Without Stimulus Market Can't Rally

 

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

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

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

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

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

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


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Gold and Silver Plummet as Dollar Rallies on EU Woes

 

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 euro fell to a yearly low on December 14th as Italian interest rates at auction hit new highs. Collateral damage to the EU crisis is showing up not only in stock prices, but in the precious metals markets as well. 

The euro fell below the psychologically important 1.30 level in European trade and is testing support from last January. If it breaks that support (and it is pretty certain that it will), the 125 level is the next stop and 1.20 after that. The euro can be tracked through the ETF FXE. At the same time the euro is breaking down, the trade-weighted dollar has broken out. The dollar has been stuck at key resistance at 80 since September. It tested  this level both in September and in November. It traded as high as 80.67 in early morning trade. There is still strong resistance just under 82. A break above that will cause the dollar will head toward 88. The dollar can be tracked through the ETF DXY.

As the dollar rises, gold and other commodities fall. Spot gold was as low as $1562 an ounce in early New York trade. Gold plummeted after the New York open and was down as much as $68 an ounce.
Gold can be tracked through the ETF GLD. Gold decisively broke its 200-day moving average (which is very bearish) and this was the first time it has traded below this level since early 2009. The next level of support is the 65-week moving average, which is currently in the high 1400s.

While gold in general should go up during a crisis, this did not happen in the fall of 2008 -- gold was down around 30% at the time. During credit crises -- and the situation in Europe is a second global credit crisis -- it is reasonable for gold to decline. Central banks lease gold cheaply to banks and large hedge funds and they sell it on the market to raise quick cash (I have explained how this is done is some detail in my book "Inflation Investing"). This time around, there is the added danger that the IMF will sell some of its large hoard of gold to raise money for a eurozone bailout.

Gold's companion metal silver is much more volatile than the yellow metal and is influenced by the economy as well as financial market events. Silver traded as low as $28.47down $2.37 after New York trading opened. This was more than a 7% drop. Silver can be tracked through the ETF SLV. It has strong support around $26. If it breaks that, expect it to head toward the $21 level.

The EU debt crisis is not over and is likely to continue for a while longer and possibly for many more months. EU leaders have come up with one "solution" to the crisis after that has failed shortly after it was announced. Look to the markets to see whether or not their future gambits will create some viable end to their problems. So far the markets have made it very clear that the situation in Europe is continuing to deteriorate and it is dangerous to be on the long side of almost any investment except the U.S. dollar. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Ben Bernanke's 'It's Not My Fault' Inflation Speech

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.

Americans shouldn’t expect to hear the truth about inflation from Fed Chief Ben Bernanke and he didn't disappoint in a speech he gave to the International Monetary Conference in Atlanta, Georgia on Monday. The money-printer-in-chief of the Federal Reserve denied that the Fed’s easy money policies are responsible for the inflation that is currently showing up in commodity prices. The public shouldn’t have expected anything else from the dissembling Fed Chair, nor should they believe anything he says.

Bernanke claims that rapidly rising commodity prices are the result of rising demand and not enough supply. While in isolation this is always the case in economics, it doesn’t explain why demand is rising in leaps and bounds and why this has occurred at the same time the Fed has been on a money printing binge. Bernanke did not make comparisons in his speech between demand and prices in 2008, when the Fed turned up the printing presses to max and conditions right now. Let’s look at a few of them:  U.S. gasoline prices went from approximately $1.60 a gallon to almost $4.00. Oil prices have tripled from a low around $33 a barrel. Copper prices almost tripled during the same period. Cotton prices have gone through the roof and took out a high established around 150 years ago. Silver prices went from a low of $8.88 to almost $50.  And that’s just the beginning.

Did global demand for oil, copper, and silver increase by three or more times in two and a half years?  It most certainly did not. If anything economic demand has only increased by a few percent at most. There is something that did increase by a lot more however – the Fed’s balance sheet, which grows when it prints money. That has gone through the roof just like commodity prices. Money printing of course increases demand for any number of items because it makes a lot more funds available in the financial system. For some reason, Bernanke didn’t quite connect the dots between the two in his speech.

The recognition that increasing the available money in the economy leads to rising prices has been known for 500 years and was first proposed by well-known astronomer Copernicus. The idea is based on grade-school arithmetic. If you have an economy of a certain size and a given amount of money and you increase that amount of money, then each unit of money is worth less. It’s not rocket science, and yet Fed officials with PhDs from top schools can’t seem to be able to grasp this simple concept. Or perhaps they don’t want to do so.

Bernanke’s speech also didn’t explain why the price of gold has doubled since its Credit Crisis low. While gold does have some industrial uses, its price is a good gage of inflation expectations on the part of the investing public. Bernanke claimed these were under control, so we don’t have to worry about inflation. Gold is telling a very different story – and gold is not known to lie.

Bernanke also fell back on the 'employment is high and there is slack in the economy, so inflation can’t happen' argument. Historical analysis indicates that hyperinflation takes place under just such conditions. The most recent example happened in Zimbabwe in the 2000s (perhaps Ben didn’t read the papers during those years). As the economy collapsed and unemployment headed toward close to 100%, prices skyrocketed. It wasn’t the first time something like this has happened, it’s the same story over and over and over again throughout history – yet Ben keeps telling us it can’t happen. Well, I guess if you don’t let little things like reality intrude in your worldview, it can’t.

As an author of a book which includes a lot of material on inflation history, I found no case in the past where the authorities admitted their guilt in causing inflation. In every instance, the government printed a lot money or cut the coinage (if it was before paper money existed). Without exception in modern times, speculators and foreign influences are blamed for inflation. For some reason the government money-printers behind the inflation that ruins their countries just never seem to admit that they’re at fault. Bernanke’s recent speech is just another example of history repeating itself.   

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
Author, "Inflation Investing: A Guide for the 2010s"

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 You Become an Inflation Victim? Take this Simple Quiz

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


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

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

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

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

QUIZ

ANSWER TRUE OR FALSE

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

WHICH INVESTMENT WOULD YOU RATHER OWN DURING HIGH INFLATION?

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

HOW TO GRADE YOUR QUIZ

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

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

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

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

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

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

 

Quadruple Witching Tops Off Weekly Trading

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


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

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

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

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

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

 Disclosure: None

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

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

Inflation Denial Won't Keep Prices Low

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.


Denial is one of the most destructive forms of behavior for investors. While the markets can operate on false scenarios for a significant period of time, reality always wins in the end. When it does, the situation can get quite ugly and all the profits gained from a belief in an unsupportable viewpoint can evaporate over night. At the moment, there is a lot of denial about inflation and investors should be paying attention to this.

The case for inflation is based on common sense and the laws of simple arithmetic. A country cannot create money at a faster rate than its economy is growing. If this occurs, the currency is devalued and it then takes more units of currency to purchase any given item (which is the same as saying prices go up).  There is a time lag between these two events however, sometimes many years, so people frequently don't connect them. Indeed, governments who engage in this behavior frequently go to great lengths to insure the public doesn't make the connection and realize that inflation is caused by government actions. Invariably throughout history, speculators and foreigners are blamed for rising prices. Think about whether or not you've heard any talk about speculators lately. There will be a lot more of that in the future.

When it comes to inflation, governments not only try to act like magicians and dazzle you with one hand while picking your pocket with the other, but they also engage in strong and persistent denial of its existence. Any number of fanciful, but easily debunked, arguments will be produced to show inflation doesn't and even can't exist. In Weimar Germany in the early 1920s, the economic establishment engaged in an across the board denial that inflation existed and there were even 'proofs' created to show that there was really deflation. Inflation eventually reached the hundred trillion percent level there.

So what is happening in the U.S. today? At the March 16th FOMC meeting, the Fed stated "With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.” The implication is of course inflation can't exist if there is substantial resource slack. By the rules of logic, if we can find a single example that contradicts this, we cannot rely on this statement. There are of course many, many such examples. The most recent and perhaps extreme is what just took place in Zimbabwe. The unemployment rate there reached 94% (yes that's unemployment) and the economy essentially experienced a total collapse. According to U.S. Fed, there should have been massive deflation in Zimbabwe, instead of the second worse case of hyperinflation in world history. How could this have happened? Zimbabwe printed a lot of money. The U.S. has also been engaged in significant excess money printing during the last two years.

The evidence of inflation is also not likely to show up first in U.S. government reports. The government has a vested interest in making sure that it doesn't. This is part of managing inflation expectations, which the Fed also mentioned in its statement. The last thing the government wants is for people to be aware of coming inflation and they will manipulate the official numbers and the news as much as necessary to keep this from happening. Investors who want to know what is really going on with inflation need to look elsewhere for the facts. The most recent ISM (Institute of Supply Management) reports indicated very strong inflation pressures in the system, particularly in the manufacturing sector. This story got buried in the media though and was covered up with glowing claims for economic recovery.

Investors should also watch the markets for what they are saying about inflation. There are three important indicators - interest rates, oil and gold. U.S. treasury interest rates have been bubbling up for awhile now. The market is having trouble absorbing the huge supply of bonds that the U.S. has to sell in order to fund the budget deficit. Long-term interest rates have broken a 30-year downtrend line and look like they will be heading higher for many years to come. Oil just broke above a nine-month trading range and is now heading higher as well. Nothing has more of an impact in leading to higher consumer inflation than does rising oil prices (which are set internationally and are out of the Fed's control). Gold has risen from a low just above $250 in 2001 to its recent high in December above 1200. It is in a seasonally weak period at the moment, but should be hitting new all-time highs in the fall.

Inflation provides an object lesson of how investors need to approach the markets. The media is filled with information on financial topics, and much of that information is misinformation. It is necessary to cut out or ignore the irrelevant to make good investing decisions. The best way to do this is think for yourself, believe your own experience, and watch what the markets are actually doing.

Disclosure: Long oil.

NEXT: An Analysis of Retail Sales Media Coverage

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.

Questionable Oil Statistics More Accurate than Other Government Numbers

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.


If it's Wednesday, it oil inventory report today. At 10:30AM New York time, the EIA (Energy Information Agency) releases it weekly statistics on the amount of crude oil, gasoline and distillates in U.S. storage. The price of oil can move sharply up or down based on this information. Unfortunately, the numbers in the inventory reports are not reliable.

An article in the March 18th edition of the Wall Street Journal entitled "DOE Documents Cite Outdated Methodology, Errors in EIA's Weekly Survey" revealed why the weekly oil data could not be trusted. The Journal stated that the process utilized by the EIA to determine inventory levels hadn't kept up with important changes over the years. It went on to mention a litany of problems with data collection at the EIA including old technology and out-of-date methodology. It specifically cited an inaccurate report in September that caused an unjustified big move up in oil prices.

Knowing that there are problems with the statistics being published by the EIA, investors should immediately wonder how accurate the other numbers are that the U.S. government publishes. There are more than enough reasons to question the GDP reports, inflation statistics and employment reports. Unlike the EIA reports, which are inaccurate because of neglect, these other reports are inaccurate because of lack of neglect. Government statisticians have gone out of their way to introduce 'improvements' over the past thirty years in the how the numbers are determined in these other reports. These 'improvements' seem to have only made the numbers more and more favorable looking. When statistical adjustments only produce better numbers, they are more accurately referred to as manipulation.

The oil report today indicated that crude oil inventories went up by 2.9 million barrels last week and gasoline inventories were up 300,000 barrels. U.S. crude oil inventories and gasoline were above the upper limit of
the average range for this time of year according to the EIA.  While these numbers don't look good, who knows whether or not they are even close to the actual ones.

Problems with the EIA notwithstanding, investors should be watching oil at this point and paying attention to the stock charts. The price of oil is determined globally, not just by what happens in the U.S. Oil is entering a seasonal strong period that will last until the summer. Light sweet crude has been in a trading range from 70 to 83 for many months now.  A breakout above that range would be bullish and could happen at any time. ETFs/ETNs that investors can use to go long on oil include OIL, DBO, USO and USL.

Disclosure: None

NEXT: Agricultural Prices Weaken on Ample Supplies

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

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

CFTC's March 25th Hearings on the Metals Markets

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


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

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

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

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

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

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

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

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

Disclosure: None

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

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

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

Will Expanding Euro Crisis Continue to Benefit U.S. Stocks?

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 euro has fallen to levels last seen in May 2009, trading as low as 133.01. A downgrade of Portugal's sovereign debt from AA to AA- by rating agency Fitch has created new weakness for the euro zone currency, as a solution to the Greek crisis still remains elusive.  The British pound, the Swiss Franc and Swedish Krona all traded down more than a percent at one point on the news. Money continues to flow out of Europe in general, not just the euro zone. This has been going on since early December. The U.S. dollar has been the beneficiary, as have U.S. stocks.

The stock rally since last March has actually had two distinct phases, although this may not be immediately obvious by looking at the charts. Both phases are connected to actions in currencies. The U.S. trade-weighted dollar sold off between March and December 2009 and U.S. stocks rallied strongly during this period. This pattern has actually been common since the early 2000s. It makes sense because when a currency devalues, stock market caps in that currency need to rise assuming the real value of a company's assets remain unchanged. This drove the first phase of the rally. The driving force then shifted gears in December with capital fleeing Europe and looking for a home elsewhere. A lot of it wound up in dollar-based assets.

The U.S. stock market rally is not healthy however. The recent rally has been on low volume. Trading volume in the Dow Jones actually peaked last March during the market low and has generally declined since then throughout the entire rally. It's gotten even worse lately. Declining volume in a trend is a strong technical negative. The VIX, the volatility index for the S&P 500, has gotten as low as 16.17 - and this is a very low  (it reached the 90 level during the market sell off in 2008). It can go lower though and traded around 10 during the placid days of 2005 and 2006. The current investment environment is not exactly placid however. The VIX is a contrary indicator and low values are a negative for future stock prices, although it can bottom months before the market falls apart. Moreover, it is not even clear that the VIX has hit bottom.

Precious metal investors should keep in the mind that the price of gold and the euro tend to move together. This is also true of oil, but to a lesser extent. The euro has strong chart support in the 1.30 area and very strong support around 1.25, the low during the Credit Crisis. The trend indicators on the daily chart indicate a new sell off has begun, so a fall to 1.30 is very likely. If that doesn't hold, a test of 1.25 will take place. If the 1.25 level breaks, investors should assume that another major crisis is unfolding in the global financial system and that it could be as bad as the one that occurred in the fall of 2008.

Disclosure: None

NEXT: CFTC's March 25th Hearings on the Metal Markets

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 Dollar, Euro, Gold, Oil, and Treasuries

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.


Problems in Greece are still impacting the market with the seemingly never-ending on-again off-again possible bailout. Some resolution, even if temporary, is of course inevitable. Problems in the euro zone have set the tone for U.S. dollar and euro trading for almost four months now. These have in turn affected U.S. long-term treasuries, gold and oil. Long-term treasuries and oil have been trading in a sideways pattern since around May 2009. Gold sold down and has been in a sideways trading pattern since December. The U.S. dollar has temporarily broken a long-term downtrend and the euro a long-term uptrend because of the Greek crisis.

The U.S. trade-weighted dollar(DXY)traded down to its 50-day moving average recently and then bounced sharply off of it. The 50-day is above the 200-day, having made a bullish cross in mid-February. It seems that the trend indicators are trying to reconfirm the uptrend. On the flip side, the euro's(FXE)technical picture is the mirror image of the dollar. The 50-day moving average made a bearish cross of the 200-day in mid February. The price rose toward the 50-day recently - an expected move since the 50-day tends to act as a magnet on the downside as well as on the upside. The euro though didn't even reach the 50-day before a sharp drop. Trend indicators look like they are moving to reconfirm the downtrend

Gold (GLD, IAU, SGOL) is apparently trendless at the moment and trading around its 50-day moving average, which is above the 200-day moving average in a bullish configuration. The price pattern seems to be forming a triangle on the charts. A break out could take place either on the upside or downside. Seasonals for gold tend to be weak in late spring and early summer. As seasonals weaken for gold however, they strengthen for oil . Oil (DBO, USL, USO, OIL) is also trading in a sideways pattern and looking for a breakout. The bullish 50-day cross took place between late June and late July 2009 depending on which proxy is being considered. Oil has been stuck in a trading range since last May and needs to break out of that range, the top of which is around $83 a barrel for light sweet crude.

The 30-year Treasury interest rate ($TYX or ^TYX) has been in bullish pattern since May 2009 with the 50-day trading above the 200-day. It has gone nowhere fast during that time period, trading in a sideways pattern on the chart. Technically, it has extremely strong resistance from a 30-year downtrend line in interest rates. A rally in interest rates on the long-term treasuries (and sell off in the bond price) doesn't look imminent at the moment based on the technical picture. When it does, bullish trades on long-term treasury interest rates can be made through TBT and TMV.

Sideways trading (also known as basing) shouldn't surprise investors. It is the norm and not the exception. Most of the time markets are trendless and you need to be a short-term trader and willing to enter and exit your positions quickly to make money under those circumstances. Trends (either up or down) are where the real money is made. You can't make them happen however, you just have to watch and wait until they come along.

Disclosure: None

NEXT: U.S. Stock Market in the First Quarter of 2010

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 Snapshot of the Energy Markets

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


Oil is entering a seasonally bullish period that generally lasts from March to August. Natural gas on the other hand tends to trade in the opposite pattern, being weak during those months and stronger during the winter. Other possible areas of interest to investors such as coal and alternatives such as solar, wind and nuclear don't exhibit the same strong seasonal trading patterns. All are affected by greater supply demand factors or government action and these can occasionally be more important than seasonal trends.

Light sweet crude (the champagne of oil) had already reached the $73 level by last June. The price just rose above $80 in the beginning of March. It has been stuck in a trading range from $70 to $83 for eight months however. The usual fall/winter sell off did not take place this year and this indicates strong underlying fundamental support in the market. Supply coming from existing fields is declining rapidly and supply from new discoveries is not even remotely making up for the loss. Only the global recession that has lowered demand has prevented a major oil price spike from already occurring again. The technical patterns on the charts of oil ETFs DBO, USO, USL and the ETN OIL don't indicate that a sustainable rally is in the offing just yet. Investors need to watch for a break above $83 in the futures markets. The first attempt may fail with the price falling back into the range however. The second break above $83 is more likely to stick and offer a profitable trading opportunity.

While the market for oil is global, the market for natural gas tends to be regional because it is usually moved from source to destination through pipelines. Transporting natural gas in a liquefied state by ship is a relatively recent development, is the more expensive alternative, and still only represents a small part of the market. The price of natural gas in the U.S. market went to incredibly low levels last August and September - the spot price at Henry Hub (the basis for futures trading) was as low as $2.25. This was well below estimated costs of production. The CFTC (Commodity Futures Trading Commission) investigations and new supply coming online were two factors that explain this economically bizarre and unsustainable behavior (commodities must trade above production costs, just like a business must sell its products for a profit). The U.S. only has 4% of global natural gas reserves though, so oversupply conditions will disappear eventually. Cold winters and hurricanes in the Gulf of Mexico are bullish for prices. There appears to be little that would be bullish for natural gas in the next several months though. The natural gas ETF GAZ hit a new yearly low on March 2nd.

As for coal, there are really two distinct markets - one for metallurgical coal, which is used for steel production and one for steam coal, used mostly for generating electricity. Metallurgical coal prices are obviously strongly dependent on the global economy, with Chinese demand being particularly important. Lower steel production because of a faltering recovery would be extremely bearish for this type of coal. Most coal though, 62% globally and 93% in the U.S., is used for producing electricity. Coal and natural gas can be used interchangeably in a large number of U.S. generating plants. So high prices for natural gas are bullish for coal and vice a versa. There is no danger in the U.S. running out of coal in the next many decades, since the U.S. has the largest coal reserves in the world. The ETF KOL has rallied since March 2009 and its chart looks very similar to the charts for the major U.S. stock indices. Expect coal to continue to trade like the overall stock market.

In the alternative energy space, solar stocks had a strong rally at the beginning of the year and than sank when the problems in Europe hit the overall market. Germany reduced subsidies for solar power and China reduced bank lending twice. The market is still dependent on government subsidies and China is a key player, so both actions were bearish. The technical picture on the charts turned from very bullish to bearish almost overnight. Solar stock ETF KWT looks like it has put in a bottom in the last few weeks, this doesn't mean a sustainable rally will necessarily follow immediately.  Some relief from a severally oversold condition should be taking place soon.

Nuclear power is even more dependent on government action than solar, wind or other alternatives. Nuclear plants take years to build and require government approval. There is a nuclear renaissance going on globally. The U.S is not part of it and it remains hidden from most Americans, as well as the fact that 20% of U.S. electricity is generated from nuclear power. There are approximately 52 new nuclear power plants being built globally - China and India are leading the way - and more are on the drawing board. This of course is bullish for uranium in the long-term. However, nuclear energy ETF NLR is currently in a bearish trading pattern. A key event that investors should watch for is the 50-day moving average going up and crossing the 200-day.

Oil is the leader in the energy markets. Rising oil prices are bullish for all the other operators in the space, although there can be a considerable time lag between the rise in oil prices and other energy commodities. Investors should keep in mind that oil is priced in U.S. dollars and a rising dollar lowers its price and a falling dollar raises its price, everything else being equal. The alternatives become increasingly desirable as energy sources with each increase in the price of oil. Investors in energy need to watch developments in the oil market closely and then add the specific supply demand picture in the other markets. The large number of ETFs now available makes it easy to move in and out of any of the energy sectors or sub-sectors and to lessen the risk of owning individual stocks.

Disclosure: No positions

NEXT: Feds Probe Hedge Funds in Euro Collusion Plot

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 U.S. Imports Inflation

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.


U.S. import price data for January indicates a rise of 1.4% from December and a 11.5% rise year over year. The price rise in January was the sixth one in a row. Higher energy prices were the major cause of both the monthly and yearly increases. The implications are inflationary.

Prices for imported oil were up 4.8% in January (the U.S. imports approximately two-thirds of its oil). Non-fuel imports were up 0.4%, led by a 1.5% price increase in industrial materials. Metals and chemicals were responsible for most of that rise. The price for foods, feeds, and beverages were up 1.3%. The report clearly indicated that commodities were responsible for almost all of the rise in U.S. import prices in January. Since all commodities are priced in U.S. dollars and the dollar rallied 0.7% during the month, the jump in import prices could have been worse - and will be if the dollar continues selling off as it did for most of 2009.

There was indeed a stark contrast between price changes for commodities and manufactured goods in January's report. Consumer goods were up only 0.2%, while capital goods and automotive vehicles decreased by 0.1%. Inflation has yet to filter into manufactured goods, which are at the end of the chain for price increases. Commodities are at the beginning. The report also indicated significant drops in air fare and air freight prices, both of which will reverse if oil prices stay high.

Over the last year there has been a dramatic change in the inflation picture based on import prices. Year over year price changes were negative and dropped each month from January to July 2009. Yearly prices decreased 12.5% in January and were down 19.1% in July. Since then, a major reversal from deflation to inflation has taken place. In November the yearly import price change became positive and was up 3.4%. It increased to 8.6% in December. In only six months from July 2009 to January 2010, the yearly change in U.S. import prices went from -19.1% to +11.5%. These are truly shocking figures.

In the last month, central banks have indicated they are starting to worry about inflation - China increased required bank reserves twice, the U.S. Fed halted five Credit Crisis liquidity programs and the Bank of England paused its quantitative easing (read money printing) program. All in all though these actions are merely very minor adjustments in monetary policies that are still highly expansionary. Inflation takes years to work its way through the financial system and by the time it is recognized, it is well-entrenched and it is too late to stop it without taking drastic action. Investors should consider the U.S. import price figures as a warning of things to come.

Disclosure: None

NEXT: Gold Down on IMF Sales, Then Up on Inflation

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.

Trouble in the Euro Zone Boosts Dollar, Lowers Commodities

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 Euro hit a 5-month low against the dollar on January 21st.  It has been selling down since the beginning of December. Troubles with peripheral euro zone debt in Greece, Portugal, Spain and Ireland are damaging the currency and boosting the U.S. dollar. The rising dollar has in turn lowered commodity prices (all commodities are priced in U.S. dollars) and commodity-based currencies such as the Australian and Canadian dollars. A combination of ballooning budget deficits and economic contraction are cited as the cause of these recent moves.

The euro has fallen as low as 1.4045 to the U.S. dollar and has breached its 200-day simple moving average - a technical negative. On the flip side the dollar rose as high as 78.81 and briefly went above its 200-day moving average for the first time since May 2009, but promptly bounced down. No major trend reversals are indicated as of yet for either the U.S. dollar or the euro. It is normal during either an uptrend or downtrend to occasionally come back to the 200-day moving average. To reverse the trend, requires rising above it or falling below it and remaining there so that the 200-day moving average itself reverses direction.

While the commodity-based currencies have sold off, they have barely broken their 50-day moving averages, which are trading well above their 200-days as is typical in strong uptrends. GLD, the major gold ETF, has also traded below its 50-day moving average, but is still far above its 200-day moving average, indicating its strong uptrend is also still in place. JJC, the copper ETF, is in even better shape and hasn't even fallen to its 50-day moving average.  The oil ETF, USO has also violated its 50-day, but is still above its 200-day. January is a seasonally weak month for oil and some selling in the commodity at this point is not out of the ordinary.

The epicenter for the problems in the euro zone is Greece. CDS (credit default swap) insurance against Greek government debt default or restructuring hit an all-time high of 340 basis points. News reports have indicated that Greece's debt to GDP ratio of 120% is behind the move. If this were the whole story, the Japanese yen would have collapsed long ago. The debt to GDP ratio in Japan is at the 200% level. The yen has barely budged, while the euro has sold off. Weakness in the euro zone economy has also been cited, with the PMI manufacturing index for January coming in at 53.6 (above 50 indicates expansion). The same day, the U.S. reported weekly unemployment claims were up 36,000 from the previous week - not exactly an indication of economic strength. To claim that the euro zone economy is in worse shape than the economy in the United States is indeed a stretch. The key difference between Greece, Japan and the U.S. is that Japan and the U.S. can print all the money they want to, whereas Greece because it is part of a currency union cannot.

In the short-term anything is possible in the markets. Manipulation - and central banks are prone to intervene with currency trading - and illusion can sway trading. The long-term trend however is that fiat currencies are all losing their value and this was already evident by the 1970s. Excessive government debt and economic weakness is a global problem shared by almost all the industrialized economies and this will accelerate the multi-decade trend of weakening currencies. Higher prices of hard assets and consumer goods are the consequence of that trend.

Disclosure: Long gold.

NEXT: As U.S. Banks Deteriorate, Obama Proposes New Regulations

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.

Toothless CFTC Tries to Bite Gold and Silver

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


The U.S. CFTC (Commodity Futures Trading Commission) announced on January 14th that it was going to investigate trading in the gold and silver markets. This follows the commission's high profile hearings on speculation in the oil and natural gas markets held in the summer of 2009. Those led to the demise of the popular ETF, DXO and caused the natural gas ETF UNG to trade so irregularly that it no longer behaved like an ETF.  Both of these were investment vehicles for the small investor. Big-time speculators went on their merry way untouched and unscathed by the CFTC's action that was supposedly aimed at protecting the public. Anyone who was the least bit cynical might conclude that the CFTC's actual purpose was to protect the profits of the large commercial users of the commodities it regulates.

The CFTC efforts in investing oil and natural gas were in reality a thinly veiled attempt at price controls. Governments almost without exception resort to price controls when inflation becomes a threat. Price controls are of course extremely effective - not in controlling prices, but in creating shortages and driving prices much higher than they would have been if controls hadn't been implemented. Governments never learn however. In the short-term, the CFTC managed to drive natural gas prices to the low levels that were common in the 1990s. Natural gas was already trading at multi-year lows before the CFTC investigations and half of all natural gas rigs in the U.S. had already been shut down. The impact on natural gas was only collateral damage though from the CFTC's real target, which was oil.

Nothing has a greater impact on consumer prices than does oil and governments know that controlling its price is one of the keys to controlling inflation. Around the same time that the U.S. CFTC announced its hearings, the prime minister of England, Gordon Brown, and the president of France, Nicolas Sarkozy made a joint proposal that an international body of government bureaucrats should set the price of oil instead of the free markets. They suggested the price should be kept in the $70 to $80 range. For those who don't recall, Gordon Brown was the British government bureaucrat that sold half the UK's gold for under $300 in 1999 and the early 2000s. Gold has since quadrupled from the price where he sold it, so the UK didn't get that profit. The U.S. dollars that Brown bought from the gold sale then subsequently lost at least 30% of their value. This is the type of market 'genius' that government brings to the table. Would you like to let a government bureaucrat make investing decisions for your 401K?

The CFTC has more ability to impact oil and natural gas than it does gold and silver. ETFs that deal with energy commodities have to do so through some type of futures trading. Oil and natural gas cannot be easily stored as is the case with gold and silver. While there are ETFs for both gold and silver that only trade futures, there are 11 ETFs globally that buy physical gold. None of them store that gold in the United States. They are beyond the reach of the CFTC and the claws of the U.S. government, which for those who don't remember confiscated all of its citizens gold in 1933 and silver in 1934. In aggregate, the gold ETFs have become the sixth largest holder of gold worldwide since the first one was created in March 2003. They hold more gold than China, but less gold than France. In several more years, they could easily have more gold in storage than any central bank.  

Both oil and gold are completely international commodities (natural gas trades in regional markets). If regulation becomes too onerous in the United States, trading can and will shift elsewhere, just as trading in ETFs will shift from those that invest with futures to those that hold physical metal. When the CFTC made its announcement that it would be investigating gold and silver trading, the London Metal Exchange said it would offer clearing for gold over-the-counter (OTC) contracts in London by the second half of 2010. Hong Kong, Singapore, Zurich, Sydney, Tokyo, and Mumbai would probably like to have the trading business too if it leaves the U.S. commodity markets. The CFTC's action is just another government- motivated attempt to prop up the U.S. dollar by trying to hold the price of gold down. It won't work. The CFTC doesn't have the power to make it happen. Prices will eventually have to move to the point that the market dictates, just as they always do. 

Disclosure: Long gold and silver

NEXT: Lessons for Investors from the U.S. Senate Race

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 Trading Day of 2010 - The Message From 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.


U.S. stocks stalled on the third trading day of 2010, just as they had on the second. The Dow and S&P 500 were barely up, while the Nasdaq and Russell 2000 closed a bit lower. Foreign stocks, including emerging markets didn't do much better, being up only slightly. While stocks went nowhere fast, commodities rallied strongly. Inflation sensitive gold, silver and oil did particularly well. Long-term bonds sold off and interest rates rose. The dollar was down on the day and net down on the year so far.

The stars of the beginning of the year trading have clearly been commodities and commodity related stocks. In the first three days, the best performing industry sectors have been Energy, up 5.3%, and Basic Materials, up 5.0%. The commodity index DJP has risen 3.8%. Metals and energy have led, while agricultural commodities have lagged. Silver was a star among stars, rising 7.7% in three days. Natural gas was up 5.8%. Copper, the most industrially sensitive metal, was up 4.4%. Oil was up 4.1% and gold up 3.7%.

Of the nine major industry sectors that make up the U.S. stock market, the interest rate sensitive Utilities group is the only one down on the year so far. Long-term bonds sold off on the third trading day and the yield on the 30-year treasury is slightly up, while the yield on the 10-year is slightly down. Technology and Consumer Staples are barely up and are clearly not being favored by investors. Consumer Discretionary and Health Care are doing only slightly better. Industrials rallied 2.4% and Financials 4.0% in early trading and are the best performing groups after the two sectors related to commodities.

Investors would be advised to look for opportunities outside the U.S. though. While the S&P 500 was up 2.0%, emerging market stocks were up 3.9% (on a par with commodities). Of the BRIC countries Russia did best, with RSX being up 6.5% and China followed, with FXI rising 5.4%. EWZ, the ETF for Brazilian stocks rallied 4.3%. Indian stocks were up 4.0%, double the amount of the U.S. market. Commodity based economies Australia and Canada had stock market gains of 4.6% and 3.5% respectively, also well ahead of the U.S.

Disclosure: Long gold, silver, and natural gas. Short long-term treasuries.

NEXT: The Fourth Trading Day of 2010 - The Message From the Markets

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 Trading Day of 2010 - The Message From 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.


Observant investors can find moneymaking opportunities if they pay attention to what takes place during the first four trading days of the year. This idea was already part of market lore over a hundred years ago and was confirmed by academic research decades ago. The reason the beginning of the year is more important is that more investment money gets allocated or reallocated on those days than at other times. Whether we like it or not, investing is influenced by a quarterly calendar with the beginning of the first quarter having outsized significance. Which parts of the market money flows into or out of as annual trading begins indicates the aggregate opinion of investors on each sector of the market and the various asset classes. If you want to know what they are thinking, follow the money.

The best way to approach this analysis is with a top down approach. First look at how the major asset classes - stocks, bond, commodities, currencies - are trading. For U.S. stocks you can look at the four major indices: the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 or their respective ETFs, DIA, SPY, QQQQ (actually the Nasdaq 100), and IWM. For stocks outside the U.S., EFA (Europe, Far East and Australia) and EEM (emerging markets) can be used. For bonds, intermediate maturity U.S treasuries are a good place to start. IEF can be used for treasuries in the 7 to 10 year range.  Overall commodity performance is best tracked through DJP, which is the ETN for the Dow Jones AIG Commodity Index. The two major commodities gold and oil should also be watched. Either their spot prices or GLD and USO can be used to do this. For a quick read on currencies, DXY gives the performance of the trade-weighted dollar.

This initial cursory view can then be refined further based on what assets are doing best or by an investor's particular interests. For stocks, the next step is to look at performance by country, market cap and the nine major sectors of the market. This can then be refined one more step by looking at sub-sectors for the sectors that have done the best. In the end, investors should look for opportunities in the top performing countries and sectors by market cap size (small, mid or large). While stocks are the most complex to analyze, commodities and currencies are the easiest because there are only a small number of them. The performance of each one them can be ranked and it is immediately apparent which ones are the best. Keep in mind seasonal factors can create bullishness or bearishness though, especially for commodities. Bonds are of course more complicated since they can be government or corporate, have a number of maturities and exist in a number of countries.

As can be seen below, based on the first trading day of the year, money was flowing into almost all markets. Stock markets outside the U.S. did the best with emerging markets being the strongest. Small cap stocks did better than large caps. Commodities generally did better than stocks. Interest rates were barely changed. The U.S. dollar lost ground, while other major currencies rallied.

STOCKS:               DIA             Up        1.5%
                               SPY             Up        1.7%
                               QQQQ        Up        1.4%
                               IWM            Up        2.5%
                               EFA             Up        2.6%
                               EEM            Up        3.0%

BONDS:                 IEF              Up        0.3%

COMMODITIES:   DJP             Up        2.0%
                               GLD            Up        2.3%
                               USO            Up        2.4%

CURRENCIES:      DXY           Down    0.5%

Please see 'The Second Trading Day of 2010 - The Message From the Market' to find out more.

Disclosure: Long gold.

NEXT: The Second Trading Day of 2010 - The Message From the Markets

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.