

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.

What's Behind the Move in Gold and Silver Prices

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.


The euro rescue plan announced pre-market Monday morning has yet to calm jittery financial markets. Gold hit a record high yesterday on rumors that Germany was planning on leaving the currency union and going back to using Deutsche marks. Silver has benefited from a U.S. government investigation of JP Morgan and its possible manipulation of global silver trading.

Gold has been rising for several years now against all major paper currencies and this indicates a massive global devaluation of fiat money (currencies that are not backed by hard assets) is taking place. We are still only in the early stages of that devaluation. When the Greek debt crisis surfaced, gold fell from December to February. Superficially, this makes sense because gold usually trades with the euro and the euro was dropping. After February, gold recaptured its usually safe haven status and starting rising as the euro continued to fall. The trade-weighted U.S. dollar was of course going up at the same time. The dollar is also traditionally a safe haven whenever there is a crisis in the world. In this case though, the dollar is hardly more sound than the euro and a good case can be made that U.S. government finances are even worse than Greece's.

There is no question that the euro currency union cannot continue to operate the way it has up to this point. When the eurozone was created, there seems to have been no consideration of how matters would be handled if problems arose - a truly amazing lack of foresight. The Greek debt crisis also revealed that the eurozone authorities were unwilling to take necessary action to enforce the standards supporting their currency. Greece lied to the EU about it fiscal position for years and its budget deficit to GDP ratio for 2009 is more than four times what is permissible by currency union rules. If this doesn't get it thrown out of the union, it appears that nothing could ever happen that would get a country removed from the eurozone. This is how the rumors that Germany would withdraw from the euro could take hold and gain some credence. At this point in time though, there is a zero percent chance that this would take place. Such an action would create a crash in the world financial system that would be much greater than what occurred after Lehman's collapse. The authorities are well aware of this.

Silver, which trades with gold, has its own unique issues. News sources on May 9th reported that parallel civil and criminal investigations had been launched into whether or not JP Morgan has engaged in manipulative practices to keep down the price of silver. The CFTC (Commodities Futures Trading Commission) is looking into civil charges, and the Department of Justice's Antitrust Division is handling the criminal probe. The CFTC has had complaints for years that a few big banks were manipulating silver prices, but just as the SEC ignored complaints against insider Bernie Madoff, the CFTC paid no attention. The CFTC hearings this spring on the silver market blatantly exposed the corrupt practices taking place. Nevertheless, the mainstream media ignored the story (just as a number of press outlets had the Madoff story for years, but failed to publish it). The hearings did get a lot of attention from blogosphere and on You Tube however and this may have finally put enough heat on the CFTC to take action.

From a technical perspective, gold has broken out from a cup structure (without a handle). Going to new highs is always a sign of strength.  Gold price action is being fed by and is in turn feeding a great deal of bullishness.  Too much bullishness though is not a good sign. The dangers for gold are a recovery in the euro (which is extremely oversold) and the market gaining some confidence in the bailout. The situation in Europe is likely to calm down into the summer. In the long-term problems will resurface however. Investors should also keep in mind that the IMF has a lot of gold and has decided to start selling it to pay for its programs (such as the euro bailout for instance). These sales can cause gold to experience a sharp and sudden price drop.

Investors can purchase gold and silver through ETFs (exchange traded funds). Gold ETFs that hold physical metals include GLD, IAU, and SGOL. Silver ETFs include SLV, USV and SIVR. The euro ETF is FXE and the trade-weighted dollar ETF is DXY.

Disclosure: Not relevant.

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.

A Problem With Volume for the New Rally

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.


One of the most talked about aspects of the stock market rally that began in March 2009 was the lack of volume support. As the market continued to go up, buying continued to dry up. The rally that began on Monday is exhibiting this behavior to an extreme. Lack of volume support now makes stocks vulnerable to another sudden downturn.

The problem with volume is most evident on the Dow Jones Industrial Average. Around the low last March, the index was trading over 600 million shares a day. Within the last two months, there were many days when volume was frequently below 200 million shares. During 2010, there have been a few volume spikes around 400 million shares, but almost all of these took place on options expiration days. Rising volume on those days doesn't indicate increased investor interest in the market.  Volume finally did perk up considerably at the end of last week though - on big selling.  Over 400 million shares were traded on the Dow on both Thursday and Friday.

Buyers have not been as enthusiastic on the upside however. The volume on the big rally on Monday was around 300 million shares, much less than volume on the two preceding down days. The Dow dropped slightly on Tuesday and volume was somewhat over 200 million shares. In and of itself this was OK since you want to see lower volume on down days.  When the market goes up afterwards though, the volume must also rise.  This didn't happen on Wednesday, despite the 150 point rally. Volume was well below 200 million shares until the close when around 30 million shares traded at the end of the day. Despite all of those shares changing hands, stock prices barely budged. This would indicate equal amounts of buying and selling (also known as stalling or churning). Final volume on Wednesday came in at 195 million shares. So there was a big rally on pathetic volume.

Not only is the rally lacking proper volume support, but the Dow, S&P 500 and Nasdaq all bounced off their 200-day moving averages on Thursday (they actually pierced them for a short period) and they have now traded back up to their 50-day moving averages. This is now a key resistance level. So far, this is a normal bear-trading pattern.  For it to turn into a bull pattern, the stock indices must get above and stay above the 50-day moving averages. We should soon find out if this can happen.

Disclosure: None relevant

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.

Liquidity from Euro Rescue Pumps Up Stock Market

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.


As I have said many times, liquidity is ultimately the driver of stock prices. A perfect illustration of that took place on Monday when a trillion dollar rescue package was announced for the euro before the market opened. After finding out about the latest big liquidity injection into the global financial system, traders went wild and the Nasdaq gapped up 100 points. Huge volatility though is rarely a good sign for the stock prices going forward.

The extreme move up could be seen as a positive event, if the problems in the eurozone will actually be solved by the recently announced euro rescue package. This is unlikely. First the need for a large-scale regional bailout indicates that we are still suffering from conditions that arose during the Credit Crisis. These have been papered over by previous massive bailouts that have paused the problems the world faces, but have not created long-term solutions for them.  Spending more money on bailouts means printing more money and this will ultimately have unpleasant consequences down the road.

Investors need to realize that the euro rescue effort is a bailout for the big banks, the ultimate beneficiaries of the many trillions spent previously by government  and central bank Credit Crisis programs. The debt crisis in Greece could have been solved instantly and without spending one penny on a bailout, if dollarization had been used to deal with the problem. Under this approach, Greece would have been allowed to continue to use the euro, but been kicked out of the currency union. This would have prevented contagion to the entire eurozone and markets worldwide. It would have cost nothing. Instead, we now have another trillion-dollar bailout to rescue the global financial system.

The euro rescue package consists of three parts. The biggest part is $560 billion in new loans from the 16 countries that are part of the eurozone. Of those 16 however, five - Greece, Portugal, Ireland, Spain and Italy (the so called PIIGS) are troubled. So it might be more accurate to say that these loans are really from the 11 more solvent countries in the currency union. The second part of the package is $318 billion from the IMF. The IMF is controlled by the United States from which it gets around 40% of its funding (if not more). So American taxpayers are participating in bailing out Europe for its misdeeds and incompetence. The third and smallest part of the rescue program is a $76 billion lending facility from the European Commission.

The huge gaps up in stock prices on Monday morning came after a short-lived market meltdown in U.S. stocks the previous Thursday. In a span of 16 minutes, the Dow Jones Industrial Average dropped 700 points and then rose 700 points. The Dow essentially opened up 400 points higher on Monday morning. Healthy markets don't have multiple big moves up and down, especially within a short period of time. Sudden big drops in the spring can frequently lead to much bigger drops in the fall. Recovery in the middle, usually lulls investors into a false sense of security. You may want to think about that while you're relaxing at the beach this summer.

Disclosure: None relevant.

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.

Similarities Between the 2010 and 1997 Market Crashes

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.


My blog post on May 4th mentioned the stock market was rolling over and on May 5th, I made the comparison between the problems in Europe today with those of Asia in 1997. I specifically pointed out that the Dow Jones Industrial Average had a one-day 7% drop because of the Asian crisis. The next day, the Dow was down 9.9% intraday on the current European crisis.

The Asian crisis in 1997, frequently referred to as the Asian contagion because it eventually spread from country to country, started with a currency crisis in Thailand. It soon engulfed most of East and South Asia. While Thailand's economy was small, it had been vibrant for many years. Its currency was overvalued though and this is where the problem began. Few people would characterize Greece as having a vibrant economy at the moment, though it is certainly represents a very minor part of overall eurozone economic activity. As the Asian situation in 1997 demonstrated, problems that show up in small countries can easily spread throughout an entire region and have global consequences.

So what did the EU leadership do? Despite this recent historical lesson, they decided to continually postpone dealing with the situation in Greece. Not surprisingly, contagion began to spread to the other PIIGS countries (Portugal, Ireland, Italy, and Spain), the euro tanked and this in now endangering the export based economies of currency union, and finally, world markets have sold off. Fortunately, EU authorities weren't faced with an outbreak of bubonic plague - otherwise we'd all be dead.

The U.S. stock market drop in 1997 mostly took place on October 27th.  The Dow Jones Industrial Average closed at 7715 on Friday the 24th. It then dropped 554 points on Monday, closing just off its low for the day. The loss was 7.2%. The bottom wasn't hit until intraday on the 28th however. At the low, the Dow had lost another 225 points and was trading at 6936. From top to bottom, the index was down 10.1% in a little over a day. On Thursday, May 6, 2010, the Dow at its intraday low was down 9.9% from the previous day's close. So far at least, the percent of the two drops is almost identical.

The 200-day moving average was an important barrier in 1997 and probably will be so in 2010 (at least for now).  The markets were trading way above the 200-day before the drop in 1997, as they have been recently. There was some piercing of the 200-day both times. It could happen again in the next few days, but the 200-day should be considered an important support level that the market will try to hold or return to quickly on a break.

The VIX, the volatility indicator, spiked into the high 40's in 1997. In 2010, it rose to 42.14. While the highs are somewhat different, the rallies of the VIX in both cases are very similar. In October 1997, the VIX had been slowly rising for almost two years from a low of around 10 and was trading around the 20 level. The low of 15.23 in 2010 was hit in early April. The VIX rose approximately 47 points from its value a few weeks earlier during both crashes.

The important question now of course is what is going to happen. The markets recovered rapidly in 1997, but this was during a long-term secular bull market. We are now in a low-term secular bear market and such buoyancy can't be assumed. The 1997 crash was not the end of the market's problems either. Regional financial crisis after all can easily cause problems for a couple of years. A deep, but short, bear market followed in August 1998 caused by the collapse of Long-Term Capital. Central banks reacted by pumping liquidity into the financial system and the tech stock blow-off followed. If they do that this time, and they most certainly will, expect a commodities blow-off instead.

Disclosure: None relevant.

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

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

The Good News, Bad News Jobs Report

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.


There was something for both bulls and bears in the April employment report. The government stated that 290,000 jobs were created last month, a solid enough number. Despite these job gains, the headline unemployment rate rose to 9.9%. If certain discouraged workers and forced part-timers were added, the unemployment rate would have been an incredibly high 17.1%.

It is of course puzzling that the unemployment rate can go up from 9.7% to 9.9% while the U.S. economy is supposedly adding 290,000 jobs. The mystery is solved according to the BLS (Bureau of Labor Statistics) by noting that 805,000 jobseekers reentered the labor market in April. Interestingly, a similar number of workers left the U.S. labor market in a one-month period between December 2009 and January 2010. Perhaps the BLS just misplaced them for four months and finally found them again? Labor force participation is one of the areas where it is easiest to fudge the numbers to make the employment statistics look better.

Seasonal 'adjustments' can also improve the numbers quite a bit as well. The economy usually adds jobs at this time of year and they are appearing right on schedule in the employment report. For an example of how seasonal adjustment works, note the employment numbers in the education category in June. There is generally a 20% reduction in education employment once the school year ends. You will see no such drop in the employment report. The BLS should perhaps give the seasonal adjustment term another name, such as 'make-believe adjustment' for instance, so the public can have better insight into how the employment numbers are created.

The BLS did at least admit that the government hired 66,000 temporary workers in April to help conduct the census. Census hiring has been going on since March 2009 and should have peaked in the last two months. Sources estimate total census-hiring in the range of 1.2 million. I have not found anything near this amount added to the government category in previous reports. However, temporary workers in the Business and Professional category have ballooned during the census hiring period. A footnote in the employment report indicates that jobs added in 'other' categories may be included in the Business and Professional category. We will have to see what happens there in a few months when almost all of the 1.2 million census workers are no longer employed.

To see if the job situation is actually improving, it is always a good idea to compare year over year figures. According to the BLS, the number of people 'not in the labor force' is over two million higher in April 2010 than it was in April 2009. This increase reduces the reported unemployment rate. The employment to population ratio is more than a percent lower today than a year earlier. The worse comparison though is for long-term unemployment (27 weeks or over). This number has grown considerably and is on its way to doubling. A year ago there were 3.7 million long-term unemployed and last month there were 6.7 million. This indicates that the unemployment rate is not just high, but a significant number of the unemployed are having trouble getting new jobs - and this will continue to be the case.

According to recent polls, just 21% of Americans consider the economy to be in good condition. The view of the average person is very different from the numbers produced by the statisticians in Washington. Even with the job increases that took place in April, there are approximately 1.5 million less people employed in the U.S. today than one year ago. When the $800 billion stimulus bill was passed in February 2009, the Obama administration claimed it would create 3.5 million additional jobs. There seems to be some inconsistency between the hype and what has actually taken place. Is it any wonder that the American people don't trust the numbers coming out of Washington?

Disclosure: None relevant.

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.

Why Thursday's Market Crash Was Caused by Computer Failure or Errant Trades

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.


The trading pattern on the U.S. markets on Thursday, May 6th can be explained by only one of two things - a huge erant trade or a computer system failure.  Even after the market close, the NYSE was claiming that there were no technical problems with its trading system. Citi specifically issued a statement that it had nothing to do with implementing an errant trade. Nasdaq however said that it was investigating possible erroneous transactions executed between 2:40 and 3:00PM.

It wasn't so much the drop that was unprecedented. The waterfall decline that took place for approximately eight minutes somewhat after 2:30PM is common in crashes. Even during crashes however, numerous intra-period gaps on the one-minute chart aren't common. There were four such gaps yesterday in S&P 500 trading. Large market indices almost always trade continuously and the probability of this type of trading pattern is extremely small. Even less probable was the instantaneous recovery of the indices. The S&P 500 also has four gaps on the upside in only eight minutes, when it rose approximately 50 points.  During that same time the Dow Jones Industrial Average was rising around 500 points. None of this represents a normal trading pattern.

The major indices were damaged enough as is on the day.  The Dow was down 348 point of 3.2%. The S&P 500 dropped 38 points or 3.2%. Nasdaq gave up 83 points or 3.4% and the small cap Russell 2000 lost 28 points or 4.0%. Of all the major sectors, financial stocks were hit hardest closing 4.1% lower. The confusion caused the VIX, the volatility index, to spike above 40. It was in the mid-20s only two days ago. It closed at 33.19, up 41% on the day. This type of movement in the VIX is extreme and is likely to be reversed in short order. Gold rallied in the confusion.

Having looked at the charts as the sudden trading plunge and the subsequent recovery that took place during and after the market close, I noted the charts changed over time. Some of the gaps on the charts disappeared and a straight-line trading pattern the existed for a while before and just after 3:00 disappeared on later charts. The straight-line trading pattern only exists if trading has been halted or if there has been a break in the information feed from the exchanges so no data is forthcoming. Either way, traders and investors are entitled to an explanation of what really went took place. Otherwise, they might think there is either a cover-up of a serious technical glitch or collusion by the big players in manipulating the market.

Disclosure: Sold VXX.

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.

Why Decisive Action is Needed to Save the Euro

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.


This morning, the euro has traded as low as 126.55 to the dollar. The currency has extremely strong support around the 125 level, so some bounce up from there should be expected. While some short-term relief is likely, in the longer term the survival of the euro is threatened until some significant changes are made in how the currency union is managed.

The current problems in Greece have exposed the flaws behind the euro. The currency was created with a set of rules that were meant to insure stability, but the eurozone seems incapable of enforcing its own standards. Because of this, the euro is losing credibility in the world markets. At this point, the EU has only two choices if it wants to regain an image of responsibility for its currency. It can either enforce its maximum 3% budget deficit to GDP limit or change the limit to something that can be accomplished and make sure all member countries stick to it. The Credit Crisis has made the first choice impossible, but the EU has yet to try to deal with this realistically. The second choice, while it would tend to lower the value of the euro, would allow it to keep functioning as a viable currency.

So far, the EU has chosen neither of these alternatives. Instead it has decided to take the bailout route. This is only a stopgap measure to deal with the problem and is not a workable solution in the long-term. It can be done for Greece, although it will be expensive, because Greece represents only 2% of the EU economy. It also could be implemented for Portugal and maybe even Ireland. At that point though the amount of bailout money being spent would be tremendous and would certainly create an inflationary strain on the entire eurozone. As the situation in Greece has shown, the cost of an actual bailout will be much larger than initial estimates. The funds for a proposed Greek bailout have already almost tripled from the first proposal and they will ultimately be much higher. The bailout solution has its limits though. Spain will be the breaking point. Italy is not even possible.

A good question is: Why are bailouts even being considered? Dollarization could easily have solved the problem - let Greece continue to use the euro, but remove it from the currency union (Greece would almost certainly have defaulted on its debt already if this had been done early on). The answer of course lies in who is really being bailed out. French and German banks together have funded the majority of external Greek government debt. They also have a decent chunk of Portuguese government debt. Just as was the case with the subprime crisis in the United States, the big banks are the ones being bailed out. Most large European banks were already bailed out is some way, shape, or form then as well. This would represent a second series of bailouts for them.

At some point, the EU has to make some tough decisions. This is something that governments throughout the world seem incapable of doing these days. Up to now, the governing body in Brussels has reacted like a deer caught in the headlights - frozen and incapable of action. Greece not only violated the EU's debt to GDP limits by a factor of four, but also lied to the EU about its numbers for many years. Instead of being punished for these serious infractions and being thrown out of the currency union, the EU and IMF have decided the best course is to reward Greece for its bad behavior with a bailout. The EU is sending the markets a clear message that their supposed standards behind the euro are meaningless. The market, not surprisingly, has sold down the euro in response.

As I said repeatedly during the Credit Crisis, there is no such thing as a single bailout. This will certainly be the case in the eurozone. If the EU wants to save its currency, it will have to take decisive action at some point. If it won't do so now, it will have to do so once it becomes obvious to them that the bailout approach is just too costly. Unfortunately for the rest of us, this can have a serious negative impact on world markets at any point in time. The Nikkei in Japan was down 3.3% last night and China's Shanghai composite was down 4.1% and they are not anywhere near Europe.

Disclosure: No position in euros.

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.

Financial Crises Compared: Eurozone 2010, Asia 1997

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.


Current market action has all the earmarks of a global financial crisis. Stocks and commodities are selling off, money is flowing into safe haven treasuries and the U.S. dollar, and the VIX and TED spread are up sharply. We've seen this before in 2008 and also during the Asian contagion in 1997.

As we all know by now, the problems started in Greece, a small economy that represents only 2% of the eurozone GDP. Greece had been lying about its budget deficit and true financial position for many years (and is certainly not the only country doing so). Even though it submitted obviously ridiculous financial numbers to the EU central HQ in Brussels, they were not officially questioned. Greece itself, like Bernie Madoff, finally confessed to the scam because it was falling apart. The EU, which has had more than six months to deal with the situation, consistently failed to take action. What was at first a minor problem has festered and grown into a problem gnawing away at the world financial system. The simple and obvious solution of using dollarization - letting Greece continue to use the euro, but removing it from the currency union (which it should never have been allowed to join in the first place) - was not even considered by EU authorities. Instead they have gone the bailout route and because they have dragged their feet, the cost of the bailout has tripled in the last few weeks alone.

A small country with a currency problem causing major problems in the global financial system has a recent precedent in Asia in 1997. The Thai baht, which was pegged to the U.S. dollar, came under speculative attack in May of that year and the government was forced to drop the dollar peg and float the currency on July 2nd. The problems in Thailand, a relatively small economy, then spread throughout East and South Asia. They eventually washed up on the shore of the U.S., with an October 27th mini-crash in the stock market  that dropped the Dow Jones Industrial Average 7% in one day. The selling may have been worse, but stock trading was halted early that day.

The euro has been seriously weakened in the last several months, falling from over 1.50 to the U.S dollar in December to under 1.28 this morning (key support is around 1.25).  Problems in Greece are spreading to other parts of Europe, just as problems in Thailand spread to other parts of Asia. Indonesia and South Korea were seriously affected first and then Hong Kong, Malaysia and the Philippines suffered damage. Problems even spread to China, India, Taiwan, Singapore and Viet Nam. Portugal, Spain and Ireland are the next dominoes to fall in the eurozone. Italy also has troubled finances, but its economy is too big to be bailed out. Bailing out Spain might also be problematic. There is a one key difference between Asia in 1997 and the eurozone today. The Asian economies were strong and had been so for many years before the crisis hit, while the eurozone economies have been relatively weak for many years and have been mired in recession for the past two.

Major stock indices in Europe and North America were down around 2% to 3% yesterday. In the U.S. the Dow dropped 2.1%, the S&P 500 2.4%, Nasdaq 3.1% and the small cap Russell 2000 3.4%. Smaller markets in Europe were down 4% to 7%. Gold was down only slightly on the day, but oil was down over 6% at one point. The VIX, the volatility index, was up 27% during the day's trading and the TED spread, a measure of stability in the financial system, rose almost 9% (the higher the number, the less stability). U.S. treasuries rallied and the U.S. trade-weighted dollar not only rallied, but also had a significant breakout above the 82 range. If this all sounds familiar, it is because this is how the market frequently traded during the fall of 2008 during the height of the Credit Crisis.

While events in 1997 had their biggest impact in East and South Asia, echoes of the problem wound up impacting U.S. and other stock markets into 1998. The collapse of hedge fund Long-Term Capital caused a severe bear market, with the Nasdaq dropping around 30% in August of that year. Regional financial crisis do not tend to get resolved quickly, and their impact can easily last for at least a couple of years and be felt half way around the world. Events in the spring can cause market sell offs in the fall. The current situation is much worse in 2010 though than it was in 1997. Bailouts and pumping liquidity into the global financial system (which lead to the tech bubble blow off in 1999 and early 2000) were used to deal with the problems in 1997.  Governments and central banks have already used these tools to a massive extent for the last two years. If we are having another crisis, clearly they aren't working.

Disclosure: Long VXX.

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

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

Is the Stock Market Rolling Over?

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.


Volatility is a sign of a top. The triple digit up and down moves on the Dow in the last few days should make bullish investors reconsider their view on the market. The 15-month rally has been overdone for quite a long time now and even a small event could do some serious damage to prices.

Investors need to realize that the stock rally has been created on a wave of liquidity even though the mainstream media has continually cited an improving economy and good corporate earnings as the basis for stocks ongoing rise. Careful examination of U.S. economic statistics indicates anything but an improving economy. They instead show an economy dependent on government spending, stimulus and easy money. As for good earnings, if you believe them, ask yourself what earnings looked like in Q3 1929, Q3 1987 and Q1 2000. They were great, but that didn't prevent the market from crashing shortly thereafter.

As for small problems, they have a way of getting bigger. The oil spill in Louisiana is not just a major environmental disaster, but could cause significant damage to the U.S. economy as well. The entire global financial system could take a hit because of problems with the PIIGS in Europe. The euro (FXE) fell to just above the 130 level this morning and that is an important support level. We will have to see if it holds. The EU has handled the situation ineptly from the beginning and has chosen denial instead of action, and proven failed approaches over innovative thinking. China, the epicenter of global growth, also restricted bank credit yesterday for the third time this year.

There is also no question that the technical picture on the U.S. stock market is deteriorating rapidly. However, this has happened before during the last year and the market managed to miraculously recover. Each time, more liquidity came to its rescue. At some point though there is no longer enough extra liquidity  to juice the market. While the U.S. Fed has made it clear that it will be keeping interest rates close to zero for a while longer, it is slowly closing down special support programs created during the Credit Crisis. The U.S. is no longer in control of the world economy, nor markets however. Investors need to pay more attention to what is going on in China. There is a severe risk of inflation there and they will have to do something about it sooner or later. This will not be a plus for world markets when it occurs.

Investors who want to short the markets can use ETFs to do so. To short the Dow, S&P500, Nasdaq 100 and Russell 2000, ProShares ETFs DOG, SH, PSQ and RWM can be used. For aggressive investors who want to take a 200% short position, the ETFs DXD, SDS, QID, and TWM are the respective choices. For super aggressive investors, Direxion offers 300% short BGZ on the Russell 1000 and TZA on the Russell 2000. Alternatively, shorting can be done by going long on the volatility index VIX with ETFs VXX or VXZ.

Disclosure: Long VXX

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.

Lousiana Oil Spill Threatens Future U.S. Oil Supply

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.


As the easy to get to oil on land has become scarcer, the industry has increasingly been forced to develop offshore wells in deeper and deeper water. This strategy is not without its risks, as the recent explosion of the Deepwater Horizon drill rig off Louisiana last week made evident. The event is rapidly turning in to one of the worst environmental disasters of all time and may surpass the Exxon Valdez spill in Alaska. The opening of new offshore wells is likely to be suspended for some time and consequently long-term projections for oil production should be lowered.

The Gulf of Mexico is a prime source of offshore oil and gas production, but it is by no means the only one in the world. Major offshore production also exists in the North Sea and even the Middle East. New discoveries off the west coast of Africa and the waters off Brazil have gotten the media's attention as the great hope for oil production in the future. When I first read the hype about the large deep-water deposits east of Brazil (which are also under a lot of earth as well as water), I noted a brief comment that stated the technology doesn't currently exist to tap these deposits. The recent disaster off Louisiana demonstrates that the technology also doesn't exist to fix a blow out or spill from currently existing offshore wells.

The description of the size of the oil spill varies considerably from one report to another. At first it was just a few thousand barrels a day, then some sources stated 42,000 gallons a day were leaking, while higher estimates have now reached 210,000. There is a device called a blowout preventer that was supposed to have kept the explosion and leak from happening, but it failed. Working around it is now something that is a major factor in trying to fix the problem. There are actually three leaks and there are now plans to cap the biggest one with a dome that is currently being constructed for this purpose. This has never been attempted in a well 5,000 feet under water. It has worked in shallow water. The U.S. Coast Guard is also planning a controlled burn of the oil slick, as it is nears coastal Louisiana  and is heads toward the beaches of Florida. Burning has been done in rivers, but this would be a first attempt in the ocean. The oil industry is in clearly in uncharted territory in trying to deal with this disaster. Perhaps we should ask ourselves how reliable are their other deep-water wells?

There was a spill in a Gulf of Mexico well, the IXOT 1, in 1979, but it was in 150 feet of water, not 5000 feet below the water's surface as is currently the case. It leaked up to 30,000 barrels of oil a day for nine months. Attempts to cap the well, more easily done considering the more favorable circumstances, failed at first. Two relief wells had to be drilled and only then could the leak be stopped. It would take months to drill a relief well now in the offshore Louisiana location.

Needless to say, oil service stocks have taken a hit because of the Louisiana disaster. ETF OIH has declined more than ETF XES though. British Petroleum (BP) has been down as much as 13% so far. Anadarko (APC) also has a 25% stake in the well and Mitsui a 10% stake. President Obama has declared that they are fully responsible for all clean up costs. The first class action suit relating to the spill has already been filed and claims for damages to fishing and related industries could be enormous. Trans Ocean Ltd (RIG) owned the rig and its stock has dropped 21% so far, Halliburton (HAL) was in charge of the drilling and Cameron International (CAM) supplied the failed blowout preventer.

Ironically, president Obama just announced the expansion of offshore drilling one month ago. There is going to be considerable blow back from this oil spill that is likely to put any future U.S. offshore drilling on hold for some time to come. And that is going to have serious consequences. The Gulf of Mexico is the only place in the U.S. where oil production has grown in the last 15 to 20 years. Unfortunately, it is a region fraught with problems. Only five years ago, BP's Thunderhorse platform was supposed to start producing 250,000 barrels of oil a day (under three miles of water). It never happened. Before Rita and even before Katrina came along, the fairly minor hurricane Dennis blew past it and wiped it out. As if there aren't already enough problems in the Gulf, hurricane seasons starts next month.

Disclosure: Long oil.

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.