Commodities Rumble, Financials Tumble

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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Alcoa was one of the biggest movers in the market yesterday. At one point it was up over 20%. It was also the stock that I pounded the table to buy at Tuesday night's class on Technical Analysis. Our February choice, DXO, is up over 50%. Basically every stock I mentioned during the class had a good to huge rally. Even FCX, used to illustrate a number of technical points and well advanced in its rally would have made you good money. It was in the upper 34's on Wednesday morning, but over 42 at its high yesterday (there are better bargains in the market at this point). Even a Canadian Royalty Trust that I only mentioned in passing that I had purchased, went up nicely. A couple of attentive attendees took the hint. Coal stocks across the board had terrific rallies. We spent a lot of time looking at coal in the class. While I wasn't sure steel had bottomed, it rallied sharply nevertheless. No one apparently picked up on the shipping company that I made a gratuitous remark about, probably because I didn't state that I owned it. It was up 28% yesterday.

What wasn't up yesterday were financials. Citigroup was down 26% at its low, but closed down 16%. It is planning a reverse split. Wells Fargo was down 10% and Regions Financial down 12%. Broker, Morgan Stanley was down 13%. Insurance companies were clobbered (watch this space for a future bailout). Prudential was down 25% and Met Life, 12%. While you can make good money day trading financials, their long term picture is down while the long term picture for commodities is up. You can no more walk away while holding these positions than you could leave a big pile of chips unattended at the gambling tables in Vegas or Atlantic City. Of course you would eventually not have that pile of chips anyway since gambling, unlike investing, is ultimately a losing activity.

While the precious metals rallied yesterday, beaten down silver did much better than gold. Both were significantly down on Wednesday morning and shot up like rockets after the Fed announcement. It looks like a lot of traders were stopped out of both during the drop. I've seen this Wall Street racket played repeatedly over the years. Manipulators drive down the stock price driving the small players out and then a sudden reversal takes place and it shoots up to the sky. The inside players get the stock cheap and makes big profits, while the small investor is left holding the bag . Only if you have a accurate big picture of what is going on can you protect yourself from this type of shake down.

Oil continued its rally yesterday, closing at 51.61. This was the highest close since December 1st and represents a very significant breakout. Next resistance for the futures contract around $57. Natural gas finally joined the party and was up 42 cents to $4.10. This is a rally right off the bottom. Probably best to wait for some pull back from the initial rally if you want to buy. Gasoline and even heating oil had significant rallies yesterday as well. Oil has now rallied from the high 33's to over 52 in a month. During this entire time, the mainstream financial media has published one story after another about how oil can't rally until the economy improves and how oil can't rally because demand is declining. Nevertheless, oil has rallied sharply. Apparently the smart money doesn't pay any attention to the media, nor should you if you want to join the big money some day.

NEXT: Making a Silk Purse Out of a Sow's Ear

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


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

Analysis of Tuesday's Market Action

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

Our Video Related to this Blog:

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

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

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

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

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

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

NEXT: How Media Manipulates Investors to do the Wrong Thing

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

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

What We Learned From the First Trading Day of 2009

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:

January 2nd was a good year for the markets throughout the world. Volume was low however since many traders took a four day weekend and this almost certainly reduced selling. While we can't look at the results as a complete picture, the first day does provide us with a good sense of what people are buying. While this is very useful information, you need to make sure selling pressure isn't overwhelming the buying interest. Under such circumstances, the areas of the market that were doing the best and worst are most likely to provide useful information.

All the U.S. indices rallied on Friday. The Nasdaq led the way, rising 55.18 points or 3.4%. The S&P was just slightly behind, going up 28.55 points or 3.1%. The Dow with its 258.30 rally was up 2.9%. Noticeably lagging were small cap stocks. The Russell 2000 rose only 6.39 points or 1.2%. Trading volume on the Dow was well below average. Nasdaq volume was low. Low volume was also seen in GLD, which was down slightly on the day. SLV which was slightly up, rose on somewhat above average volume. OIL though won the prize going up 8% on volume that was well above average.

Examining purchasing in individuals stocks, Energy related stocks had the highest percentage of buying interest by far of all industry groups. They were followed by Metals/Steel, Machinery,
Mining, and Aerospace stocks. The list of stocks that investors were scooping up could be best summed up as commodity related and infrastructure plays (the Obama administration is working on a one trillion dollar spending package which will benefit these companies).

And what stocks did investors shun like the plague? At the very top of that list was Savings and Loans. Office products were in essentially just as bad shape. Slightly better were Banks, Semiconductors, Insurance, and Computer Hardware in that order. The industries most lacking in buying interest could best be summed up as financial and those that produce products that are used for business operations - or perhaps, those that are part of the Credit Crisis and those most impacted by recession.

NEXT: Sellers Return for Second Day of Trading

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.