Bidirectional U.S. Stocks, Spanish Bonds and the ECB

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 new mantra for the U.S. markets appears to be "if it's Tuesday, it must be bidirectional market day".  Once again the Dow went up strongly, while the Nasdaq was trading in negative territory. Events in Spain seem to be connected with this unusual and bearish market action.

At one point during the trading day, the Dow Industrials were up 123 points. Nasdaq on the other hand was down by 20 points at its worse. The S&P was caught in the middle. The same strange behavior took place last week. Spanish bonds and the euro rallied both times and money pumping from the ECB (with perhaps some dollar swap activity from the Fed) explains these seemingly unrelated events.

The yield on the 10-year Spanish government bonds exceeded the dangerous 6% level last week and suddenly heavy buying came in and drove yields back down to around the 5.86% level. Today, the yield on the Spanish 10-year reached 6.049% and suddenly buying came in and drove the yields down to 5.86%. The Euro rallied both times. As measured by the ETF FXE, it rose to 131.19 today. There is no reason investors should be buying either one. Spain is at risk of developing a full-blown debt crisis just like Greece and the Dutch government fell and the French election went badly over the weekend.

Money pumping causes markets to rally. It is directly being aimed at the Spanish bond market and the euro however. It spills over into other markets though. Since the Dow consists only of very liquid big cap stocks it will be impacted the easiest. The rest of the U.S. market has serious problems though. Tech stocks have led it up and now they are struggling. The ECB money pumping isn't enough to counteract the forces driving them down.

Money pumping can't go on forever and every time there has been a pause, stock prices have suffered. Problems in Spain are merely part of a much larger ongoing debt crisis in Europe. The balance sheet for the ECB has already been increased by much more than has been the case in the U.S. and the chart line is going straight up. A pause will eventually take place and when it does stocks will weaken globally -- and this includes the Dow.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Stock Market Goes BiDirectional

 

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. stock market action on Monday was highly unusual with the Dow Jones Industrials rallying strongly while the Nasdaq experienced major selling. This behavior is bearish and indicates lower stock prices in the future.

The open set the tone for the day with the Dow up over 100 points shortly thereafter and the Nasdaq down more than 20 points. The Dow rallied even further and the Nasdaq sold down to even lower levels. By the close however, not much had changed from the open. The Dow was up 72 points to 12,921 and the Nasdaq down 23 points to 2988. The S&P 500 and the small cap Russell 2000 were caught in the middle and were barely changed. The S&P 500 fell 0.69 points to 1369.57 and the Russell 2000 rose 1.79 points to 798.08.

The explanation for the Dow Industrials rally was the supposedly good retail sales numbers (fueled by inflation with rapidly rising gasoline prices leading the way) and bailout poster child Citigroup's (C) mediocre earnings report. The culprits on the Nasdaq were easy to spot with big selling in Apple Computer (AAPL) and Google (GOOG) dragging the index down. Apple closed at 580, down $25 (4.2%) , and Google was lower by $19 (3.0%) for a final price of 606 at the end of the day. It was the second day of major selling for Google. Both drops indicate the big money is getting out of these stocks.

All the major four indices closed below their 50-day simple moving average (a strong technical negative). This was the first time the Nasdaq has done so this since last December. The Dow has done this for six days in a row however and the Russell 2000 for seven. If a stock or index moves below its 50-day moving average and stays there for several days, it should be assumed that it will eventually fall to its 200-day.  This is still in the realm of normal bull market activity.

Non-confirmation in a bull market should always be considered a negative for stocks. A bullish behaving Dow and a bearish acting Nasdaq is not a good sign. The Dow Industrials itself has a separate non-confirmation problem with the Transportation Average. Even though the Industrials went to new highs in the last few weeks, the Transportation Average has not. Perhaps it still will, but it doesn't look like it will happen. This has been a reliable market sell signal for over 100 years.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Remerging EU Debt Crisis in Spain Will Damage Stocks

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

The yield on Spanish 10-year government debt was as high as 6.16% on Monday. Credit default swaps on Spanish debt hit a record even though the peak yield on the 10-year was 6.70% on November 25, 2011. After a big selloff on Friday, stocks were rallying on Monday despite the new emerging crisis in Europe.

The 6% yield level is watched closely because when rates went over that level in Greece, the Greek debt crisis emerged. Spanish 10-year yields were over 6% three times last year. Prior to last November they reached 6.32% on July 8, 2011 and 6.28% on August 4, 2011. The ECB (European Central Bank) has intervened directly in bond markets under its Securities Market Program (SMP) to hold down interest rates in the peripheral countries. At least one Spanish official has called for a renewal of these efforts.

The ECB also established the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Massive money-pumping operations have also been conducted through the two LTROs (Long-Term Refinancing Operations), one for $645 billion and a second for $713 billion.  The massive liquidity coming out of Europe has led to the recent global market rally. This will be just one of its unintended consequences. Later on we will be experiencing a large uptick in consumer price inflation as another.

While the inflation caused by the ECB is likely to last, the lower interest rates aren't. Spain has now broken above the 6% line in the sand four times. Portugal has never even gotten down to that level. Its 10-year governments were yielding 12.7% on Monday. So far they have peaked at 17.4% on January 30th. Italian 10-year governments have also yielded over 7% last November and this January, but were driven back down to below 5%. They are now rising rapidly again and heading toward 6%.

European stock markets were damaged significantly on Friday and the U.S. markets to a lesser degree. Despite the ongoing bad news markets across the pond were rallying today. And why shouldn't they. Another bailout (and another bailout and another bailout and another bailout and even another bailout) is expected. So far, even with the massive amounts of printed money thrown at the bond markets in the peripheral countries, the debt problems keep emerging . And now the global stock market rally looks like it is beginning to fray around the edges.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

The Only Suprise for March Employment Was that it Wasn't Even Worse

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 BLS, the U.S. created only 120,000 non-farm jobs in March. The mainstream media cited this figure as a surprise because it was well below expectations. The real surprise was that the number wasn't even worse.

Winter month employment numbers came in at the 200,000 level and this was trumpeted as evidence that the economy was finally gaining steam. There were two problems will this line of reasoning. The first is that the U.S. needs to create approximately 150,000 jobs a month for the unemployment rate to stay even (this balances the loss of people retiring with new students and legal immigrants entering the job market).  In order to put any serious dent in the massive amount of unemployment that exists the monthly number of jobs being created needs to be well over 200,000. The second problem was the unusually warm weather during the winter that magnified the impact of the seasonal adjustments.

If seasonal adjustments boosted the numbers in January and February, then lower numbers should be expected in the normally warmer spring months. The weak March number seems to be bearing this out. It is interesting to note that the Retail Trade category lost 34,000 jobs in March. This does not support the idea that retail sales have actually been strong as has been claimed, but that the numbers have instead been artificially boosted by inflation. Retail employment is prone to large swings due to seasonal factors.

The official unemployment rate fell to 8.2% from 8.3%. The obvious question is how can this happen if less than 150,000 jobs were created and that's the amount needed for things to remain in equilibrium? It can only occur if more people than expected leave the labor market. This happened again last month  as has been the case during the entire economic "recovery"(millions of people have left the U.S labor market since the Great Recession began). The mass exodus from the labor market creates a huge reservoir of unemployed waiting to reenter the market if conditions actually improve. This reentry could keep the unemployment rate from falling well into the decade.

People of course do not leave the labor market in droves when the economy is on an upswing. The continued shrinkage of the labor market indicates an economic downturn. Don't expect to hear that from either the U.S. government or the cheerleading mainstream media. Politicians don't get reelected by telling the public bad news.

A key question that usually goes unexamined in reporting about the jobs numbers is the high price the U.S. taxpayer and consumer will be paying in the future for the jobs being created today. The U.S. has run deficits of $1.3 trillion or more since 2009. Pumping all of that money into the economy will of course create jobs, but at what cost?  Unless there is a free lunch, that money will have to be paid back either through higher taxes or higher inflation. Both will lead to lower job creation in the coming years.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Without Stimulus Market Can't 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.

Minutes from the last Fed's Open Market Committee meeting indicate the central bank is less likely to introduce more stimulus. While this should not have been surprising, stocks sold off on the news adding more evidence that the top has been put in.

The current market rally, indeed the entire market rally since mid-2009 has been produced primarily on liquidity provided by the Fed and other central banks. This liquidity not only allows the market to continue to rise, but it also props the market up. Without a continuing flow of liquidity, the market could easily hit an air pocket and fall apart and it can do so in a very short period of time.

The impact of what happens when just a hint that more liquidity won't be forthcoming can be seen by Wednesday's action. The Dow Jones was down 1.0% (125 points), the S&P 500 1.0% (14 points), Nasdaq 1.5% (45 points) and the small cap Russell 2000 1.7% (14 points). Commodities were hit even harder than stocks with gold dropping 3.0% or $51, silver down 4.2% or $1.33 and oil lower by $1.97 or 1.9%. Copper lost more than 3%. The major gold and silver mining ETF GDX was $ 2.05 lower or 4.2%. The junior version, the GDXJ, dropped an even dollar, also 4.2%.

While there seems to be a number of players in the market hoping for QE3, they are not likely to get their wish anytime soon. At this point it is almost impossible for the central that has been crying recovery for the past three years to justify such a move without seeming to be blatantly interfering with the ongoing presidential election. Moreover, even to an inflation-blind Fed, the risk of future rising prices is becoming increasingly difficult to ignore.

Traditionally, rallies last between six and seven months and this one is beginning its seventh month. The upside action on the indices has been decent even for an entire year. Rallies don't go to the sky however, but correct because too many people have bought and many of them have bought on margin. Once that point has been reached it takes very little to pull the market down and once the selling starts in earnest it becomes very difficult to stop. We may not be there yet, but we probably will be soon enough.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.