Wednesday, June 30, 2010

Drop in Shipping Indicates Slowing Global 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.


The Baltic Dry Index, a measure of international shipping rates for dry bulk cargoes, hit new lows for the year on Monday June 28th. The index has dropped sharply in the last month and is indicating that global manufacturing activity is experiencing a major slowdown.

Shipping rates are very dependent on market demand (it takes a long time to build a large ship and to increase the supply of shipping capacity) and will rise and fall sharply in response to it. The Baltic Dry Index (BDIY:IND) is a daily record of costs to ship goods such as building materials, coal, metallic ores and grains. Oil and natural gas are not included in the index. Many of the products that are included are used as inputs somewhere in the manufacturing pipeline.

Shipping activity for 2010 peaked so far on May 26th when the Baltic Dry Index reached 4209. Yesterday, a little more than one month later, the index stood at 2447 - a 42% drop. Until this week, the low for the year had been 2501 on January 25th.  Not only is shipping at a new low for 2010, but the high for this year was less than the high reached on November 23, 2009. On that date the index was 4423 and as of now that was the post Credit Crisis peak. This compares to the all-time high of 11,793. It looks like we won't be reaching that level again anytime soon.

Lower highs and lower lows paint a picture of a weakening trend for shipping. The next key level for investors to watch is 2163. This was the low in activity on September 24, 2009. If the index breaks below this, returns to the incredibly lackluster levels in the spring of 2009 are possible. It is not likely though that we will be returning to the all-time low level of 663 from December 5, 2008. At that time, global economic activity was literally frozen and was at a severe depression level. Even in a fairly steep double dip recession, there should be more shipping activity than that.

Disclosure: None

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

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

Tuesday, June 29, 2010

We are Now Experiencing Global Credit Crisis #2

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 key markers of a crisis in the global financial system are falling U.S. treasury yields and a rising dollar. Interest rates on the two-year treasury hit an all-time low of 0.59% today and the U.S. dollar has already tested its high from the Credit Crisis. Stocks are still well above their lows from that period however.

During the meltdown in the fall of 2008, the U.S. had already been in a recession for approximately nine months before it began. It looks like the U.S. will be heading back into recession once again. The ECRI weekly leading indicators fell to -6.9% for the week of June 18th. They have been below zero for a few weeks now. When they turned negative in 2007, a recession started approximately three months later. If that same time lag holds up this time, the U.S. will be in recession around September. It may be even sooner however.

Consumer Confidence numbers took a nosedive in June according to the Conference Board.  Analysts had expected 62.8 and missed the mark by a mile. The number came in at 52.9, falling almost a full 10 points from May. A level of 90 or above is considered healthy. The Present Situation Index, consumer's view of the current state of the economy, fell to 25.5. Consumers have not had an optimistic view of the economy for quite a long time now. What has caused the recent rise in confidence numbers was a view that the economy was going to get better in the future. U.S. Consumers got this idea from the mainstream media, which repeated it ad nauseum for months and months on end. They have yet to see much evidence of any actual improvement though and it seems they are starting to have their doubts.

During the first credit crisis, stocks were also in collapse mode. They are now just coming off a recent high reached on April 26th. The underpinnings for stocks are progressively weakening however. The Dow and S&P 500 should be giving a bear market trading signal this Friday. Moreover, the Flash Crash on May 6th should also be seen by investors as not as an isolated event, but as a precursor to greater stock market weakness in the future.

What is causing the current difference between the overall market picture in the fall of 2008 and what exists now is that there is a currently much greater support from government spending and central bank policy. The U.S. is running a $1.6 trillion deficit in 2010, compared to around $400 billion in 2008. The Fed only dropped interests rates to zero in December 2008. Stocks have benefited from these low rates since then. One of the many programs implemented during and in the aftermath of the first credit crisis was a 442 billion euro lending program from the ECB. The fiscally weaker countries in the eurozone have become disproportionately dependent on this facility. It is supposed to expire this Thursday and the impact will be devastating if it does. Expect it to be renewed in some way, shape or form.

Central banks during the last credit crisis used every weapon in their arsenal to attack the problems in the global financial system. Governments engaged in massive bailouts and ratcheted up stimulus spending to unprecedented levels. Yet, the problems seem to be returning. What ammunition do they have left to combat a second credit crisis? We should be finding out soon. While the ECR weekly indicators turned down three months before the recession began in 2007, the stock market turned down only two months before the economy did. The stock market just peaked in April, which is two months ago.

Disclosure: None

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

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

Monday, June 28, 2010

G-20 Meeting's Deficit Goals Are Meaningless

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 G-20 met this weekend and set a goal that member countries should cut their deficits in half by 2013. The agreement also calls for G-20 countries to start reducing their deficit to GDP ratio by 2016. Even with such easy to reach targets, success is by no means guaranteed.

For some reason the G-20 recently woke up and realized countries can't continue to forever spend a lot more than their income from tax receipts. Some of them have been doing just this for many decades at this point. The statement released from the meeting said, "Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt."  So at least ten years after the horse has left the corral, the G-20 now wants to close the gait.... but not all the way.

The original proposal for cutting deficits in half was changed from would to should because Japan, the U.S. and India objected. No one actually seems to think that Japan will be able to accomplish this goal. Japan is the most indebted major country on earth with its debt to GDP ratio reaching over 200% this year. Interestingly, the long-term budget projections of the Obama administration are for a deficit of $778 billion for 2013, which would be less than half of the $1.6 trillion projected budget deficit for 2010. The 2013 figure is still almost double the biggest deficit prior to the Credit Crisis however. It also assumes robust GDP growth and minimal inflation during the next few years. Another recession or rising inflation could easily move the U.S. deficit numbers back to well above a trillion dollars. 

European markets were up on the news today and the U.S. market is rallying slightly as well in morning trade. It should be clear to the markets that world leaders are not really serious about reducing government spending. Although, the markets might be worried that even small spending reductions could turn the global economy back down and risk another recession - assuming the first recession actually ended that is.

Disclosure: None

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.

Friday, June 25, 2010

Financial Non-Reform Won't Save 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.


Two years after the global financial meltdown, details of the so-called Financial Reform bill meant to reign in the excesses and abuses of Wall Street have finally been worked out. Former SEC chair Arthur Levitt described the bill as having been "bled dry of every meaningful protection for investors". As the senate was fiddling around with its usual back room deals and sweetheart arrangements for the special interests, evidence of further deterioration of the U.S. economy and global financial system mounted.

U.S. GDP for the first quarter was revised downward again today. Official figures now have it 2.7% and the reason cited for the drop was less consumer spending than originally thought. Before the Credit Crisis, consumer purchases were responsible for 72% of the economy. Because of high unemployment consumers have less income and they also have less access to credit because banks have reduced lending. Where consumers are getting the money from to increase their spending by any amount is a mystery apparently known only to statisticians who calculate the GDP. Moreover todays downward move of the GDP looks like it is a precursor to much bigger drops that will be taking place later this year. Leading indicators from the ECRI, which predicts the economy six months in advance, have turned negative.

While U.S. GDP is slowly crumbling, problems with the global financial system continue. French sovereign debt has come under pressure today. Credit default swaps for Greek debt now indicate Greece is the second most likely country in the world to default - only quasi-communist Venezuela is considered to have worse finances. Greece has a very small economy though and yet problems there have managed to rattle world markets. Investors should ponder the impact of a default in larger Spain or even much larger Italy.

Problems in Europe have caused capital to flow into the U.S. dollar and treasuries, a common response when the financial system is stressed. Interest rates on two-year treasuries just fell to 0.63%, only a tinge above their all-time low of 0.60% at the height of the Credit Crisis. Is the market telling us that the current eurozone crisis is just as bad as the 2008 global meltdown?

After peaking in late April, the U.S. stock market has been declining for the last two months. Both the S&P 500 and Dow are on course for giving a bear market signal next week. The stock market itself is a leading indicator and should be turning down around six months before the economy does. The Financial non-Reform legislation just passed by congress is not going to help. It would not have prevented the Credit Crisis meltdown, nor will it prevent the next meltdown. Investors need to realize that the possibility of another 2008 exists and it could even happen later this year.

Disclosure: None

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

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

Thursday, June 24, 2010

Stocks Weaken With the Economy

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


U.S. stocks are in sell off mode this morning with all major indices trading below their 200-day moving averages. If current trends continue, the Dow and S&P 500 will give a bear market trading signal next week.

Problems in Europe continue to be a drag on the markets. The prices of Greek debt credit default swaps (CDSs), a type of bond insurance, are rising rapidly again. Experts say they are now indicating a 57% chance of default. Meanwhile, strikes are planned throughout France because the government is trying to raise the retirement age to 62. Investors should assume that EU attempts to reduce the socialist gravy train will be fought tooth and nail by the populace everywhere on the continent. Good news came out of Australia however. Prime minister Kevin Rudd was forced out because of his unpopular 40% super-tax on the mining industry (a key part of the Australian economy).  Australia doesn't have the debt problems that exist in the U.S. and Europe.

In the U.S., the economic numbers continue to be less than impressive. After the disastrous New Homes Sales report yesterday indicated a 33% drop in sales in just one month, the Durable Goods report showed a 1.1% decline in May. Weekly claims fell to 457,000, still well within recession levels, and this got some positive commentary from the cheerleading section of the press. The stock market didn't seem impressed however. While weekly claims have been much better this year than the depression levels they were at early in 2009, they have yet to indicate that the U.S. has recovered from the recession that began in December 2007.

The technical picture for stocks turned south again this Wednesday with the Dow and S&P 500 falling and closing below their 200-day moving averages. The tech heavy Nasdaq dropped below its 200-day yesterday, but managed to close just above it. It looks like it will close below it today. The small cap Russell 2000 is trading below its 200-day today for the first time since earlier this month. The 50-day moving averages for all the indices are still above their respective 200-days in a typical bull market pattern. The 50-days are all falling however and in the case of the Dow and S&P 500, it looks they will be crossing below their 200-days next week. This is a classic bear market signal.  Investors should be watching this carefully.

Disclosure: None

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

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

Wednesday, June 23, 2010

Fed Statement Not so Bullish This Month

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. Fed ended its two-day meeting today and left its zero interest rate policy in place. While this was unsurprising, the statement the Fed issued provides investors with some insight into its current thinking on the economy. It was much less bullish today than in April, but still contained a lot of spin and denial. 

In past articles on March 17th and April 29th, I have discussed how the Fed has waited two to three years after the end of a post war era recession before raising rates and that this would be happening again.  That would mean the earliest Fed rate rise would take place around July 2011. Nevertheless, at that time many economists at the biggest U.S. bond dealers were predicting that a rate rise was likely at the Fed meeting this June. Since then, an article by the Federal Reserve Bank of San Francisco has appeared that suggested that the Fed should possibly wait until 2012 before raising rates (a three year period after the end of the recession). After reading that, the highly paid economists at the too big to fail institutions changed their tune and now almost all of them are predicting that the Fed won't raise rates until next year or even 2012. Your taxes were used for government bailout money to pay the salaries of many of these 'can't think for themselves' economists.

Almost all of these same economists are also parroting the Federal Reserve mantra that there can't be inflation while resource slack exists in the economy. One chief economist for a major bank recently stated, "inflation will hardly be a threat in an economy where massive labor-market slack is suppressing wages". Was he discussing the U.S. where unemployment is around 10% or Zimbabwe where it reached 94%? Of course, everyone would say it must be the U.S. because Zimbabwe had the second worse hyperinflation in world history. Truly massive resource slack always accompanies hyperinflation, but don't expect to get facts like that from the typical mainstream economist. They're paid to provide views that help their institutions make money, not to give the public the facts.

In its April meeting, buffoonish Ben and his stalwart crew of fed governors broke out the cigars to congratulate themselves on the great state of the U.S. economy.  The Fed statement released after the meeting was filled with glowing statements about the economy such as: "economic activity has continued to strengthen and the labor market is beginning to improve", "growth in household spending has picked up recently", "business spending on equipment and software has risen significantly", and "financial market conditions remain supportive of economic growth". There was one fly in the ointment however, " bank lending continues to contract". The Fed didn't seem too concerned. After all that only impacts the real economy, small and medium size businesses, and the guy on Main Street. Lack of lending can also cause recessions however. The Fed has apparently woken up to this unpleasant annoyance recently and behind the scenes reports indicate that it has been studying what to do in case the U.S. economy takes a second nosedive.

The Fed statement from the June meeting wasn't quite as optimistic after a number of recent economic releases indicated a weakening U.S. economy. Before the meeting ended today, it was revealed that new homes sales plunged 33% to record low level in May. The May employment report was unimpressive and indicated most new jobs were temporary and coming from the Census. Despite the obvious economic deterioration taking place, the Fed said in today's statement, "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually".

The Fed continued to maintain that household spending was increasing, but admitted that it was constrained by high unemployment, lower housing wealth and tight credit (that certainly sounds like something that's going to be taking off in the near future). The Fed also stated that investment in commercial real estate continues to be weak and that "employers remain reluctant to hire". It acknowledged that "housing starts remain at a depressed level" (it would be hard to argue that something that was at the lowest point ever was anything but). The Fed further stated that financial conditions had become less supportive of economic growth and then blamed the Europeans. Moreover it reiterated once again that "bank lending has continued to contract in recent months". The Fed then ended its statement still upbeat about the future.  Maybe they just don't think recession is such a bad thing after all.

Disclosure: None

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

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

Tuesday, June 22, 2010

More Evidence for a Double Dip Recession

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. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

Disclosure: None

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

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

Monday, June 21, 2010

EU and UK: Raise Taxes and Cut Stimulus

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.


Europeans seem bent on acting like lemmings to the sea and jumping off an economic cliff. Not only are the eurozone and UK raising taxes and cutting spending, they want the rest of the world to follow their lead and will try to get this to happen at the next G-20 meeting in late June.

Why anyone would want to follow European countries on economic matters is a real puzzle. The EU's recent handling of the Greek debt crisis will be recorded by history as one of the major episodes of government ineptness of our time (and there is really stiff competition in that category).  Instead of dealing with the problem immediately and decisively by instituting dollarization and removing Greece from the currency union, EU leadership let the matter fester until it blew up. They then tackled the problem with an approximately one trillion-dollar bailout. The EU approach to economic problems seems to be: Why institute a simple cheap solution when an expensive difficult one is available? It's enough to make one ponder if EU policy meetings resemble a multi-lingual idiot's convention.

Over the weekend German Chancellor Angela Merkel stated that she was going to push for a swift exit from fiscal stimulus programs and a focus on debt reduction at the next G-20 meeting. It was German foot dragging on the Greek debt crisis that caused the euro to lose 20% of its value in six months. With a record of success like that, of course the rest of the world should be eager to copy Germany's economic policy ideas. Earlier in June, Merkel's cabinet unveiled substantial budget cuts and tax hikes. France did the same thing recently as have other eurozone countries. Merkel is also spearheading the drive for an international financial transaction tax with the money being used for future bailouts. The possibility that there shouldn't be government bailouts of financial institutions or that the financial institutions that might be bailed out should pay the tax themselves and not their customers seems to have eluded Merkel. Of course, financial centers like London and New York would shoulder a disproportionate amount of the burden, so it is the ultimate socialist solution - get the other guy to pay. Perhaps Merkel isn't as economically challenged as seems to be the case.

Conditions don't appear to be much better in the UK, although we won't find out until Tuesday, June 21st when an emergency budget will be announced by the Conservative-Liberal coalition government. The UK is part of the EU, but not part of the eurozone so it is not obliged to follow the 3% budget deficit to GDP limit imposed there (not that the eurozone countries themselves follow this rule). Like their fellow EU members, suddenly the Brits woke up and realized they had massive deficits (they should have been reading the papers, it's been reported there on a regular basis). Large spending cuts and tax increases are on the table. Even then, the UK's budget deficit could reach 10.5% of GDP in the 2010-11 fiscal year (still less the U.S. number for 2010). It is thought the VAT (value added tax) will be raised from 17.5% to 20.0%. There have been rumors that the capital gains tax rate will be raised from 18% to 40%. If this occurs, money will flow out of British markets at a prodigious rate.

If what's going on in Europe sounds familiar to Americans, it should. These were essentially the economic policies of the failed Carter administration in the late 1970s. During that era, the U.S. economy was chronically weak and the stock market went nowhere. This economic program instituted today could have far worse consequences. The global economy was severely damaged by the Credit Crisis and is still in a very fragile state. It is likely to go into a tailspin.  The predictable follow up will be a return to spending. This scenario happened during the Great Depression after Franklin Roosevelt tried to balance the budget after the 1936 election and the U.S. economy and stock market tanked. If elected officials today are determined to repeat the mistakes of the past, investors should take note and act accordingly.  
 
Disclosure: None

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

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

Friday, June 18, 2010

Quadruple Witching Tops Off Weekly 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.


Friday was a quarterly quadruple witching day with stock options, options on futures, single stock futures and index futures all expiring. While volatilty frequently takes place on expiration days, this one was uneventful. Expirations can move markets starting days before however, with prices tending to move in the opposite direction of their recent trends during the week of expiration.

The week of June 14th was bullish for U.S. stocks, the euro, oil and gold. The euro gained 2.7% on an oversold rebound. Gold hit a record high, with GLD closing up 2.5% on the week. There was little difference though between gold's performance and that of the major U.S. stock indices. The Dow rose 2.3% on the week, the S&P 500 2.4%, the tech heavy Nasdaq 3.0% and the small cap Russell 2000 3.2%. Oil was a much bigger winner than gold, gaining 5.2% from last Friday's close. The one notable loser was economically sensitive copper, which dropped 1.5% in the last five days.

The euro, stocks, gold, oil and copper have very different technical pictures. On the daily charts, the euro looks very bearish, with its simple 50-day moving average well below its 200-day. The euro is moving up because of 'regression toward the mean'. It went down too far in too short a period of time, so it is trying to return to a trendline. The trade-weighted U.S. dollar has a mirror image picture. It has gone up too far, too fast and is coming down for that reason. Many oil ETFs/ETNs, including OIL also have their 50-day trading below their 200-day, but it is not nearly as pronounced as is the case for the euro.

U.S. stock indices are still in a bullish pattern with their 50-days above their 200-days, but the 50-days have been fallen particularly for the Dow and the S&P 500. The Russell 2000 is in the best shape of the indices. All of the indices are trading above their 200-days, but below their 50-days. The Dow and S&P 500 spent 18 days in a row below their 200-days in the last month though. Stocks can be characterized as clinging to a bullish pattern. In contrast, Gold is unquestionably bullish, trading above both its 200-day and 50-day and its 50-day is well above its 200-day. Next week could be critical for whether or not gold's rally continues based on patterns forming in its technical indicators.

Copper is changing from a bullish to bearish trading pattern. It's 50-day is touching its 200-day and will fall below it on Monday. This is a classic bear signal. Since copper trades with the economy, its behavior is supporting the possibility of a global slowdown and a double-dip recession in the United. Investors should watch copper closely. If it continues its bearish trading pattern, assume a recession could show up as early as this fall.

 Disclosure: None

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

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

Thursday, June 17, 2010

Stocks Trying to Trade Against Negative News

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.


Stocks have been attempting a recovery in the last few days for technical reasons. While they have managed to hold up despite a wave of damaging economic reports, some weakness is showing up in today's trading. Nevertheless, the market's performance has been impressive.

The S&P 500 and Dow Jones Industrial Average spent 18 days in a row trading either fully or partially below their simple 200-day moving averages. On Tuesday, they both managed to close above their respective 200-days and above the neckline of a possible double bottom. This was technically quite bullish. The S&P 500 fell below its 200-day for a while in morning trade today, which is a sign of weakness however. The Dow managed to hold at that line. The S&P has been trading below its simple 50-day moving average since May 5th and the Dow has been below its 50-day since the flash crash on May 6th. The 50-days for both indices are still above their 200-days. The 50-days falling below the 200-days would be a significant bear market signal. We are not there yet.

The news today did not indicate either a healthy economy or financial system. Weekly jobless claims increased 12,000 to 472,000. Anything around 400,000 or above is evidence of a recession. The Philadelphia Manufacturing Index dropped from 21.4 in April to 8.0 in May. It turns out that 90 banks missed their TARP payments on May 17th and many of them are trying to alter their repayment schedules. Spain managed to sell its full compliment of bonds in its auction, but had to pay very high rates to get them out the door. Spain looks like it will be the epicenter of the next crisis to erupt in the eurozone.

The future economic picture is not looking good. The most disturbing aspect of this is that government spending, the traditional Keynesian solution, just doesn't seem to be working this time. The U.S. federal government borrowed $1.42 trillion in fiscal year 2009 (ending on September 30th) to pump up the economy and the GDP during that time fell from $14.547 trillion to $14.178 trillion. This year the feds are on track to borrow $1.6 trillion. Will the GDP increase by $1.6 trillion?  It's not likely. In order to do so, it would have to be over $15.84 trillion by this September. The most recent figure is $14.60 trillion. So for every dollar of borrowing, we are not getting anywhere close to a dollar of GDP growth, but we do get more debt that we have to pay interest on from now until forever. In the long run this is a losing game. In the short run, things don't look so good either.

Disclosure: None

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

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

Wednesday, June 16, 2010

House of Cards Falling Down

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. housing data for May was out today and no matter how you look at it the report was bleak. The number of houses under construction fell to a record low of 475,000. The 17% drop in single-family homes was the biggest since the 1990-91 recession. Applications for permits were the lowest in a year.

There were hints that the housing market was already in trouble last month when construction permits fell 10%. They dropped an additional 5.9% in May. The federal government housing tax credit expired at the end of April and builders clearly understood that without government subsidies consumers were going to take a hike. And take a hike they did - mortgage purchase applications peaked on April 30th, the last day of the tax credit, and are now at a 13-year low even though mortgage rates have come down.

Housing starts are now down 70% from their peak even though the federal government has made Herculean efforts to support the market. U.S. housing was in a bubble and there is no case in history of a bubble being reinflated immediately after a collapse. Trying to do so is equivalent to pouring money down a drain. There is no better example of this than ongoing federal government subsidies of Fannie Mae and Freddie Mac. Bloomberg has just estimated that these will reach $1 trillion (more than the entire TARP program). U.S. taxpayers are footing the bill. Fannie and Freddie are going to be delisted from the New York Stock Exchange, probably on July 8th. So much for unlimited financial support from the federal government leading to success.

Housing was the epicenter of the Credit Crisis collapse. The market has not returned to health and it is not likely that it will for many more years. The overall U.S. economy itself is now on the verge of turning down again as well. ECRI leading indicators turned negative last week. The last time they did so was in September 2007. A recession began two months later. So far, the ECRI is downplaying its own data and claiming that its numbers indicate that the U.S. economy will be experiencing 'slow' growth in the next six to nine months.

The 'fast' growth that has been occurring in U.S. GDP has been based on changes in inventory levels and not an actual recovery in the private sector. In Q4 2009, a slower decline (yes decline) in inventories was responsible for approximately two-thirds of the increase in GDP. In Q1 2010, inventory replenishment accounted for more than half of the growth.

While the Credit Crisis had its origins in the U.S., the new unfolding global financial crisis is centered in Europe. There are reports that the IMF and the U.S. Treasury are in talks about a 250 billion euro bailout for Spain. While Spain and the IMF have denied the report, the market indicates some serious problem exists. The risk premium on Spanish bonds over equivalent German bonds has risen to the highest level since the creation of the euro.

Government spending can certainly make the economy or any given sector of it better for a while. Based on the evidence so far, the government has to continually spend or the economy falls right back down to where it was before the spending took place. Even reduced, but still substantial spending is not likely to be enough to keep the economy in the black under such circumstances. Governments have faced similar problems many times in history and have seen that major inflation is the outcome of utilizing this approach. Apparently the world's current regimes are now determined to make the same mistakes again.

Disclosure: None

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

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

Tuesday, June 15, 2010

Will There Be a Summer Rally This Year?

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.


Summer officially begins next week and many investors expect this to be a bullish period for stocks. Markets are trying to rise from a very oversold condition, so early summer shouldn't disappoint. The underlying problems that created the recent sell off are still with us however and they are likely to weigh on the markets once again.

The debt crisis in Europe and the drop of the euro have been the major force controlling market action for the last couple of months.  The euro (FXE) has traded down from an intraday high of 151.27 on November 25th to a low of 118.79 on June 8th. It has been rallying the last few days, but despite mainstream media reports about improving economic conditions in Europe, the reasons are technical. The bad news has not ended either, but perhaps it is now expected and already priced in the market. Yesterday, Moody's downgraded Greece's credit rating four notches to Ba1. S&P had already downgraded Greek debt to junk status on April 27th, so Moody's move shouldn't have been surprising. France also announced a three-year budget plan to cut its deficit to GDP ratio to 3% by 2013. It will be around 8% this year (still less than the estimated 8.8% in the UK). Budget cutting is pervading EU countries in an effort to maintain the maximum 3% deficit limit, which was established during rosy economic times and became impossible to meet because of the Credit Crisis. Eurozone leadership apparently made no contingency plans in case anything went wrong, nor do they seem capable of handling a crisis when one occurs.

The other issue weighing on the market this spring has been BP's deep-sea oil spill in the Gulf of Mexico. This is already the biggest oil related environmental disaster of all time and the oil leak is not likely to be stopped anytime soon. Fitch downgraded BP six notches today to BBB (still above junk). President Obama will be addressing the nation tonight and will demand BP provide $20 billion in funds that will be used to pay off damages. This should be considered only a token sum of the actual final costs. Many of the biggest potential lawsuits against BP haven't even been filed yet. It took 20 years to resolve all the litigation from the Exxon Valdez spill, so BP could be in court until 2030. BP leadership apparently made no contingency plans in case anything went wrong, nor do they seem capable of handling a crisis when one occurs.

Budget cutting in Europe is only going to hurt the still fragile and highly socialized economies of the Eurozone. A return to recession is quite likely there if the cuts are actually implemented. In the U.S., reports indicate that the Federal Reserve is now putting together plans on what to do in case of a double dip recession.  So far, the good GDP numbers have been based on inventory restocking (or even inventories dropping at a lower rate) and not an actual growth of the U.S. private sector. The American economy has been expanding with the expansion in federal government deficits. The economic numbers could easily turn south again in the fall, as the deficit is supposed to decrease for fiscal year 2011 (beginning this October 1st). At least the Fed is making contingency plans in case something goes wrong, but it is not clear that they will be capable of handling a crisis when one occurs.

In the short-term though, the stock market seems to want to trade on the technicals, with possibly a little money pumping from the major central banks helping it along. The euro is overbought and needs to rally to resolve this condition and the U.S. trade-weighted dollar (DXY) is oversold and has hit major resistance in the 88 area so it needs to sell down. The period around the July 4th holiday is usually a positive one for U.S. stocks. Late July can be quite negative however. It is best to look at the markets with a short-term perspective at the moment.

Disclosure: None

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

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

Monday, June 14, 2010

Inflation Insights From Chris Pavese and Dian Chu

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 inflation versus deflation debate is the hottest economic topic of our era. While real world events will eventually resolve the argument, for the moment readers might want to take a look at some just released articles on the topic by Christopher Pavese and Dian L. Chu.

In essence, where someone lies on the inflation/deflation debate depends on what data they look at, how long their view of history is, their reliance on basic principals versus economic models, and how much they rely on practical market signs versus abstract theory. We could also add to this how much someone believes the economics numbers published by the world's governments and whether or not they have a vested interest in promoting an establishment viewpoint. Economists who work for a government or large financial institution are paid to generally see no evil, hear no evil and speak no evil. Independent advisors, newsletter writers, and bloggers on the other hand need to strive to be accurate or they lose their clients or audience. There is no government bailout waiting in the wings for them if they screw up. Although it is not 100% the case, the inflation argument tends to be put forward by the independents and the deflation argument by establishment interests.

Christopher Pavese in his article "Why Most Western Economies Are Veering Toward Hyperinflation" relies on the work of Peter Bernholz and his seminal book, “Monetary Regimes and Inflation”.  Bernholz analyzed 2000 years of inflation history and concluded that countries with deficits in excess of 40% of expenditures risk hyperinflation. The number is currently 42% for the U.S. Those who look at inflation from a broad historical lens invariably conclude a huge inflation outbreak is on the horizon. The deflationists on the other hand tend to only look at the theories used to explain how inflation developed in the U.S. during the 1970s.  This is too narrow a time frame and geographic scope from which to create any broad conclusions. Furthermore, many of the common explanations for 1970s inflation are fanciful and were developed to mask the U.S. government's role in its development.

Dian L. Chu takes a more observational and short-term approach in her article "Deflation? Try A Tale Of Two Inflations". She describes current conditions as biflation, a state where some prices can go up substantially while other don't change or even go down. Ms. Chu specifically cites that U.S. core PPI for crude materials (excluding food and energy), shot up 60% year-over-year in April. She thinks that the biggest risk of inflation is in energy products and chemical feedstocks. In her longer-term outlook (after 2012), she maintains hyperinflation is a bigger risk in China and India, while stagflation is a bigger risk in the U.S. and Europe. While Chris Pavese is more negative on the U.S. inflation outlook, he doesn't foresee a big inflation outbreak in the immediate future either.

Chu does mention in passing the possibility of sudden hyperinflation. This idea was proposed recently by newsletter writer Harry Schultz, but without any details of how it could occur. I myself independently developed the explanation of why this is a possibility and how current conditions in the U.S. are appropriate for a major reversal from very low inflation to very high inflation in a short period of time.  This doesn't mean that this is imminent however.

Regardless of the time frame of inflation, stagflation and 1970s levels of inflation no longer represent a stable state for the U.S. economy. We can have very low inflation or very high inflation for a long time. The middle can take place, but it can't last. Our national debt is now so high, that 1970s interest rates would mean that all of our tax receipts would be needed to make interest payments and there would be no money left to run the government. Long before we got to that level, we would be creating so much new 'money' that it would devalue the dollar and this would necessitate printing even more to make up for the loss in value. A self-feeding cycle would begin and this would make some extremely high level of inflation inevitable. We may   already be at the early stages of just such a cycle.

Disclosure: None

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

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

Friday, June 11, 2010

Retail Sales Drop in May Shouldn't Be a Surprise

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. government released its Retails Sales report for May this morning. Analysts expected an increase, but sales dropped 1.2%. The markets were surprised that American consumers were spending less even though the unemployment rate is stuck around 10% and credit card debt has dropped for 19 months in a row.

The expectations for higher retail sales came from the massive amounts of federal government stimulus being pumped into the economy. There is a $1.6 trillion dollar budget deficit projected for fiscal year 2010 (the deficit for 2009 was $1.42 trillion) and this money is making all the economic numbers look much better than they would otherwise. The deficit alone is approximately 11% of the official U.S. GDP number (which is grossly overstated), but still represents less than half of all federal government spending.  Investors should ask themselves: Given all of this support, how weak is the U.S. consumer?

This is an important question because the U.S. has built an economy based on consumer spending, which reached 72% of GDP before the Credit Crisis. The consumer also became very over indebted in the 2000s and the saving's rate hovered around zero mid-decade.  To spend more, consumers need more income and credit (the amount available from savings is limited). A jobs recovery is needed to increase consumer income and even Washington admits that that is not happening in the foreseeable future. As for credit, the big banks are borrowing from the Federal Reserve at zero percent, but are not passing the savings on to the consumer. They are also decreasing credit card lines, not increasing them. Autos are one of the only areas where cheap credit has filtered down to the consumer level.

Auto sales have also directly benefited from government programs like Cash for Clunkers. There were no special government programs active in May and auto sales fell 1.7%. The drop in retail sales was essentially across the board though. Department stores were down 1.8% and general merchandise sales decreased 1.1%. Hardware stores were really hit hard with sales falling 9.3%. The only bright spot was a 3.3% drop in gasoline sales. This took place because gas prices dropped, not because less gas was purchased. The Retail Sales numbers are not adjusted for inflation.

For some time now, the message coming out of Washington has been one of economic recovery. This has been based on economic numbers pumped up by incredible levels of stimulus. The retail sales report today and the employment numbers in general show that stimulus is not working so well this time around. The basic idea for excess government spending is that it jumpstarts the economy just as an electric jolt jumpstarts a battery. If the battery is really dead however, no amount of electricity brings it back to life. The same is true for stimulus in a dead economy.

Disclosure: None

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

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

Thursday, June 10, 2010

A New Theory of Sudden Hyperinflation

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 everyone acknowledges that governments are printing and printing excess amounts of new money, more market observers are currently worried about deflation rather than inflation. There is a smaller group concerned about hyperinflation, but the theoretical underpinnings have been missing up to now that would justify how this could be possible. There is an explanation though and this indicates that hyperinflation can not only take place, but that is can happen suddenly.

There have been a number of impediments in how economists look at hyperinflation that have prevented original thought (and sometimes any thought at all) in this area.  Here are the necessary ideas:

1. Inflation is a currency losing its value (an idea most mainstream economist can't seem to grasp).
2. Severe deflation is a precursor to hyperinflation. They are not inconsistent events as is generally thought, but deflation sets the stage for hyperinflation.
3. Disinflation/deflation and inflation need not by symmetrical. For instance, if there is 30 years of disinflation, this doesn't have to be balanced by 30 years of inflation. The same amount of inflation could take place in only months or even weeks, let alone 30 years.
4. Inflation doesn't have to be a continuous phenomenon. The chart can have gaps in it with prices going up significantly overnight. Furthermore this can start from a low point where almost no inflation exists.

The origins of hyperinflation are with excess 'money' printing by a government. It is not possible to produce an ever-larger amount of currency and have each unit of that currency maintain its value. If it were, real money could be created out of thin air and everyone in the world could become infinitely rich overnight. This would also violate the basic laws of arithmetic. So excess money printing always devalues a currency and because of this less and less can bought with each unit of that currency.

This becomes a potentially dangerous problem when severe deflation takes place because of a shock to the financial system (the Credit Crisis for instance). To make up for the loss in value of assets (deflation), the government prints a huge amount of money. The printing causes devaluation of the currency and requires more printing to try to make up for the additional loss of value. A self-feeding money printing cycle then develops.

Even though huge money creation has occurred because of the Credit Crisis, we still haven't seen significant inflation yet. Indeed, the American government claims the U.S. inflation rate has fallen close to zero. How is this possible? The answer can be found in the banking system. The feds have pumped huge amounts of money into it (U.S. bank reserves have increased approximately 100 times or 10,000% since the Credit Crisis began) and banks have received this money at close to a zero percent interest rate.  Yet, if you look at commercial and consumer bank lending, you will see that they have been declining. So where did all this money go?  It was used to buy treasuries and this is what is allowing the federal government to fund its massive deficits. For all intensive purposes, this is a massive Ponzi scheme being run by the U.S. government.

Ponzi schemes though don't follow the same rules as normal businesses or economic statistics. They build to a crescendo over time and then suddenly collapse to zero instantly. The analogy for inflation will be the opposite however. Inflation will go to zero and then suddenly jump up to some very high level. In theory, zero interest rates should produce infinite inflation (hyperinflation), but nothing mandates that this has to be a gradual, long-term process. If you think about it, the Credit Crisis seems to have come out of nowhere. It didn't of course; there was a slow, long-term build up behind the scenes that just exploded suddenly. Inflation is likely to follow that same path of development. Global governments eventually got control of the Credit Crisis collapse by throwing trillions of dollars at the problem. That solution however won't work for dealing with inflation.

Disclosure: None

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

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

Wednesday, June 9, 2010

Bernanke Testimony Indicates Fed Still in Denial

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 testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

Disclosure: None

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

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

Tuesday, June 8, 2010

Market Sells Off Even Though Bernanke Is Bullish

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 stated last night that he is 'hopeful' the U.S. economy will not fall into a double dip recession. After a tremendous drubbing on Friday, stocks somehow managed to sell down to even lower levels yesterday. They are down again this morning following Bernanke's comments - a fitting response to his forecasting acumen.

Few people in the United States seem to be as oblivious to the condition of the American economy as is the guy who is in charge of the Federal Reserve. Bernanke notoriously stated that subprime borrowing wouldn't cause any problems only weeks before it blew up into the biggest financial crisis the world has ever seen. Following this, the Fed released a number of statements in the spring of 2008 about how it was hopeful that its policies would prevent the U.S. economy from falling into a recession. Unfortunately, the economy had already fallen into recession months before, but the Fed was blissfully unaware of this even though it has more access to economic data than anyone else. The buffoonish Bernanke has been beating the drum of economic recovery for a long time now, even though analysis of U.S. statistics indicates the private sector is still struggling. The only recovery that seems to have taken place is in increased government spending.

At the moment, the markets don't seem to share Bernanke's rosy view of the future. The Dow dropped 115 points (1.2%) yesterday and most of the selling took place around the close, as is typical in bear markets. The Dow's ending price of 9816 was well below the key 10,000 level. The S&P 500 fell 14 points (1.4%) and closed at a new low for 2010, as did the Dow. Selling was even more pronounced in the tech heavy Nasdaq and the small cap Russell 2000. The Nasdaq lost 45 points (2.0%) and the Russell 15 points (2.4%). As of today, the Dow and S&P 500 have spent 13 trading days below their simple 200-day moving averages, a bearish pattern. Selling was also widespread with market breadth close to three to one negative on the NYSE.

The only areas of the market that did well yesterday were utilities, gold/ gold miners, and treasuries - safe havens. Financials were hit hard with Goldman Sachs (GS) falling 2.5% and Bank of America (BAC) losing 3.4%. U.S. bank failures have reached 81 so far this year and look like they are going to handily exceed 2009's very high figure. Credit card debt has fallen for 19 months in a row and May's employment report indicated private sector hiring has disappeared. Once the 1.2 million temporary Census workers are dismissed, the U.S. unemployment rate should go above 10%. These are not signs of economic recovery and yet the Fed chair keeps spouting one cheerleading remark after another about how recovery is taking place. Herbert Hoover did the same thing in the early 1930s as the Great Depression was developing. Consequently, he is now treated as a historical laughingstock. History may take the same view of Ben Bernanke. 

Disclosure: None

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

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

Monday, June 7, 2010

Markets Trading Like They Did During Credit Crisis

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


Stocks are selling off globally. Commodities are down, but gold is holding up the best. Money is pouring into the perceived safe havens, the U.S. dollar and treasuries. Is it the late fall of 2008 or late spring of 2010?

Without further information, you can't answer that question. There is a global financial crisis occurring now because of the problems with the euro. There was a global financial crisis in 2008 because of the collapse of the prices of derivatives related to subprime mortgages. The problems with subprime debt had begun the year before and started impacting stocks in July 2007. Stocks were already in an advanced bear market sell off by the fall of 2008. The current euro crisis is only a few months old and U.S. stocks are only in a correction so far (loss of over 10% versus loss of over 20% for a bear market).

The current stock market sell off is worldwide as it was in 2008. It goes without saying the stocks in the eurozone are suffering, but technical damage can be found in major markets everywhere. The Dow Jones has broken key support at 10,000 twice already. The Nikkei gave up its significant 10,000 level a while ago, closing at 9521 last night. The Hang Seng has fallen below important support at 20,000, dropping to 19,378. In the UK, the FTSE is barely holding above 5,000 today.

The trade-weighted dollar (DXY) was as high as 88.71 in New York this morning (June 7th). This is higher than its peak in November 2008, but not as high as the top in March 2009. There was a major sell off in the middle, with the euro (FXE) having a sharp rally. Something similar is likely to happen early this summer. The dollar is very overbought and the euro is very oversold. The euro has traded as low as 1.1878 today. It may pop back up to the 120 support level and if not, there is stronger support around 115. The dollar is already hitting major resistance, so the set up for a short-term reversal looks like it is taking place.

As would be expected, U.S. treasuries have rallied strongly during the euro crisis. It is highly unlikely that they will get to the extremely low levels they did in 2008. As treasuries rally, interest rates go down of course. Interest rates on the 10-year fell to around 2.00% in December 2008. They were at 3.18% this morning. There is strong chart support at and just above the 3.00% level. So not much more of a treasury rally, interest rate sell off should be expected for now.

Currently gold has recaptured its safe haven status. It was selling off with the euro between last December and this February. Then it started rallying with the U.S. dollar, although it usually trades opposite to the dollar. Gold sold down in the fall of 2008. Central bank leasing was responsible for this. The big banks and large hedge funds leased gold at a small price and then sold it on the market to raise desperately needed cash. This is not happening at the moment to a significant enough degree that it can offset buying elsewhere. Ironically, a sharp relief rally in the euro could be short-term bearish for gold. Despite the selling in the fall of 2008, gold still closed the year up along with the U.S. dollar and U.S. treasuries. Almost every other asset closed down. It's still too early to tell if 2010 will end the same way.   

Disclosure: None

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

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

Friday, June 4, 2010

First of the Month Indicator Gives Bear Market Signal

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


It was a horrendous day in the markets on Friday June 4th. Trouble began when the euro broke support and selling then spread from Europe to North America. A disappointing U.S. jobs report added to the downward pressure and stocks sank. The small cap Russell 2000 had a mini-crash. The first four trading days of the month were down for the second month in a row, indicating we have established a bear market trading pattern.

Problems began in Europe with rumors of a possible default of a major French bank. Another European country, Hungary, indicated its finances were in trouble. The euro (FXE) fell below the key 1.20 level and traded as low as 1.1919 taken out the 1.1920 low in March 2006. Adding to the woes in Europe was the May employment report that came in well below expectations. Almost all the jobs added were from Census hiring and those jobs will disappear almost as quickly as they appeared. U.S. markets gapped down on the open.

Selling in U.S. stocks was almost continuous throughout the day. By the close, the Dow was down 323 points or 3.2%. The S&P 500 dropped 38 points or 3.4%. Nasdaq was worse still, losing 84 points of 3.6%. The Russell 2000 though gave up 33 points or 5.0%. The rule of thumb is a 5.0% drop in one day is a mini-crash. The Dow closed at 9932, which is the second recent close below the key 10,000 level. This one took place on Friday, so it appears as a loss of technical strength on the weakly charts, a more serious problem than if it had occurred just on the daily charts as was previously the case.

Even worse was that all four major indices were down for the first four trading days of the month. This is a typical bear market pattern. It does occasionally happen in bull market rallies though, so to be significant there needs to be two months in a row with a loss in the first four trading days. May also saw just such a loss, so the two down months in a row have now taken place. A bear market doesn't mean the market isn't going to go up again. Bear markets are known for their sharp and sudden short covering rallies. Traditionally, it means that traders should switch to shorting the rallies instead of buying the dips. Adept short-term traders can of course play the market both ways.

Classic market watchers will not consider stocks to be in a bear market until they've lost 20% of their value. Investors of course should never accept that type of loss. By the time that confirmation takes place; a lot of money is already gone from your brokerage account. So far, the Dow is down 11.5%, the S&P 500 12.5%, the Nasdaq 12.3% and the Russell 2000 15.0% from their respective peaks. Market observers agree that this is a correction because all the indices are down more than 10%.  Informing investors of how much they've lost after the fact is not particularly helpful. The idea is to avoid these events before they take place. If you check, you will see I published a number of articles warning of the sell off before it started.

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.

May Employment Report Indicates Economy in Trouble

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.


According to the May monthly employment report, 431,000 jobs were created last month. Unfortunately, almost all of these jobs were temporary Census positions. Private sector hiring was dead in the water.

The Bureau of Labor Statistics (BLS) further stated that the unemployment rate in May fell to 9.7% from 9.9% in April. The massive addition of Census jobs, which only last a short time, was behind much of the drop. The BLS also claimed that 286,000 people left the labor force. Those people are not counted as unemployed. The May unemployment rate that includes workers still in the labor force, but who didn't look for a job in the previous four weeks, and those who are forced to work part-time because no full time job is available was 16.6% (seasonally adjusted). Long-term unemployed reached 6.8 million in May and this group of the unemployed accounted for 46% of the total - worse than any previous post War recession.

The jobs reports for March and April were heralded as evidence that the U.S. economy was recovering. The May report indicates that judgment seems to have been premature. As an example, Construction lost 35,000 jobs in May and this reversed much of the gains reported in the prior two months. Mining and Heath Care were the two big gainers in May, adding 10,000 and 8,000 jobs respectively. Health Care has been the only sector to continually add jobs since the recession began in December 2007.

The job gains reported by the BLS during the last year have been disproportionately accounted for by Census hiring. The BLS has of course not admitted this since it would undermine the U.S. government's claim of a recovering economy. In March, I reported how the BLS seemed to be placing Census jobs in the Business and Professional Service category. Within the last week, John Crudele of the New York Post has written a series of articles documenting how the Census has hired and fired workers up to four times and by doing so managed to create a 'new' job each time. The Financial Times in London estimated the U.S. was hiring 1.2 million Census workers for the 2010 count, whereas only 600,000 were needed in 2000. The Census has not only been used as a covert government jobs program, but hiring and firing since the second half of 2009 has been done is such a way as to inflate the total Non-Farm Payroll numbers. Moreover, Census supervisor jobs seem to have been listed in such a way as to make it look like businesses and not government was doing the hiring.

The May employment report indicates that there is little hiring activity going on in the private sector. This is the case even though the federal government has spent trillions on bailouts and economic recovery measures during the last two years. This money has essentially kept the U.S. economy from collapse, but it has not created the promised growth. How much longer can this game go on?  It will be interesting to see what happens to the job numbers in the next few months when more than a million Census jobs disappear.
 
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.