Friday, January 29, 2010

U.S. 4th Quarter GDP - Slower Decline Leads to Growth

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.


Only in the magic world of economic statistics can a slower rate of decline be declared as growth. It was just this sort of Alice in Wonderland logic that led to the U.S. government declaring that its fourth quarter GDP grew at a 5.7% annual rate.  This number didn't result from actual economic growth per se, but from a slower rate of decline of inventories. While the 4th quarter GDP numbers are being used as 'proof' that the recession is over, the average American is likely to remain skeptical preferring a more reality-based criteria.

Inventory numbers that were falling at a slower rate acccounted for approximately 3.4% of the 5.7% GDP growth at the end of 2009. There has been a decrease in inventories for seven quarters in a row. Private businesses decreased inventories $33.5 billion in the fourth quarter, following a bigger decrease of $139.2 billion in the third quarter and an even bigger decrease of $160.2 billion in the second. While this number series looks like continuing economic decline, the Bureau of Economic Analysis (BEA) considers it growth because each drop is less than the previous one. If the American economy was actually healthy, inventories would be steadily increasing. Of course, they probably will have an increase in the next quarter or two. This will not necessarily mean the economy has turned the corner, it will mean that inventories can't go to zero.  

Other highlights from the report include a 2.9% increase in real nonresidential fixed investment, despite a decline of 15.4% in nonresidential structures. This was offset by a 13.3% increase in business equipment and software. One would think based on that number that U.S. business activity was humming along at a breakneck pace. BEA statisticians seem to be the only people who can find evidence of this however. They also calculated that that real residential fixed investment increased by 5.7% (something which had declined 14 quarters in a row prior to the 3rd quarter of 2009 because of weakness in the residential real estate market).

The BEA also found that real exports of goods and services increased 18.1 percent in the fourth quarter, while real imports increased by only 10.5 percent. This would indicate a remarkable improvement in the U.S. trade deficit, which has existed continually since the 1970s. While December trade numbers haven't been released yet, October and November's figures didn't indicate any such rosy development.

In addition to claiming that a decline in the rate inventories are falling represents growth, or that American business is in great shape, or the real estate market is recovering, the BEA also stated that government spending fell in the fourth quarter. Certainly a budget deficit for fiscal year 2010 (which started Oct 1, 2009) that is now estimated at $1.35 trillion seems to indicate fiscal probity and restraint on Washington's part. It is true that the deficit estimate was recently lowered from $1.5 trillion. Whether or not this is going to be reflected in less actual federal government spending remains to be seen.

The GDP report also stated that real GDP decreased 2.4 percent in 2009 after an increase of 0.4 percent in 2008. Before a multi-decade revision of GDP numbers in July 2009, the BEA had reported an increase of GDP in 2008 closer to 3%, a good growth rate for the American economy. Since it was universally acknowledged that the U.S. was in a severe recession during all of 2008, how could GDP have increased since a recession indicates negative growth? It's enough to make you wonder if U.S. GDP is being overstated by three to six percent.
 
Disclosure: None

NEXT: The 2011 U.S. Budget - Inflationary and Out of Control

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

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

Thursday, January 28, 2010

The Twilight of Ben Bernanke

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 survived the U.S. Senate vote for his reappointment, but it was touch and go for a while. The vote was 70 to 30 - an unprecedented lack of support for a sitting head of the Federal Open Market Committee. The previous lowest level of support was for Paul Volcker in 1983. His vote was 84 to 16, much better than Bernanke's. Volcker failed to get support for another nomination however. He was out in the next term. Bernanke will be lucky if he lasts even that long.

Opposition to Bernanke first arose in the blogosphere and then spread through the politically activist communities on both the Left and the Right. Even with that, the senate might still have engaged in its usual rubber stamp support for the president's nominee for Fed Chair.  The surprise upset in the Massachusetts special election for Ted Kennedy's seat indicated how angry the public was about the handling of the economy and that no senator could expect automatic voter support this fall. The one-third of senators up for reelection in November seemed particularly reluctant to support Bernanke. The White House had to get involved to salvage Bernanke's nomination. Without pressure from the president and congressional leadership, he might have gone under.

The government PR machine has been trying to turn Bernanke's first term at the head of the Fed from the fiasco it has been into a great triumph. They came up with the tag line that 'he saved the U.S. from another depression'. Obama and a number of Democratic leaders repeated this outrageous claim over and over again. There is only limited proof that this might be the case. The U.S. economy still faces a depression or at the very least an ongoing recessionary period that could last for years. The White House and the Fed may indeed be oblivious to this idea, since they both seem to believe their own press releases rather than the hard evidence that indicates otherwise. In truth, Bernanke is one of the most incompetent leaders the Fed has ever had. He failed to see the Credit Crisis coming, he failed to react quickly when it did, and when he did he took questionable actions that benefited Wall Street at the expense of Main Street. Bernanke's associates, Tim Geithner and Henry Paulson, the current and former Treasury Secretaries, also claim they did a great job handling the Credit Crisis and that they too saved the U.S. from another depression.

Why Obama submitted Bernanke's name for reappointment is indeed a mystery - at least if you believe his rhetoric about 'change you can believe in'. Bernanke was originally appointed by George Bush and is a Republican. Obama constantly complains about the big mess with the economy that George Bush left him to untangle. Yet, Obama renominates, with obsequious praise, the key architect of the Bush economy. Did he even look for someone else to fill the position?  My guess is he didn't. The rap about why senators should support Bernanke has included 'no one else would probably have done a better job handling the Credit Crisis' (an indirect admission that Bernanke didn't perform well) and 'someone else wouldn't be much different as Fed Chair'. While Washington is willing to accept mediocrity and substandard performance in top government positions, the American public seems to finally be getting fed up with Beltway incompetence.

Bernanke's loss of power is not just due to his poor handling of the economy and financial system. He is a complete contrast to the politically savvy Alan Greenspan, who survived for 19 years as Fed Chair, through both Republican and Democratic administrations. Bernanke seems to be politically tone-deaf. The Fed's actions at this month's meeting, which ended on Wednesday, included an announcement that it was closing down a number of its programs that provide liquidity to the system. Stocks gyrated wildly after the announcement and the market could easily have gone into a tailspin. Not exactly a wise move for a Fed Chair ever and particularly not smart the day before a vote for renomination where senators are looking for a reason not to support you.

Bernanke also seems to have confused the idea that the Fed should be independent with the Fed should be above the law. This imperial view does not sit well with the American public. Bernanke's renomination will only further empower the forces that want to audit the Fed and reign it in. From now on, he is Barack Obama's Fed Chair and not George Bush's. Bernanke's reappointment is likely to be one more decision that president Obama will regret having made. And if he doesn't, the voters will probably make sure he does.

Disclosure: None.
NEXT: U.S. 4th Quarter GDP - Slower Decline Leads to Growth


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 State of the Union for Investors


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.


We live in extraordinary times. The U.S. economy is at risk of veering toward a multi-year depressionary state or experiencing a massive bout of inflation. Based on president Obama's State of the Union address last night, investors should still be worrying about both possibilities.

The impact of the global Credit Crisis that began in 2007 has been deep and prolonged so far. It was met with extraordinary government action in terms of spending and in pumping liquidity into the financial system - both of which are inflationary in the long-term. Despite these efforts, economic recovery in the U.S. has been tepid and elusive so far. This has not stopped our leadership from taking credit for 'saving us from another depression' despite the lack of evidence to support this view. On a number of economic fronts, the situation has continued to deteriorate, but Washington continues to congratulate itself on its great performance. The State of the Union address with its almost uninterrupted applause for a long litany of meaningless political platitudes provides the perfect picture of just how out of touch Washington is and how oblivious they are to their record of failure.

In his speech last night, president Obama emphasized that jobs creation would be the focus of his administration this year. For those with short memories, this was also stated as the prime focus of the White House in January 2009. The U.S. unemployment rate was 7.2% at that time and the claim was that if congress didn't pass the proposed $845 billion stimulus package, unemployment would reach double digits by the end of the year. Democrats said they emphasized government spending over tax relief in the bill because that was the best and fastest way to create jobs. Well, congress passed Obama's package, really a massive giveaway to a number of special interests, and the unemployment rate was 10.0% at the end of the year.  Based on their own criteria, the White House's 2009 attempt at job creation was a complete failure and a big waste of taxpayer dollars. For some reason this wasn't mentioned in the president's upbeat speech.

By this point, I don't think anyone should expect an honest appraisal from the White House on any aspect of the administration's performance. Obama made a number of negative references in his speech to the much derided Wall Street bailout program, TARP. He stated that it was "about as popular as a root canal" and it was something which "I hated". What was left unstated was that while he was a presidential candidate Obama made phone calls to round up Democratic support for the bill and this was instrumental in passing it and one of the first acts of his administration in 2009 was to get congress to release the second $350 billion allocated in the bill so it could be spent. Imagine what he would have done if he had liked TARP.

Deficit reduction was another item highlighted in the State of the Union speech. Perhaps this was meant as the comic relief - I don't know. Apparently this will start in the 2011 budget. Obama stated that he had already found $20 billion in inefficient programs in next year's budget and would pore over it "line by line" to find even more. The 2011 budget hasn't been released yet, but the budget deficit for the 2010 budget (starting on October 1, 2009) is now estimated to be $1.35 trillion. A savings of $20 billion would reduce the current deficit by less than 1.5% and lower it to only $1.33 trillion. Doesn't exactly look like a big dent in profligate government spending does it?  While this is completely meaningless, Obama also claimed that if his health care program was passed it would result in a trillion dollar reduction in the budget deficit (over a many year period, but that wasn't emphasized). A big spending government program leading to deficit reduction?  Yeah, that can happen. Any investor who believes this should stop investing immediately because you are probably buying stock in the Brooklyn Bridge.

Despite the claims coming from Washington, the recession is not over. The White House, congress, and even the Federal Reserve seem incapable of recognizing this because it would be an admission of failure on their part. At some point it will be recognized however because the American public will insist on it (the message from the surprise upset in the Massachusetts senate race seems to have eluded the White House so far). Modern democracies will always eventually err on the side of more government spending. As we have seen in the last year, this doesn't necessarily solve the problem of a bad economy and thus it is still possible for an intractable depression to take hold. Too much government spending does eventually lead to the problem of excessive government debt though and at some point the debt becomes so high that it is impossible to pay off. That's when intractable inflation shows up. Historically, the worst economic disasters take place when government is most oblivious to these unfolding problems. In that case, Americans have a lot to worry about. President Obama stated more than once in his speech last night "I don't quit". Based on his first year in office, he should have said, "I don't listen".

Disclosure: Not applicable.

NEXT: The Twilight of Ben Bernanke

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

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

Wednesday, January 27, 2010

Home Sales Fall Expectedly


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. home sales figures for December were out this week. Existing Home Sales fell 16.7% and New Home Sales fell 7.6%. The mainstream media reported the numbers as a surprise. There was nothing surprising about them at all. The U.S. real estate market was being propped up with special government tax credits and when it looked like those credits would disappear at the end of November, homebuyers disappeared with them.

The federal government's tax credit for homebuyers, originally only for new buyers, was renewed until next spring and extended to include people who already own homes. People shopping for homes didn't know that this would happen though, so they rushed to buy before the original November 30th deadline. It looks like the credit accelerated already intended purchasers, rather than actually creating new ones. Existing Home Sales figures started rising in April 2009 (there was a dip in August) and then they fell apart in December after the intended tax expiration date. The drop in Existing Home Sales was the largest in over 40 years.

The U.S. government has instituted a number of programs other than tax credits to directly or indirectly prop up the housing market. HERA - the Housing and Economic Recovery Act of 2008 - resulted in a purchase of an estimated $220 billion in mortgage backed securities by the Treasury Department and is the vehicle for keeping Fannie Mae and Freddie Mac afloat.  The feds provided $300 billion to the FHA for its 'Hope for Homeowners' program. The legislation was signed into law in July 2008 and was considered the solution to stabilizing the housing market; apparently hope was all that was delivered however. The Obama administration's 'Making Home Affordable' program from early 2009 was intended to offer assistance to seven to nine million homeowners with loan modification to prevent foreclosure. How successful have these programs been? New Home Sales fell 22.9% to 374,000 units in 2009 - a record low (sales were at a 1.4 million annual rate in October 2005). So far, foreclosures have hit a record 237,052 in the third quarter of 2009. Figures for the fourth quarter haven't been released yet.

Instead of spending huge amounts of taxpayer money to support the housing industry, it would be best to let prices adjust to realistic market levels.  It was government programs that created the housing bubble in the first place, which in turn led to the Credit Crisis. Home prices went to unsustainable levels based on historical trends. They need to come back down to those trend levels before the market can start a true recovery. Until that happens, the market will have to have continual government money pumped into it to keep sales and prices up. Even then, the housing situation can continue to deteriorate - and it shouldn't be unexpected when it does.

Disclosure: None

NEXT: The State of the Union for Investors

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

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

Tuesday, January 26, 2010

Consumers Lack Confidence, They Also Lack Credit


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.


Before the Credit Crisis began, consumer spending made up 72% of U.S. GDP.  The current economic numbers indicate that there is little chance that this part of the economy will be recovering any time soon. Consumers have neither the desire to spend, nor the availability of funds to make it possible.

The Conference Board's consumer confidence numbers for January came in at 55.9. The historic average is 95 and somewhere around 90 is considered the dividing point between bad and good. While it is true that the current number is better than the depression level all-time low of 25.3 in February 2009, the readings have been range bound between around 50 since last June. The numbers indicate quite clearly that consumers are in no mood to shop. Even if they were, where would they get the money? 

The dismal job picture with 10% unemployment (not including discouraged workers and people forced to work part-time, which brings the U.S. unemployment number to the 17% to 20% level) is only one reason that consumers won't spend. The latest figures from November 2009 indicate that consumer credit was falling at an 8.5% annual rate. Revolving credit (much of which is credit card debt) was falling at an 18.5% annual rate. The big banks that took TARP money with the understanding that they would increase lending have increasingly cut consumers off.

The lack of consumer spending would have had more serious impact on U.S. GDP figures if large increases in government spending hadn't taken up the slack. Government subsidies have held up the housing and the auto markets, but this is completely artificial and produces only an illusion of economic recovery, rather than the real thing. Investors should keep in mind that no sustainable U.S. economic recovery is possible without the participation of the consumer. Otherwise, no matter how good the GDP numbers are in any given quarter, the improvement will only be temporary.

Disclosure: None

NEXT: Home Sales Fall Expectedly

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, January 25, 2010

The Case Against Reappointing Ben Bernanke


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.


Economics is one of the few professions where incompetence is regularly rewarded. The attempt to keep Ben Bernanke as head of the Federal Reserve for a second term is one of the most glaring examples of this practice - and one that will have serious negative repercussions for the United States going forward.

When president Obama announced that he was reappointing Bernanke last August, the reason he gave was that 'Bernanke prevented another depression'. This sound bite has been mindlessly repeated by politicians - senate leader Harry Reid most recently - and economically challenged media commentators ever since. Until the U.S. economy returns to its pre-Credit Crisis state, we will not know whether or not that we have been saved from another depression. There is more than enough evidence to indicate that we haven't been - double digit unemployment, bank loan portfolios that continue to deteriorate, rising bankruptcies and bank failures, lack of lending by the banks, and a housing market that only functions because of numerous government programs that prop it up are just a few reasons why this claim is wrong. Obama would not be the first U.S. president to prematurely call the end to a depression, Herbert Hoover did so in June 1930 when he told the press that the Great Depression was over - it was almost three years before the bottom and at least another decade before that was indeed the case.

One thing that will be pointed to as evidence of recovery will be good GDP numbers later this week - estimates are as high as 6% annualized growth for the fourth quarter of 2009.  If GDP numbers were calculated in a way that measured actual economic growth this would indeed be encouraging. Unfortunately, they are not. U.S. GDP figures for 2008 were positive even though it is universally recognized that the U.S. was in a severe recession the entire year - this is a theoretical impossibility, yet no one talks about it. The lesson of Japan in the 1990s and 2000s warns against using GDP figures as evidence that an economic crisis is over. Japan had quarters of over 10% annualized GDP growth. They were 'saved' from a depression as many as seven times (depends on how you count) in the last two decades. Their economy has nevertheless continued a long, slow leak since 1990 and bigger problems are likely in the next decade, which will be the third one after their crisis began. In reality, Japan extended its depression over a very long period of time; none of its government's actions prevented it.

The defect in the 'saving from depression' argument is an implicit assumption that the economy has two states like a light switch, on and off, instead of an infinite number of possible outcomes. Many of those outcomes involve inflation and hyperinflation. There is no discussion of the negative consequences of Bernanke's actions among his supporters - and all economic policy actions have side effects, many of which can be extremely undesirable. Bernanke himself wrote his PhD thesis on Fed policy errors during the 1930s and demonstrated that restrictive Fed monetary policy led to the debacle. He also came to the conclusion that doing the opposite would fix the problem. If the economy was as simple as a light switch it would. In a complex system, this is not the case. Doing the opposite may simply lead to a different disastrous outcome.

Bernanke also didn't show understanding of the impending problems within the financial system, nor did he react quickly. As late as June 2007, Bernanke was assuring people that there would be no problem with subprime loans. In July the problem blew up. As late as the spring of 2008, the Fed was releasing statements that they were hopeful they would still be able to prevent a recession. The recession had already begun in December 2007, but the Fed was unaware of it. In September 2008, Lehman was allowed to fail with the subsequent excuse being given that no one was interested in buying it. Only days later AIG was nationalized when no one would buy it. The Lehman failure set off a general global financial collapse. Bernanke is now claiming credit from 'saving' the system from this collapse with his quick action. As one commentator astutely observed, this is like an arsonist wanting credit for putting out a fire that he had started.

Bernanke was originally appointed by George Bush and is one of the key economic actors along with the current Treasury secretary Tim Geithner from the Bush administration. While on one hand president Obama constantly criticizes Bush economic policies and how much damage they have caused, on the other he has gone out of his way to keep the Bush economic team mostly in place. This is reminiscent of Obama's newfound criticism of irresponsible giveaways to the big banks. For those who don't recall, the TARP bill originally failed in its first congressional vote. Presidential candidate Obama was instrumental in rounding up enough Democratic votes to get it passed on a second try. Now, Bush deserves the blame.

Bernanke's appointment runs out on January 31st. The slow-moving senate has yet to get around to voting on it. While Bernanke has had his detractors in congress, they became energized after the surprise upset in the Massachusetts special senate election last week that indicated quite clearly that American voters are angry about how the economy has been handled. Senators up for reelection in November (only one-third of the total) particularly began to have second thoughts, as indeed they should. Support for Bernanke may come back to haunt them in the future even more than support for the ill-fated health care bill. Bernanke is almost guaranteed to win the vote to reappoint him however. The White House is leaning heavily on Democratic senators to support him and hoping that the public isn't paying too much attention. Voters tend to notice though when they don't have a job.

Disclosure: None

NEXT: Consumers Lack Confidence, They Also Lack Credit

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

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

Friday, January 22, 2010

As U.S. Banks Deteriorate, Obama Proposes New Regulation


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.


President Obama proposed placing new limits on the size and activities of big U.S. banks on January 21st. The new plan, known as the Volcker Rule, would effectively prevent banks from owning hedge funds and private equity funds and seeks to place curbs on the market share of liabilities for any given firm. It follows last weeks proposed new tax on the big banks to recoup losses from the 2008 bailout. The administration apparently hadn't informed Wall Street about the impending news. The U.S. market was caught off guard and predictably sold off sharply with the banks leading the way. The European and Asian markets sold off in sympathy.

Recent earnings on the big banks have shown that their loan portfolios are continuing to deteriorate. Fourth quarter regional bank earnings confirm that little if any improvement has taken place since the depths of the Credit Crisis. BB&T (BBT) earnings fell 36% last quarter and its provision for credit losses were $725 million versus $197 million in the fourth quarter of 2008. Huntington Bancshares (HBAN) losses on its commercial real estate portfolio were $258 million in the fourth quarter versus $169 million in the third quarter. SunTrust (STI) non-accrued loans are now $5.40 billion, down $42 million from the previous quarter, still very high and barely getting better.

While it is possible something may eventually come from the Obama proposals, investors shouldn't expect that they are a done deal.  In his signature, it's not my job approach, the president appeared to be leaving crucial details for his bank oversight plan to be hashed out by Congress - an institution that is perennially dysfunctional and which is viewed almost universally unfavorably by the American electorate (one recent poll found that only 21% of voters view congress favorably). This is how Obama handled his intended health care reform, which has turned into a giant boondoggle for the administration. Obama has also taken this tack with his proposed consumer protection agency that has gotten caught in partisan wrangling on the Hill. If Obama's intention is to just talk about something, but make sure nothing ever happens, he seems to have found the magic formula.

Obama took office right after the lowest point of the Credit Crisis. Like any new president, he had enormous political capital at that moment, but did very little with it. He was president for a year before he said in his press conference proposing new bank regulation that the banks nearly wrecked the economy by taking "huge, reckless risks in pursuit of quick profits and massive bonuses."  Unfortunately, we are still suffering from the after-effects of the Credit Crisis and this will be the case for some years to come. Mortgage defaults are still a major problem for the banks and a burgeoning commercial loan crisis is now taking place. In 2009, 140 U.S. banks went under, the largest number since the Savings & Loan Crisis. The administration's efforts to handle banking problems so far have been ineffective at best. It would be preferable if the Obama administration solved the current serious problems first rather than concentrating on some distant future situation.

Disclosure: None

NEXT: The Case Against Reappointing Ben Bernanke

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

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

Thursday, January 21, 2010

Trouble in the Euro Zone Boosts Dollar, Lowers Commodities


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 hit a 5-month low against the dollar on January 21st.  It has been selling down since the beginning of December. Troubles with peripheral euro zone debt in Greece, Portugal, Spain and Ireland are damaging the currency and boosting the U.S. dollar. The rising dollar has in turn lowered commodity prices (all commodities are priced in U.S. dollars) and commodity-based currencies such as the Australian and Canadian dollars. A combination of ballooning budget deficits and economic contraction are cited as the cause of these recent moves.

The euro has fallen as low as 1.4045 to the U.S. dollar and has breached its 200-day simple moving average - a technical negative. On the flip side the dollar rose as high as 78.81 and briefly went above its 200-day moving average for the first time since May 2009, but promptly bounced down. No major trend reversals are indicated as of yet for either the U.S. dollar or the euro. It is normal during either an uptrend or downtrend to occasionally come back to the 200-day moving average. To reverse the trend, requires rising above it or falling below it and remaining there so that the 200-day moving average itself reverses direction.

While the commodity-based currencies have sold off, they have barely broken their 50-day moving averages, which are trading well above their 200-days as is typical in strong uptrends. GLD, the major gold ETF, has also traded below its 50-day moving average, but is still far above its 200-day moving average, indicating its strong uptrend is also still in place. JJC, the copper ETF, is in even better shape and hasn't even fallen to its 50-day moving average.  The oil ETF, USO has also violated its 50-day, but is still above its 200-day. January is a seasonally weak month for oil and some selling in the commodity at this point is not out of the ordinary.

The epicenter for the problems in the euro zone is Greece. CDS (credit default swap) insurance against Greek government debt default or restructuring hit an all-time high of 340 basis points. News reports have indicated that Greece's debt to GDP ratio of 120% is behind the move. If this were the whole story, the Japanese yen would have collapsed long ago. The debt to GDP ratio in Japan is at the 200% level. The yen has barely budged, while the euro has sold off. Weakness in the euro zone economy has also been cited, with the PMI manufacturing index for January coming in at 53.6 (above 50 indicates expansion). The same day, the U.S. reported weekly unemployment claims were up 36,000 from the previous week - not exactly an indication of economic strength. To claim that the euro zone economy is in worse shape than the economy in the United States is indeed a stretch. The key difference between Greece, Japan and the U.S. is that Japan and the U.S. can print all the money they want to, whereas Greece because it is part of a currency union cannot.

In the short-term anything is possible in the markets. Manipulation - and central banks are prone to intervene with currency trading - and illusion can sway trading. The long-term trend however is that fiat currencies are all losing their value and this was already evident by the 1970s. Excessive government debt and economic weakness is a global problem shared by almost all the industrialized economies and this will accelerate the multi-decade trend of weakening currencies. Higher prices of hard assets and consumer goods are the consequence of that trend.

Disclosure: Long gold.

NEXT: As U.S. Banks Deteriorate, Obama Proposes New Regulations

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

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

Wednesday, January 20, 2010

Big Bank Earnings Contradict Economic Recovery Claims


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.


In its recent earnings report, JP Morgan revealed that it had a bigger loss in its retail financial services division in the fourth quarter of 2009, than it did at the height of the Credit Crisis in Q4 2008. Bank of America and Citibank earnings reports for last quarter also indicate that their lending and consumer credit operations remain troubled and that a U.S. economic recovery has yet to take place. The banks are only making money from their investment banking operations and this has offset major losses from lending activities - the core business for any bank.

The loss for JP Morgan in its retail financial services division (which includes mortgages) was $399 million in Q4 2009. The bank lost $306 million in its credit card division and this number would have been even worse if there hadn't been a payment holiday during the quarter. JP Morgan's provision for credit losses was $7.28 billion last quarter. Despite the steep losses in its lending arm, JP Morgan still reported earnings of $3.28 billion or 74 cents a share.

Unlike JP Morgan, Bank of America didn't report positive earnings, but said it lost $5.2 billion or 60 cents a share in the fourth quarter. The bank charged off $8.4 billion in bad loans. While this indicates a severely damaged loan portfolio, it was $1.2 billion lower than in the third quarter. Credit Card losses were $1.03 billion and these were much higher than in the fourth quarter of 2008. Investing banking earnings were up and this kept the reported losses from being much worse.

Citibank also reported a loss in the fourth quarter, 33 cents versus a loss of $3.40 a year ago. Its revenue from trading and investment banking was up 5.9%.  There was a loss of $2.33 billion in it local consumer lending operations. As bad as this was, it was still better than the $4.89 billion loss in the fourth quarter of 2008. Net credit losses for the bank were $7.13 billion versus $7.97 billion from a year earlier. Citibank added $706 million to its loan loss reserves.

Earnings for the big banks indicate that the U.S. economy is still in severe recession. Their lending operations are still experiencing massive losses and in some cases these have gotten worse than during the bleakest days of the Credit Crisis. Earnings have been held up through investing banking operations, which in turn have been helped by changes in accounting rules. Illusions can only work for so long for financial companies however. Investors seem to have quickly forgotten what happened to Bear Stearns in 2008. It was about to report positive first quarter earnings before it went under in March of that year. It had an $18 billion funding reserve and claimed it was solvent right up to the end. Even though the company had a reported book value of around $90 dollar a share (the number was slightly different depending on the source), the U.S. government valued it at $2 a share in the takeover its arranged from JP Morgan. Apparently the real numbers can be much worse than the reported ones for U.S. financial firms and investors should keep this in mind.

Disclosure: None

NEXT: Trouble in Euro Zone Boosts Dollar, Lowers Commodities

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

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

Tuesday, January 19, 2010

Lessons for Investors from the Massachusetts U.S. Senate Race


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 markets can be thought of as a daily poll showing support from two competing sides - the bulls and the bears. Election day is the date an investor sells. What is really taking place in the markets or a political campaign is never completely clear because there are always conflicting pieces of data. The losing side will be prone to using the mainstream media to bolster their case and they will always have something to work with, even if they have to produce the supporting numbers themselves. Investors need to sift through the numbers to pull out the most relevant ones and ignore the numbers that are questionable or that are just not that important.

The numbers produced by political polls as well as economic figures constantly confuse people. One reason is that both are subject to manipulation. The best rule for helping to sort out what is going on is 'the trend is your friend'. This rule instantly makes clear what is going on in today's Massachusetts Senate race for Ted Kennedy's old seat.  The Democrat, Martha Coakley started out 30 points ahead in the polls in the fall and has dropped to negative numbers in a number of polls taken just before the election.  While the specific numbers for each poll vary, the trend is unmistakable: Coakley in losing ground fast and her Republican opponent Scott Brown is surging. Nevertheless, the media has had a number of articles trying to downplay this story by finding problems with one poll and talking up another poll (which was usually more error prone than the poll being attacked) with somewhat different results. All this is just noise, just like much of investing coverage is.

The handling of the Massachusetts race also highlights a constant problem with investing - starting from preconceived notions. Massachusetts is one of the most Democratic leaning states in the U.S. Ted Kennedy, and President Kennedy before him, held the senate seat being contested for 56 years. It is quite reasonable to think that a Republican could not win this seat and this was indeed the conventional wisdom right up to the week before the election. The early statistical evidence indicating this could happen was ignored because of unwillingness to consider the alternative. Only when the evidence became overwhelming did it get people's attention. There are times when it can be dangerous to think something has to be one way because it has always been that way. Investors need to be alert for these possibilities. The demise of General Motors, Bear Stearns and Enron are good examples of this. Legions of people insisted that General Motors could never go bankrupt, but it did. Right up to the last week of its existence, Bear Stearns had its cheerleaders telling the public that everything was fine with the company. Enron also had it supporters trying to get investors back into the stock almost to the very end.

Just like in politics, a strongly entrenched bull or bear view can always result in a counterattack against the changing status of an investment. In Massachusetts, the Democrats finally realized an impending loss was imminent in the Senate race. Money and political operatives started flooding into the state from Washington, D.C. President Obama himself came to Massachusetts to try to rouse the base in favor of Coakley. Obama's volunteer lists were tapped and phone banks set up across the U.S. to call into Massachusetts to get Coakley voters to the polls. After being promised a big tax break in the health care bill, big labor has bussed in a number of foot soldiers to work the vote on Election Day. The entrenched interests do not give up easily and investors should always keep this in mind. A counter-trend rally is the best stock market analogy and the price movements of the U.S. dollar have similar underpinnings to the reaction counter-reaction that is taking place in Massachusetts politics.

There is also an important lesson on short versus long-term trends in the Brown Coakley race. With the exception of short-term momentum traders, most investors need to keep the long-term trend in mind. One race for the senate in and of itself represents a short-term event. In context it can have much broader implications. A loss for the Democrats in Massachusetts will follow loses in statewide races in Virginia and New Jersey in 2009. These were downplayed by the pundits as being caused by special circumstances. It will much harder to deny a third loss is not part of a bigger trend (although this will indeed happen, expect the excuse machine to be revved up to full power after the election). In the markets, a major sea change appears to be taking place in long-term U.S. interest rates. They are trying to break a three-decade downtrend. It is likely when this takes place it will be explained away by a number of investing pundits.

The implications for the Brown Coakley race in Massachusetts are very significant for U.S. politics going forward. Obama will be severely depowered by a Coakley loss, both in the short and long-term. The Democratic supermajority in the U.S. Senate will be gone. Republicans will be energized in the November elections and are likely to gain a significant number of House and Senate seats. Investors should pay attention to how the markets react the day after the Senate election and to Obama's State of the Union address on January 27th. The market will tell you what it thinks of this turn of events.

Disclosure: Not applicable

NEXT: Big Bank Earnings Contradict Economic Recovery Claims

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

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

Friday, January 15, 2010

Toothless CFTC Tries to Bite Gold and Silver


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. CFTC (Commodity Futures Trading Commission) announced on January 14th that it was going to investigate trading in the gold and silver markets. This follows the commission's high profile hearings on speculation in the oil and natural gas markets held in the summer of 2009. Those led to the demise of the popular ETF, DXO and caused the natural gas ETF UNG to trade so irregularly that it no longer behaved like an ETF.  Both of these were investment vehicles for the small investor. Big-time speculators went on their merry way untouched and unscathed by the CFTC's action that was supposedly aimed at protecting the public. Anyone who was the least bit cynical might conclude that the CFTC's actual purpose was to protect the profits of the large commercial users of the commodities it regulates.

The CFTC efforts in investing oil and natural gas were in reality a thinly veiled attempt at price controls. Governments almost without exception resort to price controls when inflation becomes a threat. Price controls are of course extremely effective - not in controlling prices, but in creating shortages and driving prices much higher than they would have been if controls hadn't been implemented. Governments never learn however. In the short-term, the CFTC managed to drive natural gas prices to the low levels that were common in the 1990s. Natural gas was already trading at multi-year lows before the CFTC investigations and half of all natural gas rigs in the U.S. had already been shut down. The impact on natural gas was only collateral damage though from the CFTC's real target, which was oil.

Nothing has a greater impact on consumer prices than does oil and governments know that controlling its price is one of the keys to controlling inflation. Around the same time that the U.S. CFTC announced its hearings, the prime minister of England, Gordon Brown, and the president of France, Nicolas Sarkozy made a joint proposal that an international body of government bureaucrats should set the price of oil instead of the free markets. They suggested the price should be kept in the $70 to $80 range. For those who don't recall, Gordon Brown was the British government bureaucrat that sold half the UK's gold for under $300 in 1999 and the early 2000s. Gold has since quadrupled from the price where he sold it, so the UK didn't get that profit. The U.S. dollars that Brown bought from the gold sale then subsequently lost at least 30% of their value. This is the type of market 'genius' that government brings to the table. Would you like to let a government bureaucrat make investing decisions for your 401K?

The CFTC has more ability to impact oil and natural gas than it does gold and silver. ETFs that deal with energy commodities have to do so through some type of futures trading. Oil and natural gas cannot be easily stored as is the case with gold and silver. While there are ETFs for both gold and silver that only trade futures, there are 11 ETFs globally that buy physical gold. None of them store that gold in the United States. They are beyond the reach of the CFTC and the claws of the U.S. government, which for those who don't remember confiscated all of its citizens gold in 1933 and silver in 1934. In aggregate, the gold ETFs have become the sixth largest holder of gold worldwide since the first one was created in March 2003. They hold more gold than China, but less gold than France. In several more years, they could easily have more gold in storage than any central bank.  

Both oil and gold are completely international commodities (natural gas trades in regional markets). If regulation becomes too onerous in the United States, trading can and will shift elsewhere, just as trading in ETFs will shift from those that invest with futures to those that hold physical metal. When the CFTC made its announcement that it would be investigating gold and silver trading, the London Metal Exchange said it would offer clearing for gold over-the-counter (OTC) contracts in London by the second half of 2010. Hong Kong, Singapore, Zurich, Sydney, Tokyo, and Mumbai would probably like to have the trading business too if it leaves the U.S. commodity markets. The CFTC's action is just another government- motivated attempt to prop up the U.S. dollar by trying to hold the price of gold down. It won't work. The CFTC doesn't have the power to make it happen. Prices will eventually have to move to the point that the market dictates, just as they always do. 

Disclosure: Long gold and silver

NEXT: Lessons for Investors from the U.S. Senate Race

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

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

Thursday, January 14, 2010

2009 Retail Sales Deconstructed


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. retail sales for December 2009 were down 0.3%. News outlets reported this as a surprising turn of events. While I am tempted to agree with that viewpoint, it is only because there is enough inflation in the system to make retail sales look better. The retail numbers are not adjusted for price increases and this should always be kept in mind when viewing them. Higher retail numbers don't necessarily mean a better economy.

The Commerce Department reported retail sales were up 5.4% year over year. It would have been almost impossible for them to be lower, since December 2008 was when the Credit Crisis was close to its worse point. Nevertheless, three major retail categories - Electronic and Appliance Stores, Building Materials and Garden Equipment and Supplies, and Furniture and Home Furnishings - had lower sales in December 2009 than they did a year earlier. These three retail sectors are dependent on the health of the real estate market. 

So what went up to improve the numbers?  Gasoline sales rose 34% year over year and by themselves accounted for almost 50% of the total increase in the raw numbers.  This is pure inflation. It is not likely that actual gasoline use is up, especially with the Cash for Clunkers program having subsidized more fuel-efficient vehicles for American motorists.  Sales for Motor Vehicle and Parts Dealers were up 6% from 2008 and this accounted for another 19% of the increase in the yearly total. Government bailouts and stimulus programs are responsible for this increase. If you removed the inflation factor, and gasoline sales represent  only some of the inflation that might be in the numbers, and government programs that directly created higher sales, how much improvement would there have been?  Not much and there may have been none at all - so much for economic recovery.

There was one other important piece of information in the report for December that has significant ramifications. Sales at non-store retailers were up over 10% in 2009. Shifting of buying to the Internet is a strong negative for retailers doing business in physical stores, which are still struggling because of the economic downturn. This indicates that commercial lending, currently one of the major weak points in the U.S. banking system, will be even more troubled than it would have been from just the recession alone. Investors should assume more bailout money will be needed and this problem will go on longer than anticipated. However, as the retail sales report shows, government money can prop up an ailing sector of the economy, can make the economic numbers look better, and can create inflation, but it can't necessarily buy a recovery.

Disclosure: Not applicable.

NEXT: Toothless CFTC Tries to Bite Gold and Silver

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

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

Wednesday, January 13, 2010

A China in a Bull's Shop


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 its own stock markets closed on January 12th, the PBOC (People's Bank of China) ordered a boost in the yuan reserve requirement ratio for banks by half a percentage point. U.S. stocks immediately sold off on the news, gold dropped $15 in only minutes, and the U.S. dollar also declined. The market viewed this as the beginning of a tightening cycle on the part of the Chinese. While analysts are debating this, it is almost certainly true. Claims that China beginning to tighten monetary policy now will be able to head off future inflation however are grossly overstated and can be put in the category of wishful thinking.

When it comes to bank lending, China has the opposite problem of the United States. Banks in the U.S. have yet to start lending again despite half a dozen support and giveaway programs from the Federal Reserve and Treasury Department that are meant to encourage them to do so. Bank lending in China is surging out of control though. Lending in the first week of 2010 was greater than the entire month of November 2009, which in turn was already strong. Analysts claim that PBOC's move will remove 200 to 300 billion yuan from the banking system. Bank lending in the first week of this year was 600 billion yuan, so the drop in liquidity caused by the new rules represents taking away half a week of lending. That should be about as effective as trying to take down an elephant with a fly swatter.

Only a significant change in monetary policy is going to have any impact on future economic numbers. Central bank interest rates are either zero or close to zero in most major economies. Raising that number half a point, a point, even two points still indicates an easy money policy. Even that is not going to happen in the foreseeable future. China itself uses interest rate hikes to cool down its economy and last did so in 2007. It has yet to start a new tightening cycle. Starting that cycle won't be enough to stop inflation either. Inflation is an insidious phenomenon that takes years to work its way through an economy. There is as much as a four-year lag between a period of easy money and a first peak in the inflation rate. That takes us at least to 2012. In the 1970s U.S., money supply expansion peaked in 1971 and inflation peaked nine years later in 1980. Trying to control inflation after money expansion has occurred doesn't work, unless severe measures are used.

Governments also fail to control inflation because they fail to focus on the cause. In China's cases, they froze their currency at the beginning of the Credit Crisis, so it is extremely undervalued. Keeping a currency at too low an exchange rate is highly inflationary. When inflation shows up in China in the not too distant future, the key to stopping it will be to significantly value the yuan upward. Other measures will prove to be ineffective, but like most government throughout history, China is likely to take the easy way out and avoid taking the necessary steps needed to reduce inflation.

As an interesting aside to China's bank announcement, it should be noted that the yen is selling off against the U.S. dollar. Almost every other currency is rallying against the dollar and some very strongly. It is quite clear that this was part of some central bank maneuver to drive down the yen. The large drop in the price of gold, which took place in minutes on the 12th, also required a large amount of capital backing it. Central banks have that large amount of capital. This ordinarily would have rallied the U.S. dollar strongly, but didn't. Manipulating the gold market is one of the old reliable techniques governments use to support the U.S. currency. Central bank actions rarely impact the markets for too long if there is no fundamental support backing up their moves. When the U.S. stops borrowing and printing money and raises interest rates substantially, real support for the dollar will exist. Until that happens, the long-term downtrend will continually reassert itself.

Disclosure: Long gold.

NEXT: 2009 Retail Sales Deconstructed

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

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

Tuesday, January 12, 2010

The U.S. Dollar in Early 2010 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.


The U.S. trade-weighted dollar began a significant sell off in early March 2009 from the 89.00 level. By November 25th (the day before Thanksgiving), it hit its yearly low at 74.23. Almost as if on schedule, a rally began in December and lasted until the 22nd (right before Christmas). Trading was mostly flat in the first week of 2010, but off the December highs. Gold, which sold off as the dollar rose, rallied strongly in the first trading week of the year. The dollar is struggling and the technical picture now looks negative in the short-term. The December rally did nothing to reverse the intermediate or the long-term downward trend in the dollar. The currency hit its high in the mid-1980s.

The Euro and Swiss franc both peaked the day the dollar bottomed and bottomed the day the dollar peaked. The British pound, which should be a weak currency considering the extensive money printing taking place in the UK, peaked earlier on November 16th and bottomed later on December 29th. The Japanese yen, which rallied strongly starting in early April 2009, peaked on November 30th and bottomed so far on January 7th. The commodity-based currencies the Canadian and Australian dollar behaved somewhat differently. The Australian dollar peaked with the pound, but bottomed with the euro. The Canadian essentially traded flat.

The selling in the yen was sharp and powerful in the first few days of December and had the fingerprints of central bank intervention all over it. Export driven economies in Asia are becoming increasingly desperate to keep their currencies from rising against the dollar since this makes their goods more expensive and hurt their economies. On January 11th alone, at least four Asian central banks - India, South Korea, Singapore and Indonesia - bought U.S. dollars in the currency market. Unlike other currencies, the Chinese yuan doesn't float and this is negatively impacting its Asian neighbors and all other exporters. The Chinese are engaging in jawboning however to try to talk down the dollar. An investment strategist for the Chinese government sovereign wealth fund just commented that the U.S. dollar had bottomed, but the yen should be selling off. He further stated, "China now has a voice in influencing the dollar's exchange rate and the interest rate on U.S. government debt." For some reason, a laugh track didn't accompany the Internet postings of this news.

It is not surprising that the U.S. dollar rallied in December, even if the cause was central bank intervention. No asset, no matter how weak, can drop in price every day. There are always counter rallies, just as there are counter sell offs for assets that are going up most of the time. The underlying problem with the U.S. dollar is irresponsible monetary and fiscal policy. Until these are corrected, and it looks like they will only be getting worse for the next several years, a sustainable rally in the dollar against hard-assets is not possible. Central banks can intervene all they want, but the results will only be temporary. It should be kept in mind that exchange rates in and of themselves are not the only thing that is important. We are in an era when all fiat currencies globally are losing their value against gold. Unless something is done to stop this, paper money will eventually get to its intrinsic value, which is zero.
 
Disclosure: Long gold.

NEXT: A China in a Bull's Shop

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, January 11, 2010

Sun Shines on Solar Stocks in Early 2010 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.


Some of the biggest gainers in the beginning of 2010 were solar stocks. While the rest of the stock market rallied starting in March 2009, these stocks were left behind. Some solar stocks are still not that far off their  lows, so they are long overdue for a bounce. Solar power ETFs, TAN and KWT, were up 10.0% and 9.9% respectively in the first week of trading. Many individual stocks were up much more, with the biggest gainer being SolarFun Power (SOLF) - up 32%. This powerful first week rally is justified if you think energy prices are going up in the long run or that inflation is in our future because of all the government money printing taking place globally.

The news has also been good for the solar sector recently. On January 8th, private company eSolar signed an agreement with China to build a series of solar thermal power plants with a 2000-megawatt capacity. Last September, First Solar (FSLR) also inked a contract with China to build an equally large photovoltaic plant. JA Solar Holdings (JASO) helped wake the sector up in December when it announced that it expected its 2010 product shipments to increase 50% in 2010.

As a young industry, solar will be prone to consolidation. This energy source is still not economically viable without government subsidies and support. These are likely to continue however until rising oil prices turn solar into a self-sustaining industry. While the risk of bankruptcy was at its height in the fall of 2008, it is still a good idea for intermediate to longer-term investors to weed out stocks that might face a liquidity crunch. Running out of cash is the biggest risk for insolvency. To avoid this, look for stocks with a Current Ratio (short-term assets divided by short-term liabilities) greater than 2.0 and keep an eye on this number. Solar industry stocks that met this standard at the end of 2009 are:  Ascent Solar Technologies (ASTI), Energy Conversion Devices (ENER), Evergreen Solar (ESLR), First Solar (FSLR), JA Solar Holdings (JASO), MEMC Electronics (WFR), and SunPower (SPWRA). Solarfun Power (SOLF) is on the cusp.

The solar stocks that performed above average for the sector in the first trading week of 2010 were:

Solarfun Power                    (SOLF)       Up 32%
ReneSola                             (SOL)         Up 21%
Energy Conversion Devices  (ENER)      Up 19%
China Sunergy                     (CSUN)      Up  19%
Evergreen Solar                   (ESLR)       Up  19%
JA Solar Holdings                (JASO)       Up  16%
Yingli Green Energy             (YGE)         Up  14%
Ascent Solar Technologies   (ASTI)        Up  14%
LDK Solar                          ( LDK)        Up 14%
Canadian Solar                    (CSIQ)       Up  13%
Trina Solar                           (TSL)         Up  13%

Except for momentum traders with very short-term trading horizons, it is generally not a good idea to chase performance. Pullbacks almost always take place after a good rally. Investors interested in the sector should wait for these and take advantage of them.

Disclosure: Long ASTI, ENER, ESLR, and WFR.

NEXT: The U.S. Dollar in Early 2010 Trading

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

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

Friday, January 8, 2010

U.S. Employment Numbers Indicate More Stimulus Ahead


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 December 2009 Nonfarm Payroll report (released January 8th) indicated that the U.S. added jobs for the first time since the recession began two years ago. This didn't take place in December however. Payrolls last month fell 85,000 with most of the damage coming from drops in construction and manufacturing. Revisions for past months made by the BLS indicate that the U.S. added 4000 jobs in November, instead of the 11,000 loss initially reported. At the same time that 15,000 extra jobs appeared in the November totals, 16,000 were subtracted from the October totals. Certainly, some would think this was suspicious.

While the BLS (Bureau of Labor Statistics) may be playing tricks with the numbers to make the U.S. employment situation look better, it is still quite obvious that the overall picture is pretty dismal. The best spin they could put on the recent news was that the drop in the numbers in the fourth quarter of 2009 was much less than in the devastating first quarter. This 'we are still falling off a cliff, but at a slower rate' message shouldn't reassure anyone. While it is true that there are less layoffs now than there were a year ago, the numbers literally couldn't have gotten much worse. Looking inside recent U.S. employment reports, it can be seen that large numbers of temporary workers added to payrolls have prevented the job loss numbers from being lower than they would have been otherwise. Another 47,000 temp workers were added in December. People have also been leaving the labor force in large enough numbers to keep the top line unemployment rate at only 10.0%. According to the BLS another 661,000 people supposedly exited the U.S. labor force between November and December 2009. While people who aren't in the labor force obviously don't have jobs, they are not considered unemployed.

There were only three industries that added employees in December. Professional and Business Services added 50,000 employees, but this seems to be mostly temporary workers. Education added 13,000 jobs. Health Care added 22,000 jobs and has been the one perennial bright spot in U.S. employment since the recession began. It has added jobs every month in the last two years. A vibrant health care sector can't be the cornerstone of a healthy economy however. The goods producing sectors are needed for this and they are still hemorrhaging jobs. Another 53,000 jobs were lost in construction and 27,000 in manufacturing in December. The loss of construction jobs is not surprising since other statistical reports indicate that U.S. real estate activity is weak. Reports on Durable Goods and the ISM Manufacturing index though indicate U.S. manufacturing has been doing well for many months. There seems to be a disconnect there.

Unemployment is perhaps the most sticky of political issues and something that politicians watch closely. Their automatic reaction is to spend more money to tackle the problem. First they borrow it, and when the credit lines run out, they print it. The U.S. is already well along in this scenario. Investors can also expect a continuation of the Fed's zero interest rate policy until there are real improvements in the employment numbers. It is estimated that it will take the creation of 200,000 jobs a month to lower the U.S. unemployment rate. December's report indicates that this won't be taking place in the near-term future.

Disclosure: Not applicable.

NEXT: Sun Shines on Solar Stocks in Early 2010 Trading

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

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

Thursday, January 7, 2010

The Fourth Trading Day of 2010 - The Message From the 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.


The first four trading days of the year provide investors with an important message of where the big money is flowing in the market. More investing money gets moved around at the beginning of the year than at any other time. Overall, the picture has been very bullish. U.S. stocks, foreign stocks, emerging market stocks, large cap, mid cap and small cap stocks have all rallied. So have commodities, with inflation sensitive energy and precious metals being particularly strong. Even U.S. government bonds and the U.S. dollar have been relatively flat. How is it possible that almost nothing has gone down?  There is only one way this can happen. The liquidity available for investing purposes is increasing substantially, as has been the case since 2008. The zero or just above interest rate policies of the world's central banks are flooding the global financial system with cash. As long as this continues, global stock markets and commodities should continue to rally.

The major U.S indices were up between 1.4% and 2.7% in the four days since the close of 2009. Nasdaq did the worst and the small-cap Russell 2000 the best. A small cap versus large cap performance difference shouldn't be read into these numbers. The big cap S&P 500 was up 2.4%, doing almost as well as the Russell and the even bigger cap Dow Jones was up little more than the Nasdaq. Of the nine sectors of the market, only two were lower than their last price in 2009 - Utilities and Technology, down
-0.8% and -0.1% (essentially unchanged) respectively. The best three performing sectors were Financials, Energy and Basic Materials up 6.3%, 5.1% and 4.5%. Liquidity should have an outsized impact in these sectors and it looks like it did. Industrials put on a decent enough rally, closing up 3.5% after the first four days of trading. Government statistics indicate that manufacturing is reviving in a number of countries thanks to all the stimulus money being spent globally. Stock prices are reflecting this money pumping effort just as they are likely to reflect the withdrawal of stimulus spending when it takes place.

Stock markets outside the United States outperformed. Developed markets overall did about the same as the S&P 500, while emerging markets did somewhat better, rising 3.3%.  The BRIC markets all did well with Brazil, India and China rising between 3.1% and 3.8%. Russia led the pack though, rallying 6.4% in the beginning four days. Commodity based markets were stronger than others. Australia was up 4.1% and Canada was up 3.3%.

Commodities were up 2.5% - on par with the major U.S. stock indices, but there was a mixed picture inside the group. Silver was one of the stars, rising 7.9%. Light sweet crude oil was up 4.2% and natural gas was up 3.8%. Gold rallied 3.0%. The agricultural commodities were the laggards. The dollar was mostly unchanged during early year trading thanks to remarks by the new Japanese finance minister (an expert in health care issues and not economics by the way) who commented that he wanted the value of the yen to come down. This led to a strong rally of the U.S. dollar against the yen. Without that, the dollar would have been down in early 2010 trading. Long-term U.S. treasuries were mostly unchanged after a sharp drop in price and big gain in interest rates in December. Yields on the 10-year and 30-year were 3.82% and 4.69%  compared to 3.84% and 4.66% at the end of December.

Rallies that take place in early year trading tend to have pullbacks later in January. Investors who want to buy into the sectors that performed the best in the first four trading days should watch for these pull backs and use them as an entry point.  Some rallies are likely to go on longer than others of course. The stock market also tends to have a seasonally weak period in March and April. The current rally has already gone on for ten months and this is a long time to not have had some significant give back in price. Watch interest rates for a hint of when this might happen.

Disclosure: Long gold, silver, and natural gas and short long-term U.S. treasuries.

NEXT: U.S. Employment Figures Indicate More Stimulus Ahead

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

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

Wednesday, January 6, 2010

The Third Trading Day of 2010 - The Message From the 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.


U.S. stocks stalled on the third trading day of 2010, just as they had on the second. The Dow and S&P 500 were barely up, while the Nasdaq and Russell 2000 closed a bit lower. Foreign stocks, including emerging markets didn't do much better, being up only slightly. While stocks went nowhere fast, commodities rallied strongly. Inflation sensitive gold, silver and oil did particularly well. Long-term bonds sold off and interest rates rose. The dollar was down on the day and net down on the year so far.

The stars of the beginning of the year trading have clearly been commodities and commodity related stocks. In the first three days, the best performing industry sectors have been Energy, up 5.3%, and Basic Materials, up 5.0%. The commodity index DJP has risen 3.8%. Metals and energy have led, while agricultural commodities have lagged. Silver was a star among stars, rising 7.7% in three days. Natural gas was up 5.8%. Copper, the most industrially sensitive metal, was up 4.4%. Oil was up 4.1% and gold up 3.7%.

Of the nine major industry sectors that make up the U.S. stock market, the interest rate sensitive Utilities group is the only one down on the year so far. Long-term bonds sold off on the third trading day and the yield on the 30-year treasury is slightly up, while the yield on the 10-year is slightly down. Technology and Consumer Staples are barely up and are clearly not being favored by investors. Consumer Discretionary and Health Care are doing only slightly better. Industrials rallied 2.4% and Financials 4.0% in early trading and are the best performing groups after the two sectors related to commodities.

Investors would be advised to look for opportunities outside the U.S. though. While the S&P 500 was up 2.0%, emerging market stocks were up 3.9% (on a par with commodities). Of the BRIC countries Russia did best, with RSX being up 6.5% and China followed, with FXI rising 5.4%. EWZ, the ETF for Brazilian stocks rallied 4.3%. Indian stocks were up 4.0%, double the amount of the U.S. market. Commodity based economies Australia and Canada had stock market gains of 4.6% and 3.5% respectively, also well ahead of the U.S.

Disclosure: Long gold, silver, and natural gas. Short long-term treasuries.

NEXT: The Fourth Trading Day of 2010 - The Message From the Markets

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.