The Inflation Trade

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Gold had another record close yesterday, the third one in four days. The near term futures contract closed at $1018.90 and was as high as $1023.30 intraday. The breakout level is $1004 and above. Gold still needs to take out its all-time intraday high of $1033. Silver closed at $17.33 and traded as high as $17.50. The New York Investing meetup mentioned gold was a good buy at $740 and silver in the the $9 to $10 range. We have also discussed in our meeting the ETF's DGP and AGQ that are 100% leveraged and move twice as much up and down as gold and silver do. These highly volatile ETFs are not appropriate for risk-adverse investors. For those who want to broaden their investments to include gold and silver miners , we proposed the ETF GDX. Our favorite gold stock is NovaGold (NG) which was first mentioned in this blog when it was just above $3.

The precious metals are going up for the same reason as global stock markets. Governments throughout the world are pumping massive amounts of liquidity into the financial system. This shows up in stock prices first and in consumer inflation later (it can take many years before the full impact is felt). The statistics indicating economic 'recovery' are usually not adjusted for inflation and what is being touted as economic growth by the mainstream media has a significant component of rising prices to it. This is only the beginning however. In a few years inflation is going to get incredibly ugly. When it becomes apparent that there is no 'real' growth, the stock market rally will fizzle - and the government will print even more money to stimulate the economy. The stock market is currently historically overbought based on some criteria. Over 90% of stocks on the NYSE are trading above their 200 day moving averages. A number in the 70% range is usually enough for a top.

Gold and silver are the ultimate protections against inflation and anyone concerned about inflation should make them the cornerstone of their investing strategy. I will hold as much as 50% of my portfolio in these metals and their miners during their bullish periods. The other two major inflation hedges are energy and agricultural commodities. Oil is seasonally weak in the fall and usually best bought early in the year and sold in the summer (as the New York Investing meetup did with DXO). Its seasonal pattern is almost the exact opposite of gold and silver's. Natural gas is the energy commodity of choice at the moment since it is seasonally strong in the fall. Agricultural commodities are dependent on weather as well as inflation. Good weather during the U.S. summer has driven many of their prices to very low levels. It might be worth taking a look at RJA or DBA (RJA is more diversified) and start putting a little of them away for a non-rainy day.

The other inflation trades include industrial metals and shorting long-term U.S. bonds. The New York Investing meetup mentioned FCX in the winter and Alcoa (AA), UYM and XME in the spring (as well as Harry Winston - HWD). These stocks have already had major rallies. They are partially dependent on inflation and partially dependent on the economy doing well going forward, so they are not the major bargains they once were. The short bond trade did well between December and June (bond prices went down and interest rates went up), but there has been some give back during the summer. TBT is a leveraged ETF that allows the average investor to short long-term bonds. When the economy heats up, interest rates go up. During bouts of inflation interest rates go through the roof. TBT works if either or both take place and it is currently at a reasonable price.

NEXT: Quadruple Witching Today; Market Update

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.

It's Not the News, It's How the Market Reacts to the News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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At the moment, world stock markets are acting more like bull markets than bear markets. In a bear market all news is bad and in a bull market all news is good. There is still plenty of really bad news out there about the economy and corporate earnings - and the media is flooding the airwaves and using a lot of ink on stories of bad news, more bad news and still more bad news. The average investor will act like a deer caught in the headlights frozen in inaction. Meanwhile stock prices keep going up and up because professional traders are buying. What the market does is the only thing you should pay attention to. If any of the reporters writing these stories actually knew anything about making money in the stock market, they would be successful traders making a hundred times more money than they do as reporters.

Last week Alcoa (AA) offered a perfect example of the bull market reaction to news. Earnings were not just bad as everyone thought they would be, but were even worse than expected by 3 to 5 cents (depending on which analyst survey you looked at). The stock actually opened up the next morning and then settled down for a small loss on the day. I had sold out my position (purchased off the bottom) in anticipation the earnings would be worse than expected. However, since the market obviously didn't care about that, I bought the stock right back the next day (at the market, I don't take the risk of not getting a good bargain by setting limit orders). Alcoa then had a big rally on Thursday. When a stock goes up like this on bad news, it indicates all the bad news has already been priced in. When that happens the price can only go up. You didn't read about that in the mainstream press however. All you saw was negative coverage of how poor the aluminum business was last quarter even though the market couldn't care less what happened last quarter.

As we detailed in last weeks meeting, the press has been not just irrelevant when it comes to the coverage of the oil market, but out and out misleading about the actual state of affairs. The oil bears have managed to drive the price of light sweet crude below the 50.50 breakout point 3 times so far. I have bought more oil related stocks at each point (Recently I started purchasing drillers which are usually the last to rally). Nymex oil closed the trading week at $52.24 on Thursday. The media is doing its best again today to highlight the negative view on oil. The IEA, International Energy Agency, is now predicting that global oil demand will fall 2.4 million barrels a day this year. Media stories didn't mention any statements from the agency concerning predictions on supply (which is falling rapidly). Meanwhile Iran's oil minister, a source that would not have any credibility with U.S. readers, released a statement that the price of oil should go to $75 to $80 a barrel and the media highlighted this. In response, renowned oil "expert" Victor Shum, a source that should have no credibility with U.S. readers, said, "nobody, even in OPEC, expects the price [of oil] to get to $75 this year". Obviously, Mr Shum doesn't follow the New York Investing meetup. If he did, he might improve the accuracy of his forecasts.

People don't make money in the stock market because they focus on the irrelevant - and the mainstream media is more than willing to help you do this. Pay attention to what the market is actually doing if you goal is to make money investing. Then you need to take action. If a consumer goes shopping and sees an incredible bargain at 90% off, they don't usually say I'll come back next week to see if its 95% off or I'll come back and get it in a couple of hours when I'm done with my shopping (lots of luck that it will still be there). People do this with stocks all the time though and this is one of the major reasons the average person has trouble making money investing.

NEXT: Rallies Make You Rich, No Matter What the Type

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.

How to Handle Earnings Season

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Earnings season officially begins today with Alcoa's earnings after the bell. While some company earnings are released every day, there is a huge bulge of announcements in the two weeks following the 7th of the month at the beginning of a quarter. Dow component Alcoa kicks off this period. While earnings are likely to be almost universally bad this doesn't mean that stock prices will go down. They may indeed go up.

Everything is relative on Wall Street. Any information that is known or suspected has already been incorporated in the price of a stock. Since the market overall fell from October 2007 to March 2009, a lot of bad news is reflected in current stock prices. So much so that anything short of a declaration of bankruptcy will be bullish for some stocks. The mainstream media will not emphasize this however and as it is doing today will write articles how earnings will be bad for last quarter. Since this is already known, your reaction should be that everyone already knows that so why are you wasting my time telling me about it. Only if earnings are worse than expected are they likely to be negative for stock prices (for more than a day or so).

If you are holding company stocks like Alcoa (AA), you have two choices. You can sell before the earnings announcement and buy back after or just hold through it. This decision isn't always clear cut. Having bought AA just off the bottom and having a nice profit it in in just a short time, I chose to sell it with the intention of buying it back. The market has had a sharp up move in the last 3 weeks and it vulnerable to a drop this week in general, so AA's earnings are coming out during a period of weakness. The market reacted quite negatively (at least for a short time) to Chalco's (the Chinese Aluminum company) earnings and negative description to the aluminum industry several days ago, so it is not unreasonable to assume a short negative reaction for Alcoa as well. Of course, Alcoa could surprise on the upside, it which case I would wait a few days for a pull back to buy it.

In general, I am still looking to buy beaten down stocks in a some commodity sectors (not copper since is has rallied since last fall, I also sold my FCX holding recently) and a technology stock here or there and will view a drop on earnings as an opportunity to get a good price. The market is filled with under priced bargains at the moment (some stocks are even selling for less than their yearly cash flow). You should look at anything that will do well in a high inflation environment and avoid the financial sector, where a low price these days usually indicates cheap goods as opposed to a bargain. It is important to know the difference.

NEXT: The News is Bad ... Time to Buy

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.

Commodities Rumble, Financials Tumble

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Alcoa was one of the biggest movers in the market yesterday. At one point it was up over 20%. It was also the stock that I pounded the table to buy at Tuesday night's class on Technical Analysis. Our February choice, DXO, is up over 50%. Basically every stock I mentioned during the class had a good to huge rally. Even FCX, used to illustrate a number of technical points and well advanced in its rally would have made you good money. It was in the upper 34's on Wednesday morning, but over 42 at its high yesterday (there are better bargains in the market at this point). Even a Canadian Royalty Trust that I only mentioned in passing that I had purchased, went up nicely. A couple of attentive attendees took the hint. Coal stocks across the board had terrific rallies. We spent a lot of time looking at coal in the class. While I wasn't sure steel had bottomed, it rallied sharply nevertheless. No one apparently picked up on the shipping company that I made a gratuitous remark about, probably because I didn't state that I owned it. It was up 28% yesterday.

What wasn't up yesterday were financials. Citigroup was down 26% at its low, but closed down 16%. It is planning a reverse split. Wells Fargo was down 10% and Regions Financial down 12%. Broker, Morgan Stanley was down 13%. Insurance companies were clobbered (watch this space for a future bailout). Prudential was down 25% and Met Life, 12%. While you can make good money day trading financials, their long term picture is down while the long term picture for commodities is up. You can no more walk away while holding these positions than you could leave a big pile of chips unattended at the gambling tables in Vegas or Atlantic City. Of course you would eventually not have that pile of chips anyway since gambling, unlike investing, is ultimately a losing activity.

While the precious metals rallied yesterday, beaten down silver did much better than gold. Both were significantly down on Wednesday morning and shot up like rockets after the Fed announcement. It looks like a lot of traders were stopped out of both during the drop. I've seen this Wall Street racket played repeatedly over the years. Manipulators drive down the stock price driving the small players out and then a sudden reversal takes place and it shoots up to the sky. The inside players get the stock cheap and makes big profits, while the small investor is left holding the bag . Only if you have a accurate big picture of what is going on can you protect yourself from this type of shake down.

Oil continued its rally yesterday, closing at 51.61. This was the highest close since December 1st and represents a very significant breakout. Next resistance for the futures contract around $57. Natural gas finally joined the party and was up 42 cents to $4.10. This is a rally right off the bottom. Probably best to wait for some pull back from the initial rally if you want to buy. Gasoline and even heating oil had significant rallies yesterday as well. Oil has now rallied from the high 33's to over 52 in a month. During this entire time, the mainstream financial media has published one story after another about how oil can't rally until the economy improves and how oil can't rally because demand is declining. Nevertheless, oil has rallied sharply. Apparently the smart money doesn't pay any attention to the media, nor should you if you want to join the big money some day.

NEXT: Making a Silk Purse Out of a Sow's Ear

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.

When Bad News is Good News and Vice-a-Versa

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. government claims that construction on new homes and apartments jumped 22% in January. Why not 222% or 2222% or the future inflation rate of 222,222%? If you are going to publish fantastic figures you might as well go for some big splashy number that indicates every existing house in the U.S. had its land subdivided and an extra house was built on it. Well, maybe people wouldn't believe that one (although the mainstream media would publish it as if it were true). Somewhat more realistic is the PPI report released today which indicates February wholesale prices went up 0.1% after a 0.8% rise in January. Dropping oil prices are still lowering the numbers, although even with much cheaper oil, the coming big deflation that the media reported all last fall and this winter has yet to show up. Oil prices have already begun inching back up and even the highly manipulated government figures are likely to soon be showing that inflation is rising again.

Oil acted quite bullish yesterday. Even though OPEC refused to cut it production quotas at its Sunday meeting, oil prices were essentially unaffected. While oil went down about 3% in Asian trading after the meeting, it recovered its losses by the close in New York. Nymex light sweet crude is trading at 47.50 a barrel as I write this, almost as high as its gotten since the double bottom made in the high 33's on February 18th. When an investment doesn't go down on what should be bearish news, what will make it go down? The market is telling you that the selling is done (this works quite well for analyst downgrades by the way, if a stock goes up on a downgrade there are no sellers left). DXO, which New York Investing said was a good purchase on the evening of February 17th is hitting its highest high since that date today.

Sometimes assets do indeed go down on bad news, but don't hit new lows. This is also bullish. You should be watching Alcoa (AA), which had horrendous news yesterday. While the dividend cut was expected by any rational person, the issuing of new stock and convertibles is dilutive for current shareholders. AA's yearly low was 4.97 reached on March 6th and it has not been breached yet in today's trading with the low so far being 5.37. AA is not the first metal stock to cut its dividend, reduce capital spending, etc., etc. Freeport McMoran Copper and Gold (FCX) did so last December 3rd and the stock bottomed 2 days later at 15.70. It has gotten over 38.00 since then. When really bad news comes out, you need to ask yourself what else could happen. If there is nothing worse, how can the investment go down further? Unlike FCX, AA does have one additional risk and that is it could be thrown out of the Dow Jones Industrial Average.

The stock market is filled with beaten down stocks at the moment. To find the real bargains you need to determine if the company will still be in business tomorrow. In some cases, the answer to that is no (think financials and anything related to them). In others like FCX, which is the lowest cost copper producer in the world, the demise of the company would mean the disappearance of an entire essential industry. If the industry isn't going to disappear, the lowest cost producer will still be around. You should find out who these companies are for every commodity.

NEXT: What Happened to Deflation?

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.