Will September be the Cruelest Month for 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.


U.S. stocks are set to close out August with the Dow Industrials dropping more than 4% on the month. If the economic numbers continue to indicate a possible double-dip recession however, stocks are likely to fall by a much greater amount in September.

Historically, it isn't crash-prone October when U.S. stocks have their worse performance, but September. Stocks are entering the month in a technically weakened state that began earlier in the summer. In July, all four major indices - the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 - began a bear market trading pattern when their 50-day moving averages fell below their 200-day moving averages (sometimes referred to hyperbolically as a death cross). This is not enough to confirm a bear market however. The 200-day moving average needs to also start moving down. This has happened on the Dow Industrials and the S&P 500 in the last few trading days. The 200-days on the Nasdaq and the Russell 2000 have been moving sideways for a week or more and should start dropping soon. The Dow Transportation Average also needs to have a 50-day 200-day cross to confirm the negative action on the Industrials. As long as there isn't a massive rally, this will happen today. So stocks will be entering September in a technically vulnerable condition.

If more negative economic reports that indicate the economy continues to deteriorate then take place, the mix could be combustible. More hints of a double-dip recession from jobs or manufacturing would be especially damaging. Housing numbers this fall probably won't affect the market as much because things simply can't get any worse (with the exception of housing prices, which still have a lot of room to drop). The bad news on housing from the summer - numbers worse than those at the bottom of the Credit Crisis - may have a delayed impact on stocks though. Jobs have been the perennial weak spot of the attempted recovery and numbers have continually been at recession levels for over two years. Worsening unemployment figures would not be viewed kindly by stock traders. Falling manufacturing numbers won't be either since manufacturing led the economy up from its bottom in the fourth quarter of 2008.

U.S. stocks may also be following Japanese stocks down. The Nikkei dropped 325 points or 3.55% in its last day of August trade. It is now at 8824 and could easily test its Credit Crisis bottom, which is around 2000 points lower. U.S. investors need to watch the key 10,000 level on the Dow Industrials and 1000 on the S&P 500. Stocks moving and staying below these key points would damage sentiment severely. The only thing left at that point to hold up the market would be the Fed's liquidity injections. These might work until the election on November 2nd. If so, you may not want to own stocks later that week.


Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Japan and U.S. Offer More 'Stimulus You Can Believe In'

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 mainstream media on Monday was hyping a Japanese expansion of a low-interest loan program to financial institutions after talking up Fed Chair Ben Bernanke's statement on Friday that the Fed "will do all that it can" to support the economy. Japanese stocks and U.S. stocks respectively rallied strongly on these essentially negative news items.

The Japanese have been trying to fix their economy for twenty years. They have engaged in one stimulus program after another after another after another after another and it's still dead in the water. Despite the repeated failure of the approach they have taken, this doesn't deter them from engaging in the same behavior again. There is no reason to believe things will be any different this time. Nevertheless, the mainstream media cues the cheerleaders and dutifully reports this as good news, instead of pointing out that the need for a new stimulus program indicates all the previous ones have not worked. That sounds like bad news to me.

The U.S. monetary and fiscal authorities seem to be doing their best to imitate the Japanese. The Fed though has only had three years to follow them on their road to perpetual economic failure. Bernanke's statement on Friday was made from the Fed's annual meeting at Jackson Hole, Wyoming, which the media described as a 'confab' (confab is short for confabulation, which in psychiatry means 'the replacement of a gap in a person's memory by a falsification that he or she believes to be true' - unquestionably an important concept when dealing with establishment economists). What exactly was Bernanke implying when he said that the Fed would be doing all that it can to support the economy? Does this mean that it wasn't doing all that it could have done previously? In at least one sense the answer to that question is yes. The Fed could have opened the floodgates of uncontrolled money-printing and Bernanke was intimating that this is what is going to be happening in the future.

While the Fed and its cohorts in the economic community continue to maintain that there will be no double-dip recession, Intel threw some more cold water on this assumption on Friday. The tech bellwether sharply lowered its third quarter earnings expectations after raising them only a month earlier. PC sales have been running below previous forecasts. This is a strong blow to the U.S. economy since computer and software sales were up 24.9% in the second quarter GDP report. A drop to a negative number for this category could turn the entire third quarter GDP negative. But don't worry, Ben Bernanke will be handling the situation and we all know what an excellent job he's done previously in fixing the economy. Wait, isn't that a confabulation?

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Q2 GDP Up Only 0.7% Without Government Spending

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 Bureau of Economic Analysis revised second quarter GPD growth down from 2.4% to 1.6% today. Stimulus spending peaked in the second quarter and despite the big boost that it provided, the U.S. economy only expanded at a rate that indicates the U.S. standard of living isn't declining further.

The U.S. needs GDP growth (adjusted for inflation) at about 1.5% for the well-being of the average person to remain the same. This is because of population increases and other factors including some overstatement of the numbers. Actual growth, meaning more jobs and increased incomes for the American people, only takes place when the GDP number is above that level. The U.S. right now needs a substantial amount of actual growth just to make up for the decline from the Credit Crisis/Great Recession and to get back over eight million lost jobs. Despite $2.7 trillion in federal deficit spending in the last two years, it's just not happening.

At the bottom of the Credit Crisis/Great Recession GDP declined at a 6.8% annual rate. So far during the 'recovery' GDP growth has been:

2009 Q3  1.6%
2009 Q4  5.0%
2010 Q1  3.7%
2010 Q2  1.6%

Most of this has come from changes in inventories -in the first three quarters, approximately two-thirds of 'growth' came from this one factor. Indeed this also would have been true of the Q2 number as well if the inventory component hadn't been lowered. Inventories for Q2 were originally reported as being responsible for GDP growth of 1.05% (divided by the new 1.6% total, this would indicate inventories were 66% of Q2 GDP growth). However the inventory contribution to GDP was revised downward even though according to the BEA, "Private businesses increased inventories $63.2 billion in the second quarter, following an increase of $44.1 billion in the first quarter". The smaller increase in inventories in Q1 was responsible for GDP increasing by 2.64%. This is a peculiarity of GDP math. In 2009 Q4 inventories decreased (yes, decreased) by $36.7 billion and this created 2.83% GDP growth. A decrease in inventories also created a 1.10% increase in GDP in Q3 2009.

Government spending was supposedly responsible for 0.86% of GDP growth last quarter. Subtracting that from 1.6% leaves only a 0.74% increase in Q2 GDP. Describing this as anemic would be an understatement. The federal government however accounts for almost a quarter of the U.S. economy and its spending increased by 9.1% in Q2. This would seem to indicate that the federal government contributed a lot more to Q2 GDP growth than what the BEA claims. It also begs the question as to how good the GDP numbers will be when government spending significantly declines as it is scheduled to do in fiscal 2011.

Q2 GDP would also have also been a lot lower without big increases in 'Gross Private Domestic Investment', which was up a whopping 25%. 'Equipment and Software' was up by 24.9% between April and June. In the recently released durable goods report for July, it had a big drop, as did machinery and other components in this category.  Two years of stimulus spending is responsible for revving up the investment component of GDP in the second quarter, but economic reports from early in the third quarter indicate that its impact is already waning. We will have to wait though until just before the November election to see the first numbers for Q3 GDP.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

July Durable Goods Add Support to Recession View

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 an existing home sales report yesterday revealed that the U.S. housing market is currently in worse shape than it was at the bottom of the Credit Crisis/Great Recession, July's durable goods report today further confirmed that the U.S. economy is sinking into a recession.

The headline number, an increase of 0.3%, seemed OK if not particularly good. Only a single item, a huge 76% increase in commercial aircraft sales, was responsible for keeping the number above zero however. Durable goods orders ex transportation fell 3.8% in July. The transportation number, particularly the aircraft sales component, is highly volatile. A strong number one month can be followed by a very negative number the next month. As for the rest of the components of the report, some were eyepoppingly bad.

Machinery orders, which fell 15%, were the weakest number in the report. It wasn't just the extent of the drop that made it so awful, but more importantly it was the biggest decline on record. Yes, the drop was larger than the decline that took place at the bottom of the Credit Crisis/Great Recession when the U.S. economy was falling off a cliff. Computer orders were down 12.7%. Capital goods orders were down 8.0%, the biggest drop since January 2009, just after the Credit Crisis/Great Recession bottom. Orders for electrical equipment and appliances were down 5.9%.

Altogether, July durable goods orders indicate that the manufacturing sector of the U.S. economy is rapidly turning south. This is particularly troubling because it was manufacturing that had the biggest upturn in the last year (the four times larger service sector didn't improve nearly as much). What will provide economic growth, now that manufacturing is weakening? An even more important question is: If some of the manufacturing numbers are as bad as or worse than the bottom of the Credit Crisis/Great Recession and this is also true of the real estate market, how is it possible that the U.S. economy is not currently in another recession?

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Existing Home Sales Collapse in July

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.


Existing home sales plunged a record 27% in July, falling to the lowest level in 15 years. Inventories of unsold homes rose by an even greater 40% and were at their highest point in over a decade. A spokesman for real estate industry group NAR described the market's disastrous performance, which took place in every region of the country, as a "pause".

Once again analysts missed the number by a mile, being far too optimistic. Predictions were for a drop of 14%, a pretty bad figure in and of itself, but little more than half the actual result. The severe drop was also well telegraphed by a 30% decrease in pending home sales in May. Pending home sales tend to turn into existing home sales around two months later. May pending home sales dropped because of the expiration of the federal government's home buying tax credit on April 30th. It is now quite obvious that all this credit accomplished was to motivate people who were already going to buy a new home to do so sooner rather than later and it didn't create any additional sales. Just another example of how the federal government is wasting tax payer money on ineffective stimulus programs.

The most amazing thing about July's existing home sales is that they were worse than anything that took place during the bottom of the Great Recession when the U.S. economy was shrinking at more than a 6% annual rate. Even at the bleakest point, existing home sales were around the 4.5 million level. This July they fall to a 3.8 million annualized rate. Moreover the drop from June was severe in every region of the United States - down 23% in the South, down 25% in the West, down 30% in the Northeast and down 35% in the Midwest.  At the same time, inventories of unsold homes rose from 8.9 months supply in June to 12.5 months in July. Year over year, July 2010 home sales were down 26% from July 2009. Despite the across the board collapse in demand, median home prices somehow defied the fundamental laws of economics and rose 0.7% to $182,600.

There are three important messages from the July existing home sales numbers. First, the housing market has not yet hit bottom and it could be a long time before this takes place. Secondly, the numerous government programs to stimulate the housing market- and this includes driving mortgage rates to record lows - have failed to make things better. Third, if the housing market is in worse shape than at the bottom of the Great Recession, then we are either already in another recession or about to enter one.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Japan Leads Global Stock Market Drop

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 Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Japan has been trying to grapple with its real estate and stock market bubbles from the 1980s for over twenty years now. Its approach has been a zero interest rate policy (ZIRP) and an unending serious of stimulus programs (it was recently announced yet another one is being considered). The United States is currently following these same failed policies, but Washington is expecting that somehow they will work here. It is true that the U.S. real estate and stock bubbles in the 1990s and early 2000s were not nearly as bad as those that took place in Japan earlier. So maybe it won't take U.S. stocks 19 years to hit their lows (that would be 2026 by the way) as was the case for the Nikkei - or at least the case for the Nikkei so far. It cannot be said for certain that the 6695 low in March 2009 will hold.

Being the perennially weak sister, problems with global economic imbalances are showing up first in the Japanese market. The Nikkei first broke key support at 10,000 in mid-May.  It managed to trade just above that level for a few days in June, but then fell back and has traded below it ever since. The chart is very bearish.  U.S. investors need to worry about the Dow Industrials holding the same 10,000 level. The Dow is only slightly above this level in today's morning trade. The Dow Transportation Average is also on the verge of a significant breakdown. The Dow Industrials closing and staying below 10,000 at the same time that the Transportation Average gives a sell signal would be a strong negative for U.S. stocks. The S&P500, the Nasdaq, the small-cap Russell 2000 and the Dow Industrials have already given sell signals in July.

The other major development in Japan during its two lost decades was a massive bond bubble, which caused even long-term rates to approach zero. This same type of bubble is now developing globally, although the powers that be are denying that this is taking place. When massive government stimulus causes interest rates to drop, it is because of a liquidity trap - money does not flow into the real economy and so the economy doesn't significantly benefit from stimulus. Eventually a steep depression develops (what has prevented the depression phase so far in Japan is that its population had enough savings to pay for the last 20 years of stimulus - sort of like rich people who have no income, but still manage to live well by slowly selling off all of their assets). The only way out of this depression is to reignite economic growth with inflation. The Japanese have yet to figure out how to do this and U.S. monetary authorities are still reluctant to pursue this option.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

FDIC Swan Song: 8 Banks a Week

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 FDIC closed down eight banks last week bringing this year's total to 118 so far. Included in this week's closures was the notorious ShoreBank in Chicago. In a separate report, the U.S. Treasury has disclosed that the Obama administration's HAMP (Home Affordable Mortgage Program) seems to be rapidly falling apart. This could further weaken the U.S. banking system.

The FDIC is operating on both borrowed time and borrowed money. This agency is the bulwark protecting American's savings in the case of failed banks, but the FDIC itself is close to going broke. The eight closures this week alone cost the FDIC’s deposit-insurance fund $473.5 million. The deposit insurance fund was already $20.9 billion in the hole at the end of the fourth quarter in 2009. In order to plug the hole and keep going, the FDIC in December forced banks to prepay three years of insurance premiums and raised about $45 billion by doing so. That money had to pay off the deficit already accumulated and then last for the next 156 months of bailouts. There have been weeks this year when the FDIC has had to shell out close to $1 billion for bank rescues. That $45 billion isn't going to last much longer.

ShoreBank was the most significant bailout this week. The bank was founded in the South Side of Chicago in 1973 and was the nation's first community development and environmental bank. Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), Bank of America (BAC), American Express (AXP), GE Capital (GE), and Wells Fargo (WFC) were investors. The bank has indirect ties to a number of members of the Obama administration. The bank was under a cease-and-desist order from the FDIC for more than a year before it was finally closed down. Its remaining assets will be transferred to a newly created corporation, Urban Partnership Bank. Some of the same executives from ShoreBank will be running this newly chartered bank (once they drive Urban Partnership Bank into the ground, it too will be bailed out). It looks like the investments of the too-big-to-fail, or even lose any money, big bank funders will also be protected under this arrangement by transferring them to Urban Partnership Bank.

Meanwhile, the poorly thought out and even more poorly run HAMP program is not making a big dent in slowing foreclosures. Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have already fallen or more likely been pushed out. Mortgage holders blame the banks for not cooperating and banks blame the mortgage holders. According to RealtyTrac, the nation is headed toward more than one million foreclosures this year - a higher amount than the 900,000 homes repossessed in 2009. Boy, HAMP is certainly doing a great job in significantly reducing the number of foreclosures. Well, I guess it's just too much too expect that something will be accomplished for only $75 billion in taxpayer money.

Based on this week's events, I have written the following theme song for the FDIC (maybe Sheila Blair will sing it at the next board meeting) to be sung to the tune of the Beatles 'Eight Days a Week':

Oh I'll bail out your bank babe,
Guess you know it's through,
Hope you like the money banker,
When I'm funding you,
Spent it, Lost it, Pay Me, Save Me
Don't do nothing but bailouts,
Eight banks a week


Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Some Recovery, Half a Million More Unemployed Last Week

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 more than a year of economic 'recovery', the Department of Labor reported weekly unemployment claims rose to 500,000 last week. Any number at 400,000 or higher indicates recession. The last time weekly claims were below that number was the week of July 17, 2007 - more than three years ago.

The unemployment problem has two components - not enough hiring in the private sector and too many job losses for people who have jobs. The lack of hiring can be seen in the monthly non-farm payrolls report and the too much firing shows up in the weekly unemployment claims. Not all U.S. workers are eligible to collect unemployment however so the weekly claims numbers understate the actual number of people who lost their job. Even with the understatement, unemployment looks bad enough as is.

The number of former workers collecting extended benefits rose to 4,753,456 in the week ending July 31st (the most recent data). This was up 260,105 or over 5% from the previous week. A year earlier in 2009, only 2,961,457 were in this category, which includes people unemployed for over 26 weeks. So the number of people who are long-term unemployed and have not yet exhausted their benefits has risen over 60% in the last year -a year when economic recovery was supposedly taking place.

Since November 2009, the weekly jobless claims have mostly been in the 450,000 to 500,000 range. There is no noticeable trend of improvement. This is amazing, not just because of trillions in deficit spending that the government told us would make the economy better, but over the long-term (and three years is the long-term) this number should automatically drift down. Companies have to have a certain minimal amount of employees to run their operations. As time goes on, the number of people that can be terminated drops significantly and so should weekly unemployment claims. This drop in claims wouldn't mean the economy is getting better, although the mainstream media would blast headlines claiming that was happening, it would mean that there aren't a lot of people left to fire. At this point in the cycle, since claims aren't dropping, business activity has to be continually declining to maintain the same high unemployment numbers. That's the definition of a recession, not a recovery.

Investors should not be surprised if the weekly unemployment claims numbers start looking better soon and for the next couple of months. The U.S. employment situation is a major embarassment for the administation and there is an important election in November. This week, the president is making appearances in  five states to make the case that it was worth borrowing trillions of dollars for stimulus spending and doing so has put America 'back on the road to recovery'. The last nine months of weekly unemployment claims certainly aren't supporting this view. With a statistical adjustment here and there though, the numbers could suddenly look a whole lot better, even if the economy isn't improving at all.

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.

Liquidity Trap: The Global Collapse of Government Bond Yields

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.


Government bond yields are dropping throughout the world. The U.S. 2-year, the German 5-year, 10-year and 30-year, and the French 10-year have all hit record lows recently. The Japanese 10-year is back below 1.0% and has fallen as low as 0.90%. The UK 10-year yield has been dropping for months and is only 17 basis points above its Credit Crisis low.

Record or close to record low yields on government bonds indicates enormous buying demand. Bonds hitting record low yields are by definition hitting record high prices. Moreover bond prices are going up when supply has undergone a tremendous expansion to pay for all the economic stimulus programs governments are running. So demand for government bonds has to be increasing faster than the rapidly growing supply if yields are falling. The obvious question is: Who is buying all of these bonds?

If yields were dropping in just one country instead of in almost everywhere, increased demand might be partially explained by countries with big foreign reserves like China buying more government debt. China has been a major purchaser of U.S. treasuries for a long time, but last month it sold about 3% of its holdings. Yet yields on long-term treasuries continued to drop, when they should have gone up. In the U.S., there has been enough buying to not only make up for the loss from China, but to purchase an even larger amount of bonds. There is only one possible source for funding for this demand for government paper in the U.S. and elsewhere on the planet and that is the national central banks and treasury departments.

Essentially, the central banks are 'printing' huge amounts of new money. This money goes into the financial system and gets recycled into purchasing government bonds and also stuck in the banking system as reserves. Most of the newly created money does not go into the real economy. It does allow governments to spend much more money than they could have ordinarily however, but most of this 'stimulus' actually goes for maintaining the status quo (with the objective of preventing further collapse) rather than for anything that would create growth in the future. So the economy stagnates, but holds up as long as the money printing ruse can be maintained. This is a liquidity trap and much of the global economy has already fallen into it based on the interest rate behavior of government bonds.

A liquidity trap is an ugly situation to say the least.  Either a country continues to spend its wealth to support its lifestyle until all of it is dissipated and complete impoverishment occurs or it finds a way to get some of the liquidity into the real economy. The problem is that only small measured amounts of liquidity can be allowed to flow into the economy in any given time period, but this is not the likely scenario. If the central bankers were capable of making this happen, they would have already done it. More likely is that the floodgates will be open and too much liquidity goes into the real economy too quickly. Hyperinflation will then occur and prices could start to skyrocket almost overnight. Japan has faced this situation for the last twenty years, now it looks like all the developed economies are going to be facing 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.

Industrial Production: July Up , But June Is Now Negative

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 Fed reported that industrial production was up 1.0% in July and this got all the media headline attention. Stocks rallied on the bullish news implying economic recovery. Buried in the coverage was that June's number, originally reported as an increase, was downwardly revised to minus 0.1%.

The government's handling and media reporting of the industrial production numbers are similar to many other economic reports. Good news is reported in the initial release. Mainstream media gives the good news big headlines and coverage that is so glowing that it is amazing there aren't cheerleaders in the background waving brightly colored pompoms and shouting 'Go US economy, Go US economy, Rah, Rah, Rah' while jumping up and down (By the way, I am expecting CNBC to steal this idea. I can see the top executives hitting themselves in the head right now and saying, "Why didn't we think of that?"). The downward revisions, and sometimes there are several, that come later on and indicate things aren't so good or there is even a decline taking place get minimal and sometimes no media attention. There's no need for a propaganda ministry when the government has a deal like this with the mainstream media.

Both the June and July industrial production reports have the additional problem of unusual situations that made the numbers better. The very hot weather in June spiked the utility component. In July, auto plants didn't shut down for their usual annual retooling. Because of this, the automotive products component of industrial production increased 8.8%. Most of that in turn was "due to large increase in light truck assemblies". Looking elsewhere in the report it can be seen that 'Output of Business Equipment' was up 1.8%. This increase was driven by the transit equipment sub-component that was up 6.3%, an "increase that in large part represented the gain in light truck assemblies" according to the report. So without the big increase in light truck assemblies (which impacted a number of components), industrial production wasn't strong in July.

The report did claim that most components of industrial production were up however. The exceptions were food, beverages, clothing, appliances  ....  you know, things that are necessities. Well, what is a better indicator of the state of the U.S. economy, a 1.1% increase in the defense component due to bigger production of military aircraft or the American consumer being able to buy food and clothing? This is apparently an example of the 'uneven recovery' that economists speak about. It doesn't prevent optimists from seeing the light at the end of the tunnel for the weak economy based on July industrial production numbers. Pessimists are seeing the light (truck assemblies) at the end of the tunnel instead.

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.

Japan's Economy Shows Limits of Keynesian Policies

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.


Second quarter GDP figures show that the Japanese economy has fallen behind China's and is now only the third largest in the world. Japan has engaged in 20 years of massive government stimulus programs and kept interest rates low, but this has failed to reignite GDP growth. Instead, its economy continues to slowly sink.

In the 1980s, Japan was an unstoppable economic juggernaut that everyone feared. It all ended when a spectacular stock market and real estate bubble blew up in the early 1990s. These bubbles were the ultimate outcome of excessive stimulus over many decades. Initially, that stimulus acted to revive the Japanese economy from the ruins of World War II. In the end, huge asset bubbles resulted. These collapsed throughout the 1990s and the first decade of the 2000s. One government stimulus program after another during that time only had temporary impact on the economy. As soon as the stimulus ended, economic growth disappeared. The U.S. is currently finding itself in the same situation.

A continual backdrop of close to zero short-term interest rates, known as ZIRP - zero interest rates policy - also did not revive the economy. Japanese government longer-term bond interest rates also collapsed, with the 10-year rate falling below 0.5% at one point. Extremely low government bond rates indicate too much liquidity exists in an economy and the government is getting too big a share of it. Businesses can be starved for capital under such circumstances and this in turn limits economic growth instead of stimulating it. This same pattern is emerging in the United States right now. The two-year bond interest rate has been at record lows for weeks. Rates fell to 0.48% this morning. The lowest rate during the Credit Crisis was 0.60%.

Keynesian economics became the almost universal approach for economic policy in the developed economies after World War II.  Keynes recommended initiatives, stimulus during a downturn and paying off the stimulus debt during the recovery, got horribly mangled to more and more stimulus during a downturn and somewhat less stimulus during a recovery. This is essentially an ongoing money-printing scam. Like many scams, it works well as long as it doesn't get out of control. Eventually though some huge crisis becomes inevitable after decades of excessive stimulus and the economy falls apart. Stimulus no longer works then. After two decades, the Japanese have failed to realize this. The economic establishment in the U.S. is equally oblivious.

China is only in the early stages of the stimulus manipulation of its economy and is now the world's current economic powerhouse. It surpassed the UK (the world's largest economy until the U.S knocked it out of the box around 1880) in 2005, Germany in 2007, and now Japan in 2010. Media reports in 2009, estimated that China would overtake Japan in 2012 or 2013.  Time seems to be speeding up. The Washington Post also predicted last year that China could overtake the U.S. as early as 2027, which was much sooner than other predictions, which are as late as 2040. Even 2027 might prove to be optimistic however.

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.

Wall Street Journal’s Flawed Reasoning For Possible Crash

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 Wall Street Journal published an article entitled, “Is a Crash Coming? 10 Reason to Be Cautious” on Friday, August 13th. While a crash is certainly possible, the reasons given by the Journal have little to do with why one could occur.

The Journal did make it clear that it was not predicting a crash. The article’s author specifically stated, “I don’t make predictions. That’s a sucker’s game.” Indeed it is a sucker’s game for almost all mainstream financial journalists, just as professional basketball is for midgets – it’s just not an area of natural talent. That of course doesn’t mean that no one can do it, but the author nevertheless made this illogical leap and this nicely set the tone for the rest of his article.

Most of the reasons given in the article for a possible crash were actually arguments for a double-dip recession. These include (my comment follow in italics):

The Fed is getting nervous (more like catatonic).

Deflation is already here (if so, it will be the first time in history money printing created deflation).

People still owe way too much money.

The job picture is much worse than they’re telling you (one of the ‘they’ referred to is the Wall Street Journal itself by the way).

Housing remains a disaster.

We’re looking at gridlock in Washington (so don’t expect any more big spending programs that accomplish little and raise your taxes)

All sorts of other [economic] indicators are flashing amber (actually bright red).

This is an implied assumption in the article that market crashes are related to recessions, also an illogical leap not supported by the facts. The worse U.S. market crash of all-time took place in October 1987, five years after a recession had ended and almost three years before another one began. There were also mini-crashes in 1989 and 1997. The economy was not in recession during these crashes either, nor was it during the recent flash crash.

Economic downturns are more properly associated with bear markets – a long, slow decline in stock prices as opposed to the sudden, sharp drops that take place during crashes. They require very different trading approaches. Even bear markets can take place outside a recession however. The 1998 bear market due to the Russian debt default and the implosion of Long-Term Capital is a good example. Both crashes and bear markets can be caused by global liquidity events and as we saw recently during the Credit Crisis, global liquidity events can also lead to recessions. This did not happen in the U.S. in the 1980s and 1990s however.

Perhaps the Wall Street Journal should have entitled its article, “10 Reasons Why We Are Headed Into a Recession”. They would have to find three additional reasons of course and they would also have to be a bit shameless as well since I already wrote that article on July 8th and it was published on a number of blog sites that day. Well, at least the Wall Street Journal is making some efforts to try to keep up with the blogosphere, even though those efforts are confused and coming weeks later. Now, what can we predict from that?


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.

This Week's Selling Indicates Bear Market Still in Play

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.


All four major U.S. stock indices began to form a bear market trading pattern during July. The rally that started early in the month paused the formation of that pattern, but didn't reverse it. Then the selling this week added more evidence that stocks are in a bear environment.

The most basic definition of a bear market is a 50-day moving average trading below the 200-day moving average for one or more stock indices and the 200-day moving down. Frequently, people only look for this pattern on one index such as the S&P 500, but that isn't enough. All the major indices - the Dow Industrials, the S&P 500, Nasdaq and the Russell 2000 - should have this pattern before a bear market can be declared.  You might also add the Dow Jones Transportation index to the list as an additional confirmation.

In early July, the simple 50-day moving average fell below the 200-day for both the S&P 500 and the Dow Industrials. Then in the middle of the month the same thing happened on the Nasdaq chart. By the end of the month, the Russell 2000 also experienced this cross (sometimes referred to the cross of death by technical analysts). However, stocks had been rallying since early July and the Russell's cross was very tentative. The 50-day barely dropped below the 200-day and then traded in tandem with it for two-weeks. The selling this week put some space between the two lines and prevented the 50-day from rising back above the Russell's 200-day.

So the 50-day crosses are in place for all the four major stocks indices. The falling 200-day moving averages are still missing however. This line is still rising, although just barely, for the Dow Industrials, S&P 500, Nasdaq, and the Russell 2000. Watch for the 200-days to turn down. The 50-day has also not crossed the 200-day on the Transportation Index. When this happens and the 200-day moving averages start declining, the bear market picture will be complete.

While a large number of economic reports for the last two months have shown a faltering U.S. economy and the Federal Reserve has confirmed that things look gloomy, stocks nevertheless managed to rally for 5 weeks in July and early August. Investors should keep in mind that there is a major election in the United States in early November. Other hard to explain bullish rallies are therefore possible until that time, so be prepared for anything. Reality eventually triumphs in all markets however and that favors the bearish view.
   
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.

Q2 GDP Much Lower Because of June Trade Deficit

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. trade deficit widened to $49.9 billion in June instead of improving as expected. This figure was missing from the second quarter GDP report and could mean a downward revision to 1.3% from the originally reported 2.4%. The lower GDP number means almost all of the growth in Q2 came from inventory accumulation and not from increased economic activity.

The U.S. trade deficit has to be funded from foreign borrowing, just like the budget deficit. Before the Credit Crisis, both used to be around the same size. Then the budget deficit exploded from record levels around $400 billion to over $1.4 trillion in 2009. The trade deficit went in the other direction, decreasing substantially, but is now coming back. The deficit in June was 19% higher than in May and would be almost $600 billion annualized. Exports fell, with computers and telecommunications equipment declining. Imports rose with consumer goods hitting a record high. Ironically, this is being made possible by the huge budget deficit the federal government is running. U.S. consumers are using the money they get from stimulus spending to buy foreign goods - something that will only lower U.S. economic growth.

The trade deficit reducing the GDP number for the second quarter has far wider implications than growth just being anemic. It confirms that the economic 'recovery' that supposedly started in the summer of 2009 has been based almost entirely on changes in inventories. From the Q3 of 2009 to Q1 of 2010, around two-thirds of the growth reported came from the inventory category. This fell to 44% in the first reading of this year's Q2 GDP, still a high number, but better than the 71% from Q1. If Q2 is revised down to 1.3%, the 1.05% that inventory contributed to GDP would represent 81% of total growth. Excessive inventory accumulation means lower GDP growth or even drops in future quarters.

Stocks turned ugly yesterday, whether because of the implications that growth was much weaker in Q2 than the originally reported number or because the realities of the Fed's August meeting finally sank in, is not clear. The Dow Industrials were down 265 points or 2.5%, the S&P 500 lost 32 points or 2.9%, Nasdaq dropped 69 point or 3.1% and the small cap Russell 2000 fell 26 points or 4.1%. Market weakness continued this morning and stocks are starting to suffer serious technical damage, which could lead to much bigger drops in the coming weeks ahead.

A just released NBC/Wall Street Journal survey indicates that close to two-thirds of the American public think that the economy is going to get worse before it gets better. Mainstream economists now think GDP growth will be 2.5% in the second half of the year. The Fed still thinks it will be above 3%. For months, both have denied the possibility of a double-dip recession. Increasingly negative economic reports however indicate another recession may have already arrived.

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.

Fed Admits 3 Years of Easy Money Hasn't Fixed 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.


After three years of easy money the Federal Reserve announced yesterday that it was going to buy around $10 billion a month in treasury bonds - a pittance for an economy the size of the United States. The Fed began its current stimulus campaign with a discount rate cut in August 2007. After using every trick in the book and creating a few new ones, the U.S. economy is still in a troubled state.

In its statement after yesterday's meeting, the Fed admitted that "the pace of recovery in output and employment has slowed in recent months" and "bank lending has continued to contract." The FOMC went on to say that "the the pace of economic recovery is likely to be more modest in the near term than had been anticipated."   Considering that the Fed was hopeful of preventing a recession in the spring of 2008- months after a recession had already started, these statements imply that the U.S. economy is currently close to or even in a downturn.

The Fed doesn't plan on doing much about it however. It can't lower the funds rate any further because it is has been at zero since December 2008. The major option the Fed has left to stimulate the economy is to expand its balance sheet through quantitative easing, essentially money printing. This would be inflationary as is the case with all forms of money printing. While the Fed constantly says there is no inflation and intimates that it is worried about deflation, it is unwilling to make a move that would be inflationary. If deflation is really a risk, expanding its balance sheet becomes the correct course of action. Investors should wonder why the Fed is unwilling to do this.

What the Fed plans on doing currently is to buy 2-year and 10-year treasuries with the proceeds it gets from selling mortgage backed securities that it acquired from Fannie Mae (FNMA) and Freddie Mac (FMCC) during the Credit Crisis. The Fed has more than a trillion dollars of these on its books. This action will prevent the Fed's balance sheet from contracting. The net purchase in treasuries will be minimal. The overall impact on the U.S. economy will be close to nil.

Investors should look to Japan for a lesson on how inept central bank and fiscal policy can lead to decades of a failed economy and low stock prices. The Nikkei closed at 9213 last night, more than 75% off from its high around 40,000 on the last day of 1989. The Japanese economy has been in the doldrums for two decades now. In the United States, it's three years and counting.


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.

Will Fed Meeting Be a Turning Point for 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 Fed has its August meeting today and stocks sold off in the morning despite media attempts to put a positive spin on the outcome. The latest phase of the rally that started in early July took place after Ben Bernanke admitted to congress that the U.S. economy was troubled. Stocks shouldn't have rallied on this news, but they did.

The stock market is supposed to be a leading indicator of the economy and should react to changes approximately six months in advance. This only works in a free market however. The more the authorities are fiddling with the financial system behind the scenes, the less stock prices will act as an early warning system. The bull market peaked in October 2007 for instance, but a recession began only two months later.

This time, U.S. stocks peaked on April 26th. May and June were bad months for the market. While stocks have not gotten back to their highs, they have been rallying since the beginning of July, when problems in the eurozone calmed down (thanks to a commitment of an almost trillion dollar bailout for the currency). The rally entered a second phase after Ben Bernanke testified before congress about the bleak prospects for the U.S. economy. The market sold off that day, but then mounted a rally on the bad news, which was supported by numerous economic reports showing the economy was turning down.

Why would anyone buy stocks when the economy was facing a possible recession? While this behavior doesn't make sense, a better question is: Who was buying stocks after this news came out? Based on the trading volume, not many market participants were entusiastic. With the exception of a few days of selling, the entire rally since early July has taken place on below average volume - a technical negative.

The 50-day moving average for volume has also been declining as well since early July. This is part of a greater trend that started in March 2009, when the bigger rally began. Volume peaked on the Dow Industrials when the market hit bottom and back then there were days when over 600 million shares were traded. More than a year later, a day when over 200 million shares traded would be considered good volume.

The market seems to be rallying on the hopes of Fed easing. With fed funds rates at zero, the traditional forms of easing are obviously no longer available. The Fed would have to engage in quantitative easing (a form of money printing), which would involve the purchase of treasury bonds and this would lower their interest rates. According to mainstream media reports, consumers and businesses would supposedly borrow and spend more money as a result. This is wishful thinking at best.

Even though the Fed has lowered interest rates to nothing and has effectively provided the big banks with free money, this has not been passed on to the consumer. Interest rates on credit cards were 14.55% in 2005 and in May 2010 they were 14.48% (see: http://www.federalreserve.gov/releases/g19/Current). Banks have not lowered their interest rates in response to the Fed's recent actions, but have pocketed the difference. This has been the major reason that they have been reporting such huge profits. It is naive to think that they are going to change their behavior.

Disconnects between markets and the underlying economy have happened many times. They don't last forever however. The two eventually have to meet. Either the economy improves to justify market pricing or market prices decline to meet the economy. The tech bubble at the end of the 1990s and the more recent real estate bubble were good excellent examples of this. Pricing that is too high will come back down to earth and the correction can last for years. Government attempts to try to hold up the market, as has happened with real estate prices, don't prevent the inevitable, they merely delay it. The current disconnect with stock prices and the economy will also self-correct and may do so suddenly. The only question is when it will occur.


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.

Less Credit and Income = More Consumer Spending?

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 of June, consumer borrowing has now dropped 16 out of the last 17 months. Credit Card debt has fallen 21 months in a row. The personal savings rate in June rose to 6.4% from 2.1% before the recession began. Wages and Salaries are down 3.6% in the last two and half years. Despite decreased credit and income and increased savings, all three of which are negatives for consumer spending, GDP figures claim American consumers are buying more.

U.S. GDP growth has been fueled by consumer borrowing for many years. Consumer credit grew faster than GDP before the Credit Crisis hit, but is now moving in reverse.  June 2010 total credit card debt (revolving credit) has now fallen below the November 2005 level. American consumers over the decades have accumulated far too much debt and deleveraging is a trend that is likely to go on for many years. This is certainly a negative for an economy that has been built on consumer spending. Even with consumer credit staying steady, it would be hard for the GDP to rise.

The reduction in consumer borrowing is not a voluntary process. The big banks are cutting credit limits, cancelling cards and demanding pay downs. Consumers are choosing to save more though. The savings rate was only 2.1% in 2007. Then it was 4.1% in 2008 and 5.9% in 2009. It was 6.0% or over each month of the second quarter of 2010. More savings means less consumer spending and this trend is likely to continue as long as consumers feel insecure about the economy.

According to the BEA (Bureau of Economic Analysis), wages and salaries of U.S. workers have declined only 3.6% since the first quarter of 2008. This small drop is really surprising considering the unemployment rate was 5.0% in December 2007 and was 9.5% in July 2010. More government jobs and government subsidized jobs prevented this number from being much worse.

Even more amazing, total personal income actually increased by 1.5% during this time. How is this possible during a recession?  Examining the figures indicates that there was a 27% increase in 'Government Social Benefits to Persons' in the last nine quarters. These various forms of stimulus payments, which are essentially welfare, along with government subsidized employment, were paid for by the approximately $3.5 trillion in deficit spending in 2008, 2009, and 2010. This has been the major source of funds for consumer spending recently.

So even though consumers have been borrowing less, the government has been borrowing more and giving the money to consumers to spend (or at least to some consumers). This is equivalent to the 'bread and circus' of Roman times. It is not a sustainable model for economic growth. Nor is it even honest to claim that this is actually economic growth. We don't exactly live in an age of financial honesty however - and that is another trend that can be expected to continue.

Some of the data for this article can be found at: http://www.bea.gov/national/nipaweb/TableView.aspSelectedTable=58&Freq=Qtr&FirstYear=2008&LastYear=2010).

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

July Payroll Report Marks 3 Years of Job Losses

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. lost 131,000 thousand jobs in July. It has now been three years since the first job losses appeared in August 2007. Despite over three trillion dollars in government deficit spending since then, the employment situation has yet to turn around.

While job losses date back to August 2007, they didn't become consistent until 2008 and 2009.  Every month in that two-year period, except November 2009 had a decline in payrolls. Job gains were reported between January and May 2010, with payrolls increasing over 200,000 in March, April and May. The U.S. economy needs to add 200,000 jobs a month just to stay even because of new entrants into the labor force (recently the mainstream media has downgraded this long accepted number to 100,000 in an effort to make things look better). Unfortunately, most of those jobs added in the spring were part-time temporary Census positions and now those people are being fired, so job losses have returned. There was a loss of 221,000 jobs in June - revised downward from the originally reported loss of 125,000.

The BLS (Bureau of Labor Statistics) reported this month that the private sector added 71,000 jobs. Only three sectors accounted for most of these 'gains' - Health Care, Motor Vehicles, and Transportation and Warehousing. Health care and Social Assistance added 27,000 jobs. Health care has been the only sector to continually add jobs during the downturn. Government and Education were the other two categories that frequently added jobs. Education and Health Care jobs mostly come from the government or are paid through government programs and should not be considered private sector. Motor Vehicles gained 21,000 jobs through the magic of seasonal adjustments, not by actually hiring more workers. Transportation and Warehousing added 12,000 jobs.

The headline unemployment rate (U-3) for July was reported as 9.5%. This compares to 4.6% rate in August 2007. Including forced part-time workers and some discouraged workers (U-6), sometimes referred to as the underemployment rate, the July 2010 rate was 16.5%. The reported unemployment rate would have been much worse if close to a million people didn't supposedly leave the U.S. labor force in May and June of this year. This was a truly amazing finding considering as many as 6.6 million American students graduated from high school and college in those two months. While all of them didn't enter the labor force, most of them that did were without jobs when they graduated. Where are they in the statistics?

The U.S. labor situation began to deteriorate three years ago. Since that time, trillions were spent in bailouts, there has been approximately $3.5 trillion in federal deficit spending, and the Fed has kept interest rates as zero percent starting in December 2008. The public was promised over and over again that each program would make things better. The stock market has rallied on that good news over and over again. Empty promises and fantasy statistics will only work for so long however. At some point we will find out for just how long.

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.

The Curious Case of Copper and Its Compatriots

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 traders are scratching their heads about how the stock market can continue to go up while the economic news continues to get worse, they also should be puzzled over the sharp rise in copper and other industrial metals in recent weeks. These metals move with building and manufacturing activity and a rise in their prices is not just an indication of an improving economy, but is also an indication of inflation - not the deflation that the Fed and its friends have been worrying about lately.

The base metals, copper, aluminum, nickel, zinc and lead, all bottomed in early June. They mounted lackluster rallies into the middle of July. Their rallies went into overdrive after Fed Chair Bernanke testified before congress that it might be years before the U.S. economy fully recovers. Stocks also mounted a significant rally on this gloomy news, which followed a host of economic reports with falling numbers that came in below expectations. Leading indicators had also turned down and were pointing toward an impending recession. Stocks and industrial metals should have tanked, but instead rallied strongly on the news. Only a lot of liquidity flowing into the financial system at that point could make something like this happen.

When trying to analyze the metals markets, the first place to look is China, the primary driver of demand. In June, China imported 212,000 metric tons (tonnes) of copper, 67,000 tonnes less than in May and a drop of 44% year over year. Moreover, projections came out for Chinese demand growth to ease for the industrial metals in the second half of the year. Then the HSBC Purchasing Managers Index for July came in below 50, indicating a decline in Chinese manufacturing. So far, none of this news has stopped the rally.

So if the news from China is bearish, the next place to look is the U.S. dollar. All commodities are priced in dollars and are affected by swings in the currency. The U.S. dollar peaked in early June at the same time that the industrial commodities bottomed. It has since lost about 10% of its value. However, much of this loss took place before Bernanke's congressional testimony and much of the base metal rally took place after. The metals rally has also been too big to be accounted for by the drop in the dollar alone. From the June low to the high of August 4th, Copper (JJC) rose 25%, Nickel (JJN) 24%, Aluminum (JJU) 23% and Lead (LD) 46%.

So we are left with a picture of strongly rallying stocks, even more strongly rallying industrial metals and lots of evidence of an economy falling apart. Has this situation ever existed before?  Indeed it has plenty of times in world financial history. This is what happens when there's massive inflation. It ruins the economy, but makes the prices of assets go up because people want to get rid of their currency. Yet the economic elites are currently worried about deflation and not inflation. Well, that's also happened before as well. In 1920s Weimar Germany, economists even managed to prove definitively that deflation existed and that inflation was not a worry, so it was OK for the government to print all the money it wanted to. Of course, after inflation reached a trillion percent, many people became skeptical.

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.

Global Wheat Supply Threatened by Weather

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 worst drought in 130 years has destroyed at least a fifth of the current Russian wheat crop and threatens much bigger damage to the winter wheat crop if the weather doesn't change soon. Only a bumper crop in the U.S. has prevented wheat prices from really going through the roof.

Russia is generally the fourth largest wheat producer in the world. Along with the former USSR member states of the Ukraine and Kazakhstan, it would be a close second to top producer China. Unfortunately, the Ukraine and Kazakhstan are also affected by drought. Ironically, the world's second largest wheat exporter, Canada, had the opposite problem of excessive rains this year and the wheat crop there is expected to be 35% below normal.  

Investors shouldn't confuse production and exports for food commodities. China and India are usually the two largest producers of wheat, but because of their huge populations, they can also be importers as well. It is the United States, the third largest producer, that is the biggest exporter of wheat and it generally accounts for 20% to 30% of the global total. The U.S., Canada, Australia, the EU-27 and Russia-Ukraine-Kazakhstan together usually supply around 90% of the wheat to the export market. France is the major source of wheat from the EU, with Germany being a distant second. Expect major wheat importing regions- North Africa and the Middle East, East and South Asia, and South America - to feel any production shortfall.

The USDA had projected a billion bushel surplus from this year's U.S. wheat harvest. Without this, global supplies would be severely strained. Nevertheless, wheat is rallying strongly with prices at the Chicago Board of Trade up 42 percent in July, the biggest monthly rally in 50 years. Wheat prices broke above $7 a bushel there on Tuesday. At the Kansas City Board of Trade, hard red winter wheat prices were at a 13-month closing high of $6.85 a bushel. This is still a far cry from the all-time high of $13.84 a bushel in 2008 however.

ETFs/ETNs that can be used to invest in wheat on the long side are GRU (around 50% wheat), JJG (around 30% wheat) and DBA (25% wheat) in the United States and WEAT and LWEA (200% leveraged) in the UK. Investors may wish to wait until there is a pullback though since wheat looks extremely overbought at the moment.

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.

Consumer Confidence Still Worse Than Last 4 Recessions

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.


Fed Chair Ben Bernanke said yesterday that he expected a recovery in consuming spending. Media headlines blared the good news and stocks rallied. The details of 'sometime in the next several quarters' got lost in the shuffle however. Nor did the media report that Bernanke has rarely made a prediction that has turned out to be correct.

An examination of where consumers are now compared to previous recessions can help shed some light on any impending consumer recovery. The Conference Board's consumer confidence number was 50.4 in July. The highest number in the 'recovery' so far was 63.30 this May. The number 90 is used as the dividing line between a lackluster and healthy economy. U.S. consumers haven't registered confidence levels anywhere near that level since December 2007 when the recession began. Confidence was 90.6 that month and then fell and has remained below 90 since that time.

Consumer confidence behaved differently before the 1990/91 recession than afterwards as is the case for a host of economic data. It was after 1990/91 recession when the first 'jobless recovery' took place. Prior to that time, unemployment bottomed during the same quarter that GDP bottomed. Only after U.S. government statisticians started making 'adjustments' to how the economic numbers were calculated in the 1980s, did such impossibilities as 'jobless recoveries' (an oxymoron if ever there was one) start to occur. Consumer confidence is affected by unemployment, so the confidence numbers would reasonably be expected to begin to lag the official recession dates as well.

The two recessions before the 1990/91 recession took place between January 1980 and July 1980 and July 1981 and November 1982. Consumer confidence bottomed in May 1980 at 50.10 (almost the same as the current value) right in the middle of the 1980 recession. The low number for the 1981/82 recession was 54.30 in October 1982, just before the recession's end. The worse point for consumer confidence in the 1982 recession was better than the July 2010 reading. The recovery we are supposed to be in now wouldn't have been recognized in the 1980s.

The 1990/91 recession took place from July 1990 to March 1991. During that period, the low point in consumer confidence was 55.10 in January 1991. That wasn't the ultimate low however. That was 47.30 in February 2002 - eleven months after the recession officially ended. A slow to improve employment picture kept consumers in a subdued state.

The 2001 recession was unique in that it was the only recession in history where consumer spending didn't decline. Since consumer spending accounts for around 70% of U.S. GDP, it is very difficult for a recession to take place at all is there isn't a drop in consumer spending. During the official dates of the recession, March 2001 to November 2001, the low point in consumer confidence was an amazingly high 84.90 in November. The ultimate low was 64.30 in March 2003 -relatively good for a recession bottom. The low point for the 2001 recession is almost the high point that we have experienced in the current recovery.

Recently, the low point in consumer confidence was 25.30 in February 2009. That is not just the bottom for the current recession, but the all-time low (the all-time high was 144.70 in 2000). After committing trillions of dollars for bailouts, $3 trillion in federal deficit spending in the last two years, and zero interest rates since December 2008, we have now managed to achieve a consumer confidence number that is worse than or around the low point for the last four recessions. From the consumer's perspective, government efforts to handle the current downturn look like the most expensive failure in history.

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.