Volatility is Back

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 market was up yesterday almost completely erasing the large losses from the day before. The beaten down financial stocks led the way up as if insolvent banks and brokers are now suddenly doing better. Well they're not, but their stocks were doing better in what is obviously a short covering rally that was pushed to the max by media reports of insider buying (more accurately portrayed as insider manipulation of the media, with full cooperation of the media itself).

The Dow was up 3.5% to close at 8228, above the psychological important level 8000. Nasdaq was up 4.6%. IBM reported (please note the use of the word reported as opposed to had) good earnings. Bank stocks were the big gainers however and this was true in Europe as well as the U.S. Both Citigroup and Bank of America were up 31%, not so difficult when you are selling in the single digits (the low single digits in Citi's case). Bank of New York was up 24%. And Tuesday's poster child for stock market disaster, State Street, managed a 15% rally. The rallies were more muted in Europe however. Barclays, which has lost half its value since the beginning of the year, was up 5% and Bank of Scotland only 9%. In Germany, Deutsche Bank was up 10% and Commerzbank 13%. Belgium's bailout baby, KBC, was still falling though after already losing 70% in the last three weeks and receiving a two billion euro cash injection.

The rally in bank stocks started out as the usual dead cat (or more appropriately dead bank) bounce. It really got going when news hits the wires about top management buying their own beaten down financial shares. Anyone who might think this was a case of blatant manipulation would have a lot of evidence on their side. When was the last time you saw a blaring headline, 'Insiders Dumping Bank Stocks', especially if it happened the day before? Lot's of luck in finding that one. Yet, yesterday's news trumpeted, Bank of America and JP Morgan insiders buying their stock. You would have had to read well into any article however to find out that in the case of JP Morgan, the buying took place last Friday before the stock was pounded down even more on Tuesday. As for the insight of bank management insiders, these were the people who brought us the current Credit Crisis and didn't see it coming. The head of Bank of America thought it was a brilliant move for the bank to buy Countrywide Financial and later on agreed to buy Merrill Lynch, two purchases that are destroying the bank. Now, we should assume his judgement has suddenly sharpened. Yeahhh ..... that can happen!

The earnings of financials are so bad they are disproportionately responsible for dragging down the earnings of the S&P 500. For Q4 of 2008, a 20% drop in corporate earnings is now expected. Before earnings season began a 15% drop was projected, but results have been worse than orginally thought. Wall Street analysts have once again underestimated how bad things are, just as Wall Street economists have done with the economic figures. I have never heard of anyone on Wall Street being fired for being continually and consistently inaccurate. In fact, it seems to be the ticket to getting to the top there. Something to think about for anyone who relies on insider purchases to indicate banks are turning around.

NEXT: Britain Points the Way to U.S. Economic Future

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.

Banking Bloodbath Covers Wall Street in Red

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

Our Video Related to this Blog:

The bloodletting on financial stocks was almost relentless in U.S. trading yesterday. Trouble began in Europe the day before with the collapse of Royal Bank of Scotland stock, a collapse which took place despite (and some are now saying because of) a second bailout of the banking system by British authorities. The U.S. markets were closed for the Martin Luther King holiday, but when they reopened banks and brokers were cut to pieces. It was not a propitious beginning for the new Presidency.

Action in the market overall was ugly Tuesday and while financials led the way down, selling wasn't isolated to just that sector. While the Dow was down 4.0% and closed below the psychologically key support level of 8000, the technology laden Nasdaq suffered even more. The Nasdaq's 5.8% loss was a crash level drop. While the rest of the market fell apart, the gold ETF GLD gapped up sharply for the second day in the row, showing incredibly strong technical strength. As it has done throughout history, gold was shining once again in the midst of a crisis.

To say the drop in some financial stocks was a crash would actually be understating the situation. State Street was cut in half with a 50% drop. PNC was down 41%. Even though Bank of America was down 'only' 29% it hit yet another yearly low and without additional intervention (it was bailed out only a few days ago) the stock looks like it is headed toward oblivion . Citi, down 20% on the day, also managed to hit a yearly low and dropped below $3. The detailed action in the financials below:

State Street down 50 percent to 21.46.
PNC down 41 percent to 22.00.
Bank of America down 29 percent to 5.10.
Wells Fargo down 24 percent to 14.03.
Suntrust Banks down 24 percent to 15.07.
Citigroup down 20 percent to 2.80.
JPMorgan Chase down 20 percent to 18.09.
Goldman Sachs down 19 percent to 59.20.
Deutsche Bank down 19 percent to 21.00.
U.S. Bancorp down 16 percent to 15.34.
Morgan Stanley down 16 percent to 13.10.
UBS down 16 percent to 10.00.
Credit Suisse down18 percent to 19.76.
HSBC down 15 percent to 33.83.

Some recovery is taking place today in the banks and brokers because of Geithner's statements about more banking bailouts. Of course, that approach hasn't worked well so far. However, nothing succeeds like failure in recent U.S. economic policy.

NEXT: Volatility is Back

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

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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

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

Our Video Related to this Blog:

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

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

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

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

NEXT:

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

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.