Industrial Production: July Up , But June Is Now Negative

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 Fed reported that industrial production was up 1.0% in July and this got all the media headline attention. Stocks rallied on the bullish news implying economic recovery. Buried in the coverage was that June's number, originally reported as an increase, was downwardly revised to minus 0.1%.

The government's handling and media reporting of the industrial production numbers are similar to many other economic reports. Good news is reported in the initial release. Mainstream media gives the good news big headlines and coverage that is so glowing that it is amazing there aren't cheerleaders in the background waving brightly colored pompoms and shouting 'Go US economy, Go US economy, Rah, Rah, Rah' while jumping up and down (By the way, I am expecting CNBC to steal this idea. I can see the top executives hitting themselves in the head right now and saying, "Why didn't we think of that?"). The downward revisions, and sometimes there are several, that come later on and indicate things aren't so good or there is even a decline taking place get minimal and sometimes no media attention. There's no need for a propaganda ministry when the government has a deal like this with the mainstream media.

Both the June and July industrial production reports have the additional problem of unusual situations that made the numbers better. The very hot weather in June spiked the utility component. In July, auto plants didn't shut down for their usual annual retooling. Because of this, the automotive products component of industrial production increased 8.8%. Most of that in turn was "due to large increase in light truck assemblies". Looking elsewhere in the report it can be seen that 'Output of Business Equipment' was up 1.8%. This increase was driven by the transit equipment sub-component that was up 6.3%, an "increase that in large part represented the gain in light truck assemblies" according to the report. So without the big increase in light truck assemblies (which impacted a number of components), industrial production wasn't strong in July.

The report did claim that most components of industrial production were up however. The exceptions were food, beverages, clothing, appliances  ....  you know, things that are necessities. Well, what is a better indicator of the state of the U.S. economy, a 1.1% increase in the defense component due to bigger production of military aircraft or the American consumer being able to buy food and clothing? This is apparently an example of the 'uneven recovery' that economists speak about. It doesn't prevent optimists from seeing the light at the end of the tunnel for the weak economy based on July industrial production numbers. Pessimists are seeing the light (truck assemblies) at the end of the tunnel instead.

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.

Nasdaq Gives Bear Market Signal

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.


As the mix of good earnings and weak economic reports continue, Nasdaq gave a bear market trading signal on Wednesday. It joined the Dow and S&P 500, which gave their own sell signals earlier this month.

While the technical picture for the market has improved somewhat after seven days of rally, the rally didn't prevent Nasdaq's simple 50-day moving average from falling below its 200-day. The Nasdaq closed at 2249.84, its 50-day fell to 2251.39, and its 200-day was at 2254.88. This means Nasdaq is also at a strong resistance point that it needs to break and stay above. Trading in the next ten days will determine if the Nasdaq continues to fall apart (and the rest of the market with it) or manages to turn around with a rising 50-day average. The recent rally has taken place with below average volume on Nasdaq every single day. The volume on the Dow Industrials was even weaker. From a technical perspective, this is another negative for the market.

Mixed news for the economy and earnings continues. JP Morgan reported a 77% Q2 rise in profits. Mainstream media accounts explained that "a slowdown in losses from failed loans helped offset a difficult spring in trading and investment banking". Huh?  Makes you wonder who does their numbers. Anyone who happens to believe that the big banks earnings reports have anything to do with reality should recall that Bear Stearns in March 2008 was rushing to get its positive first quarter earnings numbers out early, but the company went under before it could release the good news.

Meanwhile, the weekly unemployment claims rose last week, but the Labor Department reported they fell by 29,000. Huh? Makes you wonder who does their numbers. Apparently the magic of seasonal adjustments led to this 'sows ear as silk purse' news. Automakers aren't closing down for their usual summer retooling this year. Based on recent reports, there is no evidence that business in the sector is so good, or even good at all, that they can't afford the down time.

Industrial production figures in the U.S. were up by 0.1% in June. The number was only positive because of a big increase in utility output caused by increased use of air conditioning during the unusually hot month. Consumer goods seem to have been down across the board. As a reminder, consuming spending was 72% of the U.S. economy before the Credit Crisis hit. Business and industrial equipment were up, but it is likely we have exports to China to thank for that. The Chinese economy expanded by 10.3% in the second quarter, but this was below expectations. Even at the bottom of the Credit Crisis Chinese GDP was up over 6%. It was down by almost that amount in the U.S. The economy in China seems to be slowing and if this continues, watch out below.

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.

What's Driving Today's Market 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.


Major European stock indices were up two to three percent today after Asian indices rose around one percent last night. The U.S. markets then had a strong opening after the three-day holiday weekend. Mainstream media is citing bargain hunting as the source of the rally, whereas money-pumping operations to support the euro is likely the major contributor to the market's bullish behavior.

Stocks were devastated in the last two weeks and some rally at this point is reasonable in order to resolve an oversold condition. Strong buying in the U.S. though would be inconsistent with the bear market signal being giving by the S&P 500 on Friday and the small cap Russell 2000 having experienced a bear market loss of over 20% the same day. This is not the type of market environment that traders can't wait to plunge into on the long side. Liquidity pumping by the major central banks would be most effective (and likely) at a key market juncture like this however.

Central bank efforts to support a faltering global financial system began in earnest on Sunday May 9th after the Flash Crash three days earlier. The EU announced its $915 billion euro rescue plan and at the same time the U.S. Fed opened unlimited liquidity swap facilities with the European Central Bank, the Bank of England and the Swiss National Bank. A swap facility up to $30 billion was opened with the Bank of Canada. The Fed stated, "These facilities are designed to help improve liquidity conditions" and that the Bank of Japan was considering similar measures. The swap arrangements were authorized until January 2011.

Stock markets around the world then skyrocketed on Monday, May 10th since increased liquidity shows up immediately in stock prices. Investors should expect intermittent market impact both from euro rescue money and swap generated liquidity for the next few months. For the full text of the Fed's announcement, see: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm.

It is fortunate for the markets that liquidity is on tap when needed. Not only is the technical picture of the market deteriorating, but the economic news isn't supporting stocks either. Little noticed last Friday was the announcement of a decline of 1.4% in U.S. industrial production. The ISM Manufacturing index for June, which came in at 56.2, indicated a slowing expansion (over 50 indicates growth). Almost every component, except for those related to inventories, was down. New orders, an indication of future activity, dropped 7.2 from the previous month. The ISM Service index fell to 53.8, which was below forecast. The employment component was 49.7 dropping below 50 and indicating job losses. The service sector is four times bigger than the manufacturing sector in the U.S.

Investors should enjoy the rally while is lasts. The rally after the flash crash in May lasted four days. Within ten days, stocks were lower than they had been during the crash. Liquidity induced rallies can be powerful, but they don't last very long.

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.

A Break in the Bull and China Stops Shopping

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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August has not been a good month for Chinese stocks. In mid-month, the markets were down 20%, but some recovery took place and it looked like the bull market which had moved stocks up 80% or more was holding. The month ended badly last night though. After dropping 3% on Friday, Shanghai was down 6.7% and Shenzhen down 7.1% last night. Volatility, and Chinese stocks have certainly been volatile in August, is classic sign of a bubble top. The market's plunge last night took place because of concern about a drop in bank lending. Like every other major government in the world, China has been pumping massive stimulus into the economy. Even the threat that the stimulus might be reduced is enough to tank the markets. What would happen if it actually was reduced?

There was no China contagion in the other Asian markets last night. They all had relatively minor drops. The Nikkei in Japan was even up strongly in the morning, but closed down slightly.
Initial bullishness was because of the election news. The ruling party, which has been in power almost continuously since 1955, was crushed at the polls. After approximately half a dozen recessions in the last 19 years, the Japanese electorate finally became fed up enough to try something else. The U.S. electorate is not likely to be so understanding for so long.

There are lessons for what has just happened in Japan for the U.S. Japan has been producing much better economic statistics lately. GDP turned strongly positive last quarter. Industrial production figures out last night were up for the fifth month in a row. Exports have been rising (thanks mostly to China - anything happens to the Chinese economy and the GDP will go right back in the tank in a number of countries). The real estate market turn up last year (after a 15 year drop) Despite the 'improving economy' unemployment is up and retail sales are very weak. The average Japanese citizen sees his or her personal situation deteriorating. Based on how the vote went, they obviously no longer believe the government's upbeat reports on the economy.

The picture in the U.S. right now is remarkably similar to Japan's. Economists predict 3% U.S. GDP growth this quarter. Industrial production is up. Real estate prices are supposedly going up (well, that's the claim at least). Exports are supposedly doing better. However, just like in Japan, unemployment is up and retail sales are in bad shape. The economy the average person sees is deteriorating. Without massive government stimulus, it would look like the 1930s depression. Government stimulus was also the key component in improving the Japanese economy, as has been the case over and over again since 1990. Keeping the U.S. economy out of recession, will require ongoing stimulus as well and in our case this means massive money printing. When governments are forced to chose between recession and inflation, inflation always wins out. No government can risk ongoing recession and survive - even in Japan apparently.

NEXT: Next Five Days Critical for Stock Rally

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


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

A Recovery Reminscent of 1990s Japan

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

Our Video Related to this Blog:

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

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

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

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

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

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

NEXT: Japan Climbs Out of Recession ... Again

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


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

Gold, Oil, Dollar and Market Update

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 and silver had sharp sell offs this morning, while the dollar rallied. If you believe the press reports (and in general, you shouldn't), gold and silver sold off because the dollar was rallying. The dollar was supposedly rallying because of bad figures on Eurozone industrial production. Are they likely to be worse than the U.S. production figures after GM's bankruptcy (production is being closed down during the summer)? Probably not. If you look, you will see despite the screaming headlines the dollar was not up that much. As of now, the trade-weighted dollar is trading at 80.07, up from yesterday's close of 79.36. The breakdown point is 78.33.

The drop in gold and silver is more than overdone. Gold closed strongly yesterday at $962. Optimism for the U.S. dollar is also being fueled because the treasury auction went well this week and there was supposedly heavy demand for long-term U.S. treasuries from foreign buyers (I had difficulty not laughing as I wrote that last statement). What outrageous claims will the government make next? For those not paying attention, interest rates on the 10-year bond hit 4% yesterday, double the low of 2%. Not exactly and indication that these bonds are experiencing increasing demand relative to supply (interest rates would be falling if this was true, looks to me like they doubled).

Oil was over 73 yesterday and I began taking some profits in ERX and to a lesser extent DXO. The oil rally has been going on four months now and seems to be losing steam as we approach major resistance around 77. Stocks are likely to get into trouble when the S&P gets to 1000. Resistance is very strong at that point. When you have large profits, its always a good idea to take some money off the table.

For those who don't want to hold U.S. dollars, there are a lot more options in ETFs than there used to be. While we have mentioned FXA and FXC (the Australian and Canadian dollar ETFs) previously, you can now buy New Zealand (BNZ) dollars as well. You can even buy emerging market currencies such as the Brazilian Real (BZF). For a more complex trade, you can consider DBV. This ETF is double long the three G20 currencies with the highest interest rate and simultaneously short the three currencies with the lowest interest rate.

NEXT: G8 Hot Air Inflates Dollar

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 and Gold, Power Struggle Continues

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

Our Video Related to this Blog:

The U.S. dollar turned around overnight and is now testing the 80.00 level. Gold rebounded to 960 and silver to 15.30. Oil is back in the mid 69's. Media reports are stating that traders are questioning whether the dollar rise in the last few days was justified. Considering that there is no fundamental reason for it, for once the media might be right (don't get too excited, it's just a random coincidence). While fundamentals don't explain the recent action in the dollar, gold, silver and oil, technicals do. Gold, silver, and oil all hit important resistance levels. At the same time, the U.S. dollar hit an important support point. A reversal should be expected when these things happen.

The key question is how far will the counter moves go and for how long. At this point, it is not possible to say. It could be anywhere from a few days to several weeks. The price move may be minimal or to any of the Fibonacci retracements of the most recent rally for gold and silver or for the recent sell off of the trade-weighted dollar. Oil is somewhat different story and is trying to still wrap up its rally from 33 by going to the 75-78 range. It needs to break above 70.80 first. Once it does, the mid-70's should be inevitable.

It is amazing the dollar can't rally today again such extremely weak currencies as the pound. Not only do the British have a worse sub-prime crisis than the U.S and are engaging in quantitative easing as well, but prime minister Brown is in danger of being ousted from his post (on second thought, that may be one for the pound). Yet, the market is selling off the dollar against the pound. The Euro is rallying as well, even though Standards and Poor's recently downgraded Ireland's credit rating and German industrial production came in below expectations last night. As bad as things are in Britain and the Eurozone, the market is saying they are worse in the U.S. (personally, I think the market may be on to something).

We will know that gold and silver have won the game when the trade-weighted dollar falls below 78.33. Gold should break above 1000 right around that point and silver above 16. Expect the Fed and world's central bankers to keep weighing in on behalf of the dollar though. There is a G8 meeting this weekend and this will be the perfect opportunity for more pro-dollar PR cheerleading efforts. We will have to see if they can outdo Bernanke's threat or raising interest rates by the fall. If they do, they will likely be laughed off the world stage.

NEXT: Oil Gasses Up; Bear Bites Dollar

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

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

U.S. Economy Slides Deeper Into Recession

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

Our Video Related to this Blog:

As you go back in time until the mid-1970s, you will find that each U.S. recession was worse than the previous one. The 1973 to 1975 recession was the biggest economic downturn in the U.S. since the Great Depression in the 1930s. Next was the 1980/82 recession (actually a double dip recession) and then the 1990/91 recession. The 2001 recession was the mildest on record and the only recession in history without a drop in consumer spending (only possible because the Fed dropped interest rates to 1% and financial companies were willing to provide almost unlimited amounts of credit to U.S. households at slightly above zero interest rates). To get a grasp of what is going on in the U.S. economy now, it is helpful to note statistical comparisons to time periods when past recessions existed and this will give you some sense of how badly the U.S. economy is currently functioning.

One thing that will most certainly not give you a sense of how the economy is functioning is the official GDP figures from the U.S. government. According to these, economic growth in the second quarter was robust at 3.3.% (final revision has since reduced this number to 2.8%). The first GDP figures for the third quarter will be released in late October. Anything indicating less than a sharp decline should be considered to be just as fictional as the second quarter report. No matter where you look, current economic reports are dismal and levels being reported are similar to those reached in one of the previous U.S. recessions.

Retail sales, Employment and Housing Starts are each indicating that we are in a significant economic downturn. Consumer spending represents over 70% of the U.S. economy and has likely fallen for the first time since the 1991 recession based on retail sales dropping 1.2% in September and 1.0% in August. Private economists have extrapolated the retail sales figures to an estimated 3.4% drop in consumer spending in the third quarter. Considering the employment situation, don't expect consumer spending to improve any time soon either. There have been job losses every month in 2008, with the official total being 760,000 (the actual figure is much higher). Even this number would be much worse, except the 2008 employment reports indicate continual hiring in the categories 'government' and 'education' , which in itself is mostly government employment. As of September, there were 2.2 million more unemployed in the U.S. than there were a year earlier and this number keeps rising. Housing, which is dependent on both jobs and credit availability, has continued to fall off a cliff. Housing starts fell a further 6.3% in September to an annualized rate of 817,000 units (this figure was around 1.7 million at the top of the bubble). Once again this was the lowest rate since the 1991 recession.

Industrial production provides an even worse case scenario for the economy than the consumer related reports. Industrial production, which represents the output of U.S. factories, mines, and utilities, fell 2.8% in September, after a 1% drop in August. The September drop was the worse since December 1974. Like consumer spending, industrial production is not adjusted for inflation, so this should be taken into account. According to the September PPI eport there was a price drop of 0.4%, although the core rate went up 0.4% in producer prices (consumer prices were flat for the month). Almost all of this price drop took place because of falling oil prices. Since oil has already fallen over 50% since its July high, continual drops should not be counted on. Examining some components of the PPI report also indicate drops bigger than even those of 1974 - a time of deep recession combined with high inflation, which is very much like the current U.S. economic picture.

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.