Stock Rally in Beginning of Month Ignored Economic Reality

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 had an impressive rally the first four days of the month and this is generally a bullish indicator.  The rally took place with a backdrop of really ugly economic news however and that is not bullish. Weakness has a way of coming back to haunt the market as European bank news is demonstrating today.

U.S. economic reports for the last few months have been generally bad to awful. Nothing changed last week. While the ISM manufacturing index went up, this supposedly occurred because of a big increase in manufacturing jobs (the inflation component of the report was the actually the biggest gain, but the mainstream media somehow didn't report this negative news). This gain was not corroborated by the government's August employment report, which showed a drop in manufacturing jobs, nor by anecdotal evidence or anything else taking place on the planet earth. The stock market of course rallied strongly on the news.

The ISM non-manufacturing index, which measures the almost four times bigger service sector, didn't get nearly as much media coverage. It barely remained in positive territory. The inflation component, also the highest number in this report, was chiefly responsible for the number not going negative and indicating contraction.  Two components of the report were clearly in contraction however - exports and employment. The service sector losing jobs is a big negative for the overall U.S. economy.

Also lost in the stock buying frenzy was August car sales. They were down 21% year over year. This followed the 27% monthly drop in existing home sales in July and the 33% drop in new home sales in May. Last August was the peak of the Cash for Clunkers program. The numbers for car sales and home sales both demonstrate what happens when government incentives are no longer available in a market. While new homes sales fell to the lowest level ever recorded, August car sales were only at a 28-year low. For those who don't recall, 1982 was when the previous double-dip recession took place.

Government stimulus programs didn't fix the housing and car markets, but merely made them look better. This works for a while, but reality eventually rears its ugly head. A report from Europe today said that "the continent's major banks have more potentially risky government debt on their books than was disclosed during stress tests earlier this year." This wasn't exactly a piece of information that required the skills of Sherlock Holmes to uncover. At the time of their release, the stress tests were roundly criticized as being a phony PR gambit that set the bar so low that any bank not declaring insolvency in the next week would pass. Stocks of course went up on the news back then and today they are going back down.

Economic reality will eventually be reflected in the stock market. As I have said many times however, it's not the economy that drives the stock market in the short term, but liquidity. The Fed obviously kept pushing the 'flood the financial system with liquidity' button in early September. What happens when they stop doing this? See the homes sales and car sales numbers for a hint of how stimulus withdrawal impacts a market.

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.

What's Driving Today's Market Rally

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.


Major European stock indices were up two to three percent today after Asian indices rose around one percent last night. The U.S. markets then had a strong opening after the three-day holiday weekend. Mainstream media is citing bargain hunting as the source of the rally, whereas money-pumping operations to support the euro is likely the major contributor to the market's bullish behavior.

Stocks were devastated in the last two weeks and some rally at this point is reasonable in order to resolve an oversold condition. Strong buying in the U.S. though would be inconsistent with the bear market signal being giving by the S&P 500 on Friday and the small cap Russell 2000 having experienced a bear market loss of over 20% the same day. This is not the type of market environment that traders can't wait to plunge into on the long side. Liquidity pumping by the major central banks would be most effective (and likely) at a key market juncture like this however.

Central bank efforts to support a faltering global financial system began in earnest on Sunday May 9th after the Flash Crash three days earlier. The EU announced its $915 billion euro rescue plan and at the same time the U.S. Fed opened unlimited liquidity swap facilities with the European Central Bank, the Bank of England and the Swiss National Bank. A swap facility up to $30 billion was opened with the Bank of Canada. The Fed stated, "These facilities are designed to help improve liquidity conditions" and that the Bank of Japan was considering similar measures. The swap arrangements were authorized until January 2011.

Stock markets around the world then skyrocketed on Monday, May 10th since increased liquidity shows up immediately in stock prices. Investors should expect intermittent market impact both from euro rescue money and swap generated liquidity for the next few months. For the full text of the Fed's announcement, see: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm.

It is fortunate for the markets that liquidity is on tap when needed. Not only is the technical picture of the market deteriorating, but the economic news isn't supporting stocks either. Little noticed last Friday was the announcement of a decline of 1.4% in U.S. industrial production. The ISM Manufacturing index for June, which came in at 56.2, indicated a slowing expansion (over 50 indicates growth). Almost every component, except for those related to inventories, was down. New orders, an indication of future activity, dropped 7.2 from the previous month. The ISM Service index fell to 53.8, which was below forecast. The employment component was 49.7 dropping below 50 and indicating job losses. The service sector is four times bigger than the manufacturing sector in the U.S.

Investors should enjoy the rally while is lasts. The rally after the flash crash in May lasted four days. Within ten days, stocks were lower than they had been during the crash. Liquidity induced rallies can be powerful, but they don't last very long.

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.

ISM Reports for December Confirm Inflation

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 January 6th report from the ISM (Institute of Supply Management) on the state of the U.S. service economy in December indicated neither growth, nor decline. The tepid 50.1 reading was in contrast to the 55.9 number for December manufacturing that was released two days earlier. It would have been much better news for the economy if the numbers had been reversed since the service sector of the U.S. economy is four times bigger than the manufacturing sector. Neither report is adjusted for inflation. Both have a 'Prices' component that figure in the overall numbers, so inflation can make the top line number look better. The Prices component was indeed one of the highest numbers in both reports.

The dividing line for contraction versus expansion for the ISM is 50. Numbers in the 60's are very strong. The Prices component in the Manufacturing report for December came in at 61.5, up 6.5 over November. It was the third highest number. Prices in the Non-Manufacturing (services) report were up 0.9 to 58.7. This was the second highest component, exceeded only by Inventory Sentiment. December was by no means the first time the inflation numbers were high. Inflation was already evident in the reports for August 2009. In that month, the Prices component was 65.0 and 63.1 for Manufacturing and Non-Manufacturing respectively. The Non-Manufacturing number was up a whopping 21.8 from July. Prices in the Manufacturing report were up 10.0, having already been above the 50 level the month before. Gold began a major rally on this news that first took it to $1000 and then well beyond that level.

The revival in manufacturing is not just taking place in the U.S. but is occurring globally. Reports out of the UK indicate manufacturing activity there is at a 25-month high. Manufacturing in the Eurozone is at a 21-month high. China recently announced that its manufacturing sector expanded at the fastest rate in 20 months. Government stimulus programs and close to zero interest rates are having their impact and it is showing up in production statistics. This is better news for manufacturing-based economies, than it is for service-based economies like the United States. Expansionary fiscal and monetary policies are good for economic growth in the short term. This growth is not necessarily sustainable however and there is eventually a price that has to be paid with inflation.

Where is the inflation coming from? While it is likely to show up in price increases across the board in the long run, in the short run it is appearing in raw materials. The December ISM Non-Manufacturing report had an important statement confirming this. Toward the bottom of the report,  the following statement can be found: "No commodities were reported down in price". Government stimulus seems to be doing a good job of stimulating prices. 

Disclosure: Long gold.

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.

U.S. Employment Figures Don't Add Up

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.

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Fed chair Ben Bernanke is up for reappointment and is experiencing some difficult times with his congressional critics. Good news has suddenly and conveniently appeared to bolster his case however, including Bank of America planning on repaying the TARP money it received from the U.S. government and then a big improvement on the non-farms payroll number released on December 3rd. According to the Bureau of Labor Statistics, there were only 11,000 jobs lost in November 2009 and the losses for the previous couple of months weren't nearly as bad as they had reported (the last time there were actual job gains in the U.S. was in December 2007). Independent private surveys don't corroborate the government's numbers.

The U.S. government figures were not completely rosy by any means. They indicate that there were major job losses in Manufacturing and Construction, a significant drop in Information and in Leisure and Hospitality jobs, and amazingly a drop in Retail jobs during the height of the holiday season. U.S. Manufacturing employment fell by 41,000 in November and has declined by an eye-popping 2.1 million since the recession began in December 2007. Construction jobs fell by 27,000. There was also a loss of 17,000 jobs in the Information industries (half of that in telecommunications). Leisure and Hospitality lost 11,000 jobs. Jobs in retail declined by 15,000. You would not know this from reading the BLS press release however, unless you looked at the data attached to the bottom of it. The copy did not mention that there was a job loss in retail, but instead stated "there was little change in wholesale and retail employment".

So where did the job gains come from? Three categories had increases in employment -Professional and Business Services, Education and Health Services and Government. Professional and Business Services was the big gainer adding 86,000 jobs. However, 52,000 of those jobs were part-time. Education and Health Services added 40,000 jobs with 21,000 of these jobs coming from Health Care and presumably 19,000 from Education (which is not known for hiring people in November). Government added 7,000 jobs. The two consistent job producers since the recession began two years ago have been the Government and Health Care categories, with Education also frequently adding jobs (many health care and education jobs are government related).

The BLS claimed that unemployment fell from 10.2% to 10.0% in November. How can the unemployment rate fall when there are job losses? People have to leave the labor force. Barring a sudden population decrease of working age individuals, workers have to get so discouraged form the bad employment situation that they just give up looking. According to the BLS, 2.3 million people are marginally attached to the labor force and are not counted as unemployed because they did not look for a job in the previous four weeks. Another 9.2 million are working part-time even though they want full-time employment. The alternative unemployment rate which includes discouraged workers and involuntary part-time workers was reported by the BLS as 17.2%.

A check on U.S. government employment figures can be gotten from the ISM (Institute of Supply Management) Services and Manufacturing Indices, both of which survey employment as well as a number of other factors which indicate economic growth or lack thereof. The Services Index was released just yesterday and employment came in at 41.6 (under 50 means contraction). Employment in the services sector has been in decline for the last 19 months and dropped from October to November according to the ISM. All the job gains in the government employment report supposedly came from the service sector. There is a major contradiction here.

The November non-farms payroll figures are another government release indicating the U.S. economy is getting better. This one doesn't add up either. Healthy economies don't have major job losses in manufacturing and construction. Nor are jobs lost in retail during the holiday season (they are during depressions, but certainly not if the economy is improving). The big job gains were part-time, not permanent. The unemployment rate is improving because workers are so discouraged that they are leaving the labor force, not because jobs are being added. This doesn't happen if the economy is getting better either. Furthermore private surveys don't support the governments numbers. Investors should be wary. While markets can be fooled in the short-term, in the long-term they trade on reality.

Disclosure: None.

NEXT: Gold in Technical Correction as Dollar Rallies

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 Latest from Fantasy Land

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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AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

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.