Central Banks Sucker the Market

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.

Three major central banks met on August 1st and 2nd and none of them took any decisive action. Markets in the U.S. and Europe have been rallying since late June on expected policy easing they've been promised by reports in the mainstream media. So far, empty talk is all the central banks have delivered.

Traders had high expectations for the Fed's monthly meeting on July 31st and August 1st. A week previously, news hit the wires (only a few moments before Apple's disastrous earnings were announced) that the Fed was definitely going to do some easing at this week's meeting. The source was the Wall Street Journal and they followed up with a front page article the next day. And what did the Fed do?  Nothing, zilch, nada. So much for the Wall Street Journal being a reliable source of investing information.

For the previous meeting in June, Goldman Sachs claimed the Fed was going to be doing quantitative easing (or maybe some other form of easing, but you would have to have read the entire coverage to find that out). What happened when QE wasn't forthcoming? The market hypsters came out of the woodwork with assurances that QE3 would be announced at the July/August meeting. Now that that hasn't happened either, we are hearing "just wait until September". You might as well wait for Godot. The only way the Fed will be doing QE before the election is if the financial crisis in the Europe gets out of hand. This will not stimulate the economy, but prevent a total collapse of the stock market (not a drop, but a total collapse).

The Bank of England and the ECB also met today. No rate changes from either of them (unlike the U.S. and Japan both have rates slightly above zero and they could lower them). The Bank of England is already doing QE2 and has been doing so since the fall of 2011. The UK is in a recession and QE has not stopped its economic decline.

Mario Draghi, the ECB chair and one of the biggest windbags to ever run a central bank, held a press conference after his meeting. He said that the ECB would undertake "outright" open market operations and would be using non-standard policy measures. Bonds rallied on the news. Unfortunately, only minutes later, Draghi was forced to backtrack on his boisterous pronouncements. He admitted that he was only providing "guidance" of what was going to occur in the future and details wouldn't be available for weeks. Draghi continued that even if the ECB was ready to act now, it would not have the grounds to do so. Someone should give that man a bagpipe.

How long the markets will continue to fall for promises of stimulus that never comes remains to be seen. Whatever happens, there is no reason be confident that things will be getting better. If the Fed could fix the U.S. economy, it would already have done so. If the ECB could solve Europe's debt crisis, it also would have already done so. Doing more of the same is not going to work, so it's not worth waiting for cental bank action as is. Eventually, the markets will figure this out.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Behind the Market Drop and Why it Could Get Much Worse

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.

After a sharp rise since last October, the market looks like it is set up for one of its usual spring downturns. Without continued liquidity injections from the major central banks, it won't be able to break through the wall of resistance it's currently facing, nor will there be much support to hold it up.

As has been the case for months, trouble in Greece is currently roiling international markets. The bond swap deal reached as part of the latest bailout settlement isn't going well. With a March 8th deadline looming, Bloomberg is reporting that private investors holding around 20% of Greek government debt have so far agreed to participate. The Greek government has set a threshold of 75% for the deal to go through. While the mainstream media has consistently cheer leaded the success of every bailout deal, the market has never been convinced. Yields on one-year Greek government bonds have been on a strong upward trajectory since last summer and were over 1000% today.

The eurozone debt crisis has resulted in a great deal of liquidity being poured into the market by the Europeans. The  ECB pumped approximately half a trillion euros via LTROs (long-term refinancing operations) last fall. The rise in global stock markets can be traced from this event. At the same time, the Bank of England was on its second round of quantitative easing and examination of the U.S. Federal Reserve balance sheet shows what looks like the beginning of QE3. The monetary base in the United States was also moving straight up the chart last fall and earlier this year. No matter where you looked, liquidity was flowing into the system. Since stock markets respond immediately to extra liquidity, a powerful global rise in markets took place.

The problem with liquidity-driven markets is that if the liquidity dries up, they can wither like a plant that has been denied water. The constant supply of liquidity always has to slow down because eventually the liquidity will flow into the mainstream economy and turn into ugly inflation. The big liquidity pump that started last fall seems to be falling to slow trickle lately and markets are quite vulnerable once this happens. A failure of the Greek bailout deal (and government bond yields indicate that the market expects this to happen), would cause a massive negative liquidity event that would be on the scale of the Lehman default in 2008. It might even be worse.

At the same time liquidity issues are impacting the market, stock prices are stuck at resistance and the technical indicators are deteriorating. The S&P 500 is at its high that it reached earlier in 2011. The Dow Industrials are also at last year's resistance. Only the Nasdaq has managed to break through because of a small number of stocks like Apple Computer (AAPL) -- which is clearly exhibiting bubble-like action.


Recent news indicates deteriorating economies outside the United States. The economy within the U.S. is only being held up by massive government spending with budget deficits of $1.3 trillion last years and projected to be $1.3 trillion again for 2012. This is all borrowed or newly printed money. How big would the U.S. GDP be without these continual massive injections of government pseudo-cash?  Inflation is also clearly showing up in the ISM Manufacturing and Non-Manufacturing (Services) reports. The Prices component is the highest one for both. Prices for services (80% of the U.S. economy) have been rising for 31 months in a row and are listed as accelerating in February.


Stocks usually have a selloff in March or April. This year they are especially vulnerable. There will almost certainly be some type of drop. How big remains to be seen. The possibility for major selling should be kept in mind by investors.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Central Banks Pump Money to Prop Up Europe

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.

Exactly three years after Lehman Brothers filed for bankruptcy and almost brought down the global financial system, central banks in North America, Europe and Asia engaged in a coordinated money pumping operation to prevent the EU banking system from stalling. The move created a sharp stock market rally, especially in financial shares, just as was the case when similar actions took place during the 2008 Credit Crisis.

Involved in Thursday's action were the U.S. Federal Reserve, the ECB, the Bank of England, the Swiss National Bank and the Bank of Japan.  The purpose was to improve dollar liquidity among  European banks struggling because of the Greek debt crisis. The credit markets have frozen up, just as they did after the Lehman bankruptcy, and U.S. banks have been unwilling to lend dollars to European banks. The ECB will now be able to access dollars by swapping assets with the Federal Reserve. It wasn't stated in the announcement what assets were involved, but obviously they are substandard ones that wouldn't be accepted  in free market trading. This operation also increases exposure of the U.S. financial system to the new credit crisis in Europe.

Such coordinated money-pumping operations are a sign of desperation on the part of the authorities. They were commonplace after Lehman's bankruptcy on September 15, 2008. They created significant volatility in the stock market back then as they did yesterday. Both the German DAX and the French CAC-40 closed up more than 3%. Troubled banks had huge rallies, with Lloyd's Banking Group up over 7%. In 2008, even greater volatility took place, but the rallies proved time and again to be only temporary. The market ultimately nosedived.

The Friday before the Lehman bankruptcy, the S&P 500 closed at 1251.70. Lehman declared bankruptcy on Monday. At the end of the week, the S&P 500 closed at 1255.00. The day before however, the S&P rallied off of its intraday low of 1133.50 to a close of 1206.51 (that's a 6.4% intraday rally -- an enormous move for an index like the S&P). So, the first week after Lehman's bankruptcy it looked like the market wouldn't be impacted that much. It turned out that the actions of central banks provided investors with a false sense of security however.

By the end of September 2008, the S&P 500 closed at 1166.36. Then at the end of October it was down to 968.75. At the end of November, it had dropped to 896.24. It actually closed higher the last day of December at 903.25, before falling to 825.88 at the end of January. By the close of February, the S&P was trading at 735.08. It finally bottomed at 666.79 on March 6, 2009. All along the way, there were big moves up that coincided with the latest money injections of the central banks.

While mainstream media reports tend to portray the central bank actions and the big rallies they cause as good news for the market, they are actually an indication that more trouble is on the way. All investors have to do is remember what happened just three years ago. Yesterday's central bank action indicates that more volatility and lower stock prices are in our future. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Is the Bond Market Setting Up for Another Credit 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.


Spreads on high yield bonds and U.S. treasuries are narrowing. Junk bond issuance is at an all-time high because excess liquidity is lowering risk aversion. Who is buying all the bonds is not particularly clear however. But don't worry, just as they did before the last Credit Crisis, the economic elite is telling us there is nothing to worry about this time either.

When there is too much money sloshing around the global financial system, the distortion shows up clearly in the bond market because it's an insider's game. The average investor isn't exactly trading credit default swaps in his or her 401K. According to a recent Wall Street Journal report, less than $29 billion has gone into high yield bond funds in the last 20 months. Yet Dealogic data indicates that $172 billion of junk bonds have been issued in just 2010 alone. Spreads over 10-year treasuries are now around 6%, but have been somewhat lower during the summer. In 2007, spreads fell to around 2% and this indicated all common sense had abandoned the bond market. The inevitable collapse followed and at the height of the Credit Crisis, junk/treasury spreads were over 20%.

One of the major determinants of yields on junk bonds is the danger of default. The economy is in much worse shape now than it was in 2007, even though we were just told yesterday by the NBER that the recession ended 15 months ago (boy, that sure is a timely announcement). So we should not get as low as a 2% spread between junk and U.S. treasuries like we did last time. Less risk of failure because of government bailouts should not be assumed either. Few issuers of junk bonds would be considered too-big-to-fail and the government blank check for bailouts is either over or it soon will be.

There is also the mystery of why as more and more bonds are being issued, less and less trading activity is taking place. Bloomberg economist Michael McDonough recently reported U.S. treasury trading is down and so is junk bond trading. Trading in stocks on the NYSE is also down as the market has risen. So how can prices be going up when there is a greater supply of bonds, but apparently less demand?  This is not really possible, so there has to be missing information. Now who would have access to vast sums of money and the ability to hide their activities in the market?

A narrow spread between junk and treasuries is something to keep an eye on and to worry about. It is a good indicator of whether or not central banks have injected so much liquidity into the financial system that they have risked another credit crisis. It is not possible to say where the exact point is where the spread is too low, although it is now definitely somewhere well above 2%. If we haven't reached it yet, we are getting close.

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.

Stocks Rally in Short Term Reversal

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.


After hitting a lower low on the open, U.S. stocks reversed their sharp downturn in late afternoon trade yesterday. The rally so far is an expected oversold bounce.  There is no reason yet to think that it will turn into something more significant.

Technicals, not fundamentals are driving stocks at the moment. Tuesday's action was an attempt to resolve an oversold condition from Friday the 14th. Seven trading days later, the major indices - the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 were all substantially lower. They were also well above their respective 200-day moving averages on the 14th, but all were below their 200-days yesterday.

The 200-day is the key dividing line between bullish and bearish behavior. With the exception of the small cap Russell 2000 (which is holding up best in the sell off), the major indices have violated their support at the 200-day twice in the recent sell off. The first time was during the odd crash on May 6th. Many considered the intra-day drop below the 200-day then to be a mere fluke. In the last five trading days though, the Dow, S&P, and Nasdaq have again traded below the key 200-day line at least part of the day. 

Stocks are also trading to try to fill gaps (a price range where no trading took place) in the charts. This usually occurs within a few days, although weeks and even months are possible time frames. There was a large down gap in trading on May 20th and another one before that on May 14th. The market will want to rise in the near term to at least fill the gap on the 20th. Yesterday's gap down was a short-term exhaustion gap (a gap after many down days or up days) and the markets moved up to trade into the empty space that had been left on the charts.

Technical factors are moving the market up at the moment, but once they get resolved, stocks are likely to head down again. The fundamental problems that emanate from the eurozone have not been fixed. For a major bottom to be put in, some dramatic event like a Greek default or Greece being removed from the euro currency union would be a good signal for a bigger rally. A much larger bailout, such as $5 trillion instead of a mere $1 trillion would pump up stocks as well. This is what reversed the markets during the Credit Crisis and the central bankers and treasury departments of the world will almost certainly attempt their tried and true money printing solution again. The only question is when they will do it.

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.

Market Continues Choppy Trading

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.


Choppy trading is a sign of a troubled market. Within the last ten days, U.S. stocks have had a great deal of difficulty deciding which way they wish to go. As of today, the Nasdaq has either gapped up or down seven days in a row on the open. Intraday gaps, which are very rare and indicate a great deal of volatility, have also occurred.  This type of trading usually takes place at market tops or bottoms.

The problems in the U.S. stock market began intraday on Thursday, May 6th with the sudden market drop and rise around 3:00PM. In a span of approximately 16 minutes, there were multiple gaps on the downside and then multiple gaps on the upside on the major U.S. market indices on the one-minute chart. The Dow Jones Industrial Average moved 700 points in both directions in that short period. Fewer gaps appear on the five-minute and fifteen minute charts, but they are more pronounced. This was followed by a noticeable intra-day gap on the downside on all the very short-term charts on May 7th. Then there was a massive gap up on the open on Monday, May 10th, with the Nasdaq opening around 100 points higher than its Friday close. The ECB (European Central Bank) has admitted to a massive liquidity injection at that time and this money flowed directly into the stock market. Other central banks were probably involved as well.

Looking at the charts it can be seen that Nasdaq then gapped down on Tuesday, up on Wednesday, and down on Thursday on the open. The gap down on Tuesday was significant, but the other two were relatively minor and not really out of the ordinary. Then last Friday, there was an almost 30-point drop on Nasdaq when stocks began trading. That is very much out of the business as usual range. After that, there was a small gap on Monday and a somewhat larger gap up today. The market suddenly turned around in the middle of the day yesterday while trying to fill the huge gap from May 6th. This is atypical behavior (the gap was only partially filled) and has all the earmarks of central bank interference.

Markets like to trade in continuous patterns. When gaps occur, they almost always get filled (trading takes place in the price range that was skipped because of the gap). This commonly happens within a few days, but it can take weeks, months or even years.  Investors in general don't like choppy markets, although they are a boon to short-term traders. Trending markets tend to have smoother price movements and investors should be on the lookout for a return to this type of less volatile environment.

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.

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.

CFTC's March 25th Hearings on the Metals Markets

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 CFTC (Commodities Future Trading Commission) held hearings on March 25th on whether to set controls on metal's trading in the U.S. futures markets. A representative from CME (Chicago Mercantile Exchange) testified that the CFTC's attempt to put hard limits on speculative activity in the U.S. metals markets is an attempt by the government oversight agency to overstep its bounds. A spokesman for HSBC claimed that limits on metal trading were simply unnecessary. The CFTC itself said it continues to look into allegations of market manipulation in the silver market in the summer of 2008.

The CFTC has previously held hearings on setting trading limits in energy and agricultural commodities. One of the reasons that the CFTC claims it needs to set position limits in trading is because of the finite supply of any commodity. The limits are supposedly protecting the market (from itself apparently) and the CFTC claims that government bureaucrats know more about how trading should be done than market participants. While there are actual glaring examples of how the gold and silver markets are manipulated by the big players, these are rarely on the CFTC's agenda. Like the other major market regulatory body, the SEC, the CFTC just doesn't seem to notice the behavior from the big money insiders that really distorts the market. For instance, CFTC hearings last summer on energy focused on ETF UNG, which held 20% of natural gas futures contracts. Even though this was an investment vehicle heavily used by small investors, the CFTC decided it was a danger to the integrity of the markets, as opposed to the trading activities of the big banks and hedge funds. The SEC took the same approach by paying limited attention to Bernie Madoff's $65 billion investment scam for almost two decades, but during the same period was very likely to use its resources to investigate some dentist in New Jersey who suspiciously bought a 1000 option contracts and made a couple of bucks.

The CFTC's concerns with energy and agricultural trading are obviously politically motivated. Politicians want to keep the prices of these commodities down since they are necessities and the source of destabilizing inflation. The UK prime minister and French president actually wrote a widely circulated article about how energy prices need to be determined by the big government's of the world just before the CFTC's energy hearings last summer. The U.S. had price controls on energy commodities in the early 1970s and the results were long lines at gas stations and fuel shortages. Under pricing in the markets always leads to trouble down the road.

The excuse for the CFTC considering limits on metal trading is even less justified than for energy or agriculture. As the HSBC representative pointed out, metals are not wasting assets that are consumed and then no longer available as is the case for oil and food commodities. Metals get recycled. Almost all of the gold that has ever been mined is still thought to be in existence. Higher prices increase the recycling rate and bring more supply to market, so the markets for gold and silver are self-correcting. While 50% of silver is used for industrial purposes, only 13% of gold is employed for manufacturing practical items. Most gold is used to make jewelry. Does the gold market need to be controlled, so the rich can be assured of getting good prices on holiday presents?

The CFTC is also not looking at where the actual manipulation is taking place in the gold market. This is done through central bank leasing to the large banks and hedge funds. They lease the gold for a small price and then can sell it on the market to raise some quick cash. This activity held down the price of gold in the 1990s and the early 2000s. The price of gold rose as leasing activity diminished. Artificially lowering the price of a commodity doesn't seem to come under the definition of market manipulation as far as the CFTC is concerned. Central banks, large international banks and big hedge funds also seem to be citizens above suspicion as Madoff was for the SEC.

While the CFTC is looking into manipulation into the silver markets, it may not mean that much. This is probably happening because silver investor Ted Butler has worked tirelessly to bring the situation to the public's attention, thereby putting some heat on the agency. How much the CFTC actually looks this time has yet to be determined. The SEC investigated Madoff many times, but just couldn't discover his blatantly obvious crooked activities. For some time, two big banks have frequently had huge short positions in silver futures -seemingly bigger than the Hunt Brother's who were convicted on federal charges on manipulating the silver prices in the 1980s. The CFTC has already investigated silver twice before in the 2000s and didn't find any irregularities. The SEC investigated Madoff more than two times.

Steve Sherrod, acting director of surveillance at the CFTC’s division of market oversight noted in today's hearings that when Comex silver prices fell sharply in the summer of 2008 that there was no significant change in the total long or short positions in the commitment of traders’ positions in the agency’s weekly data. Nor was there a significant change in open interest during the period of July and August 2008. Sherrod tried to explain away this seeming impossibility by stating, “One could explain a change in short open interest on the BPR (bank participation report) by a change within the classification system; if the usage code changed from non-bank to bank for a trader with a short position, then an increase in the short open interest would appear on the BPR, without any change in the COT (commitment of traders) Report. Another explanation would be a merger or acquisition where a bank assumes the position of a non-bank entity, both of whom were under the same commercial classification. That may not result in a change in open interest and may not result in a change in aggregate position within a COT classification. But it may result in an increase in the reported position on the BPR.”  Readers should carefully note Sherrod's wording (and language that seems more geared to hide what is going on than to clearly explain it). While this may have been what happened, Sherrod indicates that it also may not have been what happened. So how does this enlighten us?

The small investor shouldn't expect much, if anything, from the CFTC. It is realistically a government body that uses its powers to protect the big money interests, although it will claim that whatever it does is to benefit the public. Markets can also not be controlled without serious negative consequences. Government's have attempted to do so hundreds of times throughout the ages and it has never worked. Most commodity trading is international as well (natural gas is an exception), so restrictions in trading in the U.S. means that business will just move overseas. In this doesn't happen quickly enough, shortages will appear. You will have the CFTC to thank for them when they do.

Disclosure: None

NEXT: Euro Zone Support Package Doesn't Solve the Problem

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.

Withdrawal of Liquidity Threatens Second Global Meltdown

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.


A global market sell off began today, February 4th, when the British Central Bank announced that it was calling a temporary halt to its quantitative easing (also known as money printing) program to gage the impact it was having on the British economy. This follows the U.S. Federal Reserve's announcement during its late January meeting that on February 1st it would be closing down five of its programs that have been providing liquidity to the financial system. The market rally since March 2009 has been based on liquidity and even a small reduction can cause a market drop, a large reduction can cause a crash.

Major European bourses were all down over 2% on the news. The U.S. stock market sold off strongly. All the major indices - the Dow, the S&P 500, the Nasdaq and the Russell 2000 - were already below their 50-day moving averages and are now almost certain to fall to their 200-day moving averages in future trading. If they don't hold at that level, the bull market that began last spring will be over.

The U.S. dollar rose as is common when the financial system is threatened, as was the case in the fall of 2008. The trade-weighted dollar almost hit 80.00 and has been over its 200-day moving average since last week. It's 50-day is rising and a cross of the 200-day from below would announce a new bull period. The  euro is breaking down even further, despite progress having been made with Greek debt, which has been weighing on it for the past month. The charts indicate that the British pound is entering a new bear period today.

When the dollar starts rising for deflationary reasons, commodities will be hit. Silver gapped down and broke below a lower support line established in 2008 and also fell below its 200-day moving average. Gold then followed and broke below recent support. Expect Gold to test its 200-day, which is around other key support at $1000.

The global market collapse in the fall of 2008 was caused by a massive withdrawal of liquidity from the financial system. The world's central banks stopped it with a massive and unprecedented money pumping operation. This stabilized the system and lead to the rally in stocks and commodities. It did not however fix the underlying problems. It merely neutralized them. The industrialized economies are still heavily damaged and yet to recover, even though the central banks are acting as if they have. This will be their key mistake this time.

In the Great Depression of the 1930s, the U.S. Fed withdrew liquidity from the system as the crisis began and this worsened the collapse. While our current central bankers have learned the lesson to pump money into the financial system initially, they don't seem to realize that they need to continue to do so. They will get the idea sooner or later because the impact of liquidity withdrawal will become more than obvious and a political firestorm will follow if it goes on too long.

It looks like we are beginning the second phase of the great global meltdown. In this phase, central bankers will realize they must continue to print money to keep their economies functioning. Massive inflation is the ultimate outcome of this scenario. If they don't, ongoing recession that can morph into a depression is the alternative. Investors need to shift their porfolios with central banker's policy moves.


Disclosure: No positions.

NEXT: U.S. Employment Report: 617,000 More Jobs Lost in 2009

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 China in a Bull's Shop

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.


After its own stock markets closed on January 12th, the PBOC (People's Bank of China) ordered a boost in the yuan reserve requirement ratio for banks by half a percentage point. U.S. stocks immediately sold off on the news, gold dropped $15 in only minutes, and the U.S. dollar also declined. The market viewed this as the beginning of a tightening cycle on the part of the Chinese. While analysts are debating this, it is almost certainly true. Claims that China beginning to tighten monetary policy now will be able to head off future inflation however are grossly overstated and can be put in the category of wishful thinking.

When it comes to bank lending, China has the opposite problem of the United States. Banks in the U.S. have yet to start lending again despite half a dozen support and giveaway programs from the Federal Reserve and Treasury Department that are meant to encourage them to do so. Bank lending in China is surging out of control though. Lending in the first week of 2010 was greater than the entire month of November 2009, which in turn was already strong. Analysts claim that PBOC's move will remove 200 to 300 billion yuan from the banking system. Bank lending in the first week of this year was 600 billion yuan, so the drop in liquidity caused by the new rules represents taking away half a week of lending. That should be about as effective as trying to take down an elephant with a fly swatter.

Only a significant change in monetary policy is going to have any impact on future economic numbers. Central bank interest rates are either zero or close to zero in most major economies. Raising that number half a point, a point, even two points still indicates an easy money policy. Even that is not going to happen in the foreseeable future. China itself uses interest rate hikes to cool down its economy and last did so in 2007. It has yet to start a new tightening cycle. Starting that cycle won't be enough to stop inflation either. Inflation is an insidious phenomenon that takes years to work its way through an economy. There is as much as a four-year lag between a period of easy money and a first peak in the inflation rate. That takes us at least to 2012. In the 1970s U.S., money supply expansion peaked in 1971 and inflation peaked nine years later in 1980. Trying to control inflation after money expansion has occurred doesn't work, unless severe measures are used.

Governments also fail to control inflation because they fail to focus on the cause. In China's cases, they froze their currency at the beginning of the Credit Crisis, so it is extremely undervalued. Keeping a currency at too low an exchange rate is highly inflationary. When inflation shows up in China in the not too distant future, the key to stopping it will be to significantly value the yuan upward. Other measures will prove to be ineffective, but like most government throughout history, China is likely to take the easy way out and avoid taking the necessary steps needed to reduce inflation.

As an interesting aside to China's bank announcement, it should be noted that the yen is selling off against the U.S. dollar. Almost every other currency is rallying against the dollar and some very strongly. It is quite clear that this was part of some central bank maneuver to drive down the yen. The large drop in the price of gold, which took place in minutes on the 12th, also required a large amount of capital backing it. Central banks have that large amount of capital. This ordinarily would have rallied the U.S. dollar strongly, but didn't. Manipulating the gold market is one of the old reliable techniques governments use to support the U.S. currency. Central bank actions rarely impact the markets for too long if there is no fundamental support backing up their moves. When the U.S. stops borrowing and printing money and raises interest rates substantially, real support for the dollar will exist. Until that happens, the long-term downtrend will continually reassert itself.

Disclosure: Long gold.

NEXT: 2009 Retail Sales Deconstructed

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 Santa Claus Rally and the January Effect

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 Santa Claus rally is a move up in stocks that takes place around December 25th. This rally was already part of Wall Street lore in the 1800s, and was memorialized in the ditty: 'If Santa fails to make a call, the bear will come to Broad and Wall'. There is no general agreement on the exact dates of the rally. It is defined as beginning from a few to several days before Christmas or immediately thereafter. It ends either in the current year or two or three days into the next year. It is most useful to think about it as two separate phenomenon. The first as the trading period around Christmas day and the second as the first four trading days of the new year. Each has its own message.

The bullishness in stocks around December 25th probably doesn't have much to do with the holiday per se, but with year end adjustments within the financial system. Instead of calling it the Santa Claus Rally, it would probably be more accurate to refer to it as the Year End Rally. If you look at long-term charts, you will note that the VIX, the volatility index, is either low or drops around the end of the most years. This is bullish for stocks. The VIX hit a yearly low on December 22nd in 2009 trading below 20 for the first time since the summer of 2008. An exceptionally low VIX while bullish in the short term sets the stock market up for eventual selling however.

What happens at the end of the year and at the beginning of the year can be quite different however and the two shouldn't be lumped together. Investment money tends to be reallocated at the beginning of a quarter and this is most pronounced in the first quarter. Investors should watch closely what sectors rally and what sectors of the market experience selling during the first four trading days of the year. This tells you where money is flowing. If the stock market overall sells off in the first four days, this is a bearish signal at least for the first quarter. It indicates big money is withdrawing its support from stocks.

The first four days trading signal is sometimes lumped in with the January Effect, but shouldn't be. The January Effect is a tendency for stocks to rally during the first month of the year, with small caps outperforming big and mid-caps. The January Effect was noted in the U.S. by the 1920s and perhaps even earlier. It has been observed in a number of stock markets throughout the world. The effect seems to have become dampened in recent years.

Trading volume tends to be low around the end of the year because many people are away because of the holidays. This can exaggerate price movements. Liquidity coming from the Fed and other central banks will have a more pronounced impact than usual. If you look at a chart for the U.S. Monetary Base, you will see that it has been rising vertically in the last few months. It is not surprising that the current liquidity fueled rally in stocks is continuing.

NEXT: NovaGold Leads Mining Group on Takeover

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.

Gold Closes at Record High

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:

Gold closed at a record high in New York on Friday. The settlement price of $1004.90 broke the previous record of $1003.20 set on March 18, 2008. The daily intraday high was $1011.90. This is gold's third serious attempt at trying to break to new all time highs. The $1000 level has been tested 5 times so far. A basic rule of technical analysis is that when a price is repeatedly tested, it will eventually break.

A yearly high is bullish and a record high is extremely bullish for any stock or commodity. You would never know it from reading the media reports on gold however. I have seen one article after another warning about how dangerous it is to buy gold at these prices, how a pullback is likely, how the small investor had better stay away, etc., etc. This is actually very bullish for gold. If the media liked it and was saying how great it was, it would probably be time to sell.

Negative media reports all focus on lack of physical gold demand at the moment, particularly in India (Indian consumers own 20% of the world's gold - at least as much as all central banks combined). While this is likely a temporary phenomenon based on when Indians consider it a propitious time to buy gold, you don't usually see that mentioned in articles. You frequently don't see inflation mentioned either and that the demand for investment gold is skyrocketing. This type of demand will eventually overwhelm all other forms of demand. You can also find many articles that report that the ETF GLD isn't buying gold and how negative this is for the market. What is not mentioned is that there are 10 ETFs on world markets that buy physical gold. Overall, there has been net buying recently. Only one of the ten ETFs had decreased holdings and that was GLD. Long gold futures positions have increased by 17% in the last week to 10 days and many investors are likely moving away from physical metal to more leveraged plays.

Gold's recent performance has been helped by the U.S. dollar. The trade-weighted dollar was as low as 76.46 on Friday, well below its breakdown level of 78.33. It is up slightly this morning and gold is hoovering around $1000. The dollar is in danger of hitting a yearly low soon (75.89 at the moment) and if that happens it could fall to its all time low below 72. Some short term rally is likely because the dollar is trading below its falling 50-day moving average. This could in turn cause a short-term drop in gold prices. This would just be another buying opportunity however.

We will be discussing the gold and silver markets at the New York Investing meetup's 'Technical Analysis - Chart Patterns' class this Tuesday night at PS 41 (116 West 11th Street). The class will be held from 6:45-8:45PM.

NEXT: Gas Takes Gas

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.

Market at a Key Juncture

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 Dow finally pierced and closed above its 200-day moving average yesterday, the last of the major indices to do so. This could be a possible end to the rally that began in early March, but we don't know for sure yet. The trade-weighted U.S. dollar hit major long-term support overnight and has so far managed to bounce off of it. Gold reached as high as 990, once again bumping up against its major resistance at a 1000. Oil has traded well above 68 and is close to important resistance at 70. At least a short term reversal of trends is possible for all of these markets. It will take awhile though to determine if this will turn into something bigger.

In many ways the dollar is key to all the other markets. The trade-weighted dollar fell as low as 78.40 last night and made a double bottom on the short term charts. Major support is at 78.33, which was the low point of a large reverse head and shoulder bottom pattern made between 1991 and 1993. This support was broken in 2007 and the dollar then fell to around the 72 area. The dollar traded as low as 79 at the end of last year before recovering. What saved the dollar from the precipice last night was 'unnamed sources' telling Reuters that "a downgrade in the U.S. sovereign credit rating would not discourage Asian central banks from buying U.S. treasuries." Now I wonder who could have planted that story at such a convenient time? You should also be wondering are these Asian central bankers really that dumb or should they be suing Reuters for libel?

The short term key to whether or not stocks can hold their gains and go higher is whether or not the Nasdaq can hold above its 200-day moving average. Nasdaq was the first to break through this key resistance and has been leading the market up since the bottom. The Dow is the market laggard, although its position might improve in a few days when major losers GM and Citigroup are removed from the index and replaced by Cisco and Travelers. The Nasdaq 200 line is currently at 1684 and still falling. Nasdaq is holding above 1800 this morning.

At this point, whether or not gold can finally make the break above the magic 1000 level will be determined by how the dollar holds up. If the dollar breaks below 78, gold will be breaking above a 1000 and will rally until the dollar fall is broken. Expect major government manipulation behind the scenes to try to prevent this scenario. If they fail here, they will try for a reversal lower down. A weak dollar will also boost oil to higher levels, although a good hurricane could do the same.

NEXT: Dollar Sage Continues; Commodities Take a Hit

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.

When Stimulus Ceases to be Stimulating

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:

Apparently Pavlov was right - and a better economist than anyone ever imagined. More than 100 years ago he noted that a stimulus has its greatest effect in the beginning and loses it impact if continually applied. Contemporary central bankers have apparently failed to appreciate the significance of this finding and its application to their field.

Early this morning New York time, the Bank of England cut interest rates 1.5%. While this may not be the biggest rate cut ever in nominal terms, it is enormous by any measure. The old rate was 4.75 and the new one is 3.25. Before the credit crisis began last year, a rate cut of this magnitude would have been enough to rally the market 10%, 15% or maybe even 20% in as little as a few days. However, as the credit crisis has proceeded, central banks rate cuts have lost their efficacy. The rallies that have resulted have become smaller and briefer. Today the FTSE 100 closed down 5.7%. Instead of the expected big rally, the London market crashed.

The Bank of England's grand rate cut gesture was a follow-up to the U.S. Fed's 50 basis point pre-election rate cut last week. While the Fed's cut helped prop up the American stock market into the voting, it could have done even more and there were rumors that it was considering 75 or even a 100 point cut (the remaining 25 or 50 basis point cut will probably be done at the next meeting). The ECB and the Swiss central bank decided to follow this more conservative approach today when they both cut 50 basis points also. Euro zone rates are now at 3.25%, above Britain's new 3.00% and well above the 1.00% in U.S. Counterintuitively, the trade weighted dollar rallied. This pattern has been seen since late July when funds have been flowing from high interest rate currencies to low interest rate currencies - something which seems to defy all logic.

Bourses on the continent suffered even more today than the British market, since they only had a big rate cut, instead of a truly huge rate cut to support stock prices. The German DAX was down 6.8% and the CAC-40 dropped 6.4%. The U.S. markets started selling as soon as they opened and hit a temporary bottom around 1:30, when the Dow was down more than 400 points and Nasdaq down over 70. Oil prices was hit even worse than stocks, with light sweet crude falling to $60.16 at one point. Don't be surprised if oil falls even further to 50 or even 40 in the future, although this may take awhile. In the shorter term, current levels are likely to be broken for stocks.

NEXT: Employment Losses Revealed After the Election

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.