Gold Breaks Down, Where to Look for a Bottom

 

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.

Gold fell and closed below its 200-day moving average yesterday, December 14th. This indicates a technical breakdown and the last time this happened was in August 2008. Gold bottomed approximately 30% off its high three months later in November.

Any analysis of an investment's technical state should begin with the big picture, so recent events can be put in context. Gold is in a secular (long-term) bull market which will last until approximately 2020. This means that the greater trend will move prices higher over time. No market moves straight up however. There are always reversals in a secular bull market and these are sometimes steep. The 1987 stock market crash which took the U.S. indices down 40% and some individual stocks down 70% or even 80% took place in a secular bull market that lasted between 1982 and 2000. Stock prices went to new highs after the crash despite many pundits claiming the crash meant a new depression was coming. Anyone who realized stocks were in a secular bull market could easily have predicted stocks would recover.

Even though gold has dropped below its 200-day (40-week) simple moving average, this does not indicate that it is even in a short-term bear market. At the very least the 50-day (10-week) moving average would have to fall below the 200-day to indicate that. Gold will have to trade below it's 200-day for approximately the next two weeks before that would happen. This did indeed occur in 2008, when it could be said that gold experienced a brief cyclical (short-term) bear market.  The 10-week moving average traded below the 40-week for about four months from September 2008 to January 2009. See a four-year weekly chart of the Gold ETF GLD below.

The bearish behavior of gold in latter 2008 was caused by the Credit Crisis. While you have probably heard ad nauseum that gold is a safe haven in a crisis, this does not include credit crises
(which are crises in the financial system when the banking system has difficulty functioning). We just saw that gold went down during the 2008 credit crisis and yet many gold "experts" somehow can't figure out that it should go down during the current 2011 credit crisis coming out of Europe. In our era, gold can drop during a credit crisis because central banks lease gold at low rates to the big banks and hedge funds. These entities are desperate to raise cash, so they sell the gold into the market (they can't sell many of the assets on their books). This depresses the price of gold -- temporarily. But at some point, they have to buy the gold back and return it to the central bank it was leased from. This makes the price of gold rise again. I explained the entire process in the second volume of my book "Inflation Investing", which covers gold, silver and other metals.

Gold has support at the 65-week simple moving average, but this is not the likely bottom in a full-blown credit crisis.  In order to find that, it is necessary to look at a monthly chart. It can be seen from this that the ultimate support would be at the 40-month simple moving average. Currently, this is around 120 for the gold ETF GLD. This possible buy point, which should be considered a worst-case scenario, was discussed in the October meeting of the New York Investing meetup. See the five-year monthly chart for GLD below.



It's important for investors to focus on the big picture and not get carried away with all the distractions of day to day price movements. Markets go up and down. No market goes in one direction. Every time gold drops, commentators come out of the woodwork saying it means the rally is over and deflation is taking place -- neither is true. It is the bigger price movements that have meaning and gold is in a long-term uptrend. In any secular bull market, a large drop is always a golden opportunity to buy. Just wait until there is some evidence that a bottom has been put in.  

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.

Guide to Interpreting U.S. GDP Figures

 

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.

An update for second quarter GDP figures were released today and growth was revised downward to 1.0% from the initial reading of 1.3%. There will be another revision next month and then further revisions each year in late July or early August. Expect the numbers to get worse as time goes on.

Media attention is not equally distributed to all the versions of the same GDP report. The most attention goes to the first release called the Advance Report. These have tended to be highly optimistic since the Credit Crisis began. The Second and Third Reports that follow (also known as the Preliminary and Final Reports) get slightly less attention, although these are almost always within the same ballpark. The big revisions come in the yearly updates in July and while these can be devastatingly bad, little attention is paid to them by the mainstream media. Nor is the information provided in them used by the mainstream media to interpret current data. The primary reason for this is that the mainstream media rarely interprets government statistics at all no matter how absurd and ridiculous they are. Instead, they mindlessly repeat them in a parrot-like fashion. The public then thinks it's getting real news when it isn't.

On July 29, 2011, the BEA (Bureau of Economic Analysis) revised the GDP figures back to 2006 and stated that GDP growth in Q1 2011 had only been 0.4% instead of 1.9%. There was some comment attached to this report about how seasonal adjustments had inaccurately overstated the numbers. It would be logical to think that such overstatements would be happening in Q2 as well and that these will not be corrected by the BEA until the revision in July 2012. Looking at changes made to the GDP numbers in the last few years certainly provides more than enough reason to believe that the BEA provides the best news possible when the media pays the most attention and the worst news when no one is looking.

The history of the GDP for Q4 2008, the quarter when the Credit Crisis was at its worse, provides a good example of how the government reports GDP. The first report out was a reading of -4.0% -- a bad enough reading, but much better than what was really taking place. After many revisions downward, the BEA this July said the GDP had actually changed by -8.9%. This is an absolute error of almost 5.0%. If the BEA states quarterly growth is +3.0%, you may wish to ponder if it was really
-2.0% instead, but you won't be hearing about the difference until years later. One is normal healthy growth and the other indicates a recession.

The year over year GDP figures can have even bigger errors. The difference from Q4 2007 and Q4 2008 originally indicated 3.3% GDP growth (during the worst recession since the Great Depression, this pigs-can-fly number went unquestioned by the media), but by the July 2011 revision a GDP decline of 3.3% was admitted. This is more than a 6.0% absolute difference. You might want to consider subtracting 6% from any year over year GDP number that the government provides.

The GDP figures produced by the BEA can be highly unreliable and yet the mainstream media doesn't discuss this, nor does it warn investors about it in its reporting. When hearing the news about GDP growth being a passable 2% to 3%, you should assume it might barely be positive or even somewhat negative. For reports like the recent ones that indicate growth of 1% or less, you should assume the economy is noticeably contracting. The BEA will not admit these discrepancies until well into the future however.  You can also assume other statistical manipulations being used to overstate GDP won't be admitted at all.
 
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. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Did Gold Peak on Octobler 18th?

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.


Gold as measured by the ETF GLD fell 3.2% in New York trading on Tuesday. Its chart looks very similar to December 2009 when it experienced an intermediate peak.

Early last December, gold had been rallying for three months. Sentiment was extremely bullish. GLD (and SGOL and IAU, the other ETFs which hold physical gold) was well above its simple 50-day moving average. The technical indicator RSI had become extremely overbought on the daily charts in late November, rising above 80. After a slight dip below 80, the RSI then rose to a merely overbought 80 as the price of gold hit a higher high. This negative divergence signaled the gold rally was done for the next few months. Gold then gapped down and had a sharp drop with the RSI quickly fallingl toward a neutral 50. 

More recently, gold has been rallying since late July. Sentiment has been extremely bullish for quite awhile. Gold has been trading well above its simple 50-day moving average. Gold became overbought by the last week of September and entered extremely overbought territory on the daily charts at the end of the month with the RSI rising above 80. By early October, the RSI was even higher. Then there was a quick dip below 80 and the RSI rose and hit 80 while the price of gold hitting new highs. The negative divergence once again signaled trouble. On Tuesday, gold gapped down and had a sharp drop. The RSI had even a bigger drop falling toward 50. The pattern is almost identical to December's, although gold was a bit more overbought and overbought for a longer period this time around. 

If gold follows last December's pattern, it will fall toward its simple 200-day moving average. For longer term holders, this is not a significant move. Shorter term position traders should be more concerned. Regardless of your investing time frame, this doesn't look like a good time to add to positions. In long-term bull markets, and gold has been in a long-term bull market since 2001, investors should add to positions when the price of an asset is around its 200-day moving average.  

Disclosure: No positions.

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

There is no intention in this article to endorse the purchase or sale of any security.

Precious Metals Watch

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 Fed and G20 meetings from last week both had a consensus that government generated stimulus of the U.S. and global economies should continue. The U.S. and UK and are printing substantial amounts of new money in order to engage in this stimulus. This should have been bearish for the dollar and pound and bullish for the precious metals. While the pound did indeed slide, the dollar went up and precious metals went down. These counter intuitive market reactions, common since the beginning of the Credit Crisis, should end soon.

Spot gold fell as low as $987 in overnight trading. Spot silver was as low as $15.73. The U.S. trade-weighted dollar traded between 77.12 and 77.26 on Friday. It was trading at 76.87 around the opening today. After hitting a yearly low of 75.83 four days ago, the dollar bounced of its support at 76.00. It is trying to head toward 78.00, where it has strong resistance from its 50-day moving average. Stronger resistance is just above that at 78.33, the low from the dollar sell off in the late 1980s and early 1990s.

The Fed reiterated in its post-meeting statement that it "expects that inflation will remain subdued for some time." The mainstream media is filled with commentary about how inflation isn't a problem. Comments like "many economists argue that inflation is only an issue when the economy is humming along" are common. Someone should have told Zimbabwe with its 94% unemployment rate (if that economy was humming, it was tone deaf) that it was impossible that it was having sextillion percent inflation. When discussing all the money printing the U.S. Fed is doing, media articles invariably state that it "isn't so clear whether this will create an inflation headache down the road for the Fed". No article has yet to cite one case in the entire economic history of the world where excess money creation didn't lead to major inflation. Somehow by magic it might not happen in the contemporary U.S. though. Indeed magic is the operative word because that it the only thing that will prevent inflation going forward.

The idea that too much currency creation leads to price rises is not new. The 'quantity theory of money' originated with Copernicus, better known for his 'earth revolves around the sun' theory, in the early 1500s. It was further developed in the following centuries by at least half a dozen other economic thinkers long before Milton Friedman repackaged it as a new idea and won a noble prize for his 'original' thinking. Governments always claim that printing too much money isn't a problem and the lesson that it is needs to be learned over and over and over again. Buying gold and silver has always been the protection from excess government money creation. Smart investors only need to learn this lesson once.

NEXT: The Longer Term U.S. Interest Rate Picture

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.

Gas Takes Gas

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:

Natural gas, the commodity, is having one of the most spectacular rallies of all times. It was up 11% yesterday alone. The near term contract hit a low of $2.40 and seems to be heading toward $4.00 (a low estimate of production costs). Even after the spectacular rally of the last few days, Natural gas futures are still in extreme contango. The October contract closed at 3.297 yesterday, while the February contract closed at 5.324. Actions of the commodities regulatory body, the CFTC, and its attempts to limit trading in the natural gas and oil markets have been responsible for natural gas's economically impossible behavior.

The CFTC drove oil ETF DXO out of business and is essentially trying to do the same with natural gas ETF UNG. UNG's price was artificially suppressed by actions of the CFTC and it has ceased to function according to any normal trading rules since this has taken place. An announcement from UNG that it would begin to issue shares on a restricted bases starting September 28th helped stoke yesterday's rally. By the beginning of the summer UNG owned 20% of futures contracts in the natural gas market and the big market players wanted the CFTC to crack down on it. Driving natural gas prices way down is also beneficial to the economy, so the government had a double motivation for interfering in the market.

An alternative ETF, GAZ, has been left alone by the CFTC and more closely reflects price action in the natural gas market. It's price movements are by no means ideal however. GAZ was up 4.5% yesterday, while UNG was up only 2.5%. Neither was up anywhere near 11%. The best performing Natural gas ETF was HZBBF (special thanks to New York Investing meetup member Kim L. for finding this obscure stock). It was up 19% yesterday. HZBBF seems to be the same as Canadian ETF HNU which represents two times natural gas (just as DXO did for oil), but it trades in the U.S. markets.

Natural gas is more subject to manipulation than other commodities because it is sold in regional markets. Unlike oil, it is hard to ship. Historically prices for natural gas are twice as much in Europe and Asia as in the U.S. Government attempts to control prices - and this is what the CFTC action represents - ALWAYS lead to shortages in the future. Natural gas will be no exception. Years from now we will look back and be amazed that natural gas was trading at $2.40 in 2009.

NEXT: Precious Metals Becoming More Precious

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.

Gold, Oil, Dollar and Market Update

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:

Gold and silver had sharp sell offs this morning, while the dollar rallied. If you believe the press reports (and in general, you shouldn't), gold and silver sold off because the dollar was rallying. The dollar was supposedly rallying because of bad figures on Eurozone industrial production. Are they likely to be worse than the U.S. production figures after GM's bankruptcy (production is being closed down during the summer)? Probably not. If you look, you will see despite the screaming headlines the dollar was not up that much. As of now, the trade-weighted dollar is trading at 80.07, up from yesterday's close of 79.36. The breakdown point is 78.33.

The drop in gold and silver is more than overdone. Gold closed strongly yesterday at $962. Optimism for the U.S. dollar is also being fueled because the treasury auction went well this week and there was supposedly heavy demand for long-term U.S. treasuries from foreign buyers (I had difficulty not laughing as I wrote that last statement). What outrageous claims will the government make next? For those not paying attention, interest rates on the 10-year bond hit 4% yesterday, double the low of 2%. Not exactly and indication that these bonds are experiencing increasing demand relative to supply (interest rates would be falling if this was true, looks to me like they doubled).

Oil was over 73 yesterday and I began taking some profits in ERX and to a lesser extent DXO. The oil rally has been going on four months now and seems to be losing steam as we approach major resistance around 77. Stocks are likely to get into trouble when the S&P gets to 1000. Resistance is very strong at that point. When you have large profits, its always a good idea to take some money off the table.

For those who don't want to hold U.S. dollars, there are a lot more options in ETFs than there used to be. While we have mentioned FXA and FXC (the Australian and Canadian dollar ETFs) previously, you can now buy New Zealand (BNZ) dollars as well. You can even buy emerging market currencies such as the Brazilian Real (BZF). For a more complex trade, you can consider DBV. This ETF is double long the three G20 currencies with the highest interest rate and simultaneously short the three currencies with the lowest interest rate.

NEXT: G8 Hot Air Inflates Dollar

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.

Our Video Related to this Blog:

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.

Fed Minutes Take Oil on Roller Coaster Ride

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:

It would be easy to get whiplash watching the oil market these days. The news was grim early in the morning yesterday with blaring headlines of oil falling below $48 a barrel in anticipation of a bad news oil storage report at 10:30AM. Storage however turned out to be below expectations and oil started rallying immediately. NYMEX oil got to over $51 a barrel mid-day, rising above the key breakout point around $50.50. Then late in the afternoon the minutes from the last Fed meeting were released and even though they should be taken about as seriously as a Mel Brooks movie, oil nosedived on the Fed's gloomy outlook for the economy. In the end oil was up 23 cents, closing at 49.38, though today in mid-session European trading it's above $51 again.

The price of oil was weak early Wednesday because of a report Tuesday evening from industry group, the American Petroleum Institute, that indicated there was 6.9-million-barrel build in storage.This report is not terribly reliable because it is not comprehensive and submitting data is voluntary. The government's EIA report that came out the next morning, painted a very different picture of the oil market. Oil in storage rose 1.7 million barrels, much less than the 2.3 million barrels that analysts had predicted. Distillates, which include heating oil and diesel, fell by 3.4 million barrels versus expectations of a drop of only 600,000. Gasoline demand was reported as being 0.2% below a year ago (if demand was 100 a year ago, it is now 99.8). While the drop in U.S. gasoline demand is something you would need a magnifying glass to see, the mainstream media has continually reported it as collapsing and falling off a cliff or words to that effect.

Despite the bullish tone of the storage report, oil (and most of the rest of market) sold off big time when the meetings from the Fed's March meeting were released in the late afternoon. The Fed, which didn't see the Credit Crisis coming, miscalculated it at every twist and turn, and didn't foresee the recession, is now gloomy for the next two years going forward. Sure they were wrong over and over and over again, but now they know what's going on. The minutes also indicate the Fed is worried about deflation even though it is stated in the same minutes that they are printing new money like no tomorrow. Worrying about deflation under such circumstances is like worrying about being attacked by Big Foot while walking through Central Park. The probability is somewhat less than zero.

While gasoline demand in the U.S. is flat, it should be rising in China. For the last three months cars sales in China have exceeded car sales in the U.S. Year over year, car sales are down 37% in the U.S., but up 5% in China. China is on its way to becoming the number one auto market and the number one energy user. Oil demand is shifting from North America to East Asia while the ability to produce oil is declining 6% a year by some estimates. There are even predictions out there of an oil price spike as early as later this year. While I don't necessary believe it will happen that soon, it will indeed happen as some point.

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

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.

The News is Bad ... Time to Buy

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:

In the New York Investing meetup last night, we had a talk on media manipulation of the news in the oil market. The news reported is almost completely negative and is contradicted by the facts. Under such circumstances, it's not surprising investors who rely on the news make bad investing decisions. The headlines today will likely turn out to be another great illustration of this point. When I turned on my computer this morning, there was an unrelenting barage of negative headlines. My initial reaction was that I had better buy quickly after the market opens to take advanatage of this.

What impression would these headlines make on you?

- "Stock Futures Fall on Earning Worries"
-" World Markets Track U.S. Lower Amid Earnings Fears"
-"Oil Falls below $48, Following Stocks Down"
-"Sharp Forecasts Bigger Loss Amid Global Slowdown"

The unrelenting picture of danger and risk painted by the media will keep the average investor far away from the market - and he or she will not make money as a result.

The news is also not actually as bad as the headlines indicate either, but you have already been put into a certain mindset before reading the article (assuming you do, many floor traders only see the headlines). For instance, how bad were the stock futures that were down on earning worries? A quote from the article: "Ahead of the market's open, Dow Jones industrial average futures fell 42, or 0.5 percent, to 7,720, ... Standard & Poor's 500 index futures fell 3.40, or 0.4 percent, to 810.60, while Nasdaq 100 index futures were unchanged at 1,280.75." A more accurate headline for this story might be: "Despite Earnings Worries Market Having Trouble Selling Off". Don't hold your breath in waiting for headlines that provide an accurate picture on what is going on though, it's not going to happen.

Alcoa supposedly set off these earnings worries the media is reporting today. It earnings were a few cents below expectations. Nevertheless, the stock is having trouble selling off in premarket trading. This is extremely bullish and is another piece of evidence that all the bad news has been priced into the stock. That's not the slant in media reports however. Today's stories are emphasizing how bad things were LAST quarter. The market doesn't care about this. It is interested in what is going to happen two or three quarters in the future. If the stock goes higher, the market is optimistic about the future - and its only the market's opinion you should care about if you want to make money.

NEXT: Fed Minutes Take Oil on Roller Coaster Ride

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.

Geithner Talks, Market Drops ... Again

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:

Treasury Secretary Geithner appeared on Face the Nation on Sunday. Stocks in the U.S. are selling off this morning (even though there was a decent rally in Asia last night). Stock selling seems to be the most likely response whenever Geithner speaks and anyone long the market should worry whenever Geithner's mouth is about to open. The interview dealt with the administration's latest imbroglio, the attempt to force GM into bankruptcy and how well the various current bank bailouts are going. Geithner did state, "we want greater lending". He didn't come up with any reason why this might happen.

When Geithner was asked whether the government will force banks to sell their toxic assets to improve conditions for lending, he said that "banks have a large incentive to clean up their balance sheets." A news item released in Europe (please note that this news was not originally published in the U.S.) last Thursday certainly brings that into question. It was reported that a number of large banks including Citigroup, Goldman Sachs, Morgan Stanley, and JP Morgan Chase were considering buying toxic assets to be sold by rivals under the U.S. Treasury’s latest one trillion bailout plan. The purpose of this plan is of course to get toxic assets off the bank's books. Nothing in the law apparently said the banks couldn't participate in the this free money government give away. So of course, they want the goodies too. The result of this congressional oversight could be a huge amount of government spending that results in just moving the toxic assets around the banking system instead of getting them out of it. Geithner also made it very clear in the interview that Treasury's "obligation is to apply the laws passed by Congress".

As for GM, Geithner stated multiple times that "GM is going to be part of this country's future." He followed up with "We want to see a strong automotive industry emerge from this recession," , and added that the government must be sure that GM "can emerge strong enough without having to have government help on an ongoing basis." As to whether GM will have to file for bankruptcy protection, Geithner said "there's a range of options. They've made some progress on restructuring but they're not there yet." What was not stated in the interview is what would the costs be of GM going bankrupt versus it being bailed out.

Bailing out GM will probably be many, many times cheaper than letting it go bankrupt. But hey, when dealing with taxpayer money, why not consider the most expensive option possible. The much higher costs of not bailing out GM are a consequence of the government already having bailed out the banks and the need to increase those bailouts if GM fails. Although the auto companies have been badly managed for years, the idea that the U.S. government knows better about how the auto industry should be run is ridiculous. How they've handled the bank bailouts is a good indication of just how much the government knows about anything to do with business.

NEXT: How to Handle Earnings Season

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.

U.S. Unemployment Rises to 15.6%

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 Jobs Report was out this morning and it was pretty gloomy. While the headline number indicated that unemployment rose to 8.5%, a more accurate number is 15.6%. The second figure includes many (but not all) discouraged workers, those who have looked for work in the last year, but not during the last month, and part-time workers who wish to work full-time. It is the 15.6% figure that you should compare to the approximately 25% unemployment rate at the bottom of the Depression in the 1930s.

The initial read for March was a loss of 663,000 jobs (close to economists predictions of 654,000). There will be two revisions for this number in May and June and expect both of them to be down, although the worse and worst figures will get no press and the BLS is well aware of that. January's number, originally reported as a loss of 598,000 jobs, had its second revision down today and the number is now a loss of 741,000. So far, there has been a loss of 3.7 million jobs in the U.S. economy in just the last six months. Expect this number to be even lower after all the revisions have been done.

Last month every sector except health care had job losses. In previous Jobs Reports since the Credit Crisis began, government and education have supposedly added jobs. Manufacturing continues to be decimated with a loss of 126,000 jobs in March. The Obama goal of driving GM into bankruptcy should help make these numbers even worse in the future. Professional and Business Services, which held up much longer than Manufacturing, had a loss of 133,000 jobs last month. Retail lost 48,000 jobs (and is very vulnerable to much greater losses). Despite all the bailout money, Financial Services still lost 43,000 jobs. Construction lost 161,000 jobs and with a commercial real estate collapse just beginning unemployment there could rise much higher. Not only were a lot of jobs lost last month, but the average workweek fell to a record low as well.

The stock market is selling off slightly so far on the employment news, which is not surprising considering the big rally in the last two days. The positive reaction of stock markets globally at the beginning of the quarter should help carry the current rally for another month or two, although after a big surge, sideways trading or selling for awhile is inevitable. Whether the rally can survive into the third quarter is problematical. For the moment, investors should keep in mind the old stock market adage from the 1800s - 'sell in May and go away'.

NEXT: Geither Talks, Market Drops .... Again

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.

The Bull Heard Around the World

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:

Almost every market throughout the world rallied on April 1st. In the morning (New York time) things didn't look promising. While most Asian markets had closed up nicely, all European bourses were down well into their trading day. Stocks in New York then gapped down sharply. Within a relatively short time, both New York and Europe reversed and then closed with good numbers. Today has been even more bullish. In Asia, the Hang Seng rose over 1000 points, closing up over 7%. The Nikkei went up over 4%. The Dax in Germany closed up more than 6%.

The European rally was helped by the ECB cutting interest rates by 25 basis points to 1.25%. They are also considering buying up toxic assets which the Fed in the U.S. has been doing for sometime now. At the G20 meeting in London, France and Germany pursued stronger financial regulation aimed at tax havens, hedge funds and rating agencies. European leaders said they had no need for stimulus plans because their more generous welfare systems kick in automatically with benefits for more people as the economy deteriorates. Obama kept emphasizing that 'we are all in this together'.

Meanwhile in the U.S., the financial accounting standards board FASB gave companies more leeway when valuing assets and reporting losses, providing a potential boost to battered banks' balance sheets. The mark to market system, will now be replaced with a mark to fantasy system. FASB made its move because of pressure from Capitol Hill. Our elected representatives are demanding rules that help companies mislead investors. In case you had any doubt whose side they are on, it should be pretty obvious with this action. If this was actually something that worked, Enron would managed to have avoided imploding and still be in business because it lied about its financial numbers. The banks may be able to carry on however since they have an apparently unlimited supply of freshly minted federal money available for continually bailing them out. Of course, like every other free lunch program the Feds have come up with, the costs for this one will be heavy indeed.

Money has flowed into stocks globally in the last two days and this indicates the big money is supporting the current rally - at least for awhile. The media has been filled with reports in the last week about how the rally was going to end any moment and investors had better get out. When it comes to deciding whether or not to listen to some know nothing windbag media pundit or the market, always chose the market. There is still a lot of danger in the financial system however with a lot more blow ups awaiting us. Enjoy the party while it lasts, but don't stay too long. The U.S. Employment Report tomorrow may trim the sails of this rally temporarily.

NEXT: U.S. Unemployment Rises to 15.6%

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.

Surgery Done by a Bull in the China Shop

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:

Today is the beginning of the spring quarter and the new fiscal year in Japan. Last night, most of Asia rallied and the Nikkei was up smartly (the Nikkei never hit a new low in the market sell off this spring by the way). A bailout plan in Taiwan for semiconductor manufacturers was bullish for tech stocks throughout the region. A Chinese manufacturing report was dismal, although off the low established last November (when the prices of many commodities also bottomed). European bourses are down this morning and the U.S. market indices gapped down after gapping up yesterday. The market is worried about the G20 Meeting tomorrow and the Jobs Report on Friday. The U.S. government possibly forcing GM into bankruptcy has also reared its ugly head again as well.

The government's current handling of GM is incredibly destructive economically. News has been leaked that Obama thinks a 'surgical bankruptcy' is the best option. If so, that surgery is being conducted by a bull in a China shop. A recapitulation of what is going on:

1. The U.S. Economy has been losing its manufacturing base for the last 30 years and has moved increasingly to a FIRE (Finance, Insurance, Real Estate) economy and this has led to the current implosion of our financial system.
2. Instead of trying to revive manufacturing, the government is trying to drive a top manufacturer into bankruptcy - and somehow this is going to improve things.
3. Sales for automakers are down as much as 50% year over year because of the economy. The U.S. government then tells reluctant car purchasers that we are trying to drive GM out of business and make them worry that if they buy a GM car they will ever be able to get it fixed (this may not be realistic, but it is something that will give the consumer pause and hurt GM sales even more).
4. No one knows how many credit default swaps there are on GM bonds, but the number is probably substantial. A bankruptcy would put them in the money and require that they be paid off. Most of them would have been sold by insurance companies and brokers that are already getting government bailouts and this will require more bailout money (probably many times what it would cost to bailout GM) to make up for the losses.
5. The U.S government just spent $5 billion bailing out auto part suppliers and is undermining that bailout if it forces GM into bankruptcy.
6. There are a large number of current and former employees of the auto industry, its suppliers, its shippers, etc that will be negatively affected by this action.
7. The GM announcement stopped a nascent stock market recovery in its tracks, wiping out billions more from retirement portfolios. The Dow was up over 20% (technically a new bull market) and the government apparently couldn't wait to drive it right back into bear market territory. Treasury Secretary Geithner already caused a major market sell off previously with his handling of Citigroup. If the Obama administration's goal is to keep stock prices down, they are achieving outstanding success.

While I am not a fan of bailouts, I am even more opposed to incompetent business practices combined with unlimited government stupidity. As we have said in this blog before you can bailout no one or you can bail out everyone, but doing some bailouts and not others produces the worst results. What the Obama administration is doing with GM makes no sense on any level - and it does not bode well for the handling of economic matters going forward.

NEXT: The Bull Heard Around the World

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.

Next Few Trading Days Are Important

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:

Money moves around at the beginning of a quarter. Look for shifts in the next few days. You want to observe whether money is flowing into the market overall or are people taking money out and selling. If the market goes up, the big money has become more confident and the rally is going to continue for awhile. It is even more important to note which sectors have money moving into them and which sectors are selling off. The three most bullish sectors of the recent rally have been financials, basic materials and technology. You would like to know if this is continuing or are other sectors getting more fund inflows.

The news backdrop may color the picture somewhat however. The G20 meeting is on Thursday and the possibility of fireworks exists. The Jobs Report is coming out Friday and the consensus is that it will be quite ugly. While this may seem like it will be negative for the market, it may not be. When people are expecting the worse, even something slightly better can be considered bullish and make stocks go up. And as we have stated many times in this blog, the U.S. government is not beyond manipulating its economic statistics to make them look better. The market, at least up to this point, takes these reports at face value no matter how absurd they might seem. The latest incarnation of this behavior has been in the seasonal adjustment figures which have recently been quite sizable and always in the direction of making things look better.

The market was filled with panic selling yesterday. I usually look at this behavior as an opportunity to buy and I did pick up some commodity stocks that had big sell offs. So far, yesterday looks like just another typical Wall Street shake down. Investors who got in at good prices are scared out of the market, those that haven't are frightened away. The big money buys the stocks the small money is selling. Take a look at the press coverage yesterday and you will see that it is overwhelmingly negative and one-sided. Many important facts are left out. This is not the coverage you typically see when the market is going to have a serious sell off. Media pundits tell you to get into the market to catch the next move up when the market is actually turning down. Wall Street is busy selling at that point - and they want you to buy.

The market is filled with bargains right now. If you concentrate on buying stocks in the commodity sector and beaten down stocks in industries that deal with the production or movement of tangible goods that are necessities or pervasive, you will make money. This is where you will get your biggest bang for the buck when inflation hits. And don't worry, expect the mainstream media to inform you in a year or two that this is what you should have been doing in early spring 2009.

NEXT: Surgery Done by a Bull in a China Shop

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.

Government Thinks It Knows Best, Market Disagrees

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:

If the Obama administration is trying to crash the U.S. stock market they are doing an excellent job. If not, they should all take a class in PR 101. The U.S. government announced that it is displeased with the progress the automakers have made with their restructuring plans (like somehow the government knows how to run an auto company), got the CEO of GM to resign, and is threatening to withhold bailout money from them and force them into bankruptcy. This would be devastating to the economies of the politically important swing states of Michigan and Ohio and for this reason it is not likely to happen. Nevertheless, all investors are paying this morning for this political cat and mouse game, with both the Dow and Nasdaq selling off around 4% as I write this. A crash level drop of 5% is a real possibility at the moment.

When the automakers received their first bailout in the fall, this blog stated it was only a stopgap measure to tide them over until after the election and a new bailout would be needed then. This has indeed happened right on schedule. While we constantly say, there is no such thing as a single bailout for an insolvent financial institution, the same is obviously true in many other industries as well. There is also no question that the automakers have been some of the worse run companies in the U.S. for decades, at least until the banks and brokers took the lead in this respect in the 2000s. Bailouts almost always have long term negative consequences, but this has not stopped the U.S. from establishing a de facto 'too big to fail policy' and it now seems to be moving toward state directed corporate socialism. Government management is an oxymoron if ever there was one. This is out of the frying pan into the fire economics.

Also weighing on the market is the upcoming G20 summit. Other countries, being led by Germany, are not interested in printing an endless stream of new money for economic stimulus plans and the BRIC countries want an alternative reserve currency. A coordinated policy for global stimulus is not likely to result from the meeting later this week as was hoped for by the Obama administration. This leaves the U.S. and Britain, the big money printers, holding the bag. Consequently, both are likely to have to print more money in the future. The BRIC (Brazil, Russia, India and China) countries want to establish a new reserve currency, at first consisting of a blend of dollars, euros, yen and pounds. No immediate policy shift will officially take place at the summit, but this likely represents a sea change in international currency policy. Both pieces of news are devastating for the U.S. dollar, which somehow ignored reality this morning and rallied strongly.

While it would be nice to do so, investors can't ignore politics. Deep down, there is really very little difference in a number of respects from the current administration and the last administration. Spending huge amounts of taxpayer money on bailouts was and is part of the agenda. If the spending can't fully be funded with taxpayer money (and this was a reality from the beginning), any amount of money necessary will be printed to cover the costs. The dollar will eventually lose a lot of its value because of this and there will be a lot of inflation. The Bush administration though was at least aware of the sensitivities of the stock market, while the Obama administration seems oblivious at best. The drop this morning, taking place during a nascent rally, is not the first time the current administration has stuck its foot in it and it probably won't be the last.

NEXT: Next Few Trading Days Are Important

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.

In the Eye of the Financial Hurricane

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:

There is some effort to talk down the current rally by the media today (assume the shorts have planted the stories). This doesn't mean the rally is going to end at the moment however. The momentum is very strong and doesn't seem to be have been dissipated yet, so no need to rush out and sell anything. The rally will end however and be followed by a sharp drop, possibly to lower lows. The current rally is very much a Bear Market rally and these differ in a number of ways from the beginning of a new Bull Market.

The money has been very easy in this rally and that is a common marker of Bear Market rallies. Prices move up very fast and seemingly without restraint. In contrast, beginnings of new Bull Markets are usually a struggle. It took about 10 months to put in the base at the bottom in 2002 and 2003 (the current bottom has had about a 5 month base put in so far). The market did not just shoot straight up out of that base. The bulls and bears battled for control on almost a daily basis with the bulls being able to only gradually move the market up. That type of constant give and take allows rallies to last a long time - about 10 months in 2003/2004. The current move up is almost effortless and because of that it can burn itself out pretty quickly.

The current rally has also been led by the biggest losers of the downturn - the financials. This is typical of bear market rallies, which are mostly short covering affairs. Once enough of the shorts close out and prices rise a lot, new short positions are put on that drive prices back down. The only thing that has made the financials more valuable is that the government is willing to put more taxpayer money into their coffers. Their value is no longer determined by economic forces, but corporate welfare payments. Not exactly an enticing long term economic model for investors.

There are three things for the current rally that need to be watched closely - resistance, earnings season, and April 15th. All the major indices are about to enter a strong band of resistance. For the Nasdaq, this starts at 1600 and goes to around 1650. The Dow has strong resistance at 8300, with with more resistance around 9000. For the S&P 500, there is resistance between 870 to 940. These are levels where the rally is likely to run out of steam. Another limiting factor to the rally is that first quarter earnings season starts around April 7th. Rallies into earnings usually mean a sell off after - and sometimes even during. As for April 15th, people frequently sell investments to pay their taxes and the market tends to dip then for that reason (although the dip can be temporary). So in figuring out when to sell, watch resistance and watch the calendar.

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.

No Longer Gilt Edged - the Inflation Implications

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:

Yesterday, a regular government bond auction in Britain failed for the first time since 1995. There were more 45-year gilts for sale than buyers willing to purchase them. The British government is only printing money to buy its bonds in the 5 to 25 year range and it is now obvious the printing presses are going to have to be reved up to expand this program if Britain wants to fund its various bailout and stimulus packages. Meanwhile the U.S. bond auction yesterday was a 'success', although in order to insure that success the Fed had to purchase a higher amount of bonds than was previously thought necessary. The inflation implications of more money printing did not escape the market's attention with almost every commodity rallying strongly this morning.

The commodity rally took place even though the economic news was gloomy across the board. U.S. fourth quarter 2008 GDP was revised further downward to a drop of 6.3%. Businesses and consumers are both cutting spending and unemployment roles are swelling weekly. The mainstream press has continually told investors that commodity prices can't pick up until demand increases and this will require the economy to start picking up. They have been continually wrong. Commodities are all inflation hedges and the big money is well aware of this. Even the most cursory examination of the charts indicates many commodities bottomed last fall and their prices have been moving up since then. You should ask yourself why doesn't the press just report this simple factual information?

This blog has covered the mainstream media's misreporting of the oil market in detail many times. Headlines for the weekly supply picture from Cushing, Oklahoma were uniformly bearish yesterday. Oil in storage increased 3.3 million barrels, instead of the 1+ million increase that had been predicted and was more than 15% higher from the same time last year. As usual the press quoted 'experts' indicating demand has to pick up or the current rally will falter (as opposed to the previous reporting that stated that demand has to pick up or there wouldn't be a rally). Oil indeed sold off on this bearish news. What the press didn't report or buried at the bottom of its coverage was that demand for gasoline has actually risen for the last four weeks (even though the press will tell you this is not possible during a recession - the facts sometimes get in the way of the story the media wants to tell you). Gasoline in storage is actually more than 5% below year ago levels and the beginning of the heavy usage summer driving season is only two months away.

Investors should all keep in mind that commodities are inflation hedges and the U.S. and Britain are admitting they are printing new money. This doesn't mean that they just started printing additional money, but that the money printing is so out of control that it can't be hidden any more. There is no time in history where the money supply hasn't been expanded beyond the economic growth rate and inflation hasn't resulted. The inflation this time is going to be considerable. If you haven't done so already, you should be adjusting your portfolio accordingly. By the time the mainstream media tells you to do so (they are currently telling you the deflation is your big worry), it will already be too late.

NEXT: In the Eye of the Financial Hurricane

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.

'Good' News Drives Market Higher

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 market rally continues today and is likely to do so for awhile because the momentum is on the upside. The mainstream media is doing its best to help continue the rally with the usual bullish hype. Today's bullish stories include a 3.4% rise in durable goods, the first after a six month record decline. U.S. mortgage applications are also up on the lowest mortgage rates since records have been kept. Such 'minor' bad news as Japan's exports falling 49%, with the biggest drops in exports to the U.S., and China calling for a new reserve currency to replace the dollar have been mostly ignored by the market.

The durable goods report is being interpreted as indicating the economy is improving. You can only believe this as long as you don't look beyond the headline number (most traders don't by the way, they just react immediately without getting the details). The big rise in durable goods was led by military aircraft and parts which were up 32.4% - this is 100% the result of government demand and not likely to be repeated. Heavy machinery was the next big gainer and was up 13.5% - not exactly a consumer item. Computers were up 10.1% and this would partially be accounted for by consumer purchases, although businesses are the major buyers of computers. Fabricated metal products were the only other item with a significant gain being up 1.5%. Autos and auto parts are still in heavy decline, but there was a little noticed $5 billion government bailout of the auto parts industry a few days ago that will act to prop up the industry.

The Japanese trade numbers for February gainsay any rosy interpretation for the U.S. economy that could be garnered from the Durable Goods report. While Japanese exports overall declined 49%, the biggest drop was exports to the U.S., with exports dropping 58%. Next biggest was the EU countries where exports dropped 55%. The drop in exports to China was less than 40%. While these numbers indicate a collapsing global economy, the collapse is by no means even. The U.S. is doing the worst and Europe is a close second, but Asia is holding up somewhat better.

The Chinese released a proposal a couple of days ago to replace the U.S. dollar as the world reserve currency with a Special Drawing Rights (SDR) linked currency system. Russia supports the idea. The U.S. dollar losing its reserve currency status would be devastating to the U.S. Reserve currency status keeps the value of the dollar much higher than it would be otherwise. The impact would be extremely inflationary since we would have to pay higher prices for all imports. Nevertheless, Treasury Secretary Geithner remarked this morning that the U.S. was "quite open" to the Chinese proposal. The dollar dropped like a rock for a short time thereafter. In case you have yet to realize that Geithner isn't exactly the most brilliant Treasury Secretary that the U.S. has ever had, this should remove all doubt. Someone should also tell China that a globally neutral currency has already existed for the last 5000 years - it's called gold.

The final piece of 'good' news today was U.S. mortgage applications were up 32%. Unfortunately, 79% of those application were refinancings for already existing mortgages. New purchases were only a small part of this number. Average mortgage rates fell to a record low of 4.63% last week. U.S. policy is doing its best to try to get housing prices back up to economically absurd and unsustainable levels (doing so the first time only led to the current Credit Crisis that has threatened the stability of the world financial system). The only way this can be accomplished is to create enough inflation so nominal house prices stay the same or go up. This will cause even bigger economic problems, so you should assume that this is one area where government policy will be 'successful'.

NEXT: No Longer Gilt Edged - the Inflation Implications

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.

Print Enough Money, Everything Goes Up

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 stock market continued its Bear Market rally yesterday with a massive up day. The rally was impressive by almost any measure except volume, which was below average most of the day and just hit average at the close. Breadth (stocks going up versus those going down), was 41 to 1 and this was possibly a record. Small caps led the way with the Russell 2000 up 8.4%. The S&P 500 was next with a rise of 7.1% followed by the Nasdaq which gained 6.8%. The Dow was up 6.4%. If anything, yesterday's market action could be described as a crash on the upside. Panic buying was very clearly taking place in the last half hour.

If you read this blog regularly you will remember that we warned of a spectacular bear market rally more than once within the last several weeks. While yesterday was extreme even for a bear market rally, it was quite predictable. The market was severely oversold, possibly the most in history. At some point everyone who wants to sell has done so and then the only direction to go is up because there are no more sellers left. You need to close out any shorts once you see the market turn and ride the rally up. Don't stay at the party too long however. Once you have made nice profits, you need to book them.

While the media has been hyping this as the beginning of a new Bull Market, there is no reason to believe that it is. Financials have led the market up and they are just as worthless today and they were last month. Short covering is driving their rally, not long-term position taking. New Bull Markets are not led by the most beaten down group from the previous Bull Market, but Bear Market rallies are. You would also like to see a move like yesterday's right off the bottom (not after two weeks of rally) on very high volume. The picture is just not quite right.

Stocks will be going up in the long term however. If the central banks print enough money (and they are busy doing this at a breakneck pace), the price of everything goes up. The most important determinant of stock prices is liquidity (you can think of this as excessive money creation) and this trumps everything else including bad economic numbers, lower earnings, and a bleak outlook for this that and the other thing. As an example, the biggest stock market rally globally in 2006 was in Zimbabwe even though the economy there was collapsing (they were the top money printers in the world however). If you stay focused on what really matters, you can make a lot of money in this environment. Just don't expect to hear about what you should be doing from the mainstream media. They will invariably steer you in the wrong direction.

NEXT: Good News Drives Market Higher

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.