Thursday, June 3, 2010

Some Curiosities in Wednesday's Market 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.

U.S. stocks had a big rally yesterday with a surge starting at approximately 2:20PM New York time. This rally was counter to the direction of the news flow and had many of the earmarks of central bank intervention.

Central banks will pump liquidity into the global financial system to prop it up at key points (informed cynics would use the word manipulate and might cite the U.S. Plunge Protection Team as the source of these activities). A recent example of this was the ECB's huge injection on the morning of May 10th, which caused an explosive rally for U.S. stocks on the open.  Draining the liquidity the following week caused the market to drop back down again however. These central bank activities would therefore be more accurately be described as massive pump and dump operations. If a stock manipulator in the U.S. was caught doing this, he or she would go to jail.  Governments though don't think they have to follow the rules they make for the little people.

A big liquidity injection will usually take almost all stocks up, even some highly improbable ones.  Currently stocks related to the BP oil spill off the Louisiana coast would be the best examples of this. PB had has a series of failed attempts at controlling the massive leak that is now threatening Florida beaches.  Its Operation Saw effort failed yesterday when the riser package got jammed and this could be seen through a live feed on the Internet (the saw now seems to have been freed). The situation has become so bad that Internet buzz is starting to question BP's survival. The lawsuits against the company keep escalating and some of the potentially biggest ones aren't even on the company's radar screen yet.

On this continual wave of bad news, how did the companies connected to the oil spill perform in yesterday's market?  British Petroleum (BP) was up 3.0%.  Anadarko (APC), which owns 25% of the operation, was up 5.1%. Cameron International (CAM), the provider of the failed blowout converter, was up 7.0%. Halliburton did the best of all rising 10.7%. Only Transocean (RIG) was down, falling 3.5% (although it is up by 3.5% as this is being written). Interestingly, I saw mainstream news reports that only cited the drop in Transocean stock and ignored the huge and rather inexplicable gains for the other companies.

The timing of yesterday's rally was also a bit too convenient. President Obama gave a speech on the state of the U.S. economy in Pittsburgh that ended around 2:20PM. As the speech ended, critical commentary was hitting the news wires about how his efforts to fix it have failed. Obama's February 2009 almost $1 trillion stimulus package for instance was supposed to keep unemployment from rising to 8.5% and it is now 9.9% more than a year later. Without the hiring of 1.2 million temporary census workers (twice the number used in 2000) unemployment would be significantly worse. Nevertheless, the market took off in a huge rally as the speech ended. This well-timed ringing endorsement from Wall Street of Washington's failed policies could have been mere coincidence or the invisible hand of the Federal Reserve acting behind the scenes.

During the Credit Crisis in 2008 the market constantly had big up and down days. As time went on stocks continued their downward slant because the up days were always undone within a week or so. Only when the market finally calmed down in March 2009 was a sustainable rally possible. Volatility began rising in 2007 though and the early increases, similar to the ones taking place now, were merely a warning of much worse things to come the following year.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup

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

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