Without Stimulus Market Can't Rally

 

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.

Minutes from the last Fed's Open Market Committee meeting indicate the central bank is less likely to introduce more stimulus. While this should not have been surprising, stocks sold off on the news adding more evidence that the top has been put in.

The current market rally, indeed the entire market rally since mid-2009 has been produced primarily on liquidity provided by the Fed and other central banks. This liquidity not only allows the market to continue to rise, but it also props the market up. Without a continuing flow of liquidity, the market could easily hit an air pocket and fall apart and it can do so in a very short period of time.

The impact of what happens when just a hint that more liquidity won't be forthcoming can be seen by Wednesday's action. The Dow Jones was down 1.0% (125 points), the S&P 500 1.0% (14 points), Nasdaq 1.5% (45 points) and the small cap Russell 2000 1.7% (14 points). Commodities were hit even harder than stocks with gold dropping 3.0% or $51, silver down 4.2% or $1.33 and oil lower by $1.97 or 1.9%. Copper lost more than 3%. The major gold and silver mining ETF GDX was $ 2.05 lower or 4.2%. The junior version, the GDXJ, dropped an even dollar, also 4.2%.

While there seems to be a number of players in the market hoping for QE3, they are not likely to get their wish anytime soon. At this point it is almost impossible for the central that has been crying recovery for the past three years to justify such a move without seeming to be blatantly interfering with the ongoing presidential election. Moreover, even to an inflation-blind Fed, the risk of future rising prices is becoming increasingly difficult to ignore.

Traditionally, rallies last between six and seven months and this one is beginning its seventh month. The upside action on the indices has been decent even for an entire year. Rallies don't go to the sky however, but correct because too many people have bought and many of them have bought on margin. Once that point has been reached it takes very little to pull the market down and once the selling starts in earnest it becomes very difficult to stop. We may not be there yet, but we probably will be soon enough.


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.

S&P 500 Joins Global Bear 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.

Markets opened October with almost all assets declining everywhere. The S&P 500 entered bear territory on Tuesday.  Few assets other than treasuries and the U.S. dollar are doing well, as is typical during a credit crisis.

The big talk on Monday, the first trading day of October, was about the S&P 500 making a new closing low for the year. The intraday low was only slightly lower than the previous one in early August, so peak to trough the index was off 19.8%. The big drop on the opening on Tuesday created a 20% loss, putting the S&P 500 officially in a bear market.

The small cap Russell 2000 already entered bear territory on August 8th. The Russell had another mini-crash on Monday, dropping 5.4% on the day. That was its fourth mini-crash since August. Mini-crashes are common during credit crises, but not at other times.

The selling on Tuesday first showed up in Asia with the Hang Seng in Hong Kong losing 3.4% to close at 16,250 and South Korea's KOPSI dropping 3.6%.  The ugliness then spread to Europe with the German DAX, the French CAC-40 and the UK FTSE down more than 3% during the  trading day. U.S. stocks opened then opened lower with the Dow losing more than 200 points in early trading.

As usual in Europe, banks were at the epicenter of the market quake. Franco-Belgium bank Dexia was down 22% at one point. Deutsche Bank (DB) was down more than 6% in Frankfurt after announcing it would miss its profit target for the current year.  American banks have not avoided the carnage affecting financial stocks elsewhere; just take a look at Bank of America (BAC) and Morgan Stanley (MS), both trading at two-year lows.

While the behavior of banking stocks makes it clear that a credit crisis is taking place, falling commodity prices clearly indicate that the global economy is turning down. Copper prices fell as low as $3.01 a pound early Tuesday. Copper sold for well over $4.00 at its high in February and dropped sharply throughout September. Oil is also indicating weakness, with WTI crude closing at $77.61 on Monday. It traded as low as the $75 range on Tuesday. Oil is heading into a period of seasonal weakness and this is likely to exaggerate any price drops. Next strong support is around $70 a barrel.

Money continues to move into safe haven treasuries. The 10-year yield was as low as 1.725 before selling began in the bond market. The U.S. dollar index traded just under 80 at its high. The euro, which moves opposite to the dollar, hit a low of 1.31.62 Tuesday. Further weakness should be expected until there is some resolution to the debt crises in the EU.

 In bear markets, the bigger trend is down, but this is frequently accompanied by huge volatility. This is what has taken place since August and until there is a good reason that the trend should change, investors should expect that prices will be moving lower.

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.

Stocks and Commodities Setting Up for a Major Breakdown

 

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.

Global markets were acting like they were on the verge of a collapse on Thursday, the day after the Federal Reserve's Operation Twist announcement. The selling was ugly and is likely to get even worse in October.

In Asian trading last night, the Hang Seng in Hong Kong barely avoided a mini-crash, falling 4.9% (5.0% is the cutoff) or 912 points. The Sensex in India shed 704 points and was down approximately 4.0%. The market is attempting to cover a gap on the charts made two years ago. The chronically- bearish Nikkei in Japan was down only 2.1%.

In Europe, both the FTSE in the UK and the DAX in Germany also almost closed in mini-crash territory. The FTSE was down more than 5.0% at one point, but managed to rally toward the end of day. The DAX closed down 4.96%, just a whisker less than a mini-crash. The CAC-40 in Paris wasn't as fortunate. It closed down 5.3%. European banks were in the forefront of the selling with French banks being particularly hard hit. French banks are heavily exposed to Greek government and corporate debt. UK banks were also down considerably because of problems left over from the 2008 Credit Crisis.

The U.S. markets opened down and got worse as the trading day proceeded.  The Dow closed down 391 points or 3.5%, the S&P 500 39 points of 3.3%, the Nasdaq 83 points or 3.3%, and the small cap Russell 2000 21 points or 3.2%. Banks stocks in the U.S. received bad news with Moody's downgrading the credit ratings of Bank of America, Wells Fargo and Citigroup. Moody's indicated that it believes bailouts will be less likely in the future.

Commodities were not immune to the selling with gold, silver, oil and copper experiencing significant downside action. Spot gold traded as low as $1722.30 in New York. December futures were down as much as $78.50 at one point. Spot silver traded as low as $35.41. Both gold and silver had some recovery from their lows. Crude Oil (West Texas Intermediate) fell to $80.89 and was down $5.03. Economically-sensitive copper was crushed falling as low as $3.46 a pound. It was down 8.6%. Copper has fallen more than 20% from its all-time high in February and is technically in a bear market. The price behavior of copper is supposedly the best indication of global economic activity.

The key levels for investors to watch are the August lows for stocks and commodities. These were tested today on the Dow Industrials and the Russell 2000. If these get taken out, things should really start to get interesting.  These levels have already been broken in France and the major emerging markets. Technical analysts should note that the Dow Industrials, the S&P 500 and the Russell 2000 all formed  a very clear head and shoulders topping pattern in August and September.

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.

Should Stocks be Rallying on Hopes of QE3?

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.  


Stocks have rallied significantly since August 10th on the hopes that the Federal Reserve will engage in a third round of quantitative easing (QE) -- a form of money printing. While QE1 and QE2 were successful in juicing stock prices, this is not what the Fed is supposed to be doing.

The Fed's current mandate was established by the U.S. Congress in 1977 in the Federal Reserve Reform Act. This legislation requires the Fed to establish a monetary policy that "promotes maximum employment, stable prices and moderate long-term interest rates". Manipulating stock prices is not supposed to be on the Fed's agenda. Quantitative Easing was unknown in 1977 and was therefore not specifically addressed by Congress.

If anything,the Fed has significantly overshot in its goal to keep long-term rates moderate. The Fed Funds rate has been kept at around zero percent since December 2008. The Fed has stated it will maintain this rate until 2013. The interest rate on the 10-year treasury fell below 2.00% at one point this August -- a record low. Two-year rates fell below 0.20%, also record lows and well below the bottom rate during the Credit Crisis. Low interest rates indicate an economy in recession and not deflation as is commonly claimed in the mainstream press. Maintaining interest rates at a low level for too long is inflationary however.

The Fed announced its first quantitative easing program in November 2008 (according to an analysis of its balance sheet, it was begun somewhat earlier). The second round ended this June. How has the employment situation changed during the two rounds of QE?  When QE1 started in November 2008, the official U.S. unemployment rate was 6.8%. When it ended in June 2011, it was 9.2%. The high was 10.1% in October 2009. The post-World War II average has been 5.7% and unemployment has fallen to the 3% range when the economy is strong. With respect to employment, quantitative easing seems to have been a failure.

So what about price stability, the Fed's other mandate? While the inflationary effects of quantitative easing are most evident in commodity prices, the typical American consumer has seen them in gasoline, food and clothing prices. The average price of gasoline was as low as $1.60 a gallon when the Fed started QE1 and it almost reached $4.00 a gallon during QE2. A number of commodities, including cotton and copper, hit all-time record-high prices during QE2. Gold, the ultimate measure of inflation,rose to one new price high after another. Silver went from under $10 an ounce to over $48 an ounce. Quantitative easing obviously hasn't led to price stability. In fact, it has resulted in much higher prices and is therefore counterproductive to the Fed's goal of limiting inflation.

There is no question that quantitative easing has helped the stock market and resulted in higher stock prices. This is not exactly a secret however and all Wall Street traders are well aware of it. They will therefore push stock prices higher if they think more quantitative easing is on the way and much of any rally that results will occur before it even takes place. Quantitative easing is also no panacea for stock prices. It doesn't insulate the market from external shocks. While it doesn't make crashes more likely, it will make them worse when they occur. A default on Greek, Spanish or Italian debt and any number of other crises will have greater impact than they would have ordinarily because the market has been pumped up to artificially high levels. The market has also become dependent on quantitative easing and has not been able to rally since late 2008 without it. Almost as soon as it stops, the market drops and those drops will become more serious after each succeeding round.

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.

Will You Become an Inflation Victim? Take this Simple Quiz

The 'Helicopter Economics Investing Guide' is meant to help educate the public 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 offical blog of the New York Investing meetup.


Recently, San Francisco Fed President John Williams assured the public that there won’t be runaway inflation in the United States. His remarks follow a long litany of comments from  Federal Reserve officials that inflation is under control, inflation is low, and other variations of there simply is no inflation.  People who know inflation history, and this includes very few people alive today, are getting little comfort from these remarks. Central bank officials have repeatedly assured the public that there is no inflation in the past despite inflation obviously existing. One of the most vocal and sustained denials took place in Weimar, Germany in the 1920s. The central bank, the treasury department and top economists all agreed that inflation wasn’t a problem. It eventually reached 100 trillion percent.

Americans just have to open their eyes to see that inflation exists. Gasoline prices have risen from a $1.60 a gallon at the bottom of the Credit Crisis to almost $4.00 today. A number of food commodities, including sugar and coffee are having sustained price rises, and food prices in the supermarket are noticeably higher. I have a friend who records all of his family’s food purchases in Quicken and even though they are eating the same foods in the same quantity, the amount they are spending has gone up 10% in the last year.  Prices of clothing are also rising because commodity cotton prices broke a 150-year high recently. Copper, which has the widest of uses of all metals, has also hit an all-time high earlier this year.

Yet, the Fed tells the public not to worry as it continues one program of money printing after another. Even though this has always resulted in inflation in the past (the basic laws of arithmetic would have to be violated if it didn’t), they claim things are different this time. The continually fall back on the argument that there is a lot of slack in the economy and since U.S. unemployment is around 9%, wages can’t rise and this prevents inflation. Unfortunately, real world observations of past major inflations indicate how absurd this line of reasoning is. Unemployment in Weimar, Germany rose to 23% as their inflation rate reached the trillion percent level. Slack in the German economy was nothing however compared to Zimbabwe in the early 2000s. Unemployment there reached 94% and literally nobody in the entire country had a job. The inflation rate in Zimbabwe is estimated to have been at the sextillion percent level (a number so huge it might as well be infinity).

Before inflation really gets out of control, take the  following quiz to find out how well-informed you are about inflation investments and how your portfolio will be affected by it.

QUIZ

ANSWER TRUE OR FALSE

1. Safe investments like money market accounts, CDs and government bonds are just as good during high inflation as other times.
2. TIPS (Treasury Inflation Protected Securities) will at the very least maintain my capital during inflation.
3. Buy and hold in the stock market is an effective wealth building strategy during high inflation.
4. The higher the inflation rate, the better residential real estate is as an inflation hedge.
5. The U.S. dollar is the strongest currency in the world and will remain so during a period of high inflation.
6. If I have 5% of my portfolio in gold, my assets are protected from high inflation.
7. Of all possible inflation hedges, gold will provide the biggest return during high inflation.
8. When inflation is taking off, commodity prices will rise at the same rate as inflation.
9. When a government imposes wage and price controls, you can assume the inflation rate will come down and stay down.  
10.  Speculators are the cause of high prices during inflation.

WHICH INVESTMENT WOULD YOU RATHER OWN DURING HIGH INFLATION?

11. The U.S. dollar or the Australian dollar
12. A U.S. treasury bond or a collectible Pez dispenser.
13. A house in the Chicago suburbs or a 100-acre farm in Iowa
14. A 5-year CD or a copper mining stock
15.  Utility stocks or commodity oil
16. Municipal bonds or Thai grade B rice
17. TIPS or a set of silverware
18. Long positions in U.S. treasuries or short positions in U.S. treasuries
19. A money market account or a gold ETF (exchange traded fund)
20. British stocks or an antique map of England

HOW TO GRADE YOUR QUIZ

The answers to questions 1 through 10 are all false. The correct answers for questions 11 through 20 are the second choice. If you scored between 0 and 5, don’t be critical the next time you see a homeless person looking for food in a public garbage can. If you scored between 6 and 10, you will probably remain in your home, but won’t be able to heat it that much and your cupboards won’t be well stocked. If you scored between 11 and 15, you will get through a period of high inflation relatively unscathed. If you scored between 16 and 20, go to a neighborhood of high-priced homes (assuming you don’t already live in one), find someone who scored under 5 on the quiz and tell him that you will be living in his house in the future.

Explanations for questions 1 through 10: People who own liquid investment, such as money market accounts, CDs and bonds will lose money during inflation. In the worst cases, they will lose everything. TIPS are not an effective protection because their returns are based on official inflation rates and the U.S. government has been underreporting inflation since 1983. Stock prices tend to go sideways during inflationary periods and can be highly volatile. Residential real estate is a very poor investment during inflation because it can become extremely cash flow negative because of rising taxes and maintenance costs. The U.S. dollar has not been the strongest currency in decades and it went down against every major currency between 2000 and 2010. It is good to hold gold during high inflation, but 5% isn’t enough. Gold does not produce the highest inflationary returns, silver and many other investments can outperform it. It does produce the most reliable returns however. Commodity prices actually rise much faster than the overall inflation rate (examples were cited in the beginning of the article). Wage and price controls almost always fail. The only work if government money printing is permanently halted at the same time that they are imposed. Speculators don’t cause high prices, but along with foreigners, they are universally blamed for inflation. Central bank money printing is the cause of high prices.

Explanations for questions 11 through 20:  In general, tangible investments are preferred to liquid investments during inflation, so if the choice is between a money market account, CD, or bond versus a commodity or commodity related stock, the commodity is the best investment. Antiques and collectibles are also better investments that liquid investments. Of all the public currencies in the world, the Australian dollar most closely tracks price changes in gold, so it is the top choice during inflation. Farmland is the best real estate investment during inflation. Interest rates go up during inflation, so the way to make money in bonds is to short them, not own them.

Disclosure: Author does not own any specific investments cited in this article, but does hold some U.S dollars.

Daryl Montgomery
Author: Inflation Investing – A Guide for the 2010s
http://www.amazon.com/Inflation-Investing-Guide-2010s-ebook/dp/B0051GU06W/ref=sr_1_4?s=books&ie=UTF8&qid=1306940501&sr=1-4

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 Curious Case of Copper and Its Compatriots

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.


While traders are scratching their heads about how the stock market can continue to go up while the economic news continues to get worse, they also should be puzzled over the sharp rise in copper and other industrial metals in recent weeks. These metals move with building and manufacturing activity and a rise in their prices is not just an indication of an improving economy, but is also an indication of inflation - not the deflation that the Fed and its friends have been worrying about lately.

The base metals, copper, aluminum, nickel, zinc and lead, all bottomed in early June. They mounted lackluster rallies into the middle of July. Their rallies went into overdrive after Fed Chair Bernanke testified before congress that it might be years before the U.S. economy fully recovers. Stocks also mounted a significant rally on this gloomy news, which followed a host of economic reports with falling numbers that came in below expectations. Leading indicators had also turned down and were pointing toward an impending recession. Stocks and industrial metals should have tanked, but instead rallied strongly on the news. Only a lot of liquidity flowing into the financial system at that point could make something like this happen.

When trying to analyze the metals markets, the first place to look is China, the primary driver of demand. In June, China imported 212,000 metric tons (tonnes) of copper, 67,000 tonnes less than in May and a drop of 44% year over year. Moreover, projections came out for Chinese demand growth to ease for the industrial metals in the second half of the year. Then the HSBC Purchasing Managers Index for July came in below 50, indicating a decline in Chinese manufacturing. So far, none of this news has stopped the rally.

So if the news from China is bearish, the next place to look is the U.S. dollar. All commodities are priced in dollars and are affected by swings in the currency. The U.S. dollar peaked in early June at the same time that the industrial commodities bottomed. It has since lost about 10% of its value. However, much of this loss took place before Bernanke's congressional testimony and much of the base metal rally took place after. The metals rally has also been too big to be accounted for by the drop in the dollar alone. From the June low to the high of August 4th, Copper (JJC) rose 25%, Nickel (JJN) 24%, Aluminum (JJU) 23% and Lead (LD) 46%.

So we are left with a picture of strongly rallying stocks, even more strongly rallying industrial metals and lots of evidence of an economy falling apart. Has this situation ever existed before?  Indeed it has plenty of times in world financial history. This is what happens when there's massive inflation. It ruins the economy, but makes the prices of assets go up because people want to get rid of their currency. Yet the economic elites are currently worried about deflation and not inflation. Well, that's also happened before as well. In 1920s Weimar Germany, economists even managed to prove definitively that deflation existed and that inflation was not a worry, so it was OK for the government to print all the money it wanted to. Of course, after inflation reached a trillion percent, many people became skeptical.

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.

More Evidence for a Double Dip Recession

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. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

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.

Quadruple Witching Tops Off Weekly 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.


Friday was a quarterly quadruple witching day with stock options, options on futures, single stock futures and index futures all expiring. While volatilty frequently takes place on expiration days, this one was uneventful. Expirations can move markets starting days before however, with prices tending to move in the opposite direction of their recent trends during the week of expiration.

The week of June 14th was bullish for U.S. stocks, the euro, oil and gold. The euro gained 2.7% on an oversold rebound. Gold hit a record high, with GLD closing up 2.5% on the week. There was little difference though between gold's performance and that of the major U.S. stock indices. The Dow rose 2.3% on the week, the S&P 500 2.4%, the tech heavy Nasdaq 3.0% and the small cap Russell 2000 3.2%. Oil was a much bigger winner than gold, gaining 5.2% from last Friday's close. The one notable loser was economically sensitive copper, which dropped 1.5% in the last five days.

The euro, stocks, gold, oil and copper have very different technical pictures. On the daily charts, the euro looks very bearish, with its simple 50-day moving average well below its 200-day. The euro is moving up because of 'regression toward the mean'. It went down too far in too short a period of time, so it is trying to return to a trendline. The trade-weighted U.S. dollar has a mirror image picture. It has gone up too far, too fast and is coming down for that reason. Many oil ETFs/ETNs, including OIL also have their 50-day trading below their 200-day, but it is not nearly as pronounced as is the case for the euro.

U.S. stock indices are still in a bullish pattern with their 50-days above their 200-days, but the 50-days have been fallen particularly for the Dow and the S&P 500. The Russell 2000 is in the best shape of the indices. All of the indices are trading above their 200-days, but below their 50-days. The Dow and S&P 500 spent 18 days in a row below their 200-days in the last month though. Stocks can be characterized as clinging to a bullish pattern. In contrast, Gold is unquestionably bullish, trading above both its 200-day and 50-day and its 50-day is well above its 200-day. Next week could be critical for whether or not gold's rally continues based on patterns forming in its technical indicators.

Copper is changing from a bullish to bearish trading pattern. It's 50-day is touching its 200-day and will fall below it on Monday. This is a classic bear signal. Since copper trades with the economy, its behavior is supporting the possibility of a global slowdown and a double-dip recession in the United. Investors should watch copper closely. If it continues its bearish trading pattern, assume a recession could show up as early as this fall.

 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.

NovaGold Leads Mining Group on Acquistion

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.

While gold has been struggling recently, NovaGold (NG) went up 15% on December 23rd. The previous day, the company purchased a 100% interest in the Ambler property in Alaska and this set off the rally. It is not the first time that NovaGold has lead the miners in the market. The stock is highly volatile and the company is a magnet for controversy. It is also one of the potentially biggest money makers among the mining stocks.

Like most of NovaGold's properties, Ambler is resource rich and remote. Its contains some of the largest and highest-grade known VMS (volcanogenic massive sulfide) deposits in the world, both in terms of total metal and value per tonne. The deposits consist of copper, zinc, gold and silver. Nova already had a 51% stake in the property and paid $29 million to obtain complete ownership. NovaGold also has a half interest in Donlin Creek, one of the largest untapped gold deposits globally, a half interest in Galore Creek and full ownership of Rock Creek, Big Hurrah, and Nome Gold.

How much you think NovaGold is worth depends on your view for the future prices of gold, silver, copper and other metals. If you think these prices will be going up significantly, and that has been my view for several years now, then NovaGold is one of the cheapest stocks in the market. If you think those prices will be going down in the future, then you are not as impressed with the stock because most of its assets are sitting in the ground and won't be mined for several years. As someone who thinks that there will be significant inflation and dollar devaluation in the next decade, I am quite happy with the company's current mining schedule.

Before the Ambler acquisition, NovaGold stated that it had 15.2 million ounces in proven and probable gold reserves. At $1000 an ounce those reserves are worth $15 billion and at $2000 an ounce they are worth $30 billion. The company also had 78 million ounces of measured and indicated silver reserves, worth over $1 billion at current prices and 5.2 billion ounces of copper reserves worth over $10 billion at current prices. Plug in your own estimates of future silver and copper prices to obtain a likely value of Nova's deposits. The market cap of NovaGold has been in the $1 billion range during December trading. So for $1 of stock, you are getting somewhere around $30 in gold, silver and copper assets at today's prices with the possibility of a much higher value in the future.

While the stock is cheap on a valuation basis, it is not without risk. Mining the substantial deposits in Nova's properties is not without its difficulties and this accounts for why its shares sell at a discount. Proponents argue that this discount is much too large however. Nova is also a favorite of day traders from both the long and the short side and this increases its volatility. While NovaGold has been trading in the $5 to $6 range in December, it sold for over $20 in late 2007. Its all-time high was over $50 in 1987. Nova doesn't have to go back to those levels though to make investors money.

Disclosure: Long NG and GDX.

NEXT: New Homes Reveal Old Problems with Government Statistics

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 Break Downs

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

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The trade-weighted dollar closed below its break down point of 78.33 yesterday. Intraday the dollar traded as low as 77.45 and it closed at 77.57. As has been the pattern for months now, everything else rallied as the dollar sold off. While stocks continued their long move up and the S&P 500 reached 1000 (a major resistance point), commodities were the star players in the rally. The CRB index, a broad basket of commodities, was up 3.48%. The ISM manufacturing Report supposedly set off the rally.

According to the media, the promise of economic revival was responsible for the big commodity rally. So what commodity is doing best recently? Sugar! - which was trading at a three year high yesterday. Sugar is not economically sensitive at all (people don't go into sugar eating frenzies when a recession ends), but is instead a strong mover in the early stages of inflation. The biggest winner on the day was natural gas (the chart is very bullish and UNG closed above the 50-day moving average), with the near term futures contract up 10%. Copper, which is perhaps the most economically sensitive of all commodities was up 4.4%. Copper, zinc, lead and nickle are all trading at 10-month highs. Aluminum is at an 8-month high.

The rallies in gold and silver, which are the commodities most sensitive to movements in the U.S. dollar, were somewhat muted. Gold was as high as $963 intraday. A report released yesterday stated that net sales of gold by central banks fell to 39 metric tons during the first half of this year. This was down 73% from last year. If total sales for the year come in under 140 metric tons (highly likely), they will be the lowest in decades. Central bank gold selling was a major factor keeping gold prices low in the 1980s and 1990s and it looks like it is now completely exhausted.

As for the ISM report PMI came in at 48.9 (under 50 means contraction). This was above expectations and a few components were up decently, including production, new orders, and prices paid -which is an indication of inflation. Inventories were the most negative component of the report and they have been contracting for 39 months so far. According to the ISM, six industries are now expanding - Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Transportation Equipment; and Chemical Products.

As I have stated many times in this blog, economic revival is going to mean a lot of inflation.
The dollar break down is an indication of this and the powers that be are going to have to do something soon to try to hold up the dollar. My guess is that this will happen when gold hits the $1000 area. This is the inflation marquee for the economically savvy. The Fed can deny that inflation exists all it wants, but if gold soars past 1000, only the naive and gullible will listen. Since there is usually a lot of buying pressure for gold in August, the next few weeks should be interesting.

NEXT: Gold Shining, Silver Lustrous

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.

Invest Now for the Coming Inflation

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

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The Federal Reserve finally fessed up yesterday, announcing it was going to print new money to buy U.S. Treasury bonds. While my initial reaction was, 'so what else is new?', the public has not previously been officially informed of the massive inflationary policies that the Fed is implementing. While Bernanke did admit that the Fed was printing money to pay for the bailouts (how else could they have been paid for?) in his 60 Minutes interview, the markets didn't react to his statements on Monday... but they did yesterday. The dollar dropped like a rock, gold shot straight up and interest rates plummeted. Financials had the biggest rally on the good news that worthless government paper was going to be used to purchase their worthless debt paper (for some reason this seems like some sort of scam to me), although all metals and oil went up as well.

In yesterday's announcement the Fed said it will buy $300 billion of U.S treasuries (mostly in the 2 to 10 year range), $750 billion in Mortgage Backed Securities (MBSs) from Fannie Mae and Freddie Mac (both bailouts are black holes for government money), and increase purchase of Fannie Mae and Freddie Mac debt to $200 billion. The Fed signalled it would increase its balance sheet to $4 trillion. It was $900 billion last year and $2 trillion more recently. Take these numbers with a grain of salt, they are on balance sheet only (think Enron accounting). To increase its balance sheet the Fed must print new money. Even without knowing this, it is obvious that new money was being printed for some time now. To pay for all the bailouts, there has been huge new issuance of treasury bonds. Even though this created a big increase in supply, interest rates went down indicating that demand for U.S. treasuries was increasing even faster. Where do you think all of this extra demand came from?

The reaction to the Fed's announcement is a prelude to the future. The dollar tanked almost 3% in minutes, something that previously would have been a major move in a month. Gold which had been selling down and traded as low as $889 reversed course and rallied $57, also in minutes. Silver which traded as low as the 11.75 went up a dollar - and is still a major bargain. Oil which was also selling off Wednesday morning, reversed and closed up. It traded as high as $51.65 a barrel overnight, which is a breakout that confirms that a double bottom was made last December and February. All other metals and coal went up as well and you should consider them to be good inflation hedges too. It is possible that even steel stocks put in a bottom because of the Fed's move.

You should be adding to your commodity positions at this point. Consider buying commodities that you don't already own or have large postions in. If you already own enough oil, you might want to buy some more silver for instance. You might want to consider picking up some base metals and coal, if you already own a lot of gold. While, gold, silver and oil are the foundation for inflation investing, any tangible asset that has a useful function and a limited supply that can't be increased significantly is also a good choice.

NEXT: Commodities Rumble, Financials Tumble

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 Bad News is Good News and Vice-a-Versa

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

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The U.S. government claims that construction on new homes and apartments jumped 22% in January. Why not 222% or 2222% or the future inflation rate of 222,222%? If you are going to publish fantastic figures you might as well go for some big splashy number that indicates every existing house in the U.S. had its land subdivided and an extra house was built on it. Well, maybe people wouldn't believe that one (although the mainstream media would publish it as if it were true). Somewhat more realistic is the PPI report released today which indicates February wholesale prices went up 0.1% after a 0.8% rise in January. Dropping oil prices are still lowering the numbers, although even with much cheaper oil, the coming big deflation that the media reported all last fall and this winter has yet to show up. Oil prices have already begun inching back up and even the highly manipulated government figures are likely to soon be showing that inflation is rising again.

Oil acted quite bullish yesterday. Even though OPEC refused to cut it production quotas at its Sunday meeting, oil prices were essentially unaffected. While oil went down about 3% in Asian trading after the meeting, it recovered its losses by the close in New York. Nymex light sweet crude is trading at 47.50 a barrel as I write this, almost as high as its gotten since the double bottom made in the high 33's on February 18th. When an investment doesn't go down on what should be bearish news, what will make it go down? The market is telling you that the selling is done (this works quite well for analyst downgrades by the way, if a stock goes up on a downgrade there are no sellers left). DXO, which New York Investing said was a good purchase on the evening of February 17th is hitting its highest high since that date today.

Sometimes assets do indeed go down on bad news, but don't hit new lows. This is also bullish. You should be watching Alcoa (AA), which had horrendous news yesterday. While the dividend cut was expected by any rational person, the issuing of new stock and convertibles is dilutive for current shareholders. AA's yearly low was 4.97 reached on March 6th and it has not been breached yet in today's trading with the low so far being 5.37. AA is not the first metal stock to cut its dividend, reduce capital spending, etc., etc. Freeport McMoran Copper and Gold (FCX) did so last December 3rd and the stock bottomed 2 days later at 15.70. It has gotten over 38.00 since then. When really bad news comes out, you need to ask yourself what else could happen. If there is nothing worse, how can the investment go down further? Unlike FCX, AA does have one additional risk and that is it could be thrown out of the Dow Jones Industrial Average.

The stock market is filled with beaten down stocks at the moment. To find the real bargains you need to determine if the company will still be in business tomorrow. In some cases, the answer to that is no (think financials and anything related to them). In others like FCX, which is the lowest cost copper producer in the world, the demise of the company would mean the disappearance of an entire essential industry. If the industry isn't going to disappear, the lowest cost producer will still be around. You should find out who these companies are for every commodity.

NEXT: What Happened to Deflation?

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.

Analysis of Tuesday's Market Action

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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Stocks had a spectacular rally yesterday, with the Dow being up 5.8%, the S&P 500 6.4% and the Nasdaq and Russell 2000 7.1%. Many individual stocks did much better. Unfortunately the rally was lead by insolvent financials (Citi up 38% and Bank of America up 28%). Nothing has really changed to fix their problems and make them worth something. Many beaten down commodity stocks posted double digit gains as well and unlike financials these have real long term value. Inflation hedges, gold and silver declined while stocks went up and oil showed weakness in the afternoon. While the charts indicate a stock rally should be taking place right around this point, a test of the lows (with a lower low by no means out of the question) is likely again within about two weeks or so and after that a longer lasting rally is possible.

This rally will only be a Bear Market rally. Buy and hold for stocks is dead for the moment. This is not a bad thing however. It just requires a different investing mindset. Ignore the media pundits that continually point out that it's only a Bear Market rally as if somehow the money you make from it doesn't count. Bear Market rallies can provide you with the biggest profits in the shortest period of time - what more could an investor want? The biggest monthly rallies of all time in U.S. stocks were in fact in the 1930s during the Great Depression. The Dow was up 40% in April 1933 (it best month ever) and 35% in August 1932.

As we mentioned yesterday, a 'leaked' memo from Citigroup CEO Pandit set off the rally. This memo was reported to have said the Citi was 'profitable' for the first two months of the year. This seems to have been based on Citi having high revenue numbers (sales) in January and February - just as it did in every quarter where it had massive losses because of all the write downs it had to take. Just as changes in demand mean nothing unless you know changes in supply, revenues mean nothing unless you know expenses. It is amazing that traders fall for this blatant manipulation, but it works like a charm every time, which is why it continues.

The demand without supply argument has been the prevalent press coverage for the oil market for some time now. Oil dropped yesterday afternoon because the U.S. Energy Department cut its demand for global oil use by 1.4 million barrels a day for 2009 (rumors preceded the actual announcement). This has led to a lot more press today about falling demand for oil and how bearish this is. Traders sold oil down on this 'bad' news. Assuming that this agency has the slightest idea of what it is doing (I am not vouching for that), this was actually very bullish news. How can that be? Sometimes in the very same articles, which stated how negative the demand situation is, you could find that OPEC has cut production quotas by 4.2 million barrels a day (many discount this number to something lower). Let's see, demand is falling by 1.4 million barrels and supply is falling by a much larger 4.2 million barrels and the conclusion is that the price will go down. Did any of the financial reporters writing these articles pass Intro Economics? Doesn't look like it.

If you do have a longer term perspective, you will be better off buying commodity stocks. Since governments can't 'print' huge amounts of excess money without debasing their currency (another elementary idea from Intro Economics), lots of price inflation is inevitable and the value of tangible assets will be rising. Nice rallies took place in non-precious metal stocks yesterday, such as PCU, ZINC, AA and to a lesser extent FCX (as disclosure, I have held FCX for a couple of months now and bought some AA on Monday). Steel companies such as X also did spectacularly well. These are all strongly influenced by what is taking place in China and its desire to accumulate commodities for future use, so keep that in mind. The current economic situation is more than a bit iffy there, with bad trade numbers being released this morning.

While inflation hedges gold and silver weren't doing well yesterday, a report was released indicating confidence in U.S. sovereign debt has been deteriorating for the last year. Credit default swaps (CDSs are insurance for bonds) for U.S. treasuries are now being priced at seven times higher than they were twelve months ago. During the same period, CDSs for investment grade companies haven't even doubled. On the other hand, CDS rates for leading U.S. banks and brokers hit a record high this Monday. The big money players have little confidence in the U.S. financial system and are starting to question the viability of U.S. debt itself ... but don't worry, the U.S. government can always print more money to deal with the problem.

NEXT: How Media Manipulates Investors to do the Wrong Thing

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.

Stocks - the Good, the Bad and the Ugly

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:

U.S. stocks gapped up today with the indices up 4% or more as I write this. Many individual stocks are up over 10%. While almost everything is up right now (except for gold and silver which are looking ugly at the moment), some of the rallies are more sustainable than others. In many cases, insolvent financial companies are up the most. Only for really short term traders do they offer opportunity however. Natural resource stocks on the other hand have real long term potential.

The oversold condition of the market is so extreme that it may be at historical levels. Under such circumstances, any little piece of news can ignite a sudden rally. Such bear market rallies are explosive and can last for weeks or even months. They are very tradeable and you can make a lot of money, but you have to get out and take your profits because the market is likely to go right back to where the rally started of even lower.

The news that started the rally today was Citigroup claiming it made a profit the first two months of this year. Indeed if the government pumps enough money into any given company it will eventually become profitable, no matter how insolvent it might be. This was followed up by a statement by Fed Chair Bernanke that major U.S. banks would not be allowed to fail (no matter how incompetent their management is and no matter how much it costs the taxpayer - he left that part out). Bad financials are bad investments though no matter what the government does.

Natural resource stocks are where the good values are to found in the market right now. They own tangible assets that will not only maintain their worth, but will increase substantially in an inflationary environment. They have had incredible sell offs that have sent them to major bargain prices. Other than oil, which made a double bottom on the charts in December and February and is in a seasonally strong period until the summer, a number of non-precious metal stocks seemed to have bottomed last fall. Like oil, they have not hit new lows with the market. Such relative strength is impressive and should not be ignored.

NEXT: Analysis of Tuesday's Market Action

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.