Will Stocks Continue to Rally After Quadruple Witch?

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.


Today is one of four days during the year when index futures, index options, stock options and stock futures all expire. The market has rallied throughout September into the quadruple witch, but will it continue to do so?

As has been the case with every rally since the bottom in 2009, volume this September has been below average on the Dow Industrials. Low volume is an indicator of lack of enthusiasm for a trend and indicates the trend is likely to reverse soon. Nevertheless, stocks have managed to defy the lack of buying support and hold up for almost a year and a half now. This is theoretically impossible in a free market. It is very possible in a manipulated market however where one or a few large players control the game. In such circumstances, some tip sheet on Federal Reserve liquidity pumping would be the best guide to be used for trading stocks.

The mainstream media has been giving the rally as much support as possible as well. Weekly unemployment claims which invariably fall around holiday weeks, not surprisingly went down the week before and after Labor Day. Instead of reporting this as business as usual, the cheerleading media claimed it was new evidence of an improving economy. Retail sales supposedly had a minor jump in August, although the report was not credible. The smoking gun was the auto component which barely declined over August 2009 when Cash for Clunkers was giving auto sales a huge boost. Independent industry sources showed a huge drop in sales year over year, but somehow government statisticians know nothing about it. Both reports were replete with missing data, so some component numbers were merely wishful thinking estimates. The mainstream media didn't manage to report this key information. A consumer confidence survey today indicated confidence dropped to its lowest level since August 2009. The cause for the drop was consumers getting really gloomy about the future prospects for the economy. Apparently they are increasingly tuning out the information they are getting from the government/media complex and believing what they see with their own eyes instead.

So even though the economy is continuing to deteriorate, government statisticians are doing their best to hide this from the public. The mainstream media is doing its best to help them out by not questioning any number they produce no matter how unreliable or unbelievable it is. The Fed and other central banks and treasuries (think the one trillion dollar euro-TARP program) are doing their best to keep the world financial system afloat in a sea of liquidity. The most obvious evidence for this is a range of assets - stocks, bonds, and commodities - are all rising at once. This happens if there is more money in the system, otherwise traders would need to sell one asset in order to get funds to buy another. When they can bid up every asset, there has to be more available money and less risk aversion, which makes no sense given all the problems that currently exist.

Given the current environment, stocks can certainly continue to go up. Investors should assume the Fed will do everything possible until at least the election on November 2nd to make the market look good. There is no free lunch however. While liquidity driven markets can go higher and last longer than anyone thinks possible, they can also drop faster and much further than anyone would imagine. And this can take place suddenly. Constantly keeping the liquidity trough full also risks massive and sudden inflation. Don't expect to hear about this from the mainstream media though because they will be too busy telling you not to worry because everyone knows that liquidity fattened pigs can fly - or at least that's what the latest government report said.

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.

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.

Retail Sales Drop in May Shouldn't Be a Surprise

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 U.S. government released its Retails Sales report for May this morning. Analysts expected an increase, but sales dropped 1.2%. The markets were surprised that American consumers were spending less even though the unemployment rate is stuck around 10% and credit card debt has dropped for 19 months in a row.

The expectations for higher retail sales came from the massive amounts of federal government stimulus being pumped into the economy. There is a $1.6 trillion dollar budget deficit projected for fiscal year 2010 (the deficit for 2009 was $1.42 trillion) and this money is making all the economic numbers look much better than they would otherwise. The deficit alone is approximately 11% of the official U.S. GDP number (which is grossly overstated), but still represents less than half of all federal government spending.  Investors should ask themselves: Given all of this support, how weak is the U.S. consumer?

This is an important question because the U.S. has built an economy based on consumer spending, which reached 72% of GDP before the Credit Crisis. The consumer also became very over indebted in the 2000s and the saving's rate hovered around zero mid-decade.  To spend more, consumers need more income and credit (the amount available from savings is limited). A jobs recovery is needed to increase consumer income and even Washington admits that that is not happening in the foreseeable future. As for credit, the big banks are borrowing from the Federal Reserve at zero percent, but are not passing the savings on to the consumer. They are also decreasing credit card lines, not increasing them. Autos are one of the only areas where cheap credit has filtered down to the consumer level.

Auto sales have also directly benefited from government programs like Cash for Clunkers. There were no special government programs active in May and auto sales fell 1.7%. The drop in retail sales was essentially across the board though. Department stores were down 1.8% and general merchandise sales decreased 1.1%. Hardware stores were really hit hard with sales falling 9.3%. The only bright spot was a 3.3% drop in gasoline sales. This took place because gas prices dropped, not because less gas was purchased. The Retail Sales numbers are not adjusted for inflation.

For some time now, the message coming out of Washington has been one of economic recovery. This has been based on economic numbers pumped up by incredible levels of stimulus. The retail sales report today and the employment numbers in general show that stimulus is not working so well this time around. The basic idea for excess government spending is that it jumpstarts the economy just as an electric jolt jumpstarts a battery. If the battery is really dead however, no amount of electricity brings it back to life. The same is true for stimulus in a dead economy.

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.

U.S. Consumer Credit - Being Held Up by Government Loans

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.


Consumer spending is the lifeblood of the American economy. Before the Credit Crisis, it was responsible for 72% of U.S. GDP. American consumers don't spend the money they have though, but depend on the money they can borrow. Aggregate U.S. household debt (including mortgages) is actually so large that it is bigger than the enormous government national debt. Consumer Credit has been crimped however since the recession began in December 2007 and experienced the longest continual drop in on record in 2009 and the biggest single month drop ever last November (records go back to 1943). Without a big increase in credit from government loans, things would have been even worse.

The Consumer Credit figures don't include mortgages and other real estate related loans. The total outstanding for these other loans was $2.7 trillion as of December 2009. The total in December 2007 was also $2.7 trillion (there was actually a minor $23 billion increase between the two periods). While it looks like Consumer Credit managed to remain flat for the last two years, this doesn't tell the whole story by any means. A big drop in one area was offset by a rise in another, and that took place only because of federal lending. 

There are two types of consumer credit - revolving and nonrevolving. Revolving is mostly credit card debt. Nonrevolving loans are for fixed periods, such as auto loans and student loans. Credit for revolving loans fell 8% between December 2007 and December 2009. The drop was even bigger from December 2008 to December 2009. While credit card debt was falling (there was a period of 15 months with consecutive drops), nonrevolving loans were increasing and have grown 7% so far since the beginning of the recession. While the Cash for Clunkers program certainly fueled car loans in this category, these are not counted as government loans in the credit statistics. Those government loans that are counted, such as student loans, increased by 89% between the end of 2007 and the end of 2009.  All government loans are in the nonrevolving category, without them revolving credit would have experienced a two-year drop, not a 7% gain.

Decreasing Consumer Credit is not surprising. American consumers were over leveraged before the recession began. Banks have been encouraged by regulators to tighten their lending standards and reports indicate that consumers are having trouble getting bank loans. Unemployment has soared, so this should be the case since fewer consumers are credit worthy. The February employment report indicated that approximately a million workers left the labor force between December 2009 and the early part of 2010 (this is the only way the numbers add up). Consumers have also been saving more because of the poor economy.
Despite less credit, a loss of income from less employment, and less money available for spending because of increased savings, the U.S. government has been reporting that consumers are spending more. The Consumer Credit figures indicate that it's not the consumer, but the government that's spending more.

Disclosure: None

NEXT: Will EU Accept Greece's Trojan Horse of Debt?

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.

GDP Revision Indicates Recession Isn't Over

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 final report for third quarter GDP was released on December 22nd. The numbers were revised down ... again. According to the latest government figures, GDP grew by 2.2% last quarter. Previously it was 2.8%. Before that, it was 3.5%. Do you note a pattern here? The rosy 3.5% number got the most media attention as the first release always does. Far fewer people pay attention to the final number. Even this number is likely to be revised downward in future multi-year revisions as were the numbers for all of 2008.

There were three major sources of growth in third quarter GDP. In order of importance they were: government stimulus, government stimulus and government stimulus. The Cash for Clunkers program, a government give-away to the auto industry and people who were foolish enough to buy gas guzzling vehicles, added 1.7% to the GDP total. Government backed housing initiatives, including tax credits for home buyers and FHA mortgage insurance, may have added another 1.0%. Those were only two small components of government spending however. Overall, increases in federal spending were up 7.9%. Subtract all of these components and there was negative GDP growth in the third quarter and the recession is ongoing.

While the government spending component of GDP is robust, the consumer and business components are still weak. Since they are essentially most of the real economy, this should be cause for concern. The latest revisions had consumer spending, commercial construction, and business investment (now down 5.9%) as weaker. Consumer spending, which accounted for 72% of the economy before the Credit Crisis, was still listed as up 2.8%. How this is possible with double digit unemployment, record drops in available consumer credit, and a rising savings rate is one of the mysteries of our time. There is no obvious source of money to fund this supposed increase in spending.

The sad state of the economy is evidenced by the business inventory number, if not by the headline GDP number. Inventories dropped by $139.2 billion in the third quarter compared to a drop of $160.2 billion in the second quarter. This lower drop added almost 0.7% to the 2.2% GDP total. Yes, when it comes to inventories, all it takes if for things to get less worse for GDP to go up. Keep this in mind when you see a positive GDP number. Don't assume it means that things are getting better.

Mainstream economists are now forecasting GDP growth in the strong 4% range for the 4th quarter. Meanwhile, the Fed is stating that it is keeping interest rates at zero for the foreseeable future. The Obama administration proposed a new stimulus package less than two weeks ago and the House passed an additional $100 billion in economic aid last week. While the powers that be keep telling the public everything is not just fine but getting better with the economy, their actions indicate that there is still panic on the Potomac. Perhaps they know something that they're not telling us?

Disclosure: Not applicable.

NEXT: The Santa Claus Rally and the January Effect

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.

Mark to Model GDP

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:

The 3rd quarter U.S. GDP figures were out this morning and they came in slightly above expectations. GDP was supposedly up 3.5%. Almost half of this, 1.7%, was accounted for by increases in auto production. This in turn can be traced to the Cash for Clunkers program and government spending. Overall spending on durable goods was up 22.3%. Housing investment was up even more at 23.4%, also thanks to government tax breaks and FHA mortgage insurance backing loans that a subprime lender wouldn't have touched at the height of the housing bubble. Federal government spending was up 7.9%. On the flip side, business investment fell, net exports fell and inventories fell. In other words, any part of the economy not manipulated by government spending is still declining. Even though they went down, inventories still added 0.9% to GDP growth, because they didn't go down as much as they did previously (no that doesn't make any sense to anyone except a government statistician).

An economy that is only robust because of government spending is essentially dead in the water. This is the same picture as Japan in the 1990s and first decade of the 2000s. The headlines this morning trumpeted that the U.S. is out of recession. Those headlines were common in Japan during the last two decades as well. The U.S. can only avoid this fate by coming up with one Cash for Clunkheads program after another. After all why have only a trillion dollar yearly budget deficit when you can have a two trillion dollar yearly budget deficit? Just as a reference, the Dow Jones Industrial Average was at 2753 the day the Nikkei peaked at just under 40,000 at the end of 1989. Both averages are around 10,000 at the moment.

How long the stock market continues to buy the current U.S. econo-fantasy remains to be seen. There is serious technical damage in the stock charts. The Russell 2000 (small cap stocks) has made a confirmed double top as of yesterday. The usual sell off scenario is small caps go down first, the Nasdaq next and the big cap Dow the last. This pattern was writ large in yesterdays action. The Russell 2000 dropped 3.5%, the Nasdaq 2.7%, the S&P 500 2.0% and the Dow 1.2%. Of the indices, only the Dow has held above its 50-day average. We have seen this picture before in July by the way. The market was significantly technically damaged, but managed to rise from the ashes and rally for the following few months. Things may not be so rosy this time. If there is a rally on low volume that fails to get the indices to a new high, the current rally is likely over and a good shorting opportunity is presenting itself.

There are two assets that have experienced no change in their technical pictures - the U.S. dollar and gold. The dollar is just as bearish as it has been for months and gold is just as bullish. Even with its recent small rally the dollar didn't even go up enough to reach its 50-day moving average. It's 50-day moving average is trading well below its 200-day moving average in an extremely bearish pattern. The gold chart is almost the mirror image of the dollar's chart. It is trading above its 50-day moving average, which in turn is well above its 200-day moving average in a very bullish pattern. Spot gold bounced off its breakout point of $1025 yesterday (a normal action which takes place about 50% of the time) and has traded as high as $1040.40 this morning. Spot silver has also tested its breakout level at $16 and has stayed in its $16 to $18 trading range. So far, so good.

NEXT: The Long and the Short of It

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 Dollar, the Fed, Housing and the Economy

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:

The U.S. dollar was in free-fall last night in Asia. The trade-weighted basket fell as low as 75.21 (another new yearly low), well below the significant support level of 76.00 and approaching the next weak support level of 74.00. Some form of intervention took place after European markets opened and the dollar was saved from oblivion (at least for now) and shot straight up. Gold, and silver to an even greater extent, declined sharply on the dollar reversal. The pattern of gold and silver being strong in Asian trading and weakest in the U.S., which has been going on for several days now, continues. Oil remains strong this morning because unlike gold and silver it is difficult to manipulate on a daily basis.

The high price of oil has inflationary implications that will soon be manifested. Expect CPI figures to start jumping up significantly starting at the end of the year. Oil fell as low as $33 last December and it is going to be way above that level this year. Energy prices are the most important swing factor in the inflation numbers. Long-term bond prices are likely to rise on the news. The Fed will still keep short-term rates at zero however and Ben Bernanke will have an increasingly pained look on his face. The Fed released the minutes of its September meeting yesterday and little noticed was a statement that it was reserving the option of continuing any of its current programs. The most important one of those for bond investors is the money printing being used to buy U.S. treasuries. This is supposed to expire on October 31st. It's not likely to happen, at least not for long. The Fed has concentrated these purchases in the 7 to 10 year range of the yield curve, which keeps interest rates for mortgages and other loans down. Foreign governments have moved their buying to even shorter durations. The long end of the curve between 20 and 30 years is being left unsupported. Double short long bond ETF TBT should benefit from this situation.

How can we be so sure that the Fed's money printing extravaganza will continue? Housing, the ground zero of the Credit Crisis, remains troubled for one. Almost one million U.S. properties were involved at some stage of the foreclosure process in the third quarter (the summer). This number has been reached even though there are a number of federal programs to prevent foreclosure (and there have been a number of state programs that have put a moratorium on foreclosures). Anecdotal reports indicate that there are mortgages that haven't been paid for 18 months or more that still haven't entered even the first stage of foreclosure, let alone repossession. Banks don't want these properties on their books and the federal programs (plus a lot of bailout money) lets the banks avoid taking them back. A new wave of mortgage resets to higher interest rates is also just beginning and will last through next year. It will only add to the problem.

The second motivation for more Fed money printing will be the consumer economy. Constant stimulus is needed to keep it going. Retail sales figures were down 1.5% in September and revised down to 2.2% from 2.7% in August. The Cash for Clunkers program caused the August spike, but once it was over retail sales went negative again. Retail sales figures are not adjusted for inflation and this accounts for much of any 'growth' outside of stimulus programs that is being seen in this area. While almost every mainstream U.S. economists thinks the recession is over, they will all admit that unemployment is likely to get worse for at least another 6 months if not a year or longer. Consumer credit is also dropping sharply. So how is the consumer going to spend? More stimulus from the government will be the answer. Don't expect the printing press to be mothballed any time in the near future.

NEXT: Bank Earnings Reveal True State of Economy

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.

Dollar Breaks Support ... 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:

The U.S. dollar fell below important support at 76.00 this morning. This is the third break of this level. The low yesterday was 76.02. So far today the trade-weighted dollar has been as low as 75.74 in the pre-market. This is another new yearly low. It will probably be the low for today because it certainly looks like some form of intervention took place to support the dollar when U.S. trading opened. Some weak chart support exists for the dollar at 74.00 and much stronger support around 72.00. The all time low is 71.50.

Market intervention in the U.S. can be seen in the trading of the precious metals as well. Gold was as high as $1068 (a new all time high) in London and then dropped around $10 shortly after trading in New York started. Silver reached a high of $18.02 in London and then dropped a whopping 40 cents after the New York open. Precious metals falling when trading in New York opens is not uncommon. It is in fact a recognized phenomenon that has been going on for decades. Academics studying the issue have concluded that the probability of this long term pattern taking place by chance is essentially zero and that only manipulation in the U.S. markets can explain what is going on. The CFTC, the U.S. regulatory body that is supposed to keep trading on the up and up, of course sees nothing, knows nothing and apparently reads nothing.

Platinum and palladium are less affected by U.S. government dollar manipulation than the monetary precious metals. They are mostly industrial metals which have extensive use in the auto industry. Palladium has been the best performer the last few days, but there is no ETF available in the U.S. to trade it (there is one that trades in London), even though one was announced last April. While the U.S. auto industry is collapsing again after the Cash for Clunkers program expired, this is not the case in China. Auto sales are up almost 84% there year over year. The rapidly growing Chinese car market is now bigger than the faltering U.S. car market. Think about that.

Meanwhile grains have been rallying nicely. Both RJA and GRU were up in the 4% range yesterday. GRU is more volatile and consists only of grains, with beaten down wheat the largest component. RJA is a basket of 20 different agricultural commodities. GRU confirmed a double bottom as a result of yesterday's trading action. Oil was trading around $74 this morning, not much different from the price in late June when we recommended selling DXO. Oil is seasonally weak in the fall and early winter when the precious metals are at their strongest. In the long term, uranium prices are connected to the price of oil, but the correlation can be very loose in the short and intermediate term. Dennison Mines (DNN) had some peculiar price movement Monday with a sharp rise at the close that appeared on the daily charts, but not the intraday charts until this morning. Trading volume was heavy yesterday. This definitely bears watching.

NEXT: Dollar Breaks Down; Nova Gold Breaks Out

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.

Recovery? Don't Bank on It

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:

As of Friday, 98 U.S. banks have failed this year and the FDIC Deposit Insurance fund is on the brink of insolvency. The fund now covers only 0.22% of U.S. bank deposits, whereas a 1.15% minimum is mandated by law. At the end of second quarter 416 banks were on the FDIC's troubled list (this number should be updated in about another month), so the steady drip of money leaking out of the fund could turn into a torrent. Commercial loan defaults are the current crisis hitting the system and this problem has just begun. While you may be surprised that this could be happening after Fed Chair Ben Bernanke has repeatedly told us that the banking system was saved last year, a government report released today indicated that the public had been lied to about just this very subject.

A special inspector general investigating the handling of the bank rescue program TARP in the fall of 2008 found that then Treasury Secretary Paulson and other officials falsely claimed that the first 9 institutions getting funds were sound. Paulson specifically stated, "These are healthy institutions ...". At the time, Merrill Lynch was actually collapsing. Citibank and Bank of America subsequently required significant additional funds to stay afloat. The report was criticized by Assistant Treasury Secretary Herbert Allison Jr., who now heads the bailout program for the government. Allison maintains that any critique of the announcements made a year ago should take into consideration the unprecedented circumstances facing financial regulators at the time. In other words, the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me repeat that: the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me follow that up by pointing out that there is both a credit and economic crisis still taking place.

The FDIC itself has given us more than enough reason to think the U.S. banking system has not actually been rescued. Other than the domino like collapse of smaller and midsized banks that is now occuring, the FDIC's figures state that in aggregate U.S banks lost $3.7 billion in the second quarter, even though almost every large U.S. bank reported major profits. Of course the major banks have received massive injections of government aid, while the smaller banks have not. This is a move afoot to try to inject TARP funds into smaller banks to prevent defaults on a mass scale.

At the risk of sounding like a broken record, what is taking place in the U.S. now is very similar to what took place in Japan in the 1990s. Japan had a banking system dominated by a small number of large institutions. The first 9 recipients of TARP funds controlled 75% of the assets in the U.S. banking system. In both cases, banks were allowed to become so large that a failure of even one of them endangered the entire financial system. Japan has propped up its banking system for two decades now and the cost has been an economy unable to grow unless there is government stimulus. Personally, I am waiting to see what the U.S. government is going to do to rev up the economy next quarter now that the Cash for Clunkers program has expired.

NEXT: Gold! Record High Knocking on Heaven's Door

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.

Unemployment Rises as Car Sales Collapse

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 U.S. jobs report this morning didn't indicate an economic recovery, it looked more like an economy mired in severe recession - and this is after more than $4 trillion dollars spent on bailouts and stimulus so far. The latest government stimulus program that was supposed to be saving the economy (as were all the others), Cash for Clunkers, seems to have had no residual effect on the auto industry. Data out yesterday indicate that sales fell right back to the worse levels of the recession the moment the program ended. The ISM Manufacturing report yesterday showed a drop in U.S. manufacturing activity from August to September. There is still some glow from the Clunkers program however and a bigger drop will likely be seen next month. If this is economic recovery, who needs a deep recession?

The jobs report can only be described as ugly all around. While the headline unemployment rate rose to 9.8%, the alternative measure which includes discouraged workers and forced part-timers reached 17.0% (that's the U.S. government's official number). Hours worked dropped to an all time low. The number or workers unemployed for over 6 months is also at a record. The number of job losses for July and August were revised upward by 13,000. The government further stated it might raise the total number of unemployed in its year end revision. The number of job losses this month was 263,000. Economists, almost all of whom think the recession is over, had expected only 180,000. Nothing, and I mean nothing, in the employment numbers indicates a recovering economy.

Auto sales in August and September illustrate quite clearly the impotence of government stimulus in reviving an economy with major structural weakness (Japan in the 1990s and 2000s had one stimulus program after another and is still recessionary). U.S. auto sales reached about the 14 million annual rate in August. The Clunker program ended on August 31st. September auto sales now look like they will be a bit over 9 million at an annual rate. This is as low as the lowest sales figures recorded last February and April. So once the stimulus was removed auto sales slipped right back to the bottom. Economic 'recovery' that only takes place if there is government stimulus is no recovery whatsoever.

The ISM manufacturing index was still above 50 (the point that divides expansion and contraction) this month, even though it fell from August. The index declined 18 months in a row before last month. Cash for Clunkers juiced up the numbers considerably in August. They could easily fall back into negative territory in October. Production, new orders, exports, and employment were all down in September. The item in the report that is expanding most rapidly? It's prices paid, which is a measure of inflation.

While continued massive government stimulus will not revive a structurally damaged economy, it can be very effective in creating out of control inflation. The more the economy doesn't budge, the more stimulus the government implements. In the current state of affairs in the U.S. that also means more money printing (the Japanese did not have to resort to this). Gold closed at $1004.30 today in New York - above its key breakout level of $1003.50. Some years from now, we will probably look back and wonder how gold could ever have been so cheap.

NEXT: Recovery? Don't Bank on It

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.

If You Ignore the Facts, Things Are Good

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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We are going to see a lot of new economic data in the next few days, including the monthly jobs report tomorrow. How the market reacts in the first four trading days of the quarter can give us a lot of insight on where stock and commodity prices will be heading in the next few months. The Consumer Spending report was already out this morning and spending for August was up 1.3%, the biggest gain since October 2001. The rosy numbers were due to the Cash for Clunkers program which ended August 31st... so don't expect September's numbers to look as good. The ISM Manufacturing report for September will be out later this morning and might provide more insight into the post Cash for Clunkers era, although the October report next month will be more revealing.

Weekly jobs claims surged upward to 551,000 this morning. The big rise was a surprise to economists and other people who's expectations are based on fantasy. Any number at or above 400,000 indicates the economy is in recession, 551,000 indicates a somewhat severe recession. A healthy economy has weekly claims at the 300,000 level. The idea that the economy can be recovering while unemployment gets worse is absurd and merely reflects how manipulated U.S. GDP figures are. The government can also 'statistically adjust' the jobs report as well. Watch to see how many people left the labor market in tomorrow's report. This is the fudge factor that the government uses to keep the reported unemployment rate from getting too high.

While all the money pumping the Fed has done in the last year has had only temporary and limited impact on the economy so far, it has certainly revved up the stock market. Last quarter was the best quarter for U.S. stocks since the fourth quarter of 2008 - the beginning of the tech bubble blow off that lasted until the beginning of 2000 and was followed by a Depression level drop in stock prices. The last six months have been the best two quarters for U.S. stocks since March 1987. Five months later U.S. stocks dropped 40% in only a few days. That was also at beginning of a bubble blow off. Only a handful of stocks survived the 1987 crash unscathed - most of them were gold miners. So far history seems to be repeating itself vis-a-vis money pumping and stock price behavior.

The IMF (International Monetary Fund) released revisions to its GDP predictions this morning. It now expects global GDP to decline only 1.1% this year, instead of 1.4% and for GDP to increase by 3.1% next year, instead of by 2.5%. While the report had the usual cheer leading bullish tone, a remark made at the press conference inadvertently revealed the truth. The IMF spokesman stated that the report "should not fool governments into thinking the crisis is over". Apparently they wanted to make it clear that their report was only intended to fool the public. The IMF also stated that the pattern of global demand needs to be rebalanced and this could not happen at current exchange rates and that countries with huge export surpluses needed to revalue their currencies upward. Doesn't that imply that countries with huge export deficits like the U.S. will see their currencies revalued lower? So much for that good news.

NEXT: Unemployment Rises as Car Sales Collapse

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.

So Much for That Recovery

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 G20 meeting ends today and precious metals should be under pressure and the dollar should continue to rally. Traders are worried that some rumblings about supporting the U.S. dollar may come out of the meeting, although the Japanese Finance minister recently said he was uninterested in intervening to drive the Yen down. While something could be said, the likelihood that anything would be done in the near-term is less than nil. Currency intervention is expensive and the printing presses of the major central banks are already booked full-time to support government economic stimulus programs.

The much ballyhooed impending U.S. economic recovery seems to be crumbling. While this only means more government stimulus and money printing, gold and silver are selling off instead of skyrocketing on the news (no that doesn't make any sense). The U.S. Durable Goods report came out this morning and it was down 2.4% in August. A drop of 48% in highly volatile aircraft orders was mostly responsible for the decline , as was the 98% increase in aircraft orders last month that lead to the rise in July. Autos were still up 0.4% last month with the impact of the Cash for Clunkers program waning. Core capital goods, which are the key to what is really going on in the economy, were down 0.4% in August. They dropped by 1.3% in July. So far, there doesn't seem to be any solid evidence of a sustainable recovery in manufacturing.

The bad durable goods numbers followed a 2.7% drop in existing home sales in August that was announced yesterday. That report indicated that 31% of U.S. house sales were 'distressed' (foreclosures for example) and that sales were concentrated in the low end of the market. Well that sounds like a description of a healthy housing market doesn't it? As if the banking system didn't have enough trouble from residential real estate, worse news today came from a report on large bank loans (these are loans over $20 million). Of these, 22.3% are 'troubled'. That is up from 13.4% last year. As a reminder, the U.S. banking system is supposed to have been 'stabilized' according to the Federal Reserve.

While things may look bad in the U.S., they seem to be worse in Japan. Japan is an export based economy and exports there fell 36% in August. Car shipments were down 50% and steel down 43%. GDP was positive last quarter and Japan supposedly exited its most recent recession (one of many in the last two decades)...well, maybe not. The stock of Japan's largest brokerage house, Nomura, plunged 16% last night on the news that it was issuing more stock. This is the second new stock issue in 6 months. Japan has been 'stabilizing' it financial sector for 19 years now. The U.S. looks like it is heading toward long-term 'stabilization' as well.

NEXT: Precious Metals Watch

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 Cash From Clunk-Heads Program

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 U.S. Cash for Clunkers program seems to be working quite well in reviving the economy - not the U.S. economy, but the Japanese economy. The U.S. government program that uses taxpayer money to let people who foolishly bought gas-guzzling cars trade them in for newer energy efficient models is just another reward the losers, from the losers Credit Crisis program. Yesterday's trade deficit figures tell the story. The July deficit widened by a whopping 16.3% in one month. The reason for this huge increase? Auto and auto part imports increased by 21.5%.

A widening trade deficit is negative for GDP. Yesterday's figures knock down one of the three pillars of economic recovery that mainstream economists have cited for their prediction that the U.S. recession is over (almost 100% agree that the economy is recovering). Actually, they specifically said exports were increasing, which indeed was the case in yesterday's report (thanks to highly volatile civilian aircraft shipments). Unfortunately, imports increased much more. Even though this subtracts from GDP, the press managed to put a positive spin on it. One well known economist stated "This was a positive report in that it provides further evidence that both the U.S. and foreign economies are coming back." Something that makes GDP decline is good news for the U.S. economy? Since when? There is obviously no absurdity that the mainstream media won't publish.

Of course the stock market went up on this 'good' news. Cash for Clunkers is indeed reviving manufacturing activity within the U.S (manufacturing is only 20% of the commercial economy versus 80% for services). You can see the figures have improved the most in industries related to automobiles. What one hand giveth, the other is taking away however (as seems typical of Obama administration initiatives). Toyota and Honda have been the two biggest beneficiaries of the program. Once the program stops though, you can expect manufacturing to decline again until the U.S. government comes up with another stimulus program (and another ... and another). The third pillar of the economic recovery, rising homes sales and prices, is just not believable. Foreclosures keep rising, housing inventory keeps rising, consumer credit and income keep falling, yet people are rushing to buy homes and paying more for them? It's only likely in the fantasy land known as manipulated statistics.

The U.S. is not the only country engaging in economic stimulus, it's a global phenomenon (the British also have something they call a 'Car Scrappage Scheme' by the way - at least they used the word scheme so people know what is actually going on). The Chinese market had a big rally last night after China said industrial output, investment, loans and retail sales remained strong in August, "supported by colossal stimulus measures" (a quote from one of the news services). The world's economies seem to be following the Japanese model. In the last two decades, Japan tried to repeatedly revive its economy through stimulus programs. In some cases, quarterly GDP growth exceeded 10% on an annual basis (an enormous number). However, every time the stimulus was removed, the economy sooner or later sank back into recession. There is one major difference however. Japan entered its stimulus period in a strong financial condition, whereas the U.S. and Britain were extremely overextended at the beginning of the Credit Crisis. Our stimulus plans will have to be paid for by printing money.

NEXT: Gold Closes at Record High

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.

Next Five Days Critical for Stock Rally

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:

In a healthy market the first four trading days of the month should be up in the aggregate. This month, it's the first five trading days in the U.S. because Friday is the day before a major holiday and stocks usually go up on those days. The seasonals are negative for stocks, with September historically being the weakest month. U.S. money supply has been contracting lately and investor sentiment has turned sharply down, both also negatives for the market. Whether this can outweigh the U.S. government's invisible (and not so invisible) hand in the keeping the market rally going remains to be seen.

The Chinese markets had a dead cat bounce last night, being up only a fraction of a percent after dropping around 10% in the previous two days. European markets are weak this morning. Unemployment is increasing in the Eurozone even though France and Germany supposedly pulled out of the recession with their positive recent GDP reports. In the UK, the manufacturing sector went back into contraction in August after being positive for one whole month in July (there was much celebrating about how UK manufacturing had recovered when those numbers came out). Even more problematical for the British economy is that consuming lending in the UK dropped last month for the first time since records have been kept. Like the U.S., the UK is highly dependent on consumer spending to keep its economy going. Also like the U.S., their solution to produce economic recovery is money printing.

In the U.S. auto sales are predicted to be the best since last September thanks to the Cash for Clunkers program - just one of many U.S. government programs that reward people who engaged in irresponsible and stupid economic behavior (and paid for by those who didn't). The ISM manufacturing report out this morning is predicted to turn positive because of the improvement in the auto industry. Unless the U.S. government has some new program every month to buck up the manufacturing sector, it might quickly turn negative again as happened in the UK. The biggest beneficiaries of the Cash for Clunkers program have been Toyota and Honda (Why doesn't the federal government just shoot the American auto manufacturers and put them out of their misery?). Interestingly, Japanese auto sales were reported up for the first time in a year last night.

Manufacturing activity has been up for the last 5 or 6 months in China (depending on which report you read). While internal demand was cited as one reason, exports are supposed to be up. Who is buying more of their exports? The major economies are all in bad shape and despite a positive economic statistic here and there thanks to government stimulus programs and jiggling of the figures, they will remain in bad shape for some time. Eventually, global stock markets will figure this out.

NEXT: Global Stock Markets Weaken

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 Recovery Reminscent of 1990s Japan

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:

Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... Again

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 Smoking Gun of the Economic Recovery Scam

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 Economic recovery that is supposedly taking place has been carefully arranged by the U.S. government. Unfortunately, the 'recovery' will be far more evident in the published statistics than in the economy itself. After all, it is a lot easier to change the numbers that to actually fix the economy. Apparently, the hope is that with enough cheer leading, businesses and the public will get on the bandwagon and start spending again. I can picture Bernanke, Geithner and Obama clicking their heels together and trying to wish hard enough to make it so.

The AIG earnings report came in as positive as expected on Friday. How did a company that is beyond bankrupt manage to show positive earnings? The key statement in the report about what happened was "resulting from the adoption of new accounting guidelines". These new guidelines were set by the U.S. government and probably benefited every big bank and brokerage house as well, most of which had surprisingly good earnings - even though their lending operations (the core business of any bank) were continuing to deteriorate during the quarter. So the mystery has been solved. If your earnings are disastrous, just change the accounting rules and like waving a magic wand, suddenly you're earning gobs of money. Happy days are here again!

If you want to know how well this approach works, you can take a look at Enron and GM. Enron's earnings were phony for years and then it imploded overnight. GM changed its accounting in the mid-2000s after the recession and suddenly one quarter it was earning big bucks instead of losing big bucks. To its credit, CNBC News actually reported that the big 'improvement' was merely an accounting gimmick. The stock still rallied strongly on the news (so much for the Efficient Market Hypothesis). Even though the government started pouring money into GM starting in 2007, it still went bankrupt in 2009. Now the government is supporting it to the tune of $4500 per car with the Cash for Clunkers program. Reports out today predict that autos are going to be the next big recovery area of the economy, improving both the industrial production numbers (which fell at a depression level 19% in the first quarter) and retail sales (which went up in May and June because of higher gas prices - they're not adjusted for inflation).

If the government pours huge amounts of money into any industry, the numbers will of course improve. This doesn't indicate economic recovery though, even though it is being sold that way. Will the government keep doing this every quarter? It may have to in order to keep the 'recovery' going. If you want to know how well that approach works, see Weimar Germany and Zimbabwe.

NEXT: Inconsistencies of the Economic 'Recovery'

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.