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.

S&P 500 Joins Global Bear 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.

Markets opened October with almost all assets declining everywhere. The S&P 500 entered bear territory on Tuesday.  Few assets other than treasuries and the U.S. dollar are doing well, as is typical during a credit crisis.

The big talk on Monday, the first trading day of October, was about the S&P 500 making a new closing low for the year. The intraday low was only slightly lower than the previous one in early August, so peak to trough the index was off 19.8%. The big drop on the opening on Tuesday created a 20% loss, putting the S&P 500 officially in a bear market.

The small cap Russell 2000 already entered bear territory on August 8th. The Russell had another mini-crash on Monday, dropping 5.4% on the day. That was its fourth mini-crash since August. Mini-crashes are common during credit crises, but not at other times.

The selling on Tuesday first showed up in Asia with the Hang Seng in Hong Kong losing 3.4% to close at 16,250 and South Korea's KOPSI dropping 3.6%.  The ugliness then spread to Europe with the German DAX, the French CAC-40 and the UK FTSE down more than 3% during the  trading day. U.S. stocks opened then opened lower with the Dow losing more than 200 points in early trading.

As usual in Europe, banks were at the epicenter of the market quake. Franco-Belgium bank Dexia was down 22% at one point. Deutsche Bank (DB) was down more than 6% in Frankfurt after announcing it would miss its profit target for the current year.  American banks have not avoided the carnage affecting financial stocks elsewhere; just take a look at Bank of America (BAC) and Morgan Stanley (MS), both trading at two-year lows.

While the behavior of banking stocks makes it clear that a credit crisis is taking place, falling commodity prices clearly indicate that the global economy is turning down. Copper prices fell as low as $3.01 a pound early Tuesday. Copper sold for well over $4.00 at its high in February and dropped sharply throughout September. Oil is also indicating weakness, with WTI crude closing at $77.61 on Monday. It traded as low as the $75 range on Tuesday. Oil is heading into a period of seasonal weakness and this is likely to exaggerate any price drops. Next strong support is around $70 a barrel.

Money continues to move into safe haven treasuries. The 10-year yield was as low as 1.725 before selling began in the bond market. The U.S. dollar index traded just under 80 at its high. The euro, which moves opposite to the dollar, hit a low of 1.31.62 Tuesday. Further weakness should be expected until there is some resolution to the debt crises in the EU.

 In bear markets, the bigger trend is down, but this is frequently accompanied by huge volatility. This is what has taken place since August and until there is a good reason that the trend should change, investors should expect that prices will be moving lower.

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.

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.

Energy Investing Guide for 2010

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

As has been the case for many years now, oil was once again one of the best investments in 2009. While oil has a leadership position in energy, it is only one part of a very large and complex sector that includes natural gas, coal, nuclear power, biofuels and renewables. Ultimately, the price of everything else in the sector will be influenced by the price of oil. All sources also have an easy to determine cost per unit of energy generated and these at least in theory should be somewhat similar across the sector. In reality, that price can become significantly different from one energy commodity to another and this can indicate severe over or under pricing. Price moves in oil and the other commodities in the sector don't necesarily take place at the same time, but can be considerably lagged.

While oil and coal (both the commodity and their stocks) and wind energy and natural gas stocks had significant rallies from their respective price bottoms in February and March 2009 , the natural gas commodity, uranium and nuclear-related stocks, and many solar stocks remained depressed throughout the year. While almost every commodity rallied strongly in 2009, natural gas and uranium were the two glaring exceptions. Natural gas prices literally collapsed and at the low were trading at price levels that were seen earlier in the decade and in the later 1990s. Natural gas futures fell to around $2.40 and spot prices were even lower. Uranium had a strong rally from 2003 to 2007 when it rose from around $10 to over $130. It fell to around $40 at its low in 2009 and hovered just above that price throughout the rest of the year. The solar industry is a more complex story. It is only an economically viable source of energy when oil prices are high. At lower oil prices, government subsidies are key. While a few solar stocks have rallied nicely from their lows, most had not gone up much by the end of the year.

In 2009, prices for both natural gas and uranium fell below estimates for their production costs. No commodity can trade in that range for long since production closes down to bring supply and demand back into balance. By the spring, 50% of natural gas rigs in the U.S. had already closed down. In must be kept in mind that prices in both the natural gas and nuclear industries are influenced by the government. The CFTC (Commodities Futures Trading Commission) held hearings this summer about trading in the oil and natural gas markets. Along with the SEC, the CFTC interfered with access to trading vehicles in these markets that were used by the small investor. Natural gas ETF, UNG was effectively turned into a closed-end fund because of the actions of these two government bodies. Leveraged oil ETF, DXO, closed down as a consequence of their interference. As for the nuclear market, the U.S. Department of Energy has a stockpile of 158 million pounds of uranium and it occasionally sells some of this on the open market and depresses prices, just as central bank selling of gold occasionally depresses gold prices.

While prices were down for natural gas and uranium, they are not likely to go lower in 2010, at least for any extended period of time. They will be supported because they are too close to their production cost levels. This does not mean a major rally is imminent however. Prices can get low and stay low for a long time, as was the case in the 1990s. A number of commentators claim that this will be the what happens now because oil, natural gas, uranium and solar stocks were in a bubble that lasted into the 2007 and 2008 period and once the price goes down it will not recover again for many years. Similar arguments were made in 1974 when oil hit $12 a barrel. It's ultimate high was still several years off and several times higher. Energy was in a bullish period back then just as it is now.

Oil looks like it will be strong again in 2010, based on its price behavior in the fall of 2009. Oil prices, like many commodities, have a strong seasonal component. For oil, the bottom tends to be in the winter between January and March and the yearly peak between June and September. Light sweet crude rallied 9% in October 2009, at a time of the year when it should have been selling off. This indicated unusual strength. Crude ended the year near its yearly high, which was somewhat above $80. While seasonal selling pressure will exist for the first couple of months of 2010, buying pressure will then cause the price of oil to rise. It would not be unreasonable to assume that it will get above $100 a barrel during the year. It is not likely however that price will go up enough in 2010 to break the old high of $147. That will have to wait until the following year. Oil and many oil stocks should continue to be good investments in 2010.

ETFs/ETNs, exchange traded funds and exchange traded notes, are the easiest way for investors to get oil and oil stock exposure in their portfolios. The ETF/ETNs: OIL, DBO, USO and USL can be used to invest in oil as a commodity. For those who are more aggressive and want as much as 200% long exposure through leverage, UCO, HOU or LOIL, which trade in the U.S., Canada, and the UK respectively, can be bought. For ETFs that hold stocks of oil and gas companies, XLE, IYE, and IXC are possible choices. Investors bullish on oil stocks can get leverage on them by purchasing DIG and ERX.

While oil should be doing well in 2010, natural gas does not look as promising. There is an incredible glut in the market and new supplies are coming online through the global shipping of compressed natural gas. Still the price of natural gas is relatively low compared to oil on a historical basis. It will take some time to work out the excesses however and fully restore balance between these two commodities. Natural gas tends to have sharp price rises every four to five years and the last peak was 2008, so another really big move up shouldn't be expected until around 2012. Trading opportunities will of course exist in 2010 and low prices will be available for those who want to slowly accumulate and hold their positions for a while. A good ETF for the natural gas commodity is GAZ. Leveraged natural gas ETFs HNU and LNGA trade in Canada and the UK. The leveraged ETFs are a better choice for shorter-term investors.

The supply demand picture of uranium is bullish in the intermediate term. A number of new reactors will be coming online in Asia over the next several years. Growth in the use of uranium usage is expected to be over 2% a year until 2030 according to the World Nuclear Association. The market is thought to be in deficit of 60 million pounds a year. It is estimated that uranium prices would have to move up to around $75/$80 to improve supply. Miners in particular will benefit when this happens. ETFs for nuclear power include NLR, NUCL and PKN. Only NLR has any significant trading volume however.

As for solar power, a few of the leaders had good rallies in the second half of 2009. This is an indication the whole sector is in the beginning stages of a market recovery. Investors should keep in mind though that this is a new industry and there will be a period of consolidation. Some companies will not last. Longer-term investors should avoid stocks with bad financials. The two solar ETFs are TAN and KWT, but these have partially rallied already in 2009 because the leaders in the sector started moving up. Individual stocks which have not rallied too much yet and which investors might want to consider are ENER, JASO, SPWRA, and WFR.

Commodities have been in a longer-term secular bull market since around 2000. This type of bull market tends to last around 20 years. So, there is still a lot of time left and good investments to be made. Buying stocks and commodities on intermediate term drops is the correct strategy in such markets. Buying oil in the spring of 2009 produced quick and substantial profits. Prices in other parts of the energy sector haven't moved as fast as oil did in 2009 and this is giving investors another chance to profit in 2010.

Disclosure: Long ENER, WFR, natural gas.

NEXT: Conmodities Versus Stocks: A Decade Performance Review

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 Santa Claus Rally and the January Effect

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 Santa Claus rally is a move up in stocks that takes place around December 25th. This rally was already part of Wall Street lore in the 1800s, and was memorialized in the ditty: 'If Santa fails to make a call, the bear will come to Broad and Wall'. There is no general agreement on the exact dates of the rally. It is defined as beginning from a few to several days before Christmas or immediately thereafter. It ends either in the current year or two or three days into the next year. It is most useful to think about it as two separate phenomenon. The first as the trading period around Christmas day and the second as the first four trading days of the new year. Each has its own message.

The bullishness in stocks around December 25th probably doesn't have much to do with the holiday per se, but with year end adjustments within the financial system. Instead of calling it the Santa Claus Rally, it would probably be more accurate to refer to it as the Year End Rally. If you look at long-term charts, you will note that the VIX, the volatility index, is either low or drops around the end of the most years. This is bullish for stocks. The VIX hit a yearly low on December 22nd in 2009 trading below 20 for the first time since the summer of 2008. An exceptionally low VIX while bullish in the short term sets the stock market up for eventual selling however.

What happens at the end of the year and at the beginning of the year can be quite different however and the two shouldn't be lumped together. Investment money tends to be reallocated at the beginning of a quarter and this is most pronounced in the first quarter. Investors should watch closely what sectors rally and what sectors of the market experience selling during the first four trading days of the year. This tells you where money is flowing. If the stock market overall sells off in the first four days, this is a bearish signal at least for the first quarter. It indicates big money is withdrawing its support from stocks.

The first four days trading signal is sometimes lumped in with the January Effect, but shouldn't be. The January Effect is a tendency for stocks to rally during the first month of the year, with small caps outperforming big and mid-caps. The January Effect was noted in the U.S. by the 1920s and perhaps even earlier. It has been observed in a number of stock markets throughout the world. The effect seems to have become dampened in recent years.

Trading volume tends to be low around the end of the year because many people are away because of the holidays. This can exaggerate price movements. Liquidity coming from the Fed and other central banks will have a more pronounced impact than usual. If you look at a chart for the U.S. Monetary Base, you will see that it has been rising vertically in the last few months. It is not surprising that the current liquidity fueled rally in stocks is continuing.

NEXT: NovaGold Leads Mining Group on Takeover

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.

Are Solar Stocks Waking From the Dead?

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.

While stocks and commodities have had spectacular rallies since last March, a few groups have been left behind. Solar stocks are one such group. While they rallied early in the year, they have been mostly flat to down since this spring, while almost everything else in the market was going up. Solar stocks hit their historical peaks between December 2007 and June 2008 (before oil peaked at $147 in July 2008). Some of them dropped more than 90% from their all-time highs until they hit lows at the end of 2008 and early this year. At the very least, they are due for a major technical rally from severely oversold levels.

How far that rally goes and whether or not it turns into something that can last longer than a few months remains to be seen. Some good fundamental news is starting to appear. JA Solar (JASO) hiked guidance on December 14th. The company now expects 2010 shipments to increase by greater than 50%. This made for a good day for solar stocks in general. JASO itself was up 16% during market trading and another 8% after hours.

While some improvement seems to be taking place in the short-term, the longer-term prospects for solar power depend on the future price of oil. Even a cursory supply and demand analysis indicates that oil will be rising in price for many years. According to an rigorous IEA (International Energy Administration) study released at the end of 2008, world production from existing wells is falling at a 6.7% annual rate. New discoveries and new wells coming on line are not keeping up with this loss, so supply is falling. At the same time, the demand destruction from the Credit Crisis is turning around. Forecasts now predict global oil demand will now be 86.3 million barrels per day in 2010, up 1. 7% from 2009. The impending supply/demand imbalance in the oil market will cause prices to rise once again, probably in the not too distant future. For the moment however oil is in a seasonally weak period which will last to around February or so and this should temporarily keep a lid on prices.

Just as solar stocks peaked before oil did, they can also start to rally before the price of oil goes up. A list of solar stocks (ticker symbols in parenthesis) that are at toward the lower end of their price range includes:

China Sunergy (CSUN)
Energy Conversion Devices (ENER)
LDK Solar (LDK)
JA Solar (JASO)
Renesola (SOL)
Suntech Power (STP)

There are also two solar power company ETFs: TAN and KWT.

If you think energy prices will be rising in the long-term, then solar stocks today are among the biggest bargains in the market. The sun should indeed be shining on them in the future.

Disclosure: Long ENER, LDK.

NEXT: Why Inflation is and Will be a 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.

Gold, Oil, Dollar and Market Update

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

Our Video Related to this Blog:

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

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

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

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

NEXT: G8 Hot Air Inflates Dollar

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


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

Dow Breaks Key Support Indicating a Much Lower Low

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

Our Video Related to this Blog:

The Dow confirmed a break of major support on Monday. Yesterday's low just under 7106 was over one percent lower than the 7181 intraday low on October 10th, 2002. The index is now back to where it was in 1997. It should now be considered inevitable the the Dow will have to fall to the 5600/5800 range where the next strong chart support exists. Below that, support is around the 4000 level. Even at 4000, the Dow would be in much better shape than it was in the 1930s when it dropped 89%. As of yesterday, the index is down only 50% from its bull market high. When it would get to even 6000 is open to question as well. It still might take awhile.

The market is deteriorating at this point not because economic conditions are bad, but because it doesn't look like there is anybody in charge that will be making them better. While the market was falling apart last Friday, Treasury Secretary Geithner was MIA. Word was that he was on vacation. It is certainly understandable that after a whole four or five weeks in his new job where he managed to royally screw up in record time, that he would need some rest. Besides, he knew that president Obama would soon be busy announcing that he would be cutting the budget deficit in half by the end of his first term (Republicans were demanding attempts to get the budget under control, something they never did during the Bush administration). The level of economic obliviousness this indicates is simple off the charts. It's sort of like announcing your new snow removal policy while people are dropping dead in the streets from 135 degree heat... and it has never snowed at any point in history in your country. Some immediate action on the banking crisis should be agenda item number one, not that I am confident that this will be handled intelligently by the government. We are almost guaranteed that it won't be.

Wall Street is understandably upset about the confidence gap with the new administration. While many financials took a big hit as usual, Citigroup and Bank of America were actually up and are still holding above the penny stock level (a deal was being discussed to convert the preferred stock the government owns in Citi to its worthless common stock). Resource stocks were crushed. U.S. Steel feel 13% on Monday alone. It is almost 90% off of its yearly high and it has a P/E of 1. Aluminum producer Alcoa isn't doing much better, falling 8% on the day and is down around 85% on the year. Coal company ANR fell 8% and is also about 85% off of its high. If these stocks seem absurdly undervalued it is because they are, but that doesn't mean they will be going up tomorrow. In a major bear market, there is almost no limit to how cheap stocks with real value can get. It is of course important to differentiate them from stocks that become equally cheap and will remain so because they don't have any value (currently the financials).

The biggest drops frequently happen at the bottom of a move. The monthly charts indicate that the market is likely to bottom sometime during March at the latest. Short covering will propel the rally that follows. A sustainable long term rally is still somewhere in the distant future and is receding further because of the current drop. In the longer term, zero interest rates and the unending bailouts and spending plans will provide the market with the liquidity which is the fuel it uses for its rallies. They will also mean that you will be paying $50 for a cup of coffee at Starbucks.

NEXT: State of the Nation - Denial

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.

Dow Testing Low, Gold Testing High

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:

So far today the Dow has fallen as low as 7553 and is closing in on its November low just under 7400. It is inevitable that it will test it and possibly the slightly lower 7200 area, which was the bottom in 2002/2003. Financial stocks are the culprits that are tanking the market today, with the sell off starting in Europe because of weakness in Eastern European banks. The tech heavy Nasdaq is still well above its November bottom. Gold has hit a 7-month high and oil looks like it has made a double bottom.

The U.S. stock market was actually in very good shape technically and breakouts were taking place until Treasury Secretary Geithner gave his talk on how he plans to deal with the ailing American banking system. The talk came across as Geithner fiddling around while the U.S financial system burned. Wall Street reacted with a sharp sell off and the incipient rally turned into a route for stocks. With friends like Geithner, the American investor doesn't need enemies.

While stocks are falling apart, gold and silver are breaking out through one point of resistance after another. Gold so far today has reached as high as 970 in futures trading and is closing in on its all time high in the 1000 area. Silver has broken above its 200-day moving average, but still needs to do some more work before it establishes a solid bullish pattern. Meanwhile, oil looks like it made a double bottom last Thursday when in fell into the 33's, just as it did on December 19th. Press stories about excessive supplies of oil are greatly exaggerated and are being generated by the big money interests that are short the market - don't believe them.

Problems with the global banking system are serious and are not likely to be solved for years to come. The market shouldn't be surprised by this anymore, but it is and will continue to be. The solution for all the major players will be money printing, more money printing and more money printing. Commodities will be the beneficiaries, while stocks decline or languish.

NEXT: SEC Discovers Fraud Exists/Smart Money Buys Gold

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.

China Bails Out Asia - at Least for Today

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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Finance ministers and central bankers from the Group of 20 (nineteen of the world's largest economies, plus the European Union) met in Brazil on Sunday and called for increased government spending to bolster the sagging global economy. The multi trillion dollar bailouts, massive liquidity injections, and sharp rate cuts in the last two months apparently haven't done the trick. To do its part, China promptly announced a $586 billion stimulus plan consisting of spending, subsidies, loser credit, and tax cuts. Unlike the rate cuts in Britain and the ECB last week, when the markets crashed the day they were announced, Asian markets rallied strongly on the news.

Not surprisingly, the Shanghai composite was up the most with a 7.3% gain. It is still down about two-thirds from its high last October, after rising in one of the most spectacular bubbles in history (bubble markets usually need somewhere between an 80% to 98% drop before they can stabilize). The Nikkei rose 5.8% on the news, after having hit a new low in its 18 year drop only recently. Intraday, the Nikkei has had approximately an 83% drop so far from its bubble high in 1990 to its current low. What the final number will be and when it will take place is anybody's guess. The Sensex in India, another bubble market, rose 5.8% as well. The dollar rallied against the Yen and natural resource stocks (inflation indicators) seemed to be the major beneficiaries of China's announcement. BHP Billiton, the world's biggest mining company was up 13%.

As the rally moved along with the sun to Europe, the enthusiasm dampened somewhat. Major European markets are up less than 3% as of this writing. U.S. pre-market futures indicate an even smaller rally here. Of course the Dow already rallied 2.8% on Friday, but this was after a two-day post election drop of around 10% (half of what would be necessary to create a bear market). The news of Circuit City's bankruptcy and AIG's third government bailout, with the total now up to $150 billion, will weigh on the U.S. market if rationality prevails - a dubious presumption at best.

In case there was any doubt previously, the economic policy makers for all the world's large economies are pursuing and will continue to pursue extreme inflationary policies. In many cases, this is being done to try to reinflate collapsing bubbles. There is no short-term likelihood of success in this endeavor. They will be successful however in igniting an inflation bubble. Although this is completely predictable, expect great surprise - and denial - when inflation starts to get out of control.

NEXT: Auto-Asphyxiation - GM, Ford Gasp for Bailout

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.