Showing posts with label bank stocks. Show all posts
Showing posts with label bank stocks. Show all posts

Monday, April 27, 2009

Buy When There's Flu in the Streets

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:

Reports of a possible flu pandemic are permeating media coverage today. This news caused a significant sell off in the Taiwan and Hong Kong markets last night where memories of SARS are fresh on everyone's minds. While I have frequently criticized the media for their irresponsible coverage of the stock and commodity markets, coverage of medical issues seem to be even more problematic. As usual, instead of a responsible recitation of the facts with the logical conclusions that can be drawn from them, media reports are geared toward sensationalism meant to panic the public (when you really should panic, silence or boosterism from the mainstream media is much more likely).

The first thing that needs to be considered is that a major influenza epidemic in the summer is highly unlikely, if not impossible. Recent studies indicate that flu is most contagious under dry conditions at 20 degrees Fahrenheit (minus 6 Celsius). This is why flu epidemics take place in the winter and not the summer. In the case of the 1918 pandemic, flu broke out early in season in September and October. This took place at the end of World War I when there were large concentrations of military personal confined in close quarters (ideal for spreading disease). Examining a map of the disease's spread in the U.S. flu seems to have started in port cities and around military bases. There was a small initial outbreak of flu in the spring of that year which the authorities ignored. The disease then became dormant in the summer as should have been the case. Since we are already at the end of April, weather conditions favorable to flu are quickly dissipating. This gives the authorities plenty of time to react (it is already known that antivirals are effected in combating this new incarnation of the flu and the U.S. has large amounts of these in storage). None of the small number of cases identified in the U.S. so far have been fatal and all but one person with the flu travelled to Mexico (the exception was the wife of someone who travelled to Mexico).

How does this affect your investments. It depends on when you think the news will become better. It took quite awhile before the news coverage on SARS indicated the problem had passed. In this case, the news is likely to shift to a more positive tone or disappear in a relatively short time. The market sell offs that take place during medical panic should be bought into just like those that take place because of market panics. There was already likely to have been some selling this week as is. So if this blows over quickly, look to Friday as a possible good rally day.

The important take away is that markets will sell off because of panic inflamed by the mainstream media. Often, as in this case with this new version of the flu, the media blows everything out of proportion because hype sells papers and gets big viewing audiences. Unfortunately, it can loose you money if you sell into the panic instead of buying into it. Buying high quality goods at fire sale prices is always a good way to make money and this should never be forgotten by any investor.

NEXT: Markets Catch Swine Flu

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.








Thursday, January 15, 2009

The Real Deflation is Taking Place in Bank Stocks

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:

PPI came out this morning and the U.S. government is now claiming that there has been wholesale price deflation in 2008. At least this is what the headline number indicates. Core inflation wasn't as benign, rising the most since 1988. The media is of course now hyping the headline number, which it downplays when it indicates inflation and ignoring the core number which gets a lot of attention when it's the better number (the advantage of having two numbers, one is likely to look better). The prices that are really dropping are assets, not those that are consumer related, with bank stocks yesterday taking a real hit.

According to the BLS wholesale prices in the U.S. fell by 1.9 percent in December. The yearly drop of 0.9% compares with a rise of 6.2% in 2007. As has been pointed out repeatedly in this blog, recent drops in the PPI are due almost exclusively to declining energy prices. These led the price declines last month, with energy prices overall going down 9.3% and gasoline dropping by a record 25.7%. For a change, food prices also fell, or at least the reports indicates a 1. 5% drop for the month (there was no drop for 2008, nor have U.S. food prices fallen year over year in the last four decades). Core inflation told a very different story however. It was up 0.2% in December and 4.3% in 2008. The last time it was higher was 20 years ago.

Mainstream media reporting on the PPI, as has been the case recently, has indicated the risks of consumer price deflation because of the headline numbers. The media usually reassures the public that economists (almost all of whom missed the Credit Crisis, the recession and are usually wrong in almost all of their predictions) have "confidence that the Federal Reserve (which has totally and completely mishandled the Credit Crisis since its inception) has the tools needed to keep deflation from becoming a problem". The media usually follows this up with 'isn't it great that the Fed had the foresight to cut interest rates to zero'. Certainly, you can not argue that what the Fed is doing will keep the threat of deflation away. Central Bank monetary policies that have given rise to hyperinflation in the past are usually very effective in preventing prices from falling.

While there is no actual deflation going on in consumer prices as the mass media would have you believe, assets prices are indeed deflating (the two are not interchangeable) because of the collapsing financial system. That collapse is by no means done. Bank America actually hit a new yearly low in aftermarket trading yesterday. Citigroup fell over 20% into the 4's (its yearly low is just above 3, a price that large cap financial stocks trade at only if they are on the verge of oblivion). Wells Fargo was also down quite a bit. The charts for JP Morgan, Goldman Sachs and Morgan Stanley are not looking particularly healthy either. Even after the U.S. government has pumped almost an unlimited amount of money into these companies, they are faltering again. As we have said in the New York Investing meetup over and over, "there is no such thing as a single bailout for an insolvent financial institution". We'll just have to see what the government does next.

NEXT: Bank(rupt) of America Gets Government 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.