Dollar Break Downs

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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The trade-weighted dollar closed below its break down point of 78.33 yesterday. Intraday the dollar traded as low as 77.45 and it closed at 77.57. As has been the pattern for months now, everything else rallied as the dollar sold off. While stocks continued their long move up and the S&P 500 reached 1000 (a major resistance point), commodities were the star players in the rally. The CRB index, a broad basket of commodities, was up 3.48%. The ISM manufacturing Report supposedly set off the rally.

According to the media, the promise of economic revival was responsible for the big commodity rally. So what commodity is doing best recently? Sugar! - which was trading at a three year high yesterday. Sugar is not economically sensitive at all (people don't go into sugar eating frenzies when a recession ends), but is instead a strong mover in the early stages of inflation. The biggest winner on the day was natural gas (the chart is very bullish and UNG closed above the 50-day moving average), with the near term futures contract up 10%. Copper, which is perhaps the most economically sensitive of all commodities was up 4.4%. Copper, zinc, lead and nickle are all trading at 10-month highs. Aluminum is at an 8-month high.

The rallies in gold and silver, which are the commodities most sensitive to movements in the U.S. dollar, were somewhat muted. Gold was as high as $963 intraday. A report released yesterday stated that net sales of gold by central banks fell to 39 metric tons during the first half of this year. This was down 73% from last year. If total sales for the year come in under 140 metric tons (highly likely), they will be the lowest in decades. Central bank gold selling was a major factor keeping gold prices low in the 1980s and 1990s and it looks like it is now completely exhausted.

As for the ISM report PMI came in at 48.9 (under 50 means contraction). This was above expectations and a few components were up decently, including production, new orders, and prices paid -which is an indication of inflation. Inventories were the most negative component of the report and they have been contracting for 39 months so far. According to the ISM, six industries are now expanding - Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Transportation Equipment; and Chemical Products.

As I have stated many times in this blog, economic revival is going to mean a lot of inflation.
The dollar break down is an indication of this and the powers that be are going to have to do something soon to try to hold up the dollar. My guess is that this will happen when gold hits the $1000 area. This is the inflation marquee for the economically savvy. The Fed can deny that inflation exists all it wants, but if gold soars past 1000, only the naive and gullible will listen. Since there is usually a lot of buying pressure for gold in August, the next few weeks should be interesting.

NEXT: Gold Shining, Silver Lustrous

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.

Dr. Evil and Mini Me Loot the U.S. Treasury

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:

On Monday, U.S Treasury Secretary Henry Paulson and his look-alike Interim Assistant Secretary for Financial Stability, Neel Kashkari (both originally from Goldman Sachs and participants in helping to create the credit crisis) came up with a plan to stabilize U.S banks without nationalizing them. The U.S. will be saved from socialism by pilfering its treasury and giving the money to the U.S. banks and brokers that are considered 'too big to fail' the many teetering regional banks will have to wait and if still in business, might get a share of the government's succor sometime in the future). Pilfering was their intent, along with helping out their other well-placed friends from the beginning (Kashkari drafted the Treasury department's three-page constitutionally questionable, unworkable, and politically inept power grab that was the original Wall Street bailout bill). Interestingly, every major American news outlet seems to have missed the real story about what is taking place.

The story universally reported by the U.S. media, frequently in blaring headlines, was that the government was going to distribute funds to banks in exchange for ownership stakes. No such thing is occurring. In reality, the Treasury is injecting liquidity by buying preferred stock. Preferred stock is loan in perpetuity, it does not represent any ownership rights in a company. Preferred stock is supposed to pay interest (if it doesn't, like all other permanent loans it's a gift). No interest rate was cited in the Treasury announcements, although anything less than the 10% that Warren Buffett got on his recently purchased preferred from Goldman Sachs (along with warrants) or Mitsubishi got on its purchase of Morgan Stanley preferred (backed by a U.S. guarantee), is a government subsidy. No major media source seems to have pointed this out. Instead, they all reported that if rescue plan works, the U.S. taxpayer will benefit because these preferred shares will be sold for a profit. Since preferred share prices fluctuate with interest rates and not the fortunes of a company (as long as it's a viable enterprise), they would go down, not up, if higher interest rates result from the government's inflationary policies. No common share price increases, as happens when a company does better, will benefit preferred share holders. It is of course almost 100% certain the government also overpaid substantially for this preferred stock as well (in the case of AIG, the U.S. government paid ten times the market price for the equity it purchased). The U.S. taxpayer is going to lose somewhere between a little and everything on this deal. There is no chance is will be profitable.

This looting of the treasury is also not going to be terribly effective either. With it, the government has officially established a 'too big to fail' policy. Only big banks intitally get any money. These include J.P. Morgan Chase, Bank of America, Citigroup., Wells Fargo, Bank of New York, State Street, Merrill Lynch, Morgan Stanley and Goldman Sachs Group Inc. Citigroup, Wells Fargo, and JP Morgan will get $25 billion each (even though it doesn't appear that JP Morgan, nor Wells Fargo are in trouble and need the money). Another $25 billion will be split between Bank of America, and Merrill Lynch, which are merging. Goldman Sachs and Morgan Stanley will each get $10 billion, while State Street Bank and Bank of New York (which also doesn't appear to need the money) will get roughly $3 billion each.

This latest move by the Treasury will not only help to continue to put another major dent in the U.S. government's stretched finances, but is helping to create a dangerous concentration of banking power. For 200 years, U.S. policy has promoted a large number of small banks, but now we will be getting a small number of large banks. The thinking behind America's historical approach to banking was to prevent the concentration of too much economic power in too few hands, which could threaten the capitalist and democratic systems. Based on what is happening now, these fears were obviously well justified.

NEXT:

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.