German Flash Crash Shows Vulnerability of the Market

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Between 3:30 and 4:00PM Central European time the DAX, the major German market index, lost around 250 points. This is roughly equivalent to a 500 point drop in the Dow Industrials in half an hour. Prior to that, the DAX had been slowly drifting lower. Then suddenly it dropped like a rock.

The pundits were quick to come up with possible explanations. A fat finger error was cited as a possibility (this is when a clerk accidentally puts an extra zero or two or three after the number of shares when entering a sell order). This was pure speculation on the part of the media however. While it is certainly possible that this was the cause of the drop, there is as of yet no evidence supporting this claim.

New problems with the evolving and unending Greek debt crisis were also thought to have led to the floor falling out of the market. Greece's central bank activated the Emergency Liquidity Assistance (ELA) program to help its struggling banks stay afloat. ELA is only for emergencies, so its use indicates that Greece is teetering toward default. So what else is new?  At this point, anyone who isn't in a coma should realize a Greek default is inevitable.  

The Bank of England also announced that it was extending a swap line to the ECB. The swap line allows the ECB to borrow British pounds at low interest rates in order to maintain liquidity in the Eurozone's banking system. Investors should ask themselves what exactly is going on that the ECB needs help maintaining liquidity. This is of course is always a problem during a credit crisis.

There were apparently also rumors about Germany banning short selling. Not so farfetched considering that France, Italy, Spain and Belgium extended their short-selling ban on financial stocks, which would have ended this week. Traders dislike restrictions and their initial reaction is to get out of the market when they appear. Authorities also don't make these bans unless there is good reason that traders want to engage in heavy short selling. They are an admission that something is rotten in Denmark or in this case, Greece, Portugal, Ireland, Spain and Italy. This news was out around the time the DAX had its precipitous fall.

If today's drop was an isolated incidence it wouldn't necessarily be anything to worry about. However, there has been at least one serious market problem each week for several weeks now. The Nasdaq and Russell 2000 in the U.S. have had three mini-crashes. The DAX has had a few itself. The U.S. Dow is moving up and down in multi-hundred point increments. The situation is not stable yet and the market is making that abundantly clear. 

 Disclosure: None

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security. Investing is risky. If you don't feel that you are capable of doing it yourself, seek professional advice.

Buy When There's Blood on the Street - Just Make Sure It's Not Your Own

 

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.

Monday August 8th, the first trading day after S&P downgraded U.S. debt, was a crash day in the American stock market.  Asia held up much better and so did much of Europe, except for Germany.

The Dow Industrials were down 635 points (5.55%), the S&P 500 was down 80 points (6.66%), Nasdaq was down 175 points (6.90%) and the Russell 2000 64 points (8.89%). The DAX in Germany was down slightly more than 5%, whereas the Nikkei in Japan and the Hang Seng in Hong Kong were down a little more than 2%.  A crash is traditionally defined as a drop of 5% or more in a day. The Nasdaq and Russell 2000 already had a crash day last week. U.S. stocks had numerous crashes during the Credit Crisis in 2008.

Stocks looked like they were about to enter freefall - a severe uninterrupted drop - around 3:00PM.  President Obama delivered a statement on the S&P downgrade and caused a temporary short-term move up instead. The market would have washed out otherwise and been ready for its first rally.

As is, the market is at the end of its first stage of selling, we may just have to wait a little longer.  The technical indicators on the daily charts have either hit their lowest points or are very close to them. Some short covering and opportunistic buying should lead to a quick sharp rally for a few days. This rally is for traders only. The weekly technicals have yet to bottom out and nothing longer term should be expected.  

Technical bottoms and price bottoms are not the same. The technicals will have to gather some strength before stocks can enter a new rally phase. The ultimate price bottom is probably as much as two months out, which would put it somewhere in October. Until then, choppy action that brings the indices intermittently lower should be expected. While the indices may not go a lot lower, individual stocks, especially small cap, high-beta stocks (those known for their volatility) can indeed go much lower. This also includes high flyers that have yet to have had a big drop. In major selloffs, almost everything goes down.

Once a bottom is established, the volatile stocks you wanted to avoid in the selloff are the ones you want to own. This is where you will make the most money. Small, emerging, and leveraged are the keys. Smaller cap stocks will go down the most and then back up the most (just make sure the drop was market related and not because the business of the company is threatened). Emerging markets, both the BRICs (Brazil, Russia, India, and China) as well as smaller ones will have the same up and down behavior. Russia was down 12% on August 8th for instance. You will do better still if you use leverage on your buys. There are ETFs that provide 200% and 300% exposure. For the emerging markets, these include LBJ (300% Latin America), YINN (300% China), RUSL (300% Russia), EDC (300% Emerging Markets), INDL (200% India) and UBR (200% Brazil). For small cap stocks, TNA (300% long the Russell 2000 index) is the most leveraged play.

Traders should be able to make good use of these ETFs to move in and out of the market. Investors with a longer-term perspective will want to wait until a market bottom has had time to fully develop.  

Disclosure: Waiting 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.

Wall Street Journal’s Flawed Reasoning For Possible Crash

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 Wall Street Journal published an article entitled, “Is a Crash Coming? 10 Reason to Be Cautious” on Friday, August 13th. While a crash is certainly possible, the reasons given by the Journal have little to do with why one could occur.

The Journal did make it clear that it was not predicting a crash. The article’s author specifically stated, “I don’t make predictions. That’s a sucker’s game.” Indeed it is a sucker’s game for almost all mainstream financial journalists, just as professional basketball is for midgets – it’s just not an area of natural talent. That of course doesn’t mean that no one can do it, but the author nevertheless made this illogical leap and this nicely set the tone for the rest of his article.

Most of the reasons given in the article for a possible crash were actually arguments for a double-dip recession. These include (my comment follow in italics):

The Fed is getting nervous (more like catatonic).

Deflation is already here (if so, it will be the first time in history money printing created deflation).

People still owe way too much money.

The job picture is much worse than they’re telling you (one of the ‘they’ referred to is the Wall Street Journal itself by the way).

Housing remains a disaster.

We’re looking at gridlock in Washington (so don’t expect any more big spending programs that accomplish little and raise your taxes)

All sorts of other [economic] indicators are flashing amber (actually bright red).

This is an implied assumption in the article that market crashes are related to recessions, also an illogical leap not supported by the facts. The worse U.S. market crash of all-time took place in October 1987, five years after a recession had ended and almost three years before another one began. There were also mini-crashes in 1989 and 1997. The economy was not in recession during these crashes either, nor was it during the recent flash crash.

Economic downturns are more properly associated with bear markets – a long, slow decline in stock prices as opposed to the sudden, sharp drops that take place during crashes. They require very different trading approaches. Even bear markets can take place outside a recession however. The 1998 bear market due to the Russian debt default and the implosion of Long-Term Capital is a good example. Both crashes and bear markets can be caused by global liquidity events and as we saw recently during the Credit Crisis, global liquidity events can also lead to recessions. This did not happen in the U.S. in the 1980s and 1990s however.

Perhaps the Wall Street Journal should have entitled its article, “10 Reasons Why We Are Headed Into a Recession”. They would have to find three additional reasons of course and they would also have to be a bit shameless as well since I already wrote that article on July 8th and it was published on a number of blog sites that day. Well, at least the Wall Street Journal is making some efforts to try to keep up with the blogosphere, even though those efforts are confused and coming weeks later. Now, what can we predict from that?


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.

Why Thursday's Market Crash Was Caused by Computer Failure or Errant Trades

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 trading pattern on the U.S. markets on Thursday, May 6th can be explained by only one of two things - a huge erant trade or a computer system failure.  Even after the market close, the NYSE was claiming that there were no technical problems with its trading system. Citi specifically issued a statement that it had nothing to do with implementing an errant trade. Nasdaq however said that it was investigating possible erroneous transactions executed between 2:40 and 3:00PM.

It wasn't so much the drop that was unprecedented. The waterfall decline that took place for approximately eight minutes somewhat after 2:30PM is common in crashes. Even during crashes however, numerous intra-period gaps on the one-minute chart aren't common. There were four such gaps yesterday in S&P 500 trading. Large market indices almost always trade continuously and the probability of this type of trading pattern is extremely small. Even less probable was the instantaneous recovery of the indices. The S&P 500 also has four gaps on the upside in only eight minutes, when it rose approximately 50 points.  During that same time the Dow Jones Industrial Average was rising around 500 points. None of this represents a normal trading pattern.

The major indices were damaged enough as is on the day.  The Dow was down 348 point of 3.2%. The S&P 500 dropped 38 points or 3.2%. Nasdaq gave up 83 points or 3.4% and the small cap Russell 2000 lost 28 points or 4.0%. Of all the major sectors, financial stocks were hit hardest closing 4.1% lower. The confusion caused the VIX, the volatility index, to spike above 40. It was in the mid-20s only two days ago. It closed at 33.19, up 41% on the day. This type of movement in the VIX is extreme and is likely to be reversed in short order. Gold rallied in the confusion.

Having looked at the charts as the sudden trading plunge and the subsequent recovery that took place during and after the market close, I noted the charts changed over time. Some of the gaps on the charts disappeared and a straight-line trading pattern the existed for a while before and just after 3:00 disappeared on later charts. The straight-line trading pattern only exists if trading has been halted or if there has been a break in the information feed from the exchanges so no data is forthcoming. Either way, traders and investors are entitled to an explanation of what really went took place. Otherwise, they might think there is either a cover-up of a serious technical glitch or collusion by the big players in manipulating the market.

Disclosure: Sold VXX.

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

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

Market Sell Off on Goldman News Has Deeper Roots

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 SEC's announcement on Friday (April 17th) that it was investigating Goldman Sachs on fraud charges seems to have been the cause of a serious market sell off, but other factors were at work as well. While major financial stocks took a hit, so did gold, gold miners, and oil. The tech heavy Nasdaq also had a sharp decline. The market was overbought and options expiration added an extra impetus to the volatility.  In such circumstances, any bad news can cause contagious selling.

While selling was broad based, large cap financials were indeed the epicenter of the damage. Goldman (GS) itself closed down 13% on the day. JP Morgan (JPM) was down 5% and Morgan Stanley (MS) down 6%. XLF, the financial ETF, was down 4.5%. Inexplicably, the gold mining index HUI was down 4.4% and gold and oil were each down over 2%. Gold should have seen safe haven investing flows, but did not.

As for the major market indices, the financial heavy S&P 500 had the biggest drop, falling 1.6%. The Dow Jones Industrial Average was down only 1.1% and the small cap Russell 2000 ended 1.3% lower. Nasdaq lost 1.4%. On the daily charts, the S&P 500 and Russell 2000 reached overbought territory in the middle of last week. Nasdaq became extremely overbought at the same time. If selling hadn't started on Friday, it would have done so probably at the beginning of this week.

Although the Dow has not gotten to overbought territory, it has other technical issues, namely volume or lack thereof. The Dow finally had a high volume trading day on Friday ... on heavy selling, which added even more weight to the technically negative picture. Overall volume on the Dow has been dropping since the bottom was put in last March, something that should not be taking place during a rally. Even worse, selling has been occurring on above average volume recently. This is known as distribution and indicates big money is getting out of the market. The only above average volume day so far in April was last Friday. The only high volume day in March also saw selling. February was more mixed, but the four highest volume days in January, all well above average, saw selling. 

Where the buying has been taken place in the market is also not encouraging. Only six stocks frequently account for up to 30% of the buying on the NYSE - Citigroup (C), AIG (AIG), Ambac (ABK), Bank of America (BAK), Popular (BPOP) and Fannie Mae (FNM). Considering that AIG and Fannie Mae are nationalized enterprises owned by the U.S. government and Ambac, Citigroup and Popular were penny stocks selling for 1.00 or less during the Credit Crisis, this is not exactly a sterling list of solid growth companies leading the market.

Liquidity is what makes markets go up (good earnings are the result of liquidity, although in the current rally, liberalized accounting standards may be even more important). The fed and other central banks throughout the world have pumped an almost unlimited amount of it into the world financial system since the Credit Crisis began. Too much liquidity over too long a period of time though pumps up stocks to unsustainable levels as happened in 1929, 1987 and 2000. Under such circumstances withdrawing even small amounts of liquidity can have the effect of sticking a pin in a very over inflated balloon.

Disclosure: Long oil.

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.

Do Conditions Exist for a Fall Stock Market Crash?

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.


Market crashes don't take place overnight. They result from excesses that build up because the market has failed to neutralize them with intermittent bouts of selling. Stock prices always correct and if they don't do so by smaller amounts every now and then, they will correct by bigger amounts later on. While crashes almost always take place in the fall, the possibility that one might occur at that time can usually be ascertained by the condition of the market in the preceding spring.

When there is going to be trouble in the fall, the market should already be showing frothiness around March and April. This condition is currently being met. U.S. stocks have been in rally mode for over a year now without any significant correction. Sentiment indicators are starting to indicate too much bullishness and too much complacency. The most recent Investor's Intelligence poll found less than 20% of investors are bearish. This is a low number. Market Harmonics put/call volume ratio for equities has fallen to multi-year lows and is well into extreme bulllish territory. The VIX (the volatility index for the S&P 500) made a new yearly low of 15.32 today, April 12th, and this is also quite low. All of the aforementioned are contrary indicators and the lower the numbers, the more bearish it is for stock prices going forward.

While the market could certainly be characterized as overbought, the technical indicators I use don't indicate that it is severely overbought just yet, especially on the intermediate-term charts. The stock market indices got to incredibly oversold levels in the fall of 2008 and spring of 2009 and they are still working off this condition. One of the most amazing aspects of the current rally is the lack of volume support for the Dow Jones Industrial Average. Volume peaked at the bottom in March 2009 and has been in a long, slow decline since then. Declining volume on a rally indicates buyers are losing interest. For a rally to hold up for more than a year given this condition is truly amazing.

Some selling in stocks could start any time in the next few weeks, but this would probably not indicate the end of the rally. A break in a market that is already frothy can be patched up and the market can then go even higher. When that happens there is risk of much greater selling a few months down the road. Abundant liquidity is always necessary for this to occur. That exists today just as it did in 1929 and 1987. Other underlying conditions are different however. While the 1987 market was supported by falling interest rates and lower commodity prices, current conditions are just the opposite. Now longer-term interest rates are changing trend and are going to higher levels. Commodity prices,with the notable exception of a number of food commodities, are also going higher. These are negatives in the long run for stock prices. There is also political risk to the markets later this year because U.S. capital gains rates will be raised in 2011. Ironically, the higher the market goes now, the bigger investors' profits will be and the more likely they will sell before the end of the year.

The easiest way for investors to check up on the rally is to watch the VIX. While anything at the 15 level is pretty low, the VIX fell slightly below 10 in late 2006 and early 2007. Macro economic and market conditions are not as supportive now as they were at that time though, so it should not be assumed that these same ultra-low levels will be reached again. The VIX tends to bottom several months before a major stock market sell off as well. It bottomed in May in 2008 for instance and the S&P 500 low for the year was in November. Investors who think the VIX has bottomed can buy the ETNs, VXX or VXZ. This is the same as shorting the market, but is a simpler way of doing it.

Disclosure: Long oil

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

This article is not intended to endorse the purchase or sale of any security.

Government Thinks It Knows Best, Market Disagrees

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:

If the Obama administration is trying to crash the U.S. stock market they are doing an excellent job. If not, they should all take a class in PR 101. The U.S. government announced that it is displeased with the progress the automakers have made with their restructuring plans (like somehow the government knows how to run an auto company), got the CEO of GM to resign, and is threatening to withhold bailout money from them and force them into bankruptcy. This would be devastating to the economies of the politically important swing states of Michigan and Ohio and for this reason it is not likely to happen. Nevertheless, all investors are paying this morning for this political cat and mouse game, with both the Dow and Nasdaq selling off around 4% as I write this. A crash level drop of 5% is a real possibility at the moment.

When the automakers received their first bailout in the fall, this blog stated it was only a stopgap measure to tide them over until after the election and a new bailout would be needed then. This has indeed happened right on schedule. While we constantly say, there is no such thing as a single bailout for an insolvent financial institution, the same is obviously true in many other industries as well. There is also no question that the automakers have been some of the worse run companies in the U.S. for decades, at least until the banks and brokers took the lead in this respect in the 2000s. Bailouts almost always have long term negative consequences, but this has not stopped the U.S. from establishing a de facto 'too big to fail policy' and it now seems to be moving toward state directed corporate socialism. Government management is an oxymoron if ever there was one. This is out of the frying pan into the fire economics.

Also weighing on the market is the upcoming G20 summit. Other countries, being led by Germany, are not interested in printing an endless stream of new money for economic stimulus plans and the BRIC countries want an alternative reserve currency. A coordinated policy for global stimulus is not likely to result from the meeting later this week as was hoped for by the Obama administration. This leaves the U.S. and Britain, the big money printers, holding the bag. Consequently, both are likely to have to print more money in the future. The BRIC (Brazil, Russia, India and China) countries want to establish a new reserve currency, at first consisting of a blend of dollars, euros, yen and pounds. No immediate policy shift will officially take place at the summit, but this likely represents a sea change in international currency policy. Both pieces of news are devastating for the U.S. dollar, which somehow ignored reality this morning and rallied strongly.

While it would be nice to do so, investors can't ignore politics. Deep down, there is really very little difference in a number of respects from the current administration and the last administration. Spending huge amounts of taxpayer money on bailouts was and is part of the agenda. If the spending can't fully be funded with taxpayer money (and this was a reality from the beginning), any amount of money necessary will be printed to cover the costs. The dollar will eventually lose a lot of its value because of this and there will be a lot of inflation. The Bush administration though was at least aware of the sensitivities of the stock market, while the Obama administration seems oblivious at best. The drop this morning, taking place during a nascent rally, is not the first time the current administration has stuck its foot in it and it probably won't be the last.

NEXT: Next Few Trading Days Are Important

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

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

Market Tumbles While Washington Fumbles

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:

If it doesn't seem to you that anyone is in charge in Washington, you're not hallucinating. While President Obama is busy worrying about lobbyists attacking his 2010 budget proposals and Treasury Secretary Geithner still fails to realize his job has something to do with the markets, U.S. stocks are tanking. The decline in financials, Citigroup was just above penny stock status at its low of 1.15 yesterday, is sending a clear message that Washington's piecemeal plan to deal with banks is ineffective. While the actions of the Bush administration failed to prevent further erosion of the financial system, the conclusion that the Obama administration seems to have come to is that if they do even less of the same ineffective things, this will solve the problem.

The action in U.S. stocks yesterday was brutal. The Dow was down 4.4% and traded below 7000 for the first time since 1997. The new low of 6737 is still well above a band of strong support that ranges from 5600 to 6200 or so. The S&P 500 was down even more, dropping 4.7% and traded briefly at 699, also for the first time since 1997. The Nasdaq held up better the other indices, falling only 4.0% and its close of 1322 is still above its November low of 1295. The small cap Russell 2000 was hit the worst of all with a crash level 5.4% plunge. It finally broke its November low by a couple of points.

The market drop is not isolated to the U.S. and is a resounding vote of no confidence in the handling of the Credit Crisis by world leaders. The sharp sell of in the U.S. was exacerbated by the S&P 500 breaking its November low last Friday. This confirmed that the S&P made a huge double top in 2000 and 2007. The neckline low set in 2002 was actually violated last November, but the markets rallied immediately. We were not so lucky this time. The next strong support for the S&P is in the 600 to 630 range. The S&P at 600 roughly translates to Dow 5600 and Nasdaq 1100 (the low set in 2002 was 1108). This would be a strong floor of support that the market would have trouble breaking.... certainly the first time.

In the near term, a rally can take at any point from here on in. The oversold level of the market is at extremes. What will set this rally off and what day it will start won't be known until it happens. You can assume that it will only be temporary as well. The ultimate low is way off in the future.

The monthly meeting of the New York Investing meetup is tonight at 6:45PM and it will be held at PS 41, 116 West 11th Street (at 6th Ave).

NEXT: Stocks Looking for a Bottom, Oil More Bullish

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.

Herbert Hoover Policy - Working Just as Well Today as in the 1930s

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:

Congressional Republicans got in touch with their Herbert Hoover roots last night when they defeated the proposed $14 billion auto bailout. Republicans wanted wage concessions from union workers, even though they failed to be as specific in reigning in multi-million dollar banker and broker salaries when the $700 billion Wall Street welfare bill (TARP) was passed. Fiscal conservative when it is convenient, Republican Senator Grassley, stated "I think it would appear that the people who voted against this are carrying out the will of the voters as expressed through the phone calls to our offices". While calls against TARP to congressional offices ran up to 100 to 1 against the bill, a large number of Senate Republicans saw no need to carry out the will of the people in that case. Senator Grassley was among that group.

While I am generally opposed to bailouts, I am 100% opposed to hypocrisy and governmental stupidity. You can make a case for bailing out no one and you can make a case for bailing out everyone, but bailing out some companies and industries and not others produces the worst results at the highest taxpayer cost. Ultimately the U.S auto companies will be bailed out, either immediately through funds released from TARP by President Bush (the White House released a statement this morning saying it was thinking about it) or when the new congress meets in January. The justification for putting Wall Street on the dole for $700 billion and refusing $14 billion dollars for the car makers is simply not going to fly.

Ironically, the most negative reaction to the failed auto bailout bill took place in Asia overnight. Both the Nikkei in Japan and the Hang Seng in Hong Kong had crash level drops of 5.6% and 5.4% respectively. Japanese and Korean auto stocks were the most pummelled, falling around 10%. The Yen rallied strongly against the dollar reaching 88 to 1 range at one point. Oil (light sweet crude) fell to the $46 range, still well above its low of $40.50 reached several days ago. European indices was spared the full carnage because an announcement of a new $267 billion economic stimulus plan for the 27 country eurozone was released in the morning their time. While U.S. stock futures were way down before the opening, the selling was muted (not accidentally I might point out) by the White House's conveniently timed statement on the possible use of TARP funds to bail out the auto makers.

While the Herbert Hoover administration actually implemented a number of programs to deal with the collapsing U.S. economy in the early 1930s, these programs were spotty and inconsistent. Hoover himself frequently chose denial over reality in dealing with the unfolding depression, even going so far as to give a press conference in June 1930 announcing that the depression was over (it was actually just beginning). The U.S. congress seems determined to follow in his footsteps.

NEXT: Indecent Exposure - Madoff Caught Swimming Naked

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.

NBER Admits New York Investing Was Right

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:

Yesterday, the NBER (National Bureau of Economic Research) declared the U.S. is in a recession and the peak of the last expansion was in December 2007. It was at the December 2007 meeting that the New York Investing meetup predicted a recession in the U.S. Many times after that, it was stated in various meetings that it was our belief that a U.S. recession began at the end of 2007. The NBER has now corroborated that New York Investing's views on the economy were not only correct, but one year ahead of the government's.

The value of truthful and timely economic analysis is starkly highlighted by the difference in stock market values from the time that New York Investing said recession and when the NBER did so. On December 12, 2007, the date of the New York Investing meeting when recession was predicted, the S&P 500 closed at 1487. Yesterday, when the NBER made its announcement, the S&P closed at 816. If you had gotten out of the market when you heard the news from New York Investing, you would have saved yourself a 45% loss on your portfolio.

Yesterday was of course a horrendous day in the market, even though any rational person with an IQ above room temperature has known for some time that the U.S. economy is in recession. According to news reports, even many members of the NBER thought so for awhile, but for some reason they couldn't seem to reach a consensus until after the election was over. The fact that the market was surprised by this obvious news is truly amazing and indicates the level of economic fantasy that is still built into stock prices. The Dow fell 680 points or 7.7%, the S&P 500, 80 points or 8.9%, and the Nasdaq, 138 points or 9.0%. The small caps in the Russell 2000 were truly crushed with the index experiencing a 56 point or 11.9% drop on the day.

The average post-War recession has lasted 10 months. This one has already lasted longer and in five more months will break the post-1945 record of the very deep 1973-75 and 1981-82 U.S. recessions. As of now, it is inevitable that this will take place. The government may try to manipulate the figures even more than usual so it won't look like this is happening (it's a lot easier to change the reporting of what is going on in the economy, than the economy itself), but that won't change the underlying reality. The current recession indeed has little in common with the recessions in the post-War era, it is more similar to those in the pre-War era, particular those that took place during the Great Depression of the 1930s.

NEXT: Bailout Costs: $8.5 Trillion so far ... and Counting

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.

Short-Covering Rallies, Explosive and Brief

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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On Monday night New York time, the Nikkei in Japan hit a new intraday low dipping into the high 6000s (it was almost 40,000 at its peak in early 1990). An hour or two of sharp trading in either direction means very little in current market conditions though and the Nikkei reversed and closed up 6.4%. South Korea had the opposite trading pattern, being up 8% during the session, but closing down 3%. The Shanghai deposit had a similar loss and Singapore and Taiwan were flat. The sharp drops, which have been going on for some time in stock markets throughout the world, indicate increasing short positions. Eventually, the shorts become so large they create an unstable situation that can lead to sudden and explosive rallies.

This was no more clearly illustrated than when trading in Asia was winding down and Europe opened. A short squeeze in Volkswagen caused by Porsche announcing it was increasing its stake in the company caused a 348% rally in Volkswagen stock in only two days. Volkswagen briefly became the largest company in the world based on market capitalization (this would be a nonsensical claim by any other criteria). Volkswagen is part of the the DAX in Germany and its weighting in the 30 stock index rose to 27% creating a massive move up in the DAX as well. It was soon announced that Volkswagen's weighting in the DAX would be adjusted down to 10% in order to create a more realistic pricing situation. A number of major U.S. hedge funds and Goldman Sachs were caught on the wrong side of this melt up. While some media reported that Volkswagen experiencied the largest short squeeze ever, its price move pales in comparison to one that took place in Northern Pacific stock in the U.S. during 1901.

On Tuesday, the U.S markets opened with a strong bullish tilt, but at least at one point it looked like they would turn negative. A rumor in the afternoon that the Fed would cut rates to zero caused an explosive end of the day rally (neither truth, nor realistic claims are necessary preconditions for short squeezes). The S&P 500 ended up the most rising 92 points or 10.8%. The Dow was up 889 or 9.8%, the Nasdaq 144 or 9.5%, and the Russell 2000 trailed with a rise of 34 or 7.6%. The financials (the most shorted of all stock groups for good reason and despite the recent ban) had their biggest rally in history. Equally massive rallies took place that evening in the beaten down Asian indices, with Japan up 10% and South Korea 12%.

The U.S. Fed then announced at the close of its two-day meeting on Wednesday that it was cutting interest rates 50 basis points to 1% (the same interest rate that gave rise to the current credit crisis). Since this cut was expected and some traders were obviously looking for a lot more, it should have been more than fully priced into the market. Nevertheless U.S. markets rallied initially, but sold off at the very end of the day. On Thursday evening Japan followed up with its own rate cut of 20 basis points, leaving interests rates at just 0.30% (they've been lower there). The U.S. Fed will probably be getting close to that level soon enough. Japanese stocks fell 5% on the news because apparently the market wanted more. Technically speaking this was a stock market crash, but a drop of this magnitude has become so common in the last two months that no one pays particular attention anymore.

NEXT: U.S. Election's Impact on the Market

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.

Black Friday Panic Grips World Markets

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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As I write this before the trading day begins in the U.S. markets, S&P500 futures are limit down. After having fallen 60 points, regulators will not let them trade lower until the market opens. Dow futures were down 546 points and Nasdaq 100 futures 83 points when the trading floor was established on the S&P. U.S. stock futures began sinking during the bloodbath that took place in Asia overnight and dropped further on bad news in Europe. Selling exhaustion, necessary for the market to bottom, is now a real possibility sometime between today and next Tuesday morning - assuming the U.S. authorities don't close the markets.

Even though the U.S. financial media reported yesterday's market action as positive, evidence of possible problems today could be seen in how stocks traded. Volatility, never a sign of a healthy market, was even more off the charts than it has been recently. The Dow sold off in the beginning of trading and then rallied approximately 400 points in a little more than an hour. Then in the next three hours it fell 600 points. In the last hour and a half it rallied almost 500 points to close up 172 points. Anyone of these moves is extreme for an entire day, let alone an intraday move. The VIX (the volatility index) hit a new high of 96.40 even further above the 55 reached in 2002, but still not at the 150 level in the 1987 meltdown. Watch this indicator for a sign of a possible bottom.

Overnight the Nikkei in Japan fell 9.6%, closing at 7649 or just above the 2003 low of 7603. The Nikkei has sold off for 18 years and counting as of last night. Double digit losses hit Korea, down 10.6% on the day and 20% for the week, and India, down 11%. The Hang Seng in Hong Kong and the Straight Times in Singapore were both down 8.3%. Australia was the only bright spot in the region and experienced only a modest loss. Oil fell to $64.58 despite OPEC announcing a cut in production. Selling of the U.S. dollar against the Yen was described by commentators as 'relentless'. The Yen reached 92.76, a thirteen year high.

Europe opened to Britain reporting a 0.5% drop in GDP (not nearly as bad as what is happening in the U.S. economy, just more honest). The FTSE 100 was down down in the 7% range in mid-day trading and the DAX and CAC-40 had fallen more than 8%. The pound was getting hammered, trading at 1.54 to the dollar and the euro was trading around 128. Denmark had to raise rates to defend its currency, as Hungary did earlier in the week. Hungary, along with the Ukraine and Pakistan are seeking help from the IMF. As usual , emerging and smaller markets are likely to experience the biggest losses when global selling hits.

At the moment, look for support on the Dow and S&P 500 at their 2002 lows, around 7200 and 775 respectively.

NEXT: Landslide Elections and the U.S. Stock Market

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.

Stock Market Enters Bermuda Triangle

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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In technical analysis, a symmetrical triangle pattern usually indicates a continuation of a trend. The U.S. market indices look like they are making such a pattern on the charts. Triangles aren't the most reliable of chart patterns however and a break on both to the upside and downside is possible. If a downside break occurs, and this has not happened yet, then look for a test of the intraday lows of of around 7850 on the Dow, 840 on the S&P 500 and 1542 on Nasdaq. If successful, this could put in a double bottom and make a rally possible. A break of these levels would indicate a test of the 2002 lows on the Dow and S&P, at 7200 and 775, would likely take place.

While Monday was a good rally day in the U.S. markets, the action took place on below average volume indicating a lack of conviction in the buying. On Tuesday, the Dow was up an hour before the close and then experienced approximately a 250 point drop to end down 232 or 2.5% (It's volatility like this that is preventing the the market from getting anywhere on the upside). The Nasdaq was the hardest hit of all the indices because of bad tech earnings. It dropped 73 points or 4.1% to close below 1700 at 1696. The selling continued overnight in Asia, with Japan, Hong Kong and Korea experiencing another crash day. The Nikkei was down 6.8% or 632 points, but was still well above its 2003 low. Financials bore the brunt of the selling in Japan. The Hang Seng and KOSPI were down 5.2% and 5.1% respectively. Oil fell below $70 a barrel in Asian trading.

Things were a little better in European trading this morning, but not much. The 3 major indices, the FTSE, DAX and CAC-40 managed to hold their losses at the 4% level, just below the criteria for a crash. In a surprise move, Hungary raised interest rates 3% to protect the collapsing Forint. Surprisingly, despite all the global negativity, U.S. stock futures were up early on in pre-market trade. Wachovia's announcement of a $24 billion quarterly loss, the biggest for any U.S. financial company ever, seemed to have turned sentiment highly negative.

By a number of technical criteria, the U.S. markets should have bottomed by now. There has of course been a short-term rally, but the market is having trouble holding it. Not that the monetary and fiscal authorities haven't been trying to assist it, with one new program after another - and you can expect another 50 basis point rate cut from the Fed next week as well, with Fed funds returning to the 1.0% rate that caused the credit crisis in the first place. Right now bad earnings and negative outlooks are causing stocks to sell off. None of the major problems with the financial system have been permanently solved however. Expect them to continue showing up again and again, just when you least expect it.

NEXT: The House of Cards Economy

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

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

So Much for That Rally

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

Our Video Related to this Blog:

Yesterday, U.S. Markets returned to the level of last Friday's close, with the big rally gains of Monday being wiped out after only two trading days. If you measure a crash by a closing drop of 5% or more, it was the fourth market crash day for U.S. stocks in a little over two weeks. The drop started in Europe, with mining stocks and financials being particularly hard hit, but Europe had closed before the worse selling hit the U.S. at the end of its trading day. In Asia, the Japanese and Korean markets were pummeled, but the Hang Seng managed a partial recovery. As bad as things were, no world market could even come close to 77% total meltdown experienced in Iceland when its market was reopened on Tuesday.

Wednesday's trading pattern was somewhat unusual with the S&P 500 dropping more than the Nasdaq and much more than the Dow -the S&P is filled with both financial and energy stocks (light sweet crude dropped to $74.54 during the day and fell even further to $72.66 in Asian trading). While the Dow lost 7.9% or 733 points, the Nasdaq was down 8.5% or 151 points, the S&P fell 9.0% or 90 points. Only the Russell 2000 was off more, falling 9.5% (also representing a change, until recently small caps were outperforming big caps). The Dow broke 9000 again to close at 8578, although the S&P held above the 900 level to close at 908 and Nasdaq hasn't yet returned to the 1500s, closing at 1628. While at least one major news outlet reported this was the biggest drop in the U.S. since the 1987 crash (they were presumably taking about the S&P),it was actually only the biggest drop on the Dow since this September 29th.

Asia markets were more mixed than the U.S. The Nikkei in Japan was down over 1000 points again, dropping 11.4% or 1089 points. The close of 8458 was still above the 2002 bottom. Although, Korea dropped 9.3%, the Hang Seng rallied off a greater than 8% drop to close down only 4.8%. Surprisingly, Australia was off just 6.7%. Considering the concentration of natural resource stocks in this market and that miners had started selling down in Europe because of falling demand for commodities from China, this was a relatively good performance. Problems in Asia were followed on Thursday morning with European markets experiencing further selling so that combined with their trading on Wednesday, they experienced similar drops to those that had taken place in the U.S. The Russian market, actually opened for a change, was the worst hit Thursday with an almost 9% drop.

The U.S. markets are testing the lows from last Friday and need to hold at this level if a multi-week or longer rally is to take place. If the lows are broken more than a small amount, the next stop will be the 2002 bottom for the Dow and S&P 500 or around 7200 and 775 respectively and 1500 for the Nasdaq.

NEXT: Dr. Evil and MiniMe Loot the U.S. Treasury

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.

Do the Markets Indicate a Depression?

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

Our Video Related to this Blog:

In 1931, the Dow fell below it's 200-month moving average and didn't consistently trade above it again until 1944. Following this event were the worse two years of the Great Depression in 1932 and 1933. Long term trading of the major indices below the 200-month has not reappeared in the U.S. markets since that time. Despite the huge drop in 1987, none of the indices even touched this line. In the recent 2002 market drop when the Nasdaq lost close to 80% of its value, it pierced its 200-month moving average slightly for only one month. The Dow and S&P500 were way above their 200-month averages at the 2002 bottom. Things are worse in this market sell off however and we may be entering the Depression era trading pattern once again.

This week the Dow, S&P, and Nasdaq all fell below their 200-month moving averages. The violations weren't exactly minimal either. At its low, the Dow was about 600 points below this line, the S&P more than 150 points and Nasdaq around 250 points. We will have to wait until the 31st to see if October is the first month where the indices close below this level. We will need to see a few monthly closes below the 200-month to confirm that the market is telegraphing the first economic depression in the U.S. since the 1930s. All we can say for certain now is that things are worse now than have been in many decades and we are in an ugly secular (long-term) bear market.

There are a number of other indicators indicating greater problems in the market than existed in the early 2000s and during the 1987 mega crash as well. In 2000 to 2002 sell off, intermediate market bottoms could be determined when the number of stocks on the NYSE trading below their 200-day (not month) moving averages fell to around 20%. On Friday, the figure dropped to 3%, indicating almost every U.S. stock was in a bear trading pattern. This seems to be unprecedented (once again with the possible exception of the 1930s). The TED spread, a measure of confidence in the financial system (the higher the number, the less the confidence), hit a new record high of 4.13 on Friday morning, further distancing itself from the slightly above 3.00 reading during the 1987 market route. The VIX, a measure of volatility, reached 76.94 on Friday, way above its high of 55 in 2002, but still below the total meltdown level of 150 that it got to in 1987.

It is not surprising that U.S. stocks attempted a rally on Friday. They are about as oversold as they could possibly get. Nevertheless, the Dow and S&P still couldn't close up on the day. And the Dow has now managed to close down over 100 points for seven days in a row. It dropped 18% on the week (still not as bad as many overseas markets, the FTSE in the UK was down 20% and the Nikkei in Japan was down 24%). If the market manages to continue the rally it started on Friday afternoon, some test of Friday's lows should take place within four to nine trading days - and then we may have a rally that lasts at least for several weeks. Of course, the market could still go lower sooner rather than later. Strong support levels around 7200 for the Dow, 775 for the S&P (approximately their 2002 lows) and somewhat less strong support of 1500 for Nasdaq have yet to be reached. And even after five crashes (based on intraday drops) in two weeks, another crash day still can't be ruled out.

NEXT: Unlimited Liquidity Today, Unlimited Inflation Tomorrow

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.

Will Double Digit Crashes Follow Triple Digit Losses?

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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In the last nine trading days the Dow has lost 2271 points or 20.9% of its value. Within this nine days there have been three or four days (depending on your definition) with market crashes. As of yesterday, there have been an unprecedented 6 trading days in a row with triple digit losses. The market meltdown is by no means limited to the U.S., but is global. As bad as the short-term picture is, the long-term could be much worse. Last night in Japan, the Nikkei began testing its 2002 low in a sell off that has lasted 18 years so far. If the U.S. markets follow this pattern, they will not bottom before 2225.

If you define a crash as a closing drop of 5% or more on the major indices, Thursday was the third crash day in less than two weeks (it was the fourth, if you just consider intraday drops). In an unusual trading pattern, the Dow and S&P were down more than the Nasdaq. This was caused by the SEC lifting the short selling ban on financials, which included Dow stocks GE and GM, and of which the Nasdaq has few. While the Nasdaq dropped 95 points or 5.5% to 1645, the Dow dropped 679 points or 7.3% to 8579 and the S&P dropped 75 points or 7.6% to 909. This was the first Dow close below 9000 in five years. The Russell 2000 dropped the most of all, losing 47 points or 8.7%. Trading volume was above average, but not at the spectacular level that indicates a wash out bottom. The VIX, the volatility index, hit 64.92 - way above its top of 55 in 2002, but still considerably below the historic 150 high during the 1987 crash.

As bad as it was in the U.S., worse things happened in overseas markets. The Nikkei dropped 1042 points or 11.4% to close at 8115. Drops greater than 8% took place in Australia, Hong Kong, India, the Philippines and Singapore. Indonesia closed its markets and suspended trading indefinitely. Russia did the same - again. Austria closed it market for half a day when stocks dropped 10% on the open. The major European indices were down 5% to 8% in mid-day trading. Light sweet crude fell below $82, but gold and silver both held up in the drop.

Markets don't go down forever and an explosive bounce will be taking place some time soon. Today, the Dow decisively broke its 200-month moving average (around 8470) on the open. Nasdaq and the S&P 500 broke this level several days ago. While a test of the 2002 lows for the S&P 500 and the Dow is now likely, Nasdaq may fare a little better. Look for support for the Dow around 7200/7300, S&P around 800, and Nasdaq around 1500. While it looks like we could be getting there today, market bottoms on Fridays are an unusual event.

NEXT: Do the Markets Indicate a Depression?

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 Third Crash is the Charm - Fed to the Rescue

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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As predicted in earlier entries to this blog, there was a coordinated global interest rate this morning. The only mystery is why it didn't happen yesterday morning instead. Apparently two crash days in a row in the U.S. markets were needed to expedite this action. A G7 meeting is scheduled for this Friday in Washington and it was likely that the world central banks were waiting for the meeting to be over to show that it had resulted in them taking bold, decisive rate cutting action. The U.S. Fed also probably thought that its Monday/ Tuesday announcements of $900 billion increased lending from it various credit facilities and that it would buy up to a trilion plus dollars of commercail paper would be enough to bull the market up. Instead, U.S. stocks crashed again on Tuesday. So now the ever reliable 'cut interest rates to juice up the stock market' is being tried, not just in the U.S., but globally. Instead of bold, decisive action, it smacks of bold, decisive desperation.

Tuesday's market behavior in the U.S. indicated that the monetary authorities were losing their ability to impact stock prices with their usual bag of tricks. While the announcement of the Fed's massive liquidity injections did cause a major intraday rally on Monday and a strong opening on Tuesday morning, it didn't last. At the Monday low, the Dow, S&P500, and Nasdaq were down over 8.0% and because of the Fed's announcements they closed down only in the 3% to 4% range (still a pretty bad day). If you measure a crash by intraday action, there was most certainly a market crash on Monday. If you measure it only by a closing price drop of over 5.0% on the indices there was only a crash on Tuesday (as well as Monday a week ago). While stocks were up a good bit on Tuesday morning and everything looked like it was going according to plan, the market nevertheless quickly faded and selling accelerated toward the end of the day. By the close, the Dow had dropped 508 points or 5.1%, the S&P 500 61 points or 5.7%, the Nasdaq 108 points or 5.8%, and the Russell 2000 37 points or 6.2%.

So this morning the Fed has turned to more interest rate cuts to save the market. The funds rate was lowered by half a point to 1.5% and the discount rate by the same amount to 1.75%. The ECB also dropped rates by half a point, to 3.75%, as did the Bank of England, to 4.5% (the UK recently passed an $87 billion rescue package for its banks similar to the U.S. Wall Street bailout plan). Canada, Sweden and Switzerland also joined the rate cutting party (noticeably absent, at least so far, is Japan). China lowered a key interest rate for the second time in a month. Australia had cut rates a full percentage point on Monday. This was the U.S. Fed's second intermeeting rate cut this year (the next Fed meeting is October 28, 29th), following the large cuts that took place to prevent a market meltdown in January.

The reason that central banks have avoided rate cutting recently is because of the inflationary implications. The Fed itself has stated in the minutes from it recent meetings that it sees entrenched inflation as a danger in the current economic environment. It avoided lowering rates at its September 16th meeting because of this. The stock market which had been conditioned to expect automatic rate cuts during its bouts of weakness, starting selling off and entered a crash period. Like all addictive processes, if you don't keep feeding the addict the drug, painful withdrawal follows. Supplies of the rate cut drug are almost gone however.

NEXT: Meltdown Microcosm - U.S. Future Can be Seen in Iceland Today

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 Crash Monday Phenomenon

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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Three weeks ago, Monday was an ugly day in the U.S stock markets. The Dow was down around 500 points. The drop two weeks later on Monday was even worse, the Dow was down 778 points. At the bottom yesterday, another Monday, the Dow was off 822 points (it closed down only 370 or 3.6% however). The other indices were hit even harder. The bank failures, bailouts, and sometimes lack of bailouts that are taking place over the weekend are the cause of these Monday downward spirals. When the major bank failures end or the market hits a definitive bottom, Monday will once again be a safe day to be long in the market.

Unlike the previous Monday routes, significant intraday buying came in during the afternoon to lift the stock indices off their lows. It was reported that the shadowy U.S. government operation known as the plunge protection team had met in the morning and just before noon, a number of new Fed money pumping operations were announced (a lot more of the same things that haven't worked in the past). This didn't immediately reassure the market, which kept dropping until approximately 2:45. At the lows, the Dow hit 9503, the S&P 500 1008 and the Nasdaq 1777. The S&P and Nasdaq lows were in areas of strong chart support (mentioned in last Saturday's posting), the Dow's low was not. A strong rally followed and the Dow managed to close at 9955 (the first close below 10,000 since 2004), the S&P at 1057 and the Nasdaq at 1863. Europe though having closed before the rally period began lost heavily. The Euro Stoxx 600 index was down 7.6% on the day. As usual in times of market crisis, gold rallied closing up $33 and oil tanked closing down $6.07 at 87.81.

While yesterday's market action didn't feel like a definitive bottom, a number of indicators reached levels that have previously signaled bottoms. New Lows reached 1078 toward the close and anything over 1000 is typical of major bottoms. The VIX, a measure of market volatility, hit 58 during the day, it's high during 2002 was only 55 (however, it rose to 150 during the 1987 market meltdown and this could happen again). The TED spread, a measure of perceived credit risk in the economy, which had already blown past it's 1987 highs of around 3.00 in September, reached 3.91. Market breadth, with 15 to 1 declining stocks to advancing stocks on the NYSE was also indicative of a bottom. However, it was even worse last Monday. Volume was high on the Nasdaq, but not outrageously so, and only somewhat above average on the Dow - not signs of a washout. A successful test of yesterdays lows would create some reassurance that the market has indeed bottomed (at least for now).

Crash Mondays seem to always be followed by rally Tuesdays (although today may be an exception). The panicky authorities pull out all the stops to get the market going back up again. The Fed first announced that it's TAF auctions would now be for $150 billion each (they started at $20 billion last December). Funding limits for its other operations were raised as well. Last night Australia lowered rates a full percentage point, jumping the gun on a possible coordinated world-wide central bank interest rate cut. This morning the U.S. Fed announced that it will buy worthless commercial paper on the open market to unclog the credit system. Let me assure you that the stock market will eventually succumb to these manipulations and rise appropriately. Unfortunately, so will the price of everything else. You may have to sell some of those higher priced stocks in the future to pay for your $100 hamburgers.

NEXT: The Third Crash is the Charm - Fed to the Rescue

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 First Stock Market Crash of 2008

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: http://www.youtube.com/watch?v=CCt8d6zsjQI

Monday witnessed the biggest point drop in U.S. stock market history. While the carnage was brutal, it was by no means final and the market bottom is still waiting for us somewhere in the future. Some of the worst hit stocks were the financials (down around 13% as a whole), despite the ban on shorting them - a ban that was imposed by the SEC because manipulative traders were supposedly driving their prices down artificially (so much for that theory). Gold, the ultimate safe haven in times of crisis, was up over $20, while economically sensitive oil dropped an even greater percentage than the Nasdaq.

While the point drops were the greatest ever yesterday, the largest percentage drop is still the 1987 crash when the Dow fell 22.6% in one day (the Dow dropped 23% in two days in 1929). The Nasdaq's drop of 9.1% (200 points) yesterday can't match that drop, nor can the S&P 500's drop of 8.8% (107 points) or the Dow's drop of 7.0% (778 points). Both the Dow and the S&P would have dropped more if the ban of shorting financials didn't exist and may have even exceeded the Nasdaq's losses. As has been the case for a few months now, small caps fared better than the big caps. The Russell 2000 fell only 6.7%, less than all the other major indices.

Examination of the intraday charts show that even though the market was mostly falling the entire day, there were two notable periods of sharp selling. The markets opened on a sour note because of three major bank failures here and in Europe and continued dropping gradually until it became apparent that the Wall Street bailout bill would fail. Then the floor fell out. Only five minutes later the Dow was down and additional 400 points (and the other indices a proportionate amount). Stocks quickly attempted a recovery in immensely volatile see-saw action and started drifting down again toward the end of the day. The Nasdaq hit an air pocket at the close, dropping 35 points in only a minute. The Dow, because of the market making system on the NYSE, couldn't print a final quote at 4:00 because of unresolved trades. There were huge sell-on-close orders (institutions were desperate to get rid of stocks) the last of which were processed at 4:15. The Dow fell around 200 extra points during this extended closing action.

It is not surprising that gold went up while the stock market was tanking (if you look back at what happened the day of the 1987 crash, you will see that a number of gold mining stocks actually were up on the day, there were no ETFs at that time). Not only were traders buying gold yesterday because of the crisis in the financial system, but there were also inflationary reasons as well. The U.S. Federal Reserve pumped $630 billion in liquidity into the system on Monday. This was planned before the Wall Street bailout bill failed and was being done because of the bank failures that had taken place overnight. This amount of liquidity is enormous (and possibly the most ever) and under ordinary circumstances would have resulted in a huge stock market rally. Apparently ordinary circumstances no longer apply to the U.S stock market however.

NEXT: The Next Banks and Brokers to Cash Out

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

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

The Fed's Manipulation of the Stock Market

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.

The New York Investing meetup has made a companion video to this blog entry. To see it, please go to: http://www.youtube.com/watch?v=Sobq7wCXjUw.

The Federal Reserve began a campaign of blatant and purposeful manipulation of the U.S. stock market on August 15, 2007. One hour before the futures expired for the month, it announced a surprise cut in the discount rate. Dow futures rose almost 300 points immediately (there was some noticeable rise just before the close the previous day, indicating some big money players had probably been tipped off early) and the huge profits of the shorts evaporated in an instant just before they were about to be cashed in. This changing of the rules just before the game was over had no justification as per the Fed's official mission. Lowering the discount rate one hour later would have had no difference in impact on employment or inflation . It did make a difference on the bottom line of the issuers of the futures (some of whom may have board seats on the regional Federal Reserves), who received a sudden windfall because of the Fed's destruction of this free-market trading mechanism.

As unconscionable as the Fed's actions were on August 15th, they were only beginning of a long campaign aimed at propping up the U.S. stock market. The Fed's rate cutting began in earnest on September 18, 2007 with a 50 basis point cut in the Fed Funds rate. The market already having rallied since the surprise August move by the Fed reacted with great enthusiasm continuing to go up and hitting new highs by early October. However like a junky who continually needs a larger dose of drugs to maintain a high, the U.S. stock market needed larger doses of Fed stimulation to stay at a high as well.

When there was only a 25 basis point cut it late October, stocks started selling off. The Fed realizing things weren't going as planned, did its largest liquidity injection into the U.S. financial system since 9/11 the very next day. This still wasn't enough stimulation for the market however and stocks continued to sell down. In mid-November, the Fed announced a substantial end of the year liquidity boost that finally arrested the selling -at least for a short while. The December rate cut of 25 basis points was also not enough for the market and stocks sold off the following few days. Even the new TAF (term auction facility) announced at the time was only good for a very short rally.

By the beginning of January, the stock market was clearly falling apart. On the third trading day of the year, stocks gapped down and heavy selling was taking place. The Fed then announced an increase in the amount of the TAF. This had little noticeable impact on the selling. On Martin Luther King day, U.S. markets were closed, but markets in Europe and Asia were going into free fall. Before the U.S. markets opened the next morning, the Fed announced the first interim meeting rate cut since 9/11. The huge 75 basis point cut was the biggest since the early 1980s. It worked in stabilizing the U.S. stock markets, but was not enough to make them go up. Only eight days later this was followed a 50 basis point cut and the markets still seemed to languish.

By early March stocks hit even lower lows and the market looked like it was about to fall apart just as the Bear Stearns crisis hit. The Fed would respond with an injection of liquidity that was so massive that what came before seemed almost insignificant in comparison. With international markets once again leading the way down, the Fed moved to bailout Bear Stearns, guaranteeing $30 billion of its questionable loans. The TAF auctions were up to two $50 billion auctions for the month. Two new credit facilities were created the TSLF (Term Securities Lending Facility) and the PDCF (Primary Dealer Credit Facility) with the purpose of moving hundreds of billions of dollars more into the financial system. The regular credit operations of the Fed were upped to the max as well. And to top it all off another 75 basis point cut in the Funds rate was added for good measure.

Why did the Fed embark on the path that it did, seemingly oblivious to the destruction it was wrecking on the U.S. dollar and the potential risks of out of control inflation? The simple answer was the Fed was desperate to prevent a recession in an election year and became myopic to all other implications of its actions. As the New York Investing meetup had predicted previously, March would be the end of most of the Fed's rate cutting if this was indeed the case. Since it takes about six months for Fed cuts to effect the economy and the election was in early November, the biggest impact of a fed action would result if it took place by March. This is not to say the Fed would do nothing in the months that followed, only that it moves then would have much less impact on the election.

Ben Bernanke was not just myopic concerning a possible recession however. He was also myopic concerning inflation. According to his research the Depression could have been prevented if the Fed had increased liquidity dramatically in the beginning and acted to prevent bank failures - exactly the actions he has been engaging in. However, the U.S and world were very different places in the 1930s than in the early 2000s. Currencies didn't float, the dollar wasn't in a severely weakened state, the U.S. wasn't the biggest creditor nation in the history of the world; the U.S. economy wasn't based overwhelmingly on consumer spending and borrowing, but on manufacturing and agriculture; and globalization hadn't shifted economic power to other countries. To apply ideas that might have worked in the 1930s to the situation that existed in the 2000s was pure folly. It wouldn't be the first case of governmental folly in the history of economics. Indeed, widespread mishandling by those in charge is a necessary condition to create a major economic disaster.

NEXT: Credits of Mass Destruction

Daryl Montgomery

Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21