Friday, July 30, 2010

Q2 GDP Report: 5 Important Things You Need to Know

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


The Bureau of Economic Analysis reported today that GDP increased by 2.4% in the second quarter. First quarter GDP was revised up to 3.7%. The annual revisions for previous years indicated that the U.S economy contracted at an average annual rate of 0.2% between 2006 and 2009.

While 2.4% is in and of itself a fairly decent increase in GDP, the components that made up the increase are the key to interpreting how good it really is. To do this, it's necessary to know whether or not they are sustainable and even whether or not they are believable. Increases in some components are a negative because they ultimately lead to lower growth in the future. Inventories are the best example of this. Others, such as increased government spending are at best neutral because they don't indicate an improvement in the private economy. If spending isn't going to be increased further in the future, then this also indicates lower GDP going forward. Finally, some numbers simple don't match up with other government reports, observations of reality, or economic definitions. If they don't, they are obviously inaccurate.

So how do the GDP numbers stack up in the latest report?  Based on the official news release from the BEA, which can be found at: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, it can be seen that:

1. Inventory increases added 1.05% to second quarter GDP. Based on the annual revision, they added 2.64% to first quarter GDP or 71% of the total increase. Inventories were also responsible for approximately two-thirds of the GDP increase in the fourth quarter of 2009. The entire economic 'recovery' has essentially been an inventory adjustment. This does not bode well for the future.

2. Government spending was up across the board in Q2. Federal spending increased by 9.2% in the second quarter versus 1.8% in the first quarter. State and local spending was up 1.3% this quarter versus a decline of 3.8% last quarter. The second quarter was when stimulus spending was at its maximum. So expect less of a contribution from government spending to future GDP and lower numbers as a result.

3. The most obvious fantasy figures in the report was the new home construction figure. This supposedly increased by a whopping 27.9%, even though the Commerce Department's New Residential Structures report (more commonly known as new home sales) indicated a 6% decline quarter to quarter and an 8% decline year over year. Nor is there any evidence of a massive increase in new home inventories or any real world evidence indicating a huge building boom. This number is impossible.

4. Somewhat suspicious is the increase in investment on business structures (commercial real estate). This was up for the first time since Q3 2008. The big increase in banks going under that is currently taking place is being caused by commercial loans going bad, yet commercial construction is now on an upswing? Perhaps work on the BP oil spill juiced up this number. Interestingly, the UK also reported a huge increase in construction spending last quarter as well, although there is little evidence of much construction going on there. BP is headquartered in the UK, but it spent its money to handle the oil spill in the U.S.

5. The most ridiculous claim of all was the revised figures for 2008 GDP. Based on original reports, GDP increased by almost 3% in 2008, a very good rate, even though it is universally acknowledge that the U.S. was experiencing the worst economic downturn since the 1930s Great Depression. GDP is supposed to decrease during a recession, not go up. In the revision in July 2009, GDP for 2008 was revised downward to plus 0.4%. In the current revision, GDP growth for 2008 is now listed as 0%. Perhaps after another 15 to 20 revisions it will get to a more reasonable number. The history of 2008 GDP indicates the U.S. can overstate its GDP by a total of 6% to 9% in its initial reporting. Keep that in mind when you read that GDP was up 2.4% last quarter.


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.

Thursday, July 29, 2010

U.S. Financial System Gets Its Own Stress Test

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.


Banks failures kept climbing and the Asset Back Security market completely froze up. While it sounds like a grim description of the height of the Credit Crisis, it was actually the week of July 19th.

In little reported news, there was no issuance of asset backed securities (ABS) last week. Large companies rely on this type of financing to fund their short term needs. The collapse of this market in the fall of 2008 was one of the key reasons that economic activity ground to a halt. Recently, everything looked OK for the ABS market. During the ten weeks prior to July 19th average issuance was $1.83 billion per week. Then suddenly it was zero.

The overnight disappearance of funding was an unintended consequence of the new financial 'reform' bill. One of the provisions of the bill made the rating agencies liable for their ratings - a laudable idea. However, there was no provision on the other side that prevented them from taking money for their ratings and then refusing to have them made public, which the rating agencies promptly did in the ABS market. Companies were already required by law to have their ABS paper rated before financial reform - essentially giving the ratings agencies a government enforced duopoly. So without ratings nothing could be sent to market. Even Ford Motor had to pull a major offering. To unfreeze the market, the SEC promptly ruled that ABS paper could be sold without a rating for the next six months. This too could have unintended consequences.

The Credit Crisis was also being revisited with a U.S. banking system that still looks shaky. So far this year, 103 U.S. banks have failed compared to 65 at the same time last year. At the current rate, failures could exceed 200 in 2010. This is roughly on par on a percentage basis with the worse period of the Savings and Loan Crisis. However, the FDIC, which insures bank deposits, didn't go under during the Savings and Loan Crisis. This will happen this time. There are even rumors that the FDIC is delaying taking over insolvent banks to delay its own insolvency. These rumors are probably not true because doing so wouldn't buy the FDIC that much time. Expect the federal government to bail it out with a 'loan' or some other 'line of credit'.

The problems that surfaced during the Credit Crisis have obviously not all been solved. Investors should assume that the after effects will have to be dealt with for years to come. Government solutions for dealing with these problems may themselves in turn cause other problems. The corruption in the system certainly hasn't gone away. The ratings agencies gave baskets of subprime loans triple A ratings and now they have refused to let their ratings be used for asset backed securities because of potential liability. So how accurate do think their ratings are now?   And why does the U.S. government force companies to pay them for the ratings if companies aren't guaranteed anything in return for their money?  If this type of activity took place between two businesses, it would be called an extortion racket. The FDIC forcing banks to prepay three years of deposit insurance premiums could be viewed the same way.

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.

Wednesday, July 28, 2010

8 More Reasons Why a Double-Dip is Coming

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


As earnings season continues and one company after another beats expectations, the economic numbers are continuing to come in below estimates. The data and indicators are increasingly painting a picture of an economy that is falling apart. Here are a few of the reasons why another recession is imminent:

1. U.S. orders for durable goods fell 1.0% in June. Economists expected them to rise 1.0%.  Excluding the volatile transportation sector, orders fell 0.6% and shipments were down 1.3%. Inventories rose for the sixth month in a row, indicating goods are being produced, but they're not moving out the door.

2. Industrial output in China fell 2.8% in June. A "potential weakening of the global economy" was cited as the cause.

3. The ECRI (Economic Cycle Research Institute) weekly leading indicators index has fallen as low as minus 10.5. There has never been a case when it has gotten this low and there hasn't been a recession.

4. The Consumer Metrics Institute's Growth Index has been negative since January and is now around minus 3.0 (it fell to around minus 6.0 in August 2008). It leads U.S. GDP by approximately two quarters.

5. The U.S. trade deficit widened in May and was the largest in 18 months. This happened even though oil imports fell over 9%. Rising oil imports are usually the factor that makes the trade deficit go up. The trade deficit subtracts from GDP.

6. After a sharp drop in June, U.S. consumer confidence fell even more in July. The Conference Board's latest reading was 50.4. As usual, economist's estimates were on the high side. A reading of 90 or above indicates a robust economy. Before the most recent recession, consumer spending was 72% of GDP.

7. U.S. weekly unemployment claims refuse to drop below 400,000, the approximate dividing line between recession and non-recession. At no point during the current 'recovery' have they gotten that low. The unadjusted number of claims for the week of July 17th was 498,000. Even though companies are reporting huge earnings increases and raising estimates for next quarter, more and more workers continue to lose their jobs.

8. The economic cheerleader-in-chief, Fed Chair Ben Bernanke, gave a gloomy report on the U.S. economy last week in his bi-annual testimony before congress. Bernanke didn't see the subprime crisis coming, nor did he realize the U.S. was in a recession in the spring of 2008, months after the recession had begun. So if even he admits the economy is weak, it must really be in bad shape. Bank of England Governor Mervyn King, has also recently stated, "Britain can't be confident that a sustained recovery is under way".

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.

Tuesday, July 27, 2010

Euro Banks Up on Stress Test Farce

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.


Euro banks rallied nicely on Monday after results of the EU's stress test indicated there are essentially no problems in the European banking system. The stress tests have been heavily criticized as a whitewash and a cynical PR maneuver however. Nevertheless, rallies in bank stocks are continuing today on earnings reports from UBS, Deutsche Bank, Societe Generale and Credit Agricole.

Of the 91 EU banks analyzed for the stress tests, only 7 failed - five in Spain, one in Germany and only one in Greece. No bank in Portugal, Ireland or Italy failed the test and was deemed to be in need of raising more capital. The 7 banks that did fail were supposedly only short $4.5 billion. An alternative result produced by an analyst at JP Morgan indicated at least 54 banks should have failed the stress tests and at least $100 billion in new capital needed to be raised. Even that view may be optimistic.

Although considering the great earnings out today for UBS (UBS), Deutche Bank (DB), Societe Generale and Credit Agircole perhaps enough money is being poured into the euro banks from the ECB that it is irrelevant what condition they are in. After all, another bailout is potentially always around the corner. The UBS earnings were the most telling in this regard. One reason stated for UBS doing so well was that "withdrawals in the private banking arm have continued to slow". Yes, losing business at a slower rate is certainly bullish. The stock was up 7% on the news.

In a separate report released today, lending to non-financial companies was down 1.9% year over year in the EU. So euro bank earnings are rising even though less lending is taking place to businesses. Interesting, to say the least. Mortgage lending in the EU is going up at a 3.4% annual rate however. So maybe some minor reinflation of the real estate bubble is taking place in Europe while the economy slows down. That certainly bodes well for the future.

The stress tests show once again that any number, no matter how outrageously manipulated or false, will be accepted by the market as gospel.  We saw this last week with the UK second quarter GDP figures. The construction spending number was up by an amount indicating a major building boom was taking place even though there is no other evidence of a big pick up in construction. The fact that the reported numbers didn't match up with reality apparently didn't disturb anyone. You would think it would have since the current EU financial crisis that necessitated the stress tests was cause by Greece lying about its fiscal state. Greece's numbers were off by more than 400%, but no one in EU headquarters noticed any problem with them.

When economic or business numbers are fantasies, but are accepted anyway, a major crisis will invariably follow. Before the Greek debt crisis, there was a the subprime crisis in the U.S. Bundles of subprime loans - loans from borrowers who had no job, no assets, and no history of paying their bills - were believed to be triple A credits because some authority said they were. This allowed common sense to be thrown out the window and complete absurdity to be regarded as wisdom. This type of behavior though isn't as bad right now as it was during the subprime era - it's actually much worse.

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.

Monday, July 26, 2010

New Home Sales: Still at Depression Levels

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 June New Homes Sales figures were released today and the Commerce Department claimed they were up almost 24%. Stocks rallied strongly on the supposedly good news. A revision of May's all-time low number to a much worse all-time low number is what gave the appearance of a strong rebound.

New home sales for May were originally reported at a 300,000 annual rate last month. This compares to a high of around 1.4 million in 2005. It was also the lowest number ever recorded in the history of the data. As bad as 300,000 was, and it was truly awful, there was a significant downward revision for May sales in the current report to only 267,000.

May sales were also not the only month with a downward revision. The figures for April were originally reported as 504,000 in the report released in May. Then in the report released in June, they were revised lower to 446,000. Then in today's July report they were revised downward again to 422,000. Do we see a trend here?

The home buyer tax credit was good until the end of April. With the revised numbers, new home sales actually fell 37% in May, not the merely disastrous 33% originally reported. The drop from the originally reported April number was 47% however. If you wish to claim there was a 24% rebound for the numbers in June, as the government did, you need to put it in the context of a 47% drop first taking place, otherwise you are comparing apples to oranges. No matter how you look at it though, new home sales were and still are at depression levels.

New home sales figures have been continually revised downward for several months now. It is highly likely that the 330,000 number just reported for June will be revised lower next month and quite possibly lower again the month after that. The Commerce Department reports the best number possible the month of the release. The mainstream media then gives that news big attention and uses it to reinforce an image that government programs are being effective. When the downward revisions take place in future months and indicate things aren't quite so rosy, that news gets buried in the article - if it is mentioned at all. This is not the only U.S. government data where this pattern exists, nor does this only take place in this country. Investors shouldn't let themselves be tricked by this game.

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.

Friday, July 23, 2010

UK Q2 GDP: Unblanced, Unsustainable, and Unbelievable

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 UK economy grew by 1.1% in the second quarter according to just released figures from the Office for National Statistics. The pound rallied sharply on the news, but a look inside the numbers indicates this growth is neither balanced, sustainable, nor even believable.

Even a cursory glance at the Office for National Statistics charts shows quite clearly three components of GDP had an outsized impact in creating the good headline number - Construction Spending, Business Services and Finance, and Government and Other Services.  Without these three sectors, there was no growth in the UK economy. While these sectors were growing, there were significant decreases in the Electricity, Gas, and Water and Transport, Storage, and Communication categories. It would be reasonable to assume that these categories should be showing increases in a growing economy, but they aren't. The charts can be found at: http://www.statistics.gov.uk/pdfdir/gdp0710.pdf

The UK had a bigger housing bubble than did the U.S. and they have yet to work off the excesses of too much building earlier in the decade. Nevertheless, the biggest contributor to second quarter GDP was Construction Spending, up a whopping 6.6%. Based on the numbers, a major new building boom is taking place there. People capable of logical thought may wonder how this is possible. A reasonable explanation is an obvious statistical error since the UK changed the source for its construction numbers and for the first time is basing them on a new Monthly Business Survey for Construction. Expect some major downward revisions for this figure in the future because it is something that is just not possible in the real world (government statisticians rarely question an impossible number as long as it makes the government look good).

The next best category was the one that contained financial services. The UK has propped up its big banking institutions (and has nationalized more of them than the U.S. has) with a number of government programs. Not surprisingly, after this huge transfer of money from government coffers, they are doing much better as are U.S. banks There was a 1.3% increase in the Business Services and Finance category and this contributed almost as much to the total rise in GDP as did Construction Spending. Together these are both part of the FIRE (Finance, Insurance, Real Estate) economy, where excesses led to the Credit Crisis. The UK seems to be trying to reestablish the imbalances that led to 2008 economic collapse.

Finally, government spending was up 0.9%, almost the same as the increase in total GDP. Government spending in the UK is indeed the lynchpin for making GDP look good as is the case in the U.S. The new Conservative government is planning major spending cuts and tax increases though and this will negatively impact future GDP numbers. Going forward things are not going to look rosy for the UK economy. Perhaps this is why the Bank of England was recently discussing lowering interest rates. Either they have access to other private economic data or they simply realize how misleading the current UK GDP numbers are.

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.

Thursday, July 22, 2010

Bernanke Admits Major Policy Failures; Stocks Soar

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.


What's wrong with this picture? In his bi-annual testimony before congress yesterday, Fed Chair Ben Bernanke admitted that after more than a year and a half of zero interest rates and $3 trillion in federal deficit spending since 2008, the best case scenario for the U.S. economy is slow growth and high unemployment. The S&P 500 is up 2.5% so far this morning on this 'good' news.

Bernanke's congressional testimony included the following statements (emphasis added by me):

"Most [FOMC] participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw [at the June Fed meeting] the risks to growth as weighted to the downside."

"financial conditions--though much improved since the depth of the financial crisis--have become less supportive of economic growth in recent months."

"many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight. With credit demand weak and with banks writing down problem credits, bank loans outstanding have continued to contract."

"After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009."

The market dropped as Bernanke delivered his testimony yesterday afternoon - and he was blamed for bringing it down. The Dow closed more than 109 points lower. The Dow was then up more than 117 points right after the open today and the Nasdaq gapped up over 26 points. The mainstream media reported bullish news out of Europe and good corporate earnings instantly turned market psychology around. One major news service stated, "earnings Thursday showed that if the economy is slowing, many companies are not being affected too much by the downturn". In other words corporate profits have decoupled from the state of the economy. While this may sound completely idiotic, it may not be as absurd as it initially appears to be.

If the federal government has spent $3 trillion of borrowed and printed money in the last two years, that money has to have gone somewhere. Either direct or indirect government purchases could be responsible for the current batch of good corporate earnings, although sales to the economically strong economies in East and South Asian are behind better performance for many U.S. companies that do most of their business overseas. So the private sector of the U.S. economy can be dead in the water, but corporate earnings can be good because the government has become such a large component of the economy (as is the case in socialist states).

While corporate earnings are up and cash levels are at record highs, the money doesn't seem to be flowing into the general economy. Despite the supposedly great state of corporate America, there are few announcements of major business expansions, nor is hiring picking up. The usual evidence of a robust corporate sector is simply not there. Weekly jobless claims in fact rose 37,000 to 464,000 this week. While 'seasonal adjustments' were cited behind the big increase, weekly claims have been at recessionary (if not depressionary) levels for two years now. Apparently there are negative seasonal factors in winter, spring, summer, and fall.

The alternative explanation for today's big stock market rally, despite major gloomy news, is the not so invisible hand of government manipulation. Bernanke made it clear early on that he was more than willing to interfere in the markets. When the Fed began its rate lowering campaign in August 2007, it did so one hour before monthly futures expired and this created a huge rally that wiped out the profits of the shorts (and gave a huge gift to the parties that were on the other side of the trade - the big Wall Street banks perhaps?). More recently, the Fed created a huge global liquidity facility on May 9th, after the Flash Crash, and markets soared - at least for awhile. Since there are major elections in the fall, investors should assume that powers that be will not want a crashing stock market and the announcement of a new recession. It will be interesting to see how they try to cover this up.

Disclosure: No positions.

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

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

Wednesday, July 21, 2010

What the Bear Market in Chinese Stocks is Telling Us

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.


China has been the economic engine powering the global recovery, but the engine may be sputtering based on the behavior of Chinese stocks. The Shanghai Composite has been trading in bear market territory since May 6th.

Unlike the U.S., UK and EU, which have service based economies, China's economy is heavily industrial. What takes place in China provides important information about the state of the global manufacturing. Activity in China is a key driver of the markets for industrial metals, materials, and energy. It was just announced in the media that China has become the largest consumer of energy commodities globally; pulling ahead of the United States, but the Chinese government has denied it.

Since the major Western economies and the Chinese economy have different compositions, it is reasonable to assume that their stock markets could trade in different patterns. The bull market peaks came at about the same time however. The Shanghai market hit a bottom around 1000 in mid-2005 and entered a bubble pattern in 2006, which continued until a high of 6036 was reached on October 17, 2007. As the bubble burst, Chinese stocks fell 72% until the market reached 1707 on November 4, 2008.  Unlike U.S. stocks, which continued to fall until they reached their bottom in early March 2009, the Shanghai composite then began to rally. The prices for metals, materials, and the companies that produce them tended to follow the Chinese market and not Western markets - investors should keep this in mind for future reference. Oil didn't bottom until mid-February 2009 though.

Not only did the Shanghai Composite hit its low four months earlier than the U.S. market, its high from the rally that followed took place well before the top in Western stock markets. So far, Chinese stocks topped at 3471 on August 4, 2009. U.S. stocks peaked on April 26, 2010. By the end of August 2009 the Shanghai index was down more than 20% on a closing basis, but only briefly. After some recovery, stocks entered bear market territory again for a few days in the end of September. They then moved up and traded with less than a 20% drop from the August peak for many months until May 6th of this year. Chinese stocks have continued to trade at a bear market loss since that date.

Poor performance of Chinese stocks indicates weakness in the global industrial economy. Most commodities are likely to suffer declines as a result. This has more significance for the U.S. currently than it usually would ordinarily because the industrial sector of the economy has performed best during the recovery. The much bigger service sector has remained fairly anemic despite $3 trillion of federal deficit spending in fiscal years 2009 and 2010. If U.S. manufacturing turns negative, and behavior of Chinese stocks indicates is might, the U.S. economy is likely to follow.

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.

Tuesday, July 20, 2010

Why Investors Should be Cautious on 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.


While U.S. stocks peaked in late April, silver peaked in mid-May and gold in late June. While the S&P 500, Dow Industrials, and Nasdaq have all given bear market trading signals, neither gold nor silver have done so. The technical indicators for both metals are deteriorating however and more serious drops could lie ahead.

Gold and silver are unique in that they are monetary metals and the market treats them as currency subsitutes. The is more the case for gold than it is for silver. Of all the metals, gold has the least industrial use. Only about 13% of annual output is used in manufacturing, mostly for electronic products such as cell phones and computers. Gold is not useless as many commentators claim, unless you live like the Amish. Silver, on the other hand, has a greater industrial role with 50% of its production being used for this purpose. Silver will therefore be more strongly impacted by economic developments than will gold.

Both gold and silver are still trading in a bullish chart pattern with their 50-day simple moving averages above their 200-days. Their technincal indicators though have turned negative on the daily charts. Most have moved below the point that divides bullish from bearish action. The trend indicator DMI (directional movement index) gave a sell signal for gold (GLD) in early July around the same time that the more serious bear market signal took place on the S&P 500 and Dow Industrials. Yesterday, the price of silver (SLV) closed below its 200-day moving average. Gold is still trading above this key line.

In the long-term, gold and silver will prove to be two of the best investments in the market. This doesn't mean that they will go up every day or that they can't have significant reversals. A double-dip recession will certainly be a negative for silver prices, although perhaps less so than for copper or other industrial metals this time around. If silver starts to trade consistently below its 200-day moving average, it too will be giving a bear market signal. It is still too early to tell whether or not gold will follow. A price drop  to the 200-day moving average, currently at 111.61 and rising for GLD, is almost certain at this point though.

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.

Monday, July 19, 2010

Bank Failures Driving FDIC to Insolvency

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 December of 2009, the FDIC ordered U.S. banks to make three years of prepayments to its deposit  insurance fund. It looks like the FDIC has already blown through the $15.33 billion it collected at the end of last year and will soon be needing its own bailout.

As of July 16th, 96 U.S. banks have failed. The total was 86 at the end of the first six months of the year. A simple doubling of the number would indicate that there will be 172 failures this year. Estimates though are for around 200. More failures took place in the second half of the year in 2009. Total failures for 2009 were 140 compared to only 25 in 2008 and 3 in 2007. There is no question that the number of failures will be greater once again in 2010.

The FDIC maintains a troubled bank list and there are 775 banks on that list as of the end of the first quarter. That was up from 702 in the fourth quarter of 2009. Since failed banks are removed from the list, this indicates that more banks are getting into trouble than the number failing. As long as this continues to happen, the U.S. banking system is deteriorating further. Commercial loans going sour are now being added to the problem of too many bad residential real estate loans.

Investors should not be fooled by comparisons of current U.S. bank failures with the number of failures in the past. In the early 1900s, there were a very large number of small banks in the country. Over the last 80 years, U.S. banks have become much larger and far fewer in number so only a percentage comparison makes any sense. During the Great Depression, 9146 banks failed. That would represent over 100% of the 7932 banks that now exist. Even during the Savings and Loan Crisis there were more than twice as many banks in business than there are now. The total number of failures for the Depression and Savings and Loan Crisis are also for a period of up to 15 years. So we will have to wait until 2023 to see if banking failures are or aren't as bad now as they were during past crises.

We are not likely to have to wait very long however to see if the FDIC needs a government bailout for the first time. The FDIC states very clearly on its website that its operations are funded through member banks and it doesn't require taxpayer money. Well accepting a "loan" from the federal government or whatever they will call the bailout is taking help from the taxpayer. For a long time, I have been predicting that this event will be taking place in the fall of 2010. As of now, it looks like the FDIC may have trouble holding off insolvency even until then.

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.

Friday, July 16, 2010

Market Going Down With the Ship?

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


This morning the Baltic Dry Index, a measure of freight rates for international shipping, was at 1700. It hasn't been at this level since April 2009, only four months after its Credit Crisis low and only one month after the stock market was at its bottom. 

Bloomberg News noted a week ago that the index had dropped continuously for the longest period in nine years. Yes, the current drop in the preceding seven weeks (from a high of 4209 in late May) has been bigger than anything seen during the Credit Crisis. The last drop of this magnitude was in August 2001 in the middle of that years recession. Lack of shipping activity from China, the engine for global economic activity, was cited as the main cause for the falling index. Charter rates for all types of ships tracked in the index are falling.

Prices for dry bulk shipping, which doesn't include energy commodities, tend to be very sensitive to economic activity. A sharp drop in rates indicates a significant drop in global trade. Based on historical charts it looks like the Baltic Index can lead, be coincident or lag movements in economic data and the stock market. The index seems to be most closely correlated with prices of industrial commodities and the industrial sector of the global economy. While this is not the largest component of the U.S. economy (the service sector is four times larger), it is the key sector in developing economies. It was manufacturing though that had the biggest rebound in the U.S. since last year. The service sector has remained lackluster.

The stock market will likely be following the Baltic Index down, although perhaps not with such a precipitous decline. The Index has dropped almost 60% since late May. With the exception of the small cap Russell 2000, none of the major stock indices have had even a 20% drop - at least not yet.

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.

Thursday, July 15, 2010

Nasdaq 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.


As the mix of good earnings and weak economic reports continue, Nasdaq gave a bear market trading signal on Wednesday. It joined the Dow and S&P 500, which gave their own sell signals earlier this month.

While the technical picture for the market has improved somewhat after seven days of rally, the rally didn't prevent Nasdaq's simple 50-day moving average from falling below its 200-day. The Nasdaq closed at 2249.84, its 50-day fell to 2251.39, and its 200-day was at 2254.88. This means Nasdaq is also at a strong resistance point that it needs to break and stay above. Trading in the next ten days will determine if the Nasdaq continues to fall apart (and the rest of the market with it) or manages to turn around with a rising 50-day average. The recent rally has taken place with below average volume on Nasdaq every single day. The volume on the Dow Industrials was even weaker. From a technical perspective, this is another negative for the market.

Mixed news for the economy and earnings continues. JP Morgan reported a 77% Q2 rise in profits. Mainstream media accounts explained that "a slowdown in losses from failed loans helped offset a difficult spring in trading and investment banking". Huh?  Makes you wonder who does their numbers. Anyone who happens to believe that the big banks earnings reports have anything to do with reality should recall that Bear Stearns in March 2008 was rushing to get its positive first quarter earnings numbers out early, but the company went under before it could release the good news.

Meanwhile, the weekly unemployment claims rose last week, but the Labor Department reported they fell by 29,000. Huh? Makes you wonder who does their numbers. Apparently the magic of seasonal adjustments led to this 'sows ear as silk purse' news. Automakers aren't closing down for their usual summer retooling this year. Based on recent reports, there is no evidence that business in the sector is so good, or even good at all, that they can't afford the down time.

Industrial production figures in the U.S. were up by 0.1% in June. The number was only positive because of a big increase in utility output caused by increased use of air conditioning during the unusually hot month. Consumer goods seem to have been down across the board. As a reminder, consuming spending was 72% of the U.S. economy before the Credit Crisis hit. Business and industrial equipment were up, but it is likely we have exports to China to thank for that. The Chinese economy expanded by 10.3% in the second quarter, but this was below expectations. Even at the bottom of the Credit Crisis Chinese GDP was up over 6%. It was down by almost that amount in the U.S. The economy in China seems to be slowing and if this continues, watch out below.

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.

Wednesday, July 14, 2010

Reconciling Bad Economic Data and Good Earnings

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.


So far this earnings season, company reports indicate that business is going gangbusters. U.S. economic reports are painting exactly the opposite picture however. This may not be as contradictory as it appears on the surface.

As for earnings, Intel reported record numbers yesterday, after Alcoa upgraded its forecast for global aluminum sales and U.S. railroad company CSX said shipments were up considerably. This morning however U.S. retail sales numbers disappointed again, falling 0.5% in June following a 1.1% drop in May. Mortgages for home purchases fell to a 14-year low. According to the non-farms payroll reports, close to a million people net left the U.S. labor market in May and June because jobs were so scarce that they simply gave up looking.  Later today, the Federal Reserve is expected to lower its expectations for second half U.S. economic growth.

One of the important things to note is that both Intel and Alcoa are global companies. While many people assume that the U.S. is Intel's major market, it isn't. East Asia dominates Intel's sales. Strong Intel numbers generally indicate a robust East Asian economy. Growth has indeed been strong there. Intel's biggest growth sector by far was servers, which were up 170%. These are used for the Internet. Intel also cited cloud computing as a driver of sales. It is possible for a new technology to grow while the economy declines. The best example of this is the growth of radio during the Great Depression 1930s.

As for Alcoa, its projections may prove to be much too bullish. Industrial metals appear weak across the board and this indicates global manufacturing could turn negative in the next few months. CSX's good numbers were dependent on auto shipments. That market in the U.S. peaked in the third quarter of 2009 because of the Cash for Clunkers program. In the June retail sales report, autos were the weakest component.

Investors should not make judgments for the U.S. economy based on figures for global companies, especially when the U.S. is only a minority of their business. The U.S. economy can be much weaker than Asian economies. Asia was in the driver seat pulling the world out of the Credit Crisis recession and the U.S. followed. The U.S. may lead once again though bringing the world into the next recession.

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.

Tuesday, July 13, 2010

Alcoa and CSX Earnings: Not as Positive as They Look

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 Q2 earnings season began with aluminum company Alcoa and rail freight operator CSX reporting on Monday. The stock market reacted jubilantly to the news. Careful examination however indicates there is very little reason for economic optimism based on these releases.

On the surface, comparisons looked good versus the Q2 2009. However, Q2 2009 was right off the Great Recession bottom and it would be almost impossible not to do a lot better. Alcoa's (AA) revenue was up 18% and CSX's (CSX) was up 22%. A 44% increased in metals freight shipments by CSX were seen as verification that Alcoa should be doing better. Automotive shipments by CSX were up 63% by volume year over year and vehicle manufacturing requires a lot of aluminum. It all looks really good as long as you don't look any further.

New car sales were in the dumps in Q2 2009 with only around 9.6 million vehicles sold. By Q3 2009 however around 11.5 million vehicles were sold (thanks to Cash for Clunkers), so comparisons next quarter are going to be difficult for both CSX and Alcoa. Approximately 11.2 million vehicles were sold in the U.S. in Q2 2010, but sales dropped 11% between May and June (the usual seasonal drop is 3%). So it looks like the summer will be weak for auto sales and sales for Q3 2010 will possibly be much lower than the previous year's level. This can only negatively impact next quarter's earnings for both Alcoa and CSX.

The market also got excited about Alcoa's revising its global demand forecast up 10% to 12%. While this would certainly be good news if it happens, traders seemed skeptical based on the action in the stock. Alcoa peaked in January and has been trading in a bearish pattern since mid-May. The stock is up only a very modest amount so far today. After a six-month drop, a more enthusiastic reaction should be expected on good news.

The stock market is supposed to look forward at least six months. Earnings are backward looking. They are only significant to the extent that the underlying trends that created last quarter's earnings continue to hold. There is a lot of reason to believe that this will not be the case. Big government stimulus programs are fading and the economy is weakening, not strengthening as it was a year ago.

Disclosure: No positions

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

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

Monday, July 12, 2010

Before Earnings: A Sector Analysis of Stocks

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


Second quarter earnings season begins this week and the bulls are hopeful that good earnings will turn the market around. While the Dow and S&P 500 have given bear market signals, not all nine economic sectors have turned bearish and this provides some insight as to where the market is most hopeful for positive reports.

The two sectors of the market that have remained technically strongest are the Industrials (XLI) and Consumer Discretionary (XLY).  A third sector, Utilities (XLU), was the first to turn bearish at the end of May, but its price moved above the 50-day and 200-day simple moving averages on Friday. It needs to hold at that level in order for the chart to regain a bullish tone. Utilities are highly interest rate sensitive and the big drop in interest rates in the last three months should be bullish for them. While dropping interest rates indicate a weakening economy, Industrials and Consumer Discretionary doing well indicate a relatively strong economy. Good industrial earnings may make some sense at this point, but good consumer discretionary earnings do not.

The charts for Basic Materials (XLB) and Energy (XLE) both became bearish in mid-June. Since their products are inputs for industrial companies, profits for industrials could improve because their costs are decreasing. Technology (XLK) company profits though are not that sensitive to lower raw material costs and this sector turned bearish in early July.

The two sectors that tend to be relatively recession proof, Health Care (XLV) and Consumer Staples (XLP) turned bearish in early June and early July respectively. Both had major sell offs during the Credit Crisis though - a major downturn will take everything with it. Health Care stocks are possibly more affected by recent legislation than other factors, so it is difficult to say much about them at the moment. Consumer Staples though should not be bearish, while Consumer Discretionary is bullish. In a good economy, staples will rise more slowly than the discretionary stocks, but they will both be bullish.  The economy generally has to be very troubled for a significant downturn in Consumer Staples.

The remaining sector, Financials (XLF), turned bearish in early July. This is taking place despite an array of government programs to pump money into the banking system. Government actions are so predominant for this sector, that a downturn is difficult even if the economy is deteriorating rapidly.

It will be interesting to see how bullish or bearish each sector looks after earnings season is over. In 2008, Consumer Staples, Basic Materials and Utilities had charts that were at first bearish, but then turned bullish during the spring or summer before the complete collapse in the fall. Industrials appeared to briefly turn bullish at the same time as well. Energy didn't turn bearish at all until August. Only Financials, Consumer Discretionary and Technology were consistently bearish all year. The worst possible economic and market conditions are generally necessary for all sectors to turn bearish at the same time.

Disclosure: No positions

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

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

Friday, July 9, 2010

Five Recessions the Fed Failed to Predict

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 Federal Reserve is confident that a double-dip recession won't be taking place. One of the major forecasting tools they use to determine this is yield curve analysis. This approach has never really worked and can't possibly work in a ZIRP (zero interest rate policy) environment.

According to their yield curve model, the Fed is predicting there is only a 10% chance of a recession in the near future. Before breathing a sigh of relief, investors should ask themselves how well this model has worked in the past. Here are the relevant questions and answers:

Did the model accurately predict the 2007-09 recession, the worst since the Great Depression?  Well, no it didn't.

Did the model accurately predict the 2001 recession? Err, well no it didn't do that either.

Did the model accurately predict the 1990-91 recession? Well, it missed that one as well.

Did the model predict the huge downturn in 1973-75?  Well no, it failed then too.

Did the model predict the 1969-70 downturn?  No, that was another one it missed. 

The only time the model predicted a greater than 50% chance (and it was only a little above 50%, so the prediction was basically no better than tossing a coin) of a recession was for the 1980 and the 1981-82 recessions. This had nothing to do with the double dip nature of those recessions, but was a factor of the high interest rate environment that made it possible for short-term interest rates to be higher than long-term rates. It is quite obvious that the higher interest rates are, the better this model works. The model in fact can't work at all when short-term rates are close to zero as they are now. In such circumstances, the yield curve can't invert because nominal long-term interest rates would have to be negative - an impossibility. So with our current low interest rates, the Fed model will never predict a recession.

As usual when the economy is falling apart, the Fed is making its usual positive comments of how things are really in good shape and the public should ignore all the reality-based signs of trouble. Dallas Fed President Richard Fisher was on CNBC on Wednesday and stated with confidence, "while the recovery has slowed, it is unlikely the U.S. will fall back into recession". The Fed was also very confident of avoiding the Great Recession as well and continued to say so long after the recession had begun.

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.

Thursday, July 8, 2010

10 Reasons Why We Are Heading Into 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.


We have entered another period similar to late 2007 and 2008, when the economic establishment had a rosy view of the economy, but a number of indicators were flashing warning signs that a major downturn was coming. Neither the Federal Reserve, the IMF, nor Wall Street correctly predicted a recession would begin in December 2007. None of these august bodies even realized the greatest economic downturn since the Depression was taking place even months after it had begun. Bullishness once again reigns supreme among the economic elites as one indicator after another is signaling trouble ahead.

Here are 10 reasons to think that a there will be a recession soon:

1. The ECRI weekly leading indicators have dropped to minus 7.7%. There has been no case since its existence when a recession didn't take place if this indicator fell to minus 10%. This doesn't mean that it has to fall that low, a recession is still very likely if it even gets close. Falling below zero and staying in that range for any period of time also signals a recession. In the 2007, the recession began three months after this indicator turned negative.

2. Global shipping has experienced a collapse in the last six weeks. The Baltic Dry Shipping Index has fallen from 4209 on May 26th to 2018 in early July, a drop of over 50%. The BDI is now as low as it was in May 2009. Its high in 2008 was 11,793.

3. Interest rates on U.S. treasuries have been falling rapidly and this indicates a weakening economy. The yield on the two-year note even hit an all-time low recently, dropping below its rate during the Credit Crisis in late 2008 when the global economy was in freefall.

4. The stock market is turning down and the Dow Industrials and S&P 500 have both given bear market trading signals. The small cap Russell 2000 has already experienced a bear market loss. The stock market peaked only two months before the 2007 recession began.

5. U.S. Consumer confidence took a nosedive in June falling 10 points to 52.9. A reading of 90 or above indicates a healthy confidence level.  Confidence hasn't gotten anywhere near that level during the recovery. Prior to the Credit Crisis, consumer spending was responsible for 72% of GDP. The consumer is the 800 pound gorilla that determines the fate of the economy.

6. The jobs picture hasn't improved and isn't likely to get better for a long time. Weekly unemployment claims were 454,00 this week. Anything around or above 400,000 indicates a recessionary environment. Claims have not even gotten that low at any point during the recovery. Surveys indicate that job offers for 2010 graduating students are few and far between. Long-term unemployment is far higher than it has been in any post-War recession.

7. Housing, the epicenter of the Credit Crisis, is getting worse. New Homes sales fell to an all-time low recently.

8. Government stimulus is declining and turning into retrenchment globally. The 2009 U.S. stimulus package's impact on the economy peaked this spring and spending will run out by the end of this year. It is highly unlikely a new stimulus package will appear in 2011. Government spending didn't just stimulate the recovery, government spending WAS the recovery. Without it, there will be a sharp drop in economic activity.

9. Taxes are increasing globally and higher taxes are a drag on economic growth. In the U.S., the Bush tax cuts expire at the end of the year. In the UK, capital gains are going up from 18% to 28% and the VAT is being raised from 17.5% to 20.0%. In Japan, there is a proposal to double the national sales tax from 5% to 10%. In the EU, countries are trying to outdo each other in imposing new and higher taxes.

10. The eurozone debt crisis is not yet resolved, but has been temporarily postponed. Greece could still default and problems are likely to continue in Portugal, Spain, Ireland and Italy. These can continue to negatively impact the global economy for a long time to come.

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.

Wednesday, July 7, 2010

Dow Industrials to Give Bear Market Signal Today

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 big cap Dow Industrials will be giving a bear market trading signal today.

The Dow's 50-day simple moving average will be falling below its 200-day. The happened for the S&P 500 last Friday, July 2nd. While this has not occurred for the Russell 2000 yet, the index simply confirmed small caps were already in a bear market with a close-to-close loss of 20.5% as of yesterday, July 6th. This puts it in a bear market by the strictest definition.

Trading on the U.S. markets started out with a strong bullish bias in the morning, but as the day progressed the rally lost its momentum. This is a trading pattern typical of bear markets - strong in the morning, weaker toward the close. While the Dow was up as much as 170 points early on, by around 3PM it was in negative territory like all the other major stock indices. A last minute rally pushed the Dow, S&P 500 and Nasdaq into positive territory. The Russell 2000 closed down 1.5% however. The Dow managed to close up 57 points, the S&P 500 5 points and the Nasdaq 2 points - not exactly a sterling performance after two weeks of severe losses.

The 50-day moving averages for all the indices are dropping rapidly. The 200-day's are still moving up, but just barely. They should begin to move down soon to complete the bear market picture. The 50-day almost crossed the 200-day on the Dow yesterday, but missed by coming in at 10,361.77 versus the 200-day's 10,360.60. There is no doubt that the cross will take place today.

It makes sense that small caps should enter a bear market first since they are more volatile and risky. The big cap Dow usually enters bear market territory last because it consists of what are perceived to be the safest stocks. The Nasdaq should be next to follow the Russell 2000 into the jaws of the bear, but it's trading signal is not likely to happen until the end of this next week at the earliest. Only one bad trading day though could provide it with a bear market loss. It has already declined 18.7% peak to trough. So the Nasdaq could actually be in a bear market before it gives its trading signal, just like the Russell 2000.

The market has provided investors with a number of clues, indications, and signals that the bull market it over and we have entered a rough patch. About the only thing that is missing so far is someone putting up a giant neon sign in Times Square that flashes 'Stocks are in a Bear Market'. If you need that much notice, perhaps you should try paying more attention.

Disclosure:

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, July 6, 2010

What's Driving Today's Market Rally

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


Major European stock indices were up two to three percent today after Asian indices rose around one percent last night. The U.S. markets then had a strong opening after the three-day holiday weekend. Mainstream media is citing bargain hunting as the source of the rally, whereas money-pumping operations to support the euro is likely the major contributor to the market's bullish behavior.

Stocks were devastated in the last two weeks and some rally at this point is reasonable in order to resolve an oversold condition. Strong buying in the U.S. though would be inconsistent with the bear market signal being giving by the S&P 500 on Friday and the small cap Russell 2000 having experienced a bear market loss of over 20% the same day. This is not the type of market environment that traders can't wait to plunge into on the long side. Liquidity pumping by the major central banks would be most effective (and likely) at a key market juncture like this however.

Central bank efforts to support a faltering global financial system began in earnest on Sunday May 9th after the Flash Crash three days earlier. The EU announced its $915 billion euro rescue plan and at the same time the U.S. Fed opened unlimited liquidity swap facilities with the European Central Bank, the Bank of England and the Swiss National Bank. A swap facility up to $30 billion was opened with the Bank of Canada. The Fed stated, "These facilities are designed to help improve liquidity conditions" and that the Bank of Japan was considering similar measures. The swap arrangements were authorized until January 2011.

Stock markets around the world then skyrocketed on Monday, May 10th since increased liquidity shows up immediately in stock prices. Investors should expect intermittent market impact both from euro rescue money and swap generated liquidity for the next few months. For the full text of the Fed's announcement, see: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm.

It is fortunate for the markets that liquidity is on tap when needed. Not only is the technical picture of the market deteriorating, but the economic news isn't supporting stocks either. Little noticed last Friday was the announcement of a decline of 1.4% in U.S. industrial production. The ISM Manufacturing index for June, which came in at 56.2, indicated a slowing expansion (over 50 indicates growth). Almost every component, except for those related to inventories, was down. New orders, an indication of future activity, dropped 7.2 from the previous month. The ISM Service index fell to 53.8, which was below forecast. The employment component was 49.7 dropping below 50 and indicating job losses. The service sector is four times bigger than the manufacturing sector in the U.S.

Investors should enjoy the rally while is lasts. The rally after the flash crash in May lasted four days. Within ten days, stocks were lower than they had been during the crash. Liquidity induced rallies can be powerful, but they don't last very long.

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, July 5, 2010

Russell 2000 and S&P 500 Confirm Bear 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 S&P 500 gave a bear market signal on July 2nd; while the small cap Russell 2000's decline reached bear market territory.

All the major U.S. stock indices had significant losses last week and Friday capped it off with more evidence that stocks are no longer in a bull market. From intraday peak to trough, the Russell 2000 has lost 20.2% so far. The definition of a bear market is a 20% loss.

The S&P 500 signaled it would be joining the Russell soon with its simple 50-day moving average falling below its 200-day. This is the classical technical definition of a bear market. Mathematical inevitabilities indicate that the S&P's 50-day will be falling sharply in the next two weeks putting more distance between it and the 200. The 200-day itself is still slowly rising and will have to turn down to complete the bear trading pattern. The S&P 500 should be close to a 20% loss when that happens. It has already lost 16.7% peak to trough in the latest sell off.

The Dow Jones will join the S&P 500 in giving a bear market signal by July 7th at the latest. The Nasdaq will follow the Dow shortly thereafter. Ironically, the last major index that will have a 50-day, 200-day cross will be the Russell 2000. It will obviously be anticlimactic when it happens.

Both the Russell's bear market loss and the S&P 500's bear trading signal were foreshadowed by the first four trading-days of the month indicator. Stocks sold off in the beginning of May and June and two months in a row indicates a bear market. Stocks have sold down the first two trading days of July so far, even though the day before the July 4th holiday has a high probability of being bullish. At least a small rally is quite likely in the next two days however. The Dow Industrials have sold off seven days in a row as of Friday. The last time the Dow sold off for eight consecutive days was in October 2008 at the height of the Credit Crisis. Conditions now would have to be worse than they were then for a nine day sell off.

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, July 2, 2010

June Employment Report: Where are the Graduating Students?

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.


Every May and June millions of students graduate from high school and college and enter the U.S. labor force swelling the numbers. Yet in the just released employment report for June, the BLS claimed the labor force decreased by 652,000 last month. This followed a decrease of 286,000 in May. This of course is not possible unless the U.S. economy is in the midst of a depression.

So where did the all the recent graduates go? One place most of them didn't go was to a place of employment. A survey by the National Association of Colleges and Employers found only 40% of new college graduates had a job offer before leaving school in 2010. This compares to two-thirds in pre-recession 2007.  High school graduates not going to college probably didn't do much better. The BLS lists the unemployment rate for those between 16 and 19 as 25.7%.

According to the Statistical Abstract of the United States, 3.3 million students graduated high school and another 3.3 million received college degrees in 2010. While not all of these people would have entered the labor force, it can be assumed that at least a few million did in the last two months. Nevertheless, the BLS claims that there were almost a million less people in the U.S. labor force in June than there were in April. This huge drop in participants caused the reported unemployment rate to drop to 9.5% in June since people who leave the labor force aren't counted as unemployed. The Bureau explained these disappearing participants as people who gave up looking for jobs because none were available for them - not exactly an indication of a recovering job market.

BLS figures further show that there were 301,000 less employed Americans in June than there were in May (see http://www.bls.gov/news.release/empsit.a.htm). The headline number reported a loss of only 125,000 jobs however. The BLS explained this away as a loss of 225,000 census jobs and claimed that the private sector added 83,000 jobs. If you use the 301,000 figure though, it looks like there was a loss of approximately 83,000 private sector jobs.

The insane contradictions in the BLS figures can partially be explained by 'seasonal adjustments'. This is one of the statistical tricks the bureau utilizes to try to make a sow's ear look like a silk purse. Seasonal adjustments make it possible for millions of graduating students to enter the labor force and the BLS to report that the labor force shrank while this was happening.

The employment numbers should be seen for what they are - absurd results created by gross manipulation. Many people however don't wish to believe this takes place despite all the evidence. Those are the people who really need to worry about the current state of the U.S. economy. If the labor force can decline by a million when millions or graduating students are entering it, this means it really lost maybe four or five million workers in a two-month period. That indicates that things are worse in the U.S. now than they were during the Great Depression in the 1930s.

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, July 1, 2010

Stocks End Q2 Giving Another Sell 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.


After Tuesday's sharp drop, it would be reasonable to have assumed that U.S stocks could have at least had a dead cat bounce. Not only didn't the cat bounce, but prices fell even further confirming a head and shoulders top on the S&P 500. Even worse, a more important sell signal will be given by Friday when the S&P's simple 50-day moving average falls below its 200-day. This is a classic bear market confirmation. The first of the month indicator already confirmed a bear market in early June.

While it looks like there's much worse to come for stocks, the second quarter was bad enough as is. The U.S. stock market was in a correction no matter how you measure it. For the quarter, the Dow was down 10% and the S&P 500 and Nasdaq were both down 12%.  From their highs on April 26th to their lows on June 30th, the Dow, the S&P 500, the Nasdaq and the small cap Russell 2000 were down 13.9%, 15.7%, 17.0% and 18.4% respectively. A market is in correction when it has dropped between 10% and 20% from its high.

A market has entered bear territory once it is down 20%. There is more than enough reason to think that this will be happening soon. Both the S&P 500 and Nasdaq hit their 2010 lows on June 30th. The Dow was only slightly above its low on June 8th. The S&P 500's head and shoulders topping formation indicates a possible additional drop of 20% (based on the work of market technician Thomas Bulkowski). This pattern was confirmed when the S&P 500 fell below 1040.78. Its low on the last day of the quarter was 1028.33. In an article on May 28th, I pointed out that this chart pattern was in formation. Well, now it has been confirmed and is providing one more piece of evidence of a market prone to selling.

U.S. stocks already started a bear trading pattern when the major indices sold off during the first four trading days of the month in both May and June. An article I wrote on June 6th detailed the specifics. The next confirmation will be the simple 50-day moving average crossing below the simple 200-day moving average. This will take place for the S&P 500 this Friday, if not today. The ultimate and final confirmation will be given when the 200-day moving averages for the major indices start heading down.  They have been flattening out and trending sideways lately, so this too will be happening soon.

The technical picture for the major U.S. stock indices is not only negative, but is getting worse. The market is dropping just ahead of the sharp and sudden deterioration of the economy that is beginning to show up in a number of places. The upcoming bear market though is likely to move faster than the previous one that lasted 18 months from peak to trough. Traders will love the volatility. Investors should wait for the signs of a bottom, which will offer them many opportunities for major profits.

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.