Expect Market Volatility Because of Europe

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.

This week was a good one for stocks. The Dow was up almost 300 points on Wednesday and markets in Europe had powerful rallies as well. The action was technical in nature, being an oversold bounce. The problems in Europe that have been weighing on the market haven't gone away and more selling will follow.

The major indices in the U.S. — the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 — all hit and even fell below their 200-day moving averages on Monday after many days of selling. A bounce from this level should be expected. It is a common place traders view as a support level where they should start buying. After such a bounce, they usually start selling when prices get near the 50-day moving average.

Problems in Europe haven't gone away. There is still an emerging credit crisis taking place there and it is only a matter of time before it boils over into global markets. Greece has its next election on June 17th and the anti-bailout parties are likely to gain further strength. Unemployment is 21.9% there and the GDP shrank 6.5% in the first quarter after falling 7.5% last year. Greece is in its fifth year of recession and there is no respite in sight. If it leaves the euro, it would be a major blow to German and French banks and the stability of the entire eurozone.

Spain is now potentially an even bigger problem. Its unemployment rate is 24.4% and its banking system is in serious trouble. Bankia, which was formed in 2010 by the merger of seven regional banks, claimed it had a 300 million euro profit in 2011, but it turned out that it actually had a 3 billion euro loss. Now the results of other Spanish banks are being questioned. Money is leaving Spain and on Tuesday the Treasury Minister stated that "at current rates, financial markets are off limits to Spain". The 10-year bond auction went well on the 7th however with Spain paying a yield of 6.06% (rates were as high as 6.65% in late May). It is quite obvious that the ECB was behind the buying in one way or the other. The IMF has said that Spanish banks need an immediate cash injection of $50 billion.

Some bailout of Spanish banks should be expected soon. While the market may rally on this news, don't assume that it will keep things stable for too long. Spain, which had the worst real estate bubble in the world,  is still building empty houses and the debt for these non-productive assets is still piling up in its banks. Like Greece, Spain needs to restructure its economy. Bailouts will only work if this is done and so far there hasn't been any movement in this direction. Consequently, investors should expect the markets will start to increasingly trade like they did during the last Credit Crisis in 2008.


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.

Updating the Definition of a 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.

While there is a lot of talk about the S&P 500 being in a bear market because it fell 20% from its high, this definition is not particularly useful to traders or investors. The focus should be on whether or not the market is trending down and will continue to do so. A market having fallen by so much, regardless of what the amount chosen is, does not provide that information.

The term bear market dates backs to at least the 18th century and was in common use on Wall Street in the 19th. All calculations were done by hand back then and changes in prices were all traders had to go on. Just as is the case today, much of trading took place based on momentum. Traders assumed that if the market was going down, it would continue to do so and vice versa. At some point a 20% drop became the rule of thumb that a drop was serious and likely to continue. While 20% certainly indicates a  major fall in prices, the markets may or may not continue to fall after that level is reached.

A much better approach, the concept of moving averages and the idea of using them as trading guidelines didn't develop until the twentieth century. The 50-day and 200-day moving averages became the standard benchmarks for determining bullish and bearish patterns. This approach could only be widely implemented after computers became generally available. A bear pattern was established when the price fell below and remained below the 200-day moving average (the price would be trading at or below the 50-day as well). The bear would be confirmed when the 50-day moving average crossed the 200-day from above and moved below it. This is nowadays referred to with the dramatic term "death cross".  This generally takes place before a market has lost 20% of its value.

The so called death cross took place for all the major U.S. indices in August and for many this confirmed that stocks were in a bear market. The 50-day, 200-day cross is prone to failure however. It tends to give too many false signals, as was the case in the summer of 2010 when all major U.S. indices also made this cross and then reversed shortly thereafter. Not only was there no bear market, but a major rally followed.

Instead of using the 50-day and 200-day moving averages as benchmarks, a more accurate bear market
reading can be obtained from using the 50-day and 325-day moving averages (or 10-week and 65-week moving averages).  While this will provide a bear market confirmation later, it will be more accurate when it does so. It takes a lot of selling energy to drive the 50-day moving average below the 325-day and if the market can't accomplish this, a real bear market doesn't exist.  Although this provides a later sell signal, it provides an earlier buy signal on the way back up.

The S&P 500 and the Russell 2000 made the 50-day, 325-day cross in mid-September, but had already made the 10-week, 65-week cross by the beginning of the month.  The Dow industrials and the Nasdaq made the daily cross at the end of September, but had already had a cross on the weekly charts by the middle of the month. Based on the weekly charts, the S&P was already in a bear market for a month before the 20% intraday drop took place on October 4th.

Investors and traders need not rely on just moving averages to find out whether or not a bear or bull market exists. Volatility can provide an important additional clue. The daily price swings for stocks in the summer of 2010 were relatively minor compared to those in August 2011. Volatility is bearish for markets and its presence recently is just another confirmation of a serious and prolonged downturn.

Modern technical analysis also provides a whole bag of tricks to help determine if a bear or bull market exists. The DMI (directional movement indicator) is the most directly applicable. Investors want to look for a  clear sell signal with a rising trend line on the DMI  on the weekly charts (the daily charts are too "noisy"). A sell signal was given in late July on the S&P 500, the Russell 2000 and the Dow Industrials. The trend line has been going up since then indicating a strengthening downtrend. A sell signal appeared in August for Nasdaq. It then failed, but a new sell signal was given in September.

There is more than enough reason to believe that U.S. stocks are in a bear market regardless of what percentage drop has taken place. Moving averages, volatility and technical indicators are all indicating that a bear market started in the U.S. somewhere between late July and mid-September 2011. This bear will not end until the 10-week moving averages cross back above their respective 65-week moving averages, volatility calms down, and DMI buy signals are given on the weekly charts.  

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.

Traders Should Watch the Gap

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.


Anyone who rides a commuter rail in the United States is probably used to hearing a message to 'watch the gap'. The advice also holds for stock trading.

A gap is a price level on a chart where no trading took place from one time unit to the next time unit. This happens on daily charts when the opening price is above or below the previous closing price and the market continues to trade in the direction of the gap. Gaps in the stock market on the daily charts invariably show up on Nasdaq because all stocks open at a price determined by market conditions. Specialists try to balance the buys and sells on the NYSE and this can delay the opening of stocks there and smooth out the price. Since most Dow Industrial stocks trade on the NYSE and its stocks frequently open gradually over several minutes, gaps on the opening are rarely seen on the Dow. This also mutes the gaps on the S&P 500, which contains a significant number of NYSE stocks.

Markets move to fill gaps, or in other words trade at the price points that were missed when the gap was created. Most of the time, this happens anywhere from the next day to a few weeks later. It sometimes takes months or even years however to fill a gap. Short-term traders should be aware of all the gaps within the last few weeks on the indices, stocks, and even the ETFs they trade (even commodity ETFs fill their gaps on the U.S. charts even though these gaps are artificial because trading took place at the appropriate price points overnight). Traders with a longer term view should keep in mind gaps from the last couple of years that have remained unfilled.

Trading of U.S. stocks in the last six weeks can be viewed as an attempt to fill gaps. Nasdaq gapped up on August 1st and that gap was filled on August 6th. Nasdaq gapped down on August 12th and that gap still remains unfilled. Nasdaq gapped down again on August 24th and that gap was finally filled when Nasdaq gapped up on September 1st. The September 1st move however created a new gap. Nasdaq gapped up again on Friday, September 3rd and attempted to fill that gap in yesterday's trading, but didn't quite fall low enough to succeed. So Nasdaq has unfilled gaps both above and below where it is currently trading.

A market that gaps up and a down a lot is usually directionless, volatile, potentially unstable, and possibly manipulated. It can be a boon to short-term traders. It is not something however that a position trader or long-term investor should find attractive. Those with a longer view may wish to consider that Nasdaq has a large gap around 1800 that occurred in July 2009 and still remains unfilled.

Disclosure: No positions.

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

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

Some Curiosities in Wednesday's Market Rally

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


U.S. stocks had a big rally yesterday with a surge starting at approximately 2:20PM New York time. This rally was counter to the direction of the news flow and had many of the earmarks of central bank intervention.

Central banks will pump liquidity into the global financial system to prop it up at key points (informed cynics would use the word manipulate and might cite the U.S. Plunge Protection Team as the source of these activities). A recent example of this was the ECB's huge injection on the morning of May 10th, which caused an explosive rally for U.S. stocks on the open.  Draining the liquidity the following week caused the market to drop back down again however. These central bank activities would therefore be more accurately be described as massive pump and dump operations. If a stock manipulator in the U.S. was caught doing this, he or she would go to jail.  Governments though don't think they have to follow the rules they make for the little people.

A big liquidity injection will usually take almost all stocks up, even some highly improbable ones.  Currently stocks related to the BP oil spill off the Louisiana coast would be the best examples of this. PB had has a series of failed attempts at controlling the massive leak that is now threatening Florida beaches.  Its Operation Saw effort failed yesterday when the riser package got jammed and this could be seen through a live feed on the Internet (the saw now seems to have been freed). The situation has become so bad that Internet buzz is starting to question BP's survival. The lawsuits against the company keep escalating and some of the potentially biggest ones aren't even on the company's radar screen yet.

On this continual wave of bad news, how did the companies connected to the oil spill perform in yesterday's market?  British Petroleum (BP) was up 3.0%.  Anadarko (APC), which owns 25% of the operation, was up 5.1%. Cameron International (CAM), the provider of the failed blowout converter, was up 7.0%. Halliburton did the best of all rising 10.7%. Only Transocean (RIG) was down, falling 3.5% (although it is up by 3.5% as this is being written). Interestingly, I saw mainstream news reports that only cited the drop in Transocean stock and ignored the huge and rather inexplicable gains for the other companies.

The timing of yesterday's rally was also a bit too convenient. President Obama gave a speech on the state of the U.S. economy in Pittsburgh that ended around 2:20PM. As the speech ended, critical commentary was hitting the news wires about how his efforts to fix it have failed. Obama's February 2009 almost $1 trillion stimulus package for instance was supposed to keep unemployment from rising to 8.5% and it is now 9.9% more than a year later. Without the hiring of 1.2 million temporary census workers (twice the number used in 2000) unemployment would be significantly worse. Nevertheless, the market took off in a huge rally as the speech ended. This well-timed ringing endorsement from Wall Street of Washington's failed policies could have been mere coincidence or the invisible hand of the Federal Reserve acting behind the scenes.

During the Credit Crisis in 2008 the market constantly had big up and down days. As time went on stocks continued their downward slant because the up days were always undone within a week or so. Only when the market finally calmed down in March 2009 was a sustainable rally possible. Volatility began rising in 2007 though and the early increases, similar to the ones taking place now, were merely a warning of much worse things to come the following year.

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.

Stocks Continue Volatile 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.


While day traders love it, volatility is never a good sign for investors. Money is made by following the trends and when wild swings up and down occur, there usually is no trend. Even if one is beginning, it's hard to discern.

Right now, stocks are attempting a relief rally to resolve an oversold condition. The market is still in a very vulnerable state. Any piece of news can whipsaw it up or down. Wednesday morning, the 'good' U.S. Durable Goods report helped send the Dow Jones Industrial Average up 135 points in morning trade. The headlines on trading terminals around the globe flashed that durable goods had risen 2.9% in April (excluding the volatile transportation sector, they were actually down 1.0%, but you had to read further to find that not so good news). Morning mania faded late in the afternoon however.

Before the U.S. markets closed, the Financial Times reported that China was reviewing its eurozone debt holdings. The Dow closed down at 9974. For the first time in months it ended below the key 10,000 number. When it went above 10,000 in October 2009, this represented a major breakout on the upside. It looked like the breakout was failing immediately afterwards and then again briefly in February when the Dow spent some time below 10,000 again. In neither case was the index below its 200-day moving average as it is now. We have already taken out the February intraday low of 9822 twice this month. The next step is an intraday number below 9647, the low in November 2009. A break of that level should be considered a sign of extreme market weakness.

Stocks are rallying smartly today however, with the Dow up more than 200 points in morning trade. China denied the Financial Times report and this made the markets jubilant. This is of course nonsensical since there is no way China would admit that it was selling its European debt. Doing so would cause prices to fall and it would lose a lot of money if it acknowledged this. Furthermore, China has a long history of operating in secrecy and admitting what it has done only years after the fact. But somehow traders think the wily Chinese are going to shoot themselves in the foot this time and admit to what they are doing in the markets.

The buoyant mood this morning caused the Nasdaq to gap up approximately 48 points. These large differences from the previous day's close have been common lately. They are also unhealthy. Gaps are usually closed within a few days. Professional traders tend to fade them (trade in the opposite direction). Professional traders also tend to trade heavily around the close as well. This helps explain the typical bear market pattern of strong opens and weak closes. That was certainly the pattern yesterday.

Disclosure: No positions.

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

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

Market Continues Choppy 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.


Choppy trading is a sign of a troubled market. Within the last ten days, U.S. stocks have had a great deal of difficulty deciding which way they wish to go. As of today, the Nasdaq has either gapped up or down seven days in a row on the open. Intraday gaps, which are very rare and indicate a great deal of volatility, have also occurred.  This type of trading usually takes place at market tops or bottoms.

The problems in the U.S. stock market began intraday on Thursday, May 6th with the sudden market drop and rise around 3:00PM. In a span of approximately 16 minutes, there were multiple gaps on the downside and then multiple gaps on the upside on the major U.S. market indices on the one-minute chart. The Dow Jones Industrial Average moved 700 points in both directions in that short period. Fewer gaps appear on the five-minute and fifteen minute charts, but they are more pronounced. This was followed by a noticeable intra-day gap on the downside on all the very short-term charts on May 7th. Then there was a massive gap up on the open on Monday, May 10th, with the Nasdaq opening around 100 points higher than its Friday close. The ECB (European Central Bank) has admitted to a massive liquidity injection at that time and this money flowed directly into the stock market. Other central banks were probably involved as well.

Looking at the charts it can be seen that Nasdaq then gapped down on Tuesday, up on Wednesday, and down on Thursday on the open. The gap down on Tuesday was significant, but the other two were relatively minor and not really out of the ordinary. Then last Friday, there was an almost 30-point drop on Nasdaq when stocks began trading. That is very much out of the business as usual range. After that, there was a small gap on Monday and a somewhat larger gap up today. The market suddenly turned around in the middle of the day yesterday while trying to fill the huge gap from May 6th. This is atypical behavior (the gap was only partially filled) and has all the earmarks of central bank interference.

Markets like to trade in continuous patterns. When gaps occur, they almost always get filled (trading takes place in the price range that was skipped because of the gap). This commonly happens within a few days, but it can take weeks, months or even years.  Investors in general don't like choppy markets, although they are a boon to short-term traders. Trending markets tend to have smoother price movements and investors should be on the lookout for a return to this type of less volatile environment.

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.

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.

The Stock Market's Early Returns

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:

While the election doesn't appear to have resulted in the worse possible outcome for Wall Street, what did occur was interpreted by the market negatively enough to cause a small crash today. So far Obama has won the presidency by a 7% plurality, although based on turnout estimates several million votes seem to be missing from the tally. The Democrats have picked up at least five seats in the Senate and have solidified control, but the filibuster proof majority remains elusive for them. Four seats - Georgia, Minnesota, Oregon, and Alaska - are still undecided however. Currently the Republican is ahead by 500 votes or less in Minnesota and Alaska and recounts will be taking place. All the ballots haven't yet been counted in Oregon's mail-in-only election, but it looks like the Democrat will win when they are. As of now, Georgia is heading toward a run-off election next month because neither candidate got 50% of the vote. Alaska would have to have another election as well if convicted felon Stephens wins, since he will probably be expelled from the senate by early next year at the latest. Current tallies indicate that the Democrats picked up around 20 seats in the House and will have between an 81 an 88 vote majority.

Inexplicably the market rallied while the voting was taking place, with the Dow closing up 305 points or 3.3%. This was the biggest rally since 1980 when the market was first opened on election day. The previous biggest rally was a 1.2% gain in 1984 when Reagan defeated Mondale in a massive landslide that was universally predicted. Today, after seeing the returns all the major U.S. stock indices dropped 5% to 6%. Previously this would have been a headline news, but a drop of this magnitude has become commonplace in the last two months of high volatility trading.

Volatile markets are of course not healthy markets. A 305 point Dow rally yesterday, followed by a 487 point or 5.1% drop today should not inspire confidence. The S&P and Nasdaq were down a slightly greater percentage and the Russell was down the most with a 5.7% drop. Oil dropped $5.23 a barrel after an even bigger rally on election day. When Japan opened, the Nikkei followed the U.S. markets down, ending its morning session with a drop of 5.7%. The Hang Seng in Hong Kong was having an even bigger drop, while the Shanghai Composite hit a two-year low before attempting a recovery. Like the Nikkei, Korea and Taiwan were experiencing crash level drops at mid-day while Singapore and Australia were down somewhat less than 5%. If anything, volatility in Asian markets has been even greater than in the U.S.

In the longer term, there is a lot more to consider than the 5% to 6% drop in the U.S. markets today. Since September 2007, the New York Investing meetup has pointed out how the Federal Reserve and the Treasury have attempted to prevent and cover up economic problem before the presidential election. Well, the election is now over. Some of these actions may now start to unravel. If so, we shall begin to see this in the next month or two.

NEXT: When Stimulus Ceases to Be Stimulating

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

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

The Fed Should be Careful What It Wishes For

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:

Volatility is still the predominant feature of the U.S. stock market, with multi-hundred point moves being a daily occurrence on the Dow. For the moment, a Monday rally pattern seems to have replaced the Monday crash pattern that began in mid-September. The media reported yesterday's big move up in stocks as the market's approval of Fed chair Bernanke's endorsement of a new economic stimulus package. This of course makes no sense. The number of stimulus packages, special Fed lending facilities, special Fed asset purchasing programs, bailouts, bailout bills and government loans since the credit crisis began is now somewhere in the double digits - there have been so many, I've lost count. The need for more is just an admission of failure for all of the other initiatives, many of which were claimed to be just what was needed to turn things around. Apparently, the turning hasn't taken place yet.

The Fed announced even another new program this morning (for $540 billion this time). It will start buying commercial paper and dollar denominated CDs directly from money market funds. If you have been following this blog, you may have thought this was already being done. However, what was taking place is the Fed has been lending banks, a $123 billion so far, the money for this type of purchase. However, $341 billion has been withdrawn from money market funds by institutional investors since that program began. So the Fed has decided to eliminate the middleman (or more appropriately the middle-bank) and put an increased amount of funding behind this operation. This new program should not be confused with the one that begins on October 27th when the Fed will begin buying up to a trillion plus of commercial paper from an array of companies. The security of U.S. money market funds was supposed to have been assured about a month ago with the (legally questionable) establishment of a $50 billion dollar government insurance fund. It looks like things aren't exactly working as planned.

Today's country to announce the latest multi-billion dollar injection into its banking system is France. The French government will provide $14 billion in funding to the nations six largest banks. This appears to be part of their half a trillion bank rescue package announced several days ago. Between these two bailout announcements, French authorities were embarrassed once again with another bank trading scandal. Caisse d'Epargne announced an $800 million loss from derivative trading that allegedly took place because of rogue traders. It makes you wonder if there are there any controls on trading operations in French banks. Regardless, the biggest banks in France, just as in other advanced economies, will be assured of survival. Smaller and medium sized banks will be the ones taking the hit from the credit crisis.

The close to infinite liquidity being poured into the world's financial system is having the immediate desired effect of lowering interbank lending rates, which fell to their lowest level in a month yesterday. While the liquidity tsunami is good in the short-term, if successful it could lead to a very ugly long-term. Examination of a U.S. Adjusted Monetary Base chart shows a line going straight up (http://research.stlouisfed.org/fred2/series/BASE). This figure is currency in circulation, plus bank reserves and a massive increase in bank reserves is what is causing its vertical rise. Since banks are not lending at the moment, the inflationary effects will be muted from these additional reserves as long as the economy remains weak. A roaring economy where banks are lending out their reserves full stop would translate to an annual U.S. inflation rate somewhere around 2000% if the current rate of increase was maintained - and that would certainly make the stock market go up.

NEXT: Stock Market Enters the Bermuda Triangle

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.