Monday Update on the 2nd Global Financial 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.


It's Monday May 17th and the Euro is heading lower, having broken its low from Friday. The trade-weighted dollar has hit new highs for this move. European stocks are having a mild rally, while U.S. stocks are mostly flat. Asian stocks sold off on Sunday night. The ECB is withdrawing liquidity from the market and this should be a negative for stocks going forward.

If there is to be a near-term recovery in world stock markets, it is important that the euro rallies back to and above the 125 level - its low during the Credit Crisis.  The euro (FXE) traded as low as 123.24 on Friday and today has been as low as 122.71 in New York morning trade. A significant break in support has taken place and this is a major development. In all likelihood it indicates a much lower low in the future. What that low will be and when it will take place are of course the key questions that need to be answered. The euro's next support is at 1.20, and it is now heading to that level. That support is relatively minor however. A number of technicians claim better support around 1.07. The equivalent strong support that existed at 1.25 would be at 1.00 however. What unfolds in the future depend on how the EU continues to handle matters affecting the currency. Up to this point, we have only seen world-class ineptness coming out of Brussels.

For its part the ECB (European Central Bank) announced that it would launch a program on Tuesday to re-absorb the liquidity that it pumped into the market early last week. They intend to withdraw $21 billion (16.5 billion euros) through this operation. If the liquidity injection was good for stocks (the market did indeed have a huge rally coincident with the ECB's move), investors should consider the withdrawal of liquidity should be bad for stocks.

In Asia the Nikkei in Japan was down 2.17% last night and the Hang Seng in Hong Kong fell 2.14%.  European markets had a modest rally today, with the FTSE in England and the DAX in Germany rallying about half a percent. U.S. markets were basically flat in morning trade (they turned down dramatically just around noon). The trade-weighted dollar (DXY) was as high as 87.06.  The U.S. markets had a massive gap up on Monday May 10th. This can be seen most clearly by looking at Nasdaq, where no specialists delay the open to balance buying and selling. Prices fell into the gap on Friday and the very short-term technicals in the day's trading were ugly. The rule of thumb it that once a gap is partially filled, it will be completely filled (prices will go down to the bottom of the gap in this case).

Investors need to realize that the world's central banks are well aware of this crisis. How much comfort this should be to them is open to debate. The central banks all saw the global financial disaster that resulted from Lehman's failure in the fall of 2008. They all know that a small currency crisis in Thailand in 1997 spread throughout Asia and then damaged world stock markets for more than a year thereafter. This knowledge though didn't prevent the ECB from sitting on its hands for more than six months while the situation in Greece escalated into an international problem. The central banks then finally acted with a trillion dollar bailout (likely to be just the beginning). So, we can conclude the central banks haven't learned to react in time to prevent a future crisis, but they do know how to print money - a talent that has some serious downside risks if you don't like inflation.

Disclosure: No positions.

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.

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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.