The Smoking Gun of the Economic Recovery Scam

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

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

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

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

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

NEXT: Inconsistencies of the Economic 'Recovery'

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dollar Watch; Bad Earnings are Good; Natural Gas

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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While no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural 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.

How to Handle Earnings Season

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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Earnings season officially begins today with Alcoa's earnings after the bell. While some company earnings are released every day, there is a huge bulge of announcements in the two weeks following the 7th of the month at the beginning of a quarter. Dow component Alcoa kicks off this period. While earnings are likely to be almost universally bad this doesn't mean that stock prices will go down. They may indeed go up.

Everything is relative on Wall Street. Any information that is known or suspected has already been incorporated in the price of a stock. Since the market overall fell from October 2007 to March 2009, a lot of bad news is reflected in current stock prices. So much so that anything short of a declaration of bankruptcy will be bullish for some stocks. The mainstream media will not emphasize this however and as it is doing today will write articles how earnings will be bad for last quarter. Since this is already known, your reaction should be that everyone already knows that so why are you wasting my time telling me about it. Only if earnings are worse than expected are they likely to be negative for stock prices (for more than a day or so).

If you are holding company stocks like Alcoa (AA), you have two choices. You can sell before the earnings announcement and buy back after or just hold through it. This decision isn't always clear cut. Having bought AA just off the bottom and having a nice profit it in in just a short time, I chose to sell it with the intention of buying it back. The market has had a sharp up move in the last 3 weeks and it vulnerable to a drop this week in general, so AA's earnings are coming out during a period of weakness. The market reacted quite negatively (at least for a short time) to Chalco's (the Chinese Aluminum company) earnings and negative description to the aluminum industry several days ago, so it is not unreasonable to assume a short negative reaction for Alcoa as well. Of course, Alcoa could surprise on the upside, it which case I would wait a few days for a pull back to buy it.

In general, I am still looking to buy beaten down stocks in a some commodity sectors (not copper since is has rallied since last fall, I also sold my FCX holding recently) and a technology stock here or there and will view a drop on earnings as an opportunity to get a good price. The market is filled with under priced bargains at the moment (some stocks are even selling for less than their yearly cash flow). You should look at anything that will do well in a high inflation environment and avoid the financial sector, where a low price these days usually indicates cheap goods as opposed to a bargain. It is important to know the difference.

NEXT: The News is Bad ... Time to Buy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Next Few Trading Days Are Important

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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Money moves around at the beginning of a quarter. Look for shifts in the next few days. You want to observe whether money is flowing into the market overall or are people taking money out and selling. If the market goes up, the big money has become more confident and the rally is going to continue for awhile. It is even more important to note which sectors have money moving into them and which sectors are selling off. The three most bullish sectors of the recent rally have been financials, basic materials and technology. You would like to know if this is continuing or are other sectors getting more fund inflows.

The news backdrop may color the picture somewhat however. The G20 meeting is on Thursday and the possibility of fireworks exists. The Jobs Report is coming out Friday and the consensus is that it will be quite ugly. While this may seem like it will be negative for the market, it may not be. When people are expecting the worse, even something slightly better can be considered bullish and make stocks go up. And as we have stated many times in this blog, the U.S. government is not beyond manipulating its economic statistics to make them look better. The market, at least up to this point, takes these reports at face value no matter how absurd they might seem. The latest incarnation of this behavior has been in the seasonal adjustment figures which have recently been quite sizable and always in the direction of making things look better.

The market was filled with panic selling yesterday. I usually look at this behavior as an opportunity to buy and I did pick up some commodity stocks that had big sell offs. So far, yesterday looks like just another typical Wall Street shake down. Investors who got in at good prices are scared out of the market, those that haven't are frightened away. The big money buys the stocks the small money is selling. Take a look at the press coverage yesterday and you will see that it is overwhelmingly negative and one-sided. Many important facts are left out. This is not the coverage you typically see when the market is going to have a serious sell off. Media pundits tell you to get into the market to catch the next move up when the market is actually turning down. Wall Street is busy selling at that point - and they want you to buy.

The market is filled with bargains right now. If you concentrate on buying stocks in the commodity sector and beaten down stocks in industries that deal with the production or movement of tangible goods that are necessities or pervasive, you will make money. This is where you will get your biggest bang for the buck when inflation hits. And don't worry, expect the mainstream media to inform you in a year or two that this is what you should have been doing in early spring 2009.

NEXT: Surgery Done by a Bull in a China Shop

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.

In the Eye of the Financial Hurricane

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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There is some effort to talk down the current rally by the media today (assume the shorts have planted the stories). This doesn't mean the rally is going to end at the moment however. The momentum is very strong and doesn't seem to be have been dissipated yet, so no need to rush out and sell anything. The rally will end however and be followed by a sharp drop, possibly to lower lows. The current rally is very much a Bear Market rally and these differ in a number of ways from the beginning of a new Bull Market.

The money has been very easy in this rally and that is a common marker of Bear Market rallies. Prices move up very fast and seemingly without restraint. In contrast, beginnings of new Bull Markets are usually a struggle. It took about 10 months to put in the base at the bottom in 2002 and 2003 (the current bottom has had about a 5 month base put in so far). The market did not just shoot straight up out of that base. The bulls and bears battled for control on almost a daily basis with the bulls being able to only gradually move the market up. That type of constant give and take allows rallies to last a long time - about 10 months in 2003/2004. The current move up is almost effortless and because of that it can burn itself out pretty quickly.

The current rally has also been led by the biggest losers of the downturn - the financials. This is typical of bear market rallies, which are mostly short covering affairs. Once enough of the shorts close out and prices rise a lot, new short positions are put on that drive prices back down. The only thing that has made the financials more valuable is that the government is willing to put more taxpayer money into their coffers. Their value is no longer determined by economic forces, but corporate welfare payments. Not exactly an enticing long term economic model for investors.

There are three things for the current rally that need to be watched closely - resistance, earnings season, and April 15th. All the major indices are about to enter a strong band of resistance. For the Nasdaq, this starts at 1600 and goes to around 1650. The Dow has strong resistance at 8300, with with more resistance around 9000. For the S&P 500, there is resistance between 870 to 940. These are levels where the rally is likely to run out of steam. Another limiting factor to the rally is that first quarter earnings season starts around April 7th. Rallies into earnings usually mean a sell off after - and sometimes even during. As for April 15th, people frequently sell investments to pay their taxes and the market tends to dip then for that reason (although the dip can be temporary). So in figuring out when to sell, watch resistance and watch the calendar.

NEXT:

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.

Oil Yes, Financials No

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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Suddenly, oil inventories in Cushing, Oklahoma dropped by 200,000 barrels yesterday instead of increasing by 3.5 million barrels that industry 'experts' predicted. While I have predicted that this would happen in this blog and stated so at a class given this Tuesday by the New York Investing meetup, I was a lone voice in the wilderness. Before the news came out, oil ETFs were making new lows as were many financial stocks. While superficially oil and the financials looks like major bargains, only oil should be assumed to be so.

When the 'surprise' (only a surprise to people who get their information from the mass media) news came out that oil stocks had declined, the March contract for Light Sweet Crude jumped $4.86 to close at $39.48. April, which will be the front month after today, closed at $40.18. Anecdotal reports indicate supply is drying up, but you will not see any coverage of this in the American press, other than in relationship to OPEC. For those who are unaware of it (and this presumably includes all reporters on energy topics), every oil and gas lease in the United States contains a term that the producer can stop pumping if the prices aren't high enough. Based on the behavior of the oil futures, which have jumped back to the $40 level over and over again, the market is telling us a price under $40 a barrel just isn't sustainable.

Nevertheless, the coverage in the media today is once again the same old (off-key) song. You will see quotes like, "It was a significant move last night, but there's not much out there that can create a bullish story" . And the reason for this is, "The demand outlook is very weak, and there's nothing to suggest that it will improve in the near term." There is no analysis of the supply side of the equation, despite the news out of Cushing, Oklahoma yesterday. Supply dropping faster than demand is indeed a bullish story. The same reporters who know nothing about how the oil industry functions, also seem to have forgotten to take high school economics. The current coverage of oil is an excellent example of why the average investor who gets his or her (mis)information from the mass media can't make money in the markets.

While oil had a big pop up yesterday, financials hit their lows in many cases and remained at those levels. Citigroup fell to 2.50, Wells Fargo to 11.94 and Amex to 12.74. Bank of America dropped as low as 3.86, only a tinge above its low of 3.77. Collapsing financials led the market down and helped the Dow close at a six-year low. The possibility of a Swedish style bailout of the big banks is becoming more of a reality. This would wipe out the equity holders completely (which include every major pension fund in the United States as well as Wall Street insiders) and has been resisted for that reason. While there is a risk of losing everything if you buy financial stocks, no such risk exists with oil. All commodities have a minimal price which is the cost of production. The minimal price for a troubled stock however is zero.

NEXT: Stocks/Oil Trying to Bottom, Gold at Resistance

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.

Negative Outlook for Market from January Barometer

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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At the New York Investing meetup we look at the first four trading days of the year as a guide to whether money is shifting into or out of the U.S. stock market. This reading was essentially neutral this year. There are others however that look at the entire month of January to gage money flow for the market. This reading was unabashedly negative. The Dow Jones was down 8.8% and the S&P 500 was down 8.6% on the month. While the stock market was suffering in January, gold was gaining strength and closed at a bullish six-month high the last day of the month. While worries about inflation (which are only going to get worse) are propelling gold upwards, collapsing corporate earnings and an economy that continues to deteriorate are pushing stocks down.

Trading activity in January only reinforced already existing trends for stocks and gold that can clearly be seen in their charts. All major U.S. stock indices, including the Dow, the S&P 500, Nasdaq and Russell 2000, pierced their 200-month simple moving averages four months ago. All of them closed below this line in January. There have only been two significant breaks of the 200-month moving average in the last 100 years - briefly during the mid-70s and for a much longer time during the Great Depression 1930s. In sharp contrast to the mega-bear stock index charts, the gold chart is extremely bullish. It indicates that gold's drop from the 1033 high last March is merely a consolidation (sideways movement) in a longer term uptrend.

The poor performance of stocks in January was consistent with the outlook for the economy and corporate earnings, which only got worse as the month progressed. Only a week ago, analysts were predicting a 28% drop in S&P earnings for the Q4 2008. Now a 35% drop is projected. Seven of the 10 sectors in the S&P 500 are expected to have earnings drops. Financials are the only sector that is likely to out and out lose money though. The next worse hit sectors, consumer discretionary and the materials, are heading toward 70% and 69% drops in earnings respectively. Health care, consumer staples and utilities are the only sectors with any possible earnings growth. U.S. consumer spending figures for December were released this morning and were down a worse than expected 1.0% (a record sixth straight drop). Until the economy revives (and this is not in the foreseeable future), earnings growth outside of companies that provide necessities or precious metals is unlikely.

While the beginning of the year provides the most valuable information for future stock performance, trading at the beginning of the month is also something that should be watched. In a bull market, these days are almost always up, although an occasional glitch does happen. In a bear market, down days are much more likely during this period because money is flowing out of the market instead of into as is does during bull phases. Keep an eye on this during the rest of the year, especially at the beginning of a quarter.

NEXT: Government Action on Both Sides of the Pacific

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 New York Investing meetup predicts the current bear market in Aug 2007

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.

After having warned its members that the subprime crisis would soon start impacting the stock market in July 2007 (days before it actually happened), the New York Investing meetup followed this up in the August 8, 2007 meeting with a prediction of a crash or Bear Market. By January 23, 2008 both the Nasdaq and the Russell 2000 had fallen over 20% and were officially in Bear markets.

The August meeting emphasized that the Bull Market was over, that earnings wouldn't save the Market (a common claim by the financial media pundits at the time), the hardest hit sectors would be the bubble sectors of the Bull Market, real estate and financials, and short-covering rallies would be the key to profits on the long side in the future. It was even predicted that one or more broker-dealers would fail, with Bear Stearns name mentioned. The most important point made in the talk "Crash or Bear Market" (http://investing.meetup.com/21/files/) was that the Federal Reserve would not be able to save the stock market with its usual liquidity injections into the financial system. It was emphasized quite strongly that the U.S. dollar was in precarious shape and that any attempt to save the U.S. stock market with rate cuts would ultimately fail because of the damage it caused to the dollar. Future events would more than bear out this prediction.

Next: Bernanke Get in His Helicopter and Does His First Money Drop on Wall Street

Daryl Montgomery

For more information about the New York Investing meetup, please see: http://investing.meetup.com/21