Tuesday, April 24, 2012

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

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

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