Global Markets Slip on Greece

 

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.

Stocks in Asia, Europe and North America are falling as contagion from the Greek debt crisis continues to impact markets worldwide. Until there is some resolution, investors should expect this to continue along with intermittent sharp moves up due to central bank liquidity injections.  

Trouble began in Asia last night with the Hang Seng in Hong Kong falling 537 points or 2.8%. It closed at 18,918, well below the critical 20,000 support level. The Indian Sensex was down 188 points or 1.1% to 16,745. It has been leading Asian markets down and is trading on top of a very large gap made in May 2009. The Nikkei in Japan managed to buck the trend and close up 195 points to 8864 or 2.3%. It has been mostly trading below key support at 10,000 since March when the Tohoku earthquake struck. All three markets are in a technically bearish trading pattern.

No part of the globe can escape what is happening in Europe. EU finance ministers said Friday they would delay authorizing a new installment of emergency funds for Greece until October. Greece is still on its first €110 billion bailout, but the final payments have yet to be made. A second bailout has yet to be fully approved, although the terms have been set.  Greece's fiscal situation continues to deteriorate rapidly despite all the funding it has received from the EU and the IMF.  The bailout money is life support for Greece. If the plug is pulled, the patient defaults.

German stocks have been hit the hardest by the Greek crisis and have fallen well into bear market territory. After rallying from a severely oversold level last week, the DAX was down 157 points or 2.8% on Monday. The French CAC-40 was down 91 points or 3.0%. The British FTSE was down 108 points or 2.0%. UK stocks have been less affected by events in Greece (the UK is not part of the eurozone). As is the case in Asia, all major European markets are in a technically bearish trading pattern.

U.S. stocks have actually held up somewhat better than most other markets. The S&P 500 and small cap Russell 200 have the same negative technical picture found elsewhere, but the Dow Industrials and Nasdaq have so far held just above it. In early afternoon trade, the Dow was down 205 points or 1.8%, the S&P 500 21 points or 1.7%, the Nasdaq 30 points or 1.2%, and the Russell 2000 14 points or 2.0%. A report released in the morning indicated that U.S. investors have pulled more money out of equity funds since April than they did during the five months after Lehman Brothers collapsed. The real history making news however was in the bond market, where the two-year treasury hit an all-time low yield of 0.1491% -- a sign of a global credit crisis if ever there was one.

Investors should expect more market drama from the unfolding Greek tragedy in the coming weeks and months. Unless Germany and France are willing to commit to unlimited bailouts, Greece will eventually default.  Only then will we know how this affects Ireland, Portugal, Spain and Italy and the euro itself.  Stocks are vulnerable to more volatility and downside until this occurs.  

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.

Will September be the Cruelest Month for Stocks?

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


U.S. stocks are set to close out August with the Dow Industrials dropping more than 4% on the month. If the economic numbers continue to indicate a possible double-dip recession however, stocks are likely to fall by a much greater amount in September.

Historically, it isn't crash-prone October when U.S. stocks have their worse performance, but September. Stocks are entering the month in a technically weakened state that began earlier in the summer. In July, all four major indices - the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 - began a bear market trading pattern when their 50-day moving averages fell below their 200-day moving averages (sometimes referred to hyperbolically as a death cross). This is not enough to confirm a bear market however. The 200-day moving average needs to also start moving down. This has happened on the Dow Industrials and the S&P 500 in the last few trading days. The 200-days on the Nasdaq and the Russell 2000 have been moving sideways for a week or more and should start dropping soon. The Dow Transportation Average also needs to have a 50-day 200-day cross to confirm the negative action on the Industrials. As long as there isn't a massive rally, this will happen today. So stocks will be entering September in a technically vulnerable condition.

If more negative economic reports that indicate the economy continues to deteriorate then take place, the mix could be combustible. More hints of a double-dip recession from jobs or manufacturing would be especially damaging. Housing numbers this fall probably won't affect the market as much because things simply can't get any worse (with the exception of housing prices, which still have a lot of room to drop). The bad news on housing from the summer - numbers worse than those at the bottom of the Credit Crisis - may have a delayed impact on stocks though. Jobs have been the perennial weak spot of the attempted recovery and numbers have continually been at recession levels for over two years. Worsening unemployment figures would not be viewed kindly by stock traders. Falling manufacturing numbers won't be either since manufacturing led the economy up from its bottom in the fourth quarter of 2008.

U.S. stocks may also be following Japanese stocks down. The Nikkei dropped 325 points or 3.55% in its last day of August trade. It is now at 8824 and could easily test its Credit Crisis bottom, which is around 2000 points lower. U.S. investors need to watch the key 10,000 level on the Dow Industrials and 1000 on the S&P 500. Stocks moving and staying below these key points would damage sentiment severely. The only thing left at that point to hold up the market would be the Fed's liquidity injections. These might work until the election on November 2nd. If so, you may not want to own stocks later that week.


Disclosure: No positions

Daryl Montgomery
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.

Japan Leads Global Stock Market Drop

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


The Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Japan has been trying to grapple with its real estate and stock market bubbles from the 1980s for over twenty years now. Its approach has been a zero interest rate policy (ZIRP) and an unending serious of stimulus programs (it was recently announced yet another one is being considered). The United States is currently following these same failed policies, but Washington is expecting that somehow they will work here. It is true that the U.S. real estate and stock bubbles in the 1990s and early 2000s were not nearly as bad as those that took place in Japan earlier. So maybe it won't take U.S. stocks 19 years to hit their lows (that would be 2026 by the way) as was the case for the Nikkei - or at least the case for the Nikkei so far. It cannot be said for certain that the 6695 low in March 2009 will hold.

Being the perennially weak sister, problems with global economic imbalances are showing up first in the Japanese market. The Nikkei first broke key support at 10,000 in mid-May.  It managed to trade just above that level for a few days in June, but then fell back and has traded below it ever since. The chart is very bearish.  U.S. investors need to worry about the Dow Industrials holding the same 10,000 level. The Dow is only slightly above this level in today's morning trade. The Dow Transportation Average is also on the verge of a significant breakdown. The Dow Industrials closing and staying below 10,000 at the same time that the Transportation Average gives a sell signal would be a strong negative for U.S. stocks. The S&P500, the Nasdaq, the small-cap Russell 2000 and the Dow Industrials have already given sell signals in July.

The other major development in Japan during its two lost decades was a massive bond bubble, which caused even long-term rates to approach zero. This same type of bubble is now developing globally, although the powers that be are denying that this is taking place. When massive government stimulus causes interest rates to drop, it is because of a liquidity trap - money does not flow into the real economy and so the economy doesn't significantly benefit from stimulus. Eventually a steep depression develops (what has prevented the depression phase so far in Japan is that its population had enough savings to pay for the last 20 years of stimulus - sort of like rich people who have no income, but still manage to live well by slowly selling off all of their assets). The only way out of this depression is to reignite economic growth with inflation. The Japanese have yet to figure out how to do this and U.S. monetary authorities are still reluctant to pursue this option.

Disclosure: No positions

Daryl Montgomery
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.

Markets Trading Like They Did During Credit Crisis

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.


Stocks are selling off globally. Commodities are down, but gold is holding up the best. Money is pouring into the perceived safe havens, the U.S. dollar and treasuries. Is it the late fall of 2008 or late spring of 2010?

Without further information, you can't answer that question. There is a global financial crisis occurring now because of the problems with the euro. There was a global financial crisis in 2008 because of the collapse of the prices of derivatives related to subprime mortgages. The problems with subprime debt had begun the year before and started impacting stocks in July 2007. Stocks were already in an advanced bear market sell off by the fall of 2008. The current euro crisis is only a few months old and U.S. stocks are only in a correction so far (loss of over 10% versus loss of over 20% for a bear market).

The current stock market sell off is worldwide as it was in 2008. It goes without saying the stocks in the eurozone are suffering, but technical damage can be found in major markets everywhere. The Dow Jones has broken key support at 10,000 twice already. The Nikkei gave up its significant 10,000 level a while ago, closing at 9521 last night. The Hang Seng has fallen below important support at 20,000, dropping to 19,378. In the UK, the FTSE is barely holding above 5,000 today.

The trade-weighted dollar (DXY) was as high as 88.71 in New York this morning (June 7th). This is higher than its peak in November 2008, but not as high as the top in March 2009. There was a major sell off in the middle, with the euro (FXE) having a sharp rally. Something similar is likely to happen early this summer. The dollar is very overbought and the euro is very oversold. The euro has traded as low as 1.1878 today. It may pop back up to the 120 support level and if not, there is stronger support around 115. The dollar is already hitting major resistance, so the set up for a short-term reversal looks like it is taking place.

As would be expected, U.S. treasuries have rallied strongly during the euro crisis. It is highly unlikely that they will get to the extremely low levels they did in 2008. As treasuries rally, interest rates go down of course. Interest rates on the 10-year fell to around 2.00% in December 2008. They were at 3.18% this morning. There is strong chart support at and just above the 3.00% level. So not much more of a treasury rally, interest rate sell off should be expected for now.

Currently gold has recaptured its safe haven status. It was selling off with the euro between last December and this February. Then it started rallying with the U.S. dollar, although it usually trades opposite to the dollar. Gold sold down in the fall of 2008. Central bank leasing was responsible for this. The big banks and large hedge funds leased gold at a small price and then sold it on the market to raise desperately needed cash. This is not happening at the moment to a significant enough degree that it can offset buying elsewhere. Ironically, a sharp relief rally in the euro could be short-term bearish for gold. Despite the selling in the fall of 2008, gold still closed the year up along with the U.S. dollar and U.S. treasuries. Almost every other asset closed down. It's still too early to tell if 2010 will end the same way.   

Disclosure: None

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.

Why Decisive Action is Needed to Save the Euro

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.


This morning, the euro has traded as low as 126.55 to the dollar. The currency has extremely strong support around the 125 level, so some bounce up from there should be expected. While some short-term relief is likely, in the longer term the survival of the euro is threatened until some significant changes are made in how the currency union is managed.

The current problems in Greece have exposed the flaws behind the euro. The currency was created with a set of rules that were meant to insure stability, but the eurozone seems incapable of enforcing its own standards. Because of this, the euro is losing credibility in the world markets. At this point, the EU has only two choices if it wants to regain an image of responsibility for its currency. It can either enforce its maximum 3% budget deficit to GDP limit or change the limit to something that can be accomplished and make sure all member countries stick to it. The Credit Crisis has made the first choice impossible, but the EU has yet to try to deal with this realistically. The second choice, while it would tend to lower the value of the euro, would allow it to keep functioning as a viable currency.

So far, the EU has chosen neither of these alternatives. Instead it has decided to take the bailout route. This is only a stopgap measure to deal with the problem and is not a workable solution in the long-term. It can be done for Greece, although it will be expensive, because Greece represents only 2% of the EU economy. It also could be implemented for Portugal and maybe even Ireland. At that point though the amount of bailout money being spent would be tremendous and would certainly create an inflationary strain on the entire eurozone. As the situation in Greece has shown, the cost of an actual bailout will be much larger than initial estimates. The funds for a proposed Greek bailout have already almost tripled from the first proposal and they will ultimately be much higher. The bailout solution has its limits though. Spain will be the breaking point. Italy is not even possible.

A good question is: Why are bailouts even being considered? Dollarization could easily have solved the problem - let Greece continue to use the euro, but remove it from the currency union (Greece would almost certainly have defaulted on its debt already if this had been done early on). The answer of course lies in who is really being bailed out. French and German banks together have funded the majority of external Greek government debt. They also have a decent chunk of Portuguese government debt. Just as was the case with the subprime crisis in the United States, the big banks are the ones being bailed out. Most large European banks were already bailed out is some way, shape, or form then as well. This would represent a second series of bailouts for them.

At some point, the EU has to make some tough decisions. This is something that governments throughout the world seem incapable of doing these days. Up to now, the governing body in Brussels has reacted like a deer caught in the headlights - frozen and incapable of action. Greece not only violated the EU's debt to GDP limits by a factor of four, but also lied to the EU about its numbers for many years. Instead of being punished for these serious infractions and being thrown out of the currency union, the EU and IMF have decided the best course is to reward Greece for its bad behavior with a bailout. The EU is sending the markets a clear message that their supposed standards behind the euro are meaningless. The market, not surprisingly, has sold down the euro in response.

As I said repeatedly during the Credit Crisis, there is no such thing as a single bailout. This will certainly be the case in the eurozone. If the EU wants to save its currency, it will have to take decisive action at some point. If it won't do so now, it will have to do so once it becomes obvious to them that the bailout approach is just too costly. Unfortunately for the rest of us, this can have a serious negative impact on world markets at any point in time. The Nikkei in Japan was down 3.3% last night and China's Shanghai composite was down 4.1% and they are not anywhere near Europe.

Disclosure: No position in euros.

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.

Desert Bubble Bursts, Blows Sand in Market's Face

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.

Our Video Related to this Blog:

America was on holiday for Thanksgiving, but London unexpectedly joined it with a halt in trading for over three hours on Thursday. The LSE (London Stock Exchange) computer system just simply stopped functioning. It couldn't have come at a worse time. Major selling was taking place before the trading halt because Dubai's state-owned Dubai World announced a 6-month 'standstill' for payment of its massive debt. While the mainstream financial media described this action as a potential default, failure to make debt payments in a timely fashion is a default, period. If it walks like a duck and quacks like a duck, it's a duck. It is estimated that Dubai World has $60 billion in foreign debt outstanding with British and European banks holding two-thirds of that. The ever alert U.S. rating agencies Moody's and S&P promptly downgraded Dubai World's debt, once again giving the appearance that they are the last to know when a financial problem exists.

Dubai's problems were already known during Asian trading on Thursday ( Wednesday night in New York) and the Shanghai market dropped 3.6% and the Hang Seng in Hong Kong was down 1.8%. Things got worse in Europe Thanksgiving day. The unexpected technical problems on the LSE (not the first time this happened by the way) caused worry to turn to panic. This is a typical reaction to traders when they can't access a market and there is some bad news floating around. They will sell down other markets which are open and when the closed market reopens, there is a bigger drop than there would have been. Banks stock were particularly crushed on Thursday, bringing back memories of last years Credit Crisis. Royal Bank of Scotland was down 7.6%, Barclay's down 6.7%, ING down 6.4%, Deutsche Bank down 5.7%, and Standard Chartered down 5.7%. The FTSE in England was down 3.2%, the DAX in Germany down 3.3% and the CAC-40 in France down 3.4%

Credit default swaps (insurance on bonds) rates rose precipitously throughout the Gulf region - another blast from the Credit Crisis past. The problems in Dubai have been brewing for a long time and it is hardly the only place in the world where there are financial problems remaining. It is merely the first new blow up. Dubai's faith was sealed with the general global collapse in 2008. The government has been stonewalling its creditors ever since, assuring them everything was fine. Earlier this month, the ruler finally told Dubai's critics to shut up. In February, Dubai received a $10 billion bailout from the UAE central bank. On Wednesday, another $5 billion was forthcoming.

Predictably, money moved into the U.S. dollar as markets reacted to the latest crisis. Considering the the trade-weighted dollar plunged on Wednesday, falling as low as 74.23, a rally was not unexpected as is. The yen hit a 14-year high against the dollar and rumors are rife that the Bank of Japan might intervene to drive the yen down, like the Swiss central bank did on Thursday when it sold francs against the dollar. Spot gold managed to eke out another all time high by a couple of points in early overseas trading Thursday after its strong rally on Wednesday. It then fell as low as $1180, but then bounced back up to $1190.

Stocks in Asia got clocked again in Friday trading. The Nikkei in Japan was down 3.4%, closing at 9082. For those who haven't been paying attention, the Nikkei broke key support at 10,000 a while ago - the weakest stocks market usually sell down first. Shanghai was down 2.4%. Hong Kong and South Korea had the biggest damage though, falling 4.8% and 4.7% respectively. Traditionally, a one drop of 5% or more is considered a crash. .

The global market contagion moved to New York this morning. The Nasdaq gapped down 58 points or 2.7% and the S&P 500 was down 25 points or 2.3%. The Dow, which takes a long time to open when there is major news, was down around 200 points or 2.0% on the first print. The dollar was as high as 75.58 today so far. Oil got hit more than any other asset and was down 5% at one point falling as low as $72.39 a barrel. Gold plummeted to $1139 around 2AM New York time, but has already traded as high as $1178 today. All the major European markets gapped down strongly, but turned positive for the first time around 7:30AM. They will close up nicely.
U.S. markets close early today and volume is incredibly light which allows for large moves in either direction. Monday is the key day to see if there is going to be any long-term impact from the Dubai fallout.

Disclosure: Long gold.

NEXT: Dubai Default Damages Denial

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.

A Break in the Bull and China Stops Shopping

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:

August has not been a good month for Chinese stocks. In mid-month, the markets were down 20%, but some recovery took place and it looked like the bull market which had moved stocks up 80% or more was holding. The month ended badly last night though. After dropping 3% on Friday, Shanghai was down 6.7% and Shenzhen down 7.1% last night. Volatility, and Chinese stocks have certainly been volatile in August, is classic sign of a bubble top. The market's plunge last night took place because of concern about a drop in bank lending. Like every other major government in the world, China has been pumping massive stimulus into the economy. Even the threat that the stimulus might be reduced is enough to tank the markets. What would happen if it actually was reduced?

There was no China contagion in the other Asian markets last night. They all had relatively minor drops. The Nikkei in Japan was even up strongly in the morning, but closed down slightly.
Initial bullishness was because of the election news. The ruling party, which has been in power almost continuously since 1955, was crushed at the polls. After approximately half a dozen recessions in the last 19 years, the Japanese electorate finally became fed up enough to try something else. The U.S. electorate is not likely to be so understanding for so long.

There are lessons for what has just happened in Japan for the U.S. Japan has been producing much better economic statistics lately. GDP turned strongly positive last quarter. Industrial production figures out last night were up for the fifth month in a row. Exports have been rising (thanks mostly to China - anything happens to the Chinese economy and the GDP will go right back in the tank in a number of countries). The real estate market turn up last year (after a 15 year drop) Despite the 'improving economy' unemployment is up and retail sales are very weak. The average Japanese citizen sees his or her personal situation deteriorating. Based on how the vote went, they obviously no longer believe the government's upbeat reports on the economy.

The picture in the U.S. right now is remarkably similar to Japan's. Economists predict 3% U.S. GDP growth this quarter. Industrial production is up. Real estate prices are supposedly going up (well, that's the claim at least). Exports are supposedly doing better. However, just like in Japan, unemployment is up and retail sales are in bad shape. The economy the average person sees is deteriorating. Without massive government stimulus, it would look like the 1930s depression. Government stimulus was also the key component in improving the Japanese economy, as has been the case over and over again since 1990. Keeping the U.S. economy out of recession, will require ongoing stimulus as well and in our case this means massive money printing. When governments are forced to chose between recession and inflation, inflation always wins out. No government can risk ongoing recession and survive - even in Japan apparently.

NEXT: Next Five Days Critical for Stock Rally

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.

Stock Market Gappy, Inflation Worries Surface

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:

Global market weakness started again in Asia last night. At one point, the Shanghai market was down more than 5%, but recovered slightly to close down 4.3%. So far this month Shanghai is down almost 20%. Hong Kong was down 1.7% and the Nikkei in Japan was down 0.8%. This was a greater amount that their dead cat bounces on Tuesday. Europe was down strongly this morning and the U.S. markets gapped down again, just like they did on Monday. Strong buying came in immediately to fill the gap. The gap on Monday was partially filled in Tuesday's trading.

Since the market has had a long rise and has been flat for a few weeks now, a gap down where the gap is not filled would be a breakaway gap (or more appropriately a breakdown gap). This is the only type of gap that doesn't have to be filled. The breakdown gap establishes a new ceiling for trading and indicates the beginning of a longer sell off. This hasn't happened yet, but there were two almosts in the last three days. The VIX (volatility index) had its third spike up on the open in three days. When the VIX goes up, stocks go down. The dollar was just above 79.00 recently, still keeping above its 78.33 breakdown level.

A survey of fund managers by Merrill Lynch indicates fund manager optimism is at its highest level in 6 years. This is a contrary indicator. Fund managers love buying at the top and selling at the bottom, which is why as much as 85% of mutual funds fail to beat the S&P 500 in any given year. This doesn't mean the market is going down next week however. Within the next few months though is quite possible.

There are some important articles out today about inflation. One states the Fed has no exit strategy from its stimulus programs (in fact, it is extending them). The one getting the most attention though is an Op-Ed piece by Warren Buffet in the New York Times, entitled "The Greenback Effect". Buffett very gently points out that printing money can cause inflation and there could be trouble on the horizon for the U.S. While the New York Investing meetup has been pointing this out for the last two years, this reality-based view is not supported by the government, Wall Street or the mainstream media. Buffet deserves credit for stating the obvious.

NEXT: Oil Up; Retail, Employment and Economy Down

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.

Monday's Ugly Market Action

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:

While selling began in the U.S. on Friday, it didn't have a lot of momentum until the Asian markets opened Sunday night. Japan, Hong Kong and China were down between 3% to 5%. Last night the recovery in the East was anemic. The Nikkei was barely up and the Hang Sang was up less than 1%. The major Euro markets were all up around half a percent today. U.S. stocks are rallying as of now, but how they close is the key. The U.S. dollar is selling off and nothing significant has changed for it . It is still in a precarious state.

Basically the only thing that rallied yesterday was the U.S. dollar. Everything else sold off. This has been the common pattern since March. It doesn't make any sense based on the media story of what is going on in the markets and the economy. U.S. stocks should rally if the dollar is rallying. The opposite only occurs in inflationary environments.

The technicals on the index charts have weakened considerably in the last few weeks. The RSI on the daily charts even fell below 50 for the Nasdaq yesterday. The S&P hit 50. The Dow stayed just above it. Bouncing off this level and rallying is an almost automatic market reaction and this is happening today. We will have to see how long this lasts. The MACD is still relatively strong, so this will probably keep the market from falling apart at the moment. The DMI patterns can only be described as twisted looking. They are indicating that the uptrend is endangered.

The market seems to be in a topping pattern, but this can last awhile. As we head into the seasonal week period of September and October, the risk of a major sell off for stocks becomes greater.

NEXT: Stock Market Gappy, Inflation Worries Surface

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.

Japan Climbs Out of Recession...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:

Japan's second quarter GDP figures were released last night and indicated the economy grew by 3.6% on an annual basis. This was after a 14.2% decline in the first quarter. What caused the turnaround? 'Government stimulus measures' as usual were cited and a big increase in export growth. Internal demand remains incredibly weak. Japan joins Germany and France, which also climbed out of recession thanks to government stimulus measures. The United States, the king of government stimulus measures, is predicted to join them in the third quarter.

This is not the first time Japan has 'recovered' from or avoided recession thanks to government stimulus measures. This also happened in 1993, 1997, 1998, 1999, 2001, 2004 and now after the 2008/2009 recession. Japan is very good at recovering from recession. The only problem is that it is even better at falling into recession. Insolvency of the banking system - the current problem in the U.S. is almost identical - is what has caused the two-decade economic nightmare. Residential real estate in Tokyo lost 90% of its value from the bubble top. Top A level commercial properties declined 99%. So far the stock market had a 18 year sell-off there after bottoming last October (assuming it doesn't go lower again). The Nikkei fell 3.1% last night. Hong Kong was down 3.6% and Shanghai down 5.8%. Apparently the good news wasn't good enough.

Problems in the market began last Friday, when U.S. Consumer Confidence suddenly dropped. Economists had predicted it would be going up. Imagine, consumers are becoming less confident even though unemployment is likely to be a major problem for at least another year (by economists own admission) and their income is likely to continue to fall. Who could have predicted that not having a job or money would make consumers less confident? Certainly not U.S. economists. And how are consumers going to increase their spending under such circumstances? Obviously they aren't going to. So much for the 72% of the U.S. GDP (based on 2008) that consumer spending is responsible for getting better. Nevertheless, I have little doubt that U.S. GDP will be positive next quarter - although people who insist on dealing with reality will have trouble understanding how this occurred.

The stock market was buoyed when second quarter U.S. GDP was released a couple of weeks ago. It was a major surprise that the decline was only 1.0%. What caused this better performance? Nothing involved with consumer spending or industrial production (although there were claims that the auto industry was doing better - try not to laugh). Government stimulus measures were the key. Federal government expenditures were up 10.9% in the quarter and state expenditures were up 2.4%. How state expenditures were up when at least 20 states are facing major budgetary problems is not clear. Like Japan though, as long as the U.S. keeps up the government stimulus measures, it will be good at climbing out of recession. It will probably be able to do so over and over and over again in the next decade or two.

NEXT: Monday's Ugly Market Action

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.

Markets Catch Swine Flu

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 only pandemic that you need to worry about right now is that global markets are being infected by swine flu hysteria. The Asia markets sold off last night, Taiwan and Hong Kong for the second day in a row with both down 1.9%. The Nikkei dropped 2.7% and South Korea's Kopsi was off 3%. As I write this, major European markets are down between 2.1% and 2.8% and S&P futures are down 1.8%. Oil if falling from the above the 50 level again (this has become a recurrent pattern as of late). Most amazingly, gold is down about $20 in the futures market, even though the price of gold should go up during a crisis (is this telling us something about the Fed meeting taking place this week?).

The media's handling of the swine flu news is incredibly irresponsible and outrageous (keep this in mind when reading financial news which is not handled that much differently). You would think that another Medieval Black Plague was about to strike. Just as in investing reporting the facts get buried amid the hype and the news deviates significantly from reality. So far, it doesn't look like there are any deaths outside of Mexico. While flu has been found in 40 people in the U.S. who had traveled to Mexico, the cases seem relatively mild and this seems to be true in other countries as well. The disease seems to be one thing in Mexico, but quite another outside of Mexico. This is a huge inconsistency that doesn't make sense, so there is obviously more to this story than is being reported, or perhaps it would be more accurate to say, less to the story.

So far the most damaged stock groups from the Swine flu news are airlines and hotels. AMR, UAUA, and LCC were all down in the double digits yesterday. They are still not buys however since they were already overextended on the upside when they began selling off. They would have to have about 4 serious days of selling to make them interesting for other than day trading purposes. Anti-viral biotechs were the big winners, most going up well into the double digits. Expect them to come right back down once the crisis blows over. At that point they might be longer term buys. If you want to take a look: BCRX, BTAHY/BTAHF, GNBT, HEB, NVAX, PPHM, and VICL. Only very experienced traders should play with these stocks.

Wall Street reaction to the swine flu is as would be expected. Hearing the word swine, the usual suspects have answered the call. One market analyst is out on the net with a statement that the market could drop 15% (if this turns out to be as bad as SARS that is - it won't be, the two aren't comparable at all). One oil analyst has come out with a prediction that oil will go back to $33 a barrel because air travel is likely to have a huge drop. My guess is this is all going to be much ado about nothing. Even though the swine flu may disappear, don't assume the swine on Wall Street will have done the same. You always need to worry about them.

NEXT: The Stupidity Pandemic; U.S. GDP Tanks

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.

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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.

Government Action on Both Sides of the Pacific

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 Japanese are at it again. The Bank of Japan is now instituting yet another program to buy shares of bank stocks. The history of their interference in the Japanese stock market goes way back and has proven to be a failed approach over and over again. Apparently just because something doesn't work is not a good enough reason for the Japanese (or almost any other government for that matter) to abandon it. While the U.S. is close to emulating Japan's disastrous market interference policies, there is a common-sense bill in Congress that would limit Credit Default Swaps. These instruments are more responsible for the financial market collapse worldwide than anything else. The discredited U.S. financial industry of course opposes the bill. Just because it is obvious they have no idea what they are doing, doesn't mean the U.S. government won't follow their suggestions.

When the Japanese government decided it was better than the Free Market in determining stock prices is not clear. It is known that during the 1987 crash, which was less serious in Japan than in other countries, that the Ministry of Finance called all the major brokerage houses to a meeting and told them to buy stocks (with at least a tacit agreement that the government would make good on the losses). After the Nikkei started tanking from its high of 40,000 set the first day of 1990, various schemes were used by the government to funnel money into stock purchases. While these moved the market up for awhile, each one eventually failed, but the market looked like it might have finally hit bottom after a 13 year sell off in spring of 2003 (the Nikkei was in the low 7000s). But this was not the case.

As per usual the Japanese government helped establish the 2003 stock market low by buying banking stocks. This last stock purchase program took place between November 2002 and September 2004. The Bank of Japan began disposing of these holdings in October 2007 (when international stock markets were at their peak). They had to suspend their selling by September 2008 when they still had 1.3 trillion Yen of stock on the books (at least that's the 'official' number). The Nikkei then hit a new 18 year low after that. The Bank of Japan's just released scheme is to buy one trillion Yen of bank shares, but there a plan in the works to add a 20 trillion Yen to that amount. Unfortunately, at some point these Bank of Japan purchased shares will have to be sold, otherwise the Japanese government would eventually wind up owning most, if not all, of the shares of their major banks. It is quite possible any new selling will cause a new market low to be established. If the Japanese government's real objective is to create the longest stock market sell off in history, they might be successful. If it is to fix their financial system, they should realize that they don't know more than the Free Market.

As for the proposed ban on Credit Default Swaps (CDS) in the U.S. This bill would limit the purchase of CDSs to parties that have an underlying economic interest and reduce the size of the market (and associated risk in it) substantially. CDSs, because they allowed huge leverage in the financial system were key components of the implosion that we are currently witnessing. One industry witness testified that this bill could 'collapse' the $31 trillion CDS market. I seem to remember the less than a year ago the CDS market was $62 trillion is size. Looks to me like the CDS market already collapsed by itself.

NEXT: New York Investing Meetup Versus the SEC

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.

Herbert Hoover Policy - Working Just as Well Today as in the 1930s

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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Congressional Republicans got in touch with their Herbert Hoover roots last night when they defeated the proposed $14 billion auto bailout. Republicans wanted wage concessions from union workers, even though they failed to be as specific in reigning in multi-million dollar banker and broker salaries when the $700 billion Wall Street welfare bill (TARP) was passed. Fiscal conservative when it is convenient, Republican Senator Grassley, stated "I think it would appear that the people who voted against this are carrying out the will of the voters as expressed through the phone calls to our offices". While calls against TARP to congressional offices ran up to 100 to 1 against the bill, a large number of Senate Republicans saw no need to carry out the will of the people in that case. Senator Grassley was among that group.

While I am generally opposed to bailouts, I am 100% opposed to hypocrisy and governmental stupidity. You can make a case for bailing out no one and you can make a case for bailing out everyone, but bailing out some companies and industries and not others produces the worst results at the highest taxpayer cost. Ultimately the U.S auto companies will be bailed out, either immediately through funds released from TARP by President Bush (the White House released a statement this morning saying it was thinking about it) or when the new congress meets in January. The justification for putting Wall Street on the dole for $700 billion and refusing $14 billion dollars for the car makers is simply not going to fly.

Ironically, the most negative reaction to the failed auto bailout bill took place in Asia overnight. Both the Nikkei in Japan and the Hang Seng in Hong Kong had crash level drops of 5.6% and 5.4% respectively. Japanese and Korean auto stocks were the most pummelled, falling around 10%. The Yen rallied strongly against the dollar reaching 88 to 1 range at one point. Oil (light sweet crude) fell to the $46 range, still well above its low of $40.50 reached several days ago. European indices was spared the full carnage because an announcement of a new $267 billion economic stimulus plan for the 27 country eurozone was released in the morning their time. While U.S. stock futures were way down before the opening, the selling was muted (not accidentally I might point out) by the White House's conveniently timed statement on the possible use of TARP funds to bail out the auto makers.

While the Herbert Hoover administration actually implemented a number of programs to deal with the collapsing U.S. economy in the early 1930s, these programs were spotty and inconsistent. Hoover himself frequently chose denial over reality in dealing with the unfolding depression, even going so far as to give a press conference in June 1930 announcing that the depression was over (it was actually just beginning). The U.S. congress seems determined to follow in his footsteps.

NEXT: Indecent Exposure - Madoff Caught Swimming Naked

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. Market Tests Low as Global Recession Predicted

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 OECD (Organization for Economic Cooperation and Development) is now forecasting GDP will fall 0.3% overall during 2009 in the 30 market economies it tracks. This is down from this June's prediction of 1.7% growth for next year. According to the OECD, 2009 will be the first time since the mid-70s that the U.S., Europe, and Japan are in recession. In all likelihood the global recession has already been well underway in 2008. Just last night, Germany reported negative GDP for the second quarter in a row. France and Italy should follow with similar results. The U.S. already reported negative GDP for one quarter and now that the presidential election is over the reported GDP numbers should get much worse. China, while not in danger of recession yet, reported a sharp decline in industrial production yesterday with growth slowing from 11.4% to 8.2%.

Despite the dismal economic numbers coming out of China, the Shanghai Composite was up 3.7% last night on hopes of a bigger stimulus package from the government. Hope didn't cross the Chinese border however and all other Eastern indices closed down. The Nikkei in Japan and the Hang Seng in Hong Kong were down 5.5% and 5.2% respectively - technically another crash day, but it would take a much bigger drop than that to get any ones attention these days. Australia lost 5% and Korea was down 7% at the low, but recovered enough to be off only 3.2% at the close. The Yen rallied against the dollar and oil fell as low as $56.06 during Asian trading.

The recession news out of Germany hammered the euro and the pound. The euro was as low as 1.2388 and the pound fell to 1.497 at one point. The DAX has hoovered around the unchanged mark for most of the day so far and the CAC-40 in France is actually up, while the FTSE is down marginally. Oil fell as low as $54.67 (on its way to $50 and probably $40 as mentioned in this blog previously). The dollar has been rallying against euro currencies because the U.S. economy is supposedly in much better shape than the euro zone economies. In reality, the U.S is only better at producing false GDP figures that overstate its economic growth. As long as the market is willing to trade on this fiction, expect it to continue.

The stock markets in the U.S. came close to their recent lows yesterday and should be watched carefully at this point. The Nasdaq was down 5.2% and closed at 1499, just above its 1494 yearly bottom so far (there is support around 1500). The S&P 500 also dropped 5.2% and closed only 12 points above its previous low of 840. The Russell 2000 was the worst hit of all, dropping 6.1% and was only 9 points away from a new low at the close. The Dow was the only major index to have a less than crash level drop (just under 5.0%) and at 8282 was well above the 7774 level it hit in recent trading. Dow companies, Intel and Walmart then both lowered earnings expectations after yesterday's close. This news should propel the market lower. If the market can't hold its yearly lows look for the Dow to hold around 7200 and the S&P 500 around 775 (the 2002 lows). Many traders will be buying if they see these prices.

NEXT: The Trader of Last Resort

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.

China Bails Out Asia - at Least for Today

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:

Finance ministers and central bankers from the Group of 20 (nineteen of the world's largest economies, plus the European Union) met in Brazil on Sunday and called for increased government spending to bolster the sagging global economy. The multi trillion dollar bailouts, massive liquidity injections, and sharp rate cuts in the last two months apparently haven't done the trick. To do its part, China promptly announced a $586 billion stimulus plan consisting of spending, subsidies, loser credit, and tax cuts. Unlike the rate cuts in Britain and the ECB last week, when the markets crashed the day they were announced, Asian markets rallied strongly on the news.

Not surprisingly, the Shanghai composite was up the most with a 7.3% gain. It is still down about two-thirds from its high last October, after rising in one of the most spectacular bubbles in history (bubble markets usually need somewhere between an 80% to 98% drop before they can stabilize). The Nikkei rose 5.8% on the news, after having hit a new low in its 18 year drop only recently. Intraday, the Nikkei has had approximately an 83% drop so far from its bubble high in 1990 to its current low. What the final number will be and when it will take place is anybody's guess. The Sensex in India, another bubble market, rose 5.8% as well. The dollar rallied against the Yen and natural resource stocks (inflation indicators) seemed to be the major beneficiaries of China's announcement. BHP Billiton, the world's biggest mining company was up 13%.

As the rally moved along with the sun to Europe, the enthusiasm dampened somewhat. Major European markets are up less than 3% as of this writing. U.S. pre-market futures indicate an even smaller rally here. Of course the Dow already rallied 2.8% on Friday, but this was after a two-day post election drop of around 10% (half of what would be necessary to create a bear market). The news of Circuit City's bankruptcy and AIG's third government bailout, with the total now up to $150 billion, will weigh on the U.S. market if rationality prevails - a dubious presumption at best.

In case there was any doubt previously, the economic policy makers for all the world's large economies are pursuing and will continue to pursue extreme inflationary policies. In many cases, this is being done to try to reinflate collapsing bubbles. There is no short-term likelihood of success in this endeavor. They will be successful however in igniting an inflation bubble. Although this is completely predictable, expect great surprise - and denial - when inflation starts to get out of control.

NEXT: Auto-Asphyxiation - GM, Ford Gasp for Bailout

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 Stock Market's Early Returns

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:

While the election doesn't appear to have resulted in the worse possible outcome for Wall Street, what did occur was interpreted by the market negatively enough to cause a small crash today. So far Obama has won the presidency by a 7% plurality, although based on turnout estimates several million votes seem to be missing from the tally. The Democrats have picked up at least five seats in the Senate and have solidified control, but the filibuster proof majority remains elusive for them. Four seats - Georgia, Minnesota, Oregon, and Alaska - are still undecided however. Currently the Republican is ahead by 500 votes or less in Minnesota and Alaska and recounts will be taking place. All the ballots haven't yet been counted in Oregon's mail-in-only election, but it looks like the Democrat will win when they are. As of now, Georgia is heading toward a run-off election next month because neither candidate got 50% of the vote. Alaska would have to have another election as well if convicted felon Stephens wins, since he will probably be expelled from the senate by early next year at the latest. Current tallies indicate that the Democrats picked up around 20 seats in the House and will have between an 81 an 88 vote majority.

Inexplicably the market rallied while the voting was taking place, with the Dow closing up 305 points or 3.3%. This was the biggest rally since 1980 when the market was first opened on election day. The previous biggest rally was a 1.2% gain in 1984 when Reagan defeated Mondale in a massive landslide that was universally predicted. Today, after seeing the returns all the major U.S. stock indices dropped 5% to 6%. Previously this would have been a headline news, but a drop of this magnitude has become commonplace in the last two months of high volatility trading.

Volatile markets are of course not healthy markets. A 305 point Dow rally yesterday, followed by a 487 point or 5.1% drop today should not inspire confidence. The S&P and Nasdaq were down a slightly greater percentage and the Russell was down the most with a 5.7% drop. Oil dropped $5.23 a barrel after an even bigger rally on election day. When Japan opened, the Nikkei followed the U.S. markets down, ending its morning session with a drop of 5.7%. The Hang Seng in Hong Kong was having an even bigger drop, while the Shanghai Composite hit a two-year low before attempting a recovery. Like the Nikkei, Korea and Taiwan were experiencing crash level drops at mid-day while Singapore and Australia were down somewhat less than 5%. If anything, volatility in Asian markets has been even greater than in the U.S.

In the longer term, there is a lot more to consider than the 5% to 6% drop in the U.S. markets today. Since September 2007, the New York Investing meetup has pointed out how the Federal Reserve and the Treasury have attempted to prevent and cover up economic problem before the presidential election. Well, the election is now over. Some of these actions may now start to unravel. If so, we shall begin to see this in the next month or two.

NEXT: When Stimulus Ceases to Be Stimulating

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.

Short-Covering Rallies, Explosive and Brief

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 night New York time, the Nikkei in Japan hit a new intraday low dipping into the high 6000s (it was almost 40,000 at its peak in early 1990). An hour or two of sharp trading in either direction means very little in current market conditions though and the Nikkei reversed and closed up 6.4%. South Korea had the opposite trading pattern, being up 8% during the session, but closing down 3%. The Shanghai deposit had a similar loss and Singapore and Taiwan were flat. The sharp drops, which have been going on for some time in stock markets throughout the world, indicate increasing short positions. Eventually, the shorts become so large they create an unstable situation that can lead to sudden and explosive rallies.

This was no more clearly illustrated than when trading in Asia was winding down and Europe opened. A short squeeze in Volkswagen caused by Porsche announcing it was increasing its stake in the company caused a 348% rally in Volkswagen stock in only two days. Volkswagen briefly became the largest company in the world based on market capitalization (this would be a nonsensical claim by any other criteria). Volkswagen is part of the the DAX in Germany and its weighting in the 30 stock index rose to 27% creating a massive move up in the DAX as well. It was soon announced that Volkswagen's weighting in the DAX would be adjusted down to 10% in order to create a more realistic pricing situation. A number of major U.S. hedge funds and Goldman Sachs were caught on the wrong side of this melt up. While some media reported that Volkswagen experiencied the largest short squeeze ever, its price move pales in comparison to one that took place in Northern Pacific stock in the U.S. during 1901.

On Tuesday, the U.S markets opened with a strong bullish tilt, but at least at one point it looked like they would turn negative. A rumor in the afternoon that the Fed would cut rates to zero caused an explosive end of the day rally (neither truth, nor realistic claims are necessary preconditions for short squeezes). The S&P 500 ended up the most rising 92 points or 10.8%. The Dow was up 889 or 9.8%, the Nasdaq 144 or 9.5%, and the Russell 2000 trailed with a rise of 34 or 7.6%. The financials (the most shorted of all stock groups for good reason and despite the recent ban) had their biggest rally in history. Equally massive rallies took place that evening in the beaten down Asian indices, with Japan up 10% and South Korea 12%.

The U.S. Fed then announced at the close of its two-day meeting on Wednesday that it was cutting interest rates 50 basis points to 1% (the same interest rate that gave rise to the current credit crisis). Since this cut was expected and some traders were obviously looking for a lot more, it should have been more than fully priced into the market. Nevertheless U.S. markets rallied initially, but sold off at the very end of the day. On Thursday evening Japan followed up with its own rate cut of 20 basis points, leaving interests rates at just 0.30% (they've been lower there). The U.S. Fed will probably be getting close to that level soon enough. Japanese stocks fell 5% on the news because apparently the market wanted more. Technically speaking this was a stock market crash, but a drop of this magnitude has become so common in the last two months that no one pays particular attention anymore.

NEXT: U.S. Election's Impact on the Market

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.

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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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Another market bloodbath took place in Asia last night. The Nikkei fell a further 6.4% and took out its 2003 low of 7603 to close at 7162. This is now a 26 year low and it's not clear that even 18 years of selling has been enough to establish a long-term stock market bottom in Japan. The surging Yen is crushing exporters there. Drops were even bigger elsewhere, with the Hang Seng in Hong Kong falling 12.7% to close at 11,016. The 10,000 support level, broken during the Asian financial crisis in 1997, seems to be acting as a magnet for the index. The Philippines market, after dropping 12.3%, halted trading. Only Korea was up slightly after it cut interest rates three-quarters of a point, the largest cut ever there. The U.S. Fed, which is meeting this week, almost certainly took notice.

While the Yen is going up against the dollar, the euro continues its fall and hit 1.2461 in overnight trading. Oil hit 62.20 and is now down 57% from its mid-July high. The drop has been so sharp and so quick that gas prices in the U.S. have fallen 53 cents in only two weeks - just in time for the November election, where the high cost of fuel was a major issue eroding voter support for the Republican party. The U.S. dollar's strong rally against almost all currencies other than the Yen, engineered by central banks acting in concert starting this summer, is partially responsible for the fall in oil prices. Their dollar support activities have been so 'successful' that the trade weighted dollar was above 87.50 early this morning. If the rally continues, this could cause U.S. exports to drop off a cliff, as they did in the early stages of the Great Depression, and take the economy with them. The American financial media, which published one story after another about the beneficial effects of a falling dollar when the U.S. currency was sliding, has so far ignored the flip side of this story.

European markets, down in the 4% to 6% range in early trading, started paring their losses by mid-day. The U.S. markets did not open down that much, but it's the close that will be important. The Treasury announced today that it would begin distributing it gift bags of money from the Wall Street bailout bill to banks and this may be helping to limit selling. The U.S. Fed will be meeting this Tuesday and Wednesday and a 50 basis point rate cut is expected - more is possible and that would rally the market if it occurs. The New York Investing meetup predicted in fall 2007 that the Fed would move rates close to zero and this prediction seems to be coming to fruition.

Stocks are extremely oversold and resistance to further selling has been evident for the last few days of trading. Buying on any major drop should now be considered. It is likely that soon some event will take place that will rally the market and its beaten down segments. While the financials may still be overpriced (doesn't mean they can't rally substantially in the short term), sectors like the precious metal miners have been fallen to truly bargain level prices. Buying at a real discount is always a good way to make money in any market.

NEXT: Short Covering Rallies, Explosive and Brief

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.