The Fourth 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.


The first four trading days of the year provide investors with an important message of where the big money is flowing in the market. More investing money gets moved around at the beginning of the year than at any other time. Overall, the picture has been very bullish. U.S. stocks, foreign stocks, emerging market stocks, large cap, mid cap and small cap stocks have all rallied. So have commodities, with inflation sensitive energy and precious metals being particularly strong. Even U.S. government bonds and the U.S. dollar have been relatively flat. How is it possible that almost nothing has gone down?  There is only one way this can happen. The liquidity available for investing purposes is increasing substantially, as has been the case since 2008. The zero or just above interest rate policies of the world's central banks are flooding the global financial system with cash. As long as this continues, global stock markets and commodities should continue to rally.

The major U.S indices were up between 1.4% and 2.7% in the four days since the close of 2009. Nasdaq did the worst and the small-cap Russell 2000 the best. A small cap versus large cap performance difference shouldn't be read into these numbers. The big cap S&P 500 was up 2.4%, doing almost as well as the Russell and the even bigger cap Dow Jones was up little more than the Nasdaq. Of the nine sectors of the market, only two were lower than their last price in 2009 - Utilities and Technology, down
-0.8% and -0.1% (essentially unchanged) respectively. The best three performing sectors were Financials, Energy and Basic Materials up 6.3%, 5.1% and 4.5%. Liquidity should have an outsized impact in these sectors and it looks like it did. Industrials put on a decent enough rally, closing up 3.5% after the first four days of trading. Government statistics indicate that manufacturing is reviving in a number of countries thanks to all the stimulus money being spent globally. Stock prices are reflecting this money pumping effort just as they are likely to reflect the withdrawal of stimulus spending when it takes place.

Stock markets outside the United States outperformed. Developed markets overall did about the same as the S&P 500, while emerging markets did somewhat better, rising 3.3%.  The BRIC markets all did well with Brazil, India and China rising between 3.1% and 3.8%. Russia led the pack though, rallying 6.4% in the beginning four days. Commodity based markets were stronger than others. Australia was up 4.1% and Canada was up 3.3%.

Commodities were up 2.5% - on par with the major U.S. stock indices, but there was a mixed picture inside the group. Silver was one of the stars, rising 7.9%. Light sweet crude oil was up 4.2% and natural gas was up 3.8%. Gold rallied 3.0%. The agricultural commodities were the laggards. The dollar was mostly unchanged during early year trading thanks to remarks by the new Japanese finance minister (an expert in health care issues and not economics by the way) who commented that he wanted the value of the yen to come down. This led to a strong rally of the U.S. dollar against the yen. Without that, the dollar would have been down in early 2010 trading. Long-term U.S. treasuries were mostly unchanged after a sharp drop in price and big gain in interest rates in December. Yields on the 10-year and 30-year were 3.82% and 4.69%  compared to 3.84% and 4.66% at the end of December.

Rallies that take place in early year trading tend to have pullbacks later in January. Investors who want to buy into the sectors that performed the best in the first four trading days should watch for these pull backs and use them as an entry point.  Some rallies are likely to go on longer than others of course. The stock market also tends to have a seasonally weak period in March and April. The current rally has already gone on for ten months and this is a long time to not have had some significant give back in price. Watch interest rates for a hint of when this might happen.

Disclosure: Long gold, silver, and natural gas and short long-term U.S. treasuries.

NEXT: U.S. Employment Figures Indicate More Stimulus Ahead

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.

ISM Reports for December Confirm 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.


The January 6th report from the ISM (Institute of Supply Management) on the state of the U.S. service economy in December indicated neither growth, nor decline. The tepid 50.1 reading was in contrast to the 55.9 number for December manufacturing that was released two days earlier. It would have been much better news for the economy if the numbers had been reversed since the service sector of the U.S. economy is four times bigger than the manufacturing sector. Neither report is adjusted for inflation. Both have a 'Prices' component that figure in the overall numbers, so inflation can make the top line number look better. The Prices component was indeed one of the highest numbers in both reports.

The dividing line for contraction versus expansion for the ISM is 50. Numbers in the 60's are very strong. The Prices component in the Manufacturing report for December came in at 61.5, up 6.5 over November. It was the third highest number. Prices in the Non-Manufacturing (services) report were up 0.9 to 58.7. This was the second highest component, exceeded only by Inventory Sentiment. December was by no means the first time the inflation numbers were high. Inflation was already evident in the reports for August 2009. In that month, the Prices component was 65.0 and 63.1 for Manufacturing and Non-Manufacturing respectively. The Non-Manufacturing number was up a whopping 21.8 from July. Prices in the Manufacturing report were up 10.0, having already been above the 50 level the month before. Gold began a major rally on this news that first took it to $1000 and then well beyond that level.

The revival in manufacturing is not just taking place in the U.S. but is occurring globally. Reports out of the UK indicate manufacturing activity there is at a 25-month high. Manufacturing in the Eurozone is at a 21-month high. China recently announced that its manufacturing sector expanded at the fastest rate in 20 months. Government stimulus programs and close to zero interest rates are having their impact and it is showing up in production statistics. This is better news for manufacturing-based economies, than it is for service-based economies like the United States. Expansionary fiscal and monetary policies are good for economic growth in the short term. This growth is not necessarily sustainable however and there is eventually a price that has to be paid with inflation.

Where is the inflation coming from? While it is likely to show up in price increases across the board in the long run, in the short run it is appearing in raw materials. The December ISM Non-Manufacturing report had an important statement confirming this. Toward the bottom of the report,  the following statement can be found: "No commodities were reported down in price". Government stimulus seems to be doing a good job of stimulating prices. 

Disclosure: Long gold.

NEXT:

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 Second 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.


The first day of the year was a good one for almost all asset classes - U.S. stocks, foreign stocks, emerging market stocks, and commodities. Bonds were mostly unchanged and the U.S. dollar went down.  The four major U.S. stock indices - the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 all hit new yearly highs. There was some minor give back in the second day of trading, which after a strong rally is not surprising. The basic picture on the second day remained the same however.

While there are slight variations in performance in U.S. stocks based on market cap, there is nothing out of the ordinary so far. They all have had good rallies, with small caps doing a little better than big caps. This is normal behavior since small caps are more risky.  Out performance by big caps would indicate the market was becoming more risk adverse and possibly getting ready to turn over.  Price changes for the first two days by market cap, using the ETFs SPY, IJH, IJR and IWC were as follows:

Big Cap       SPY     +2.0%
Mid Cap      IJH      +2.0%
Small Cap    IJR      +2.2%
Micro Cap   IWC    +2.4%

While the stock market overall has been quite bullish, not all of its nine sectors were doing equally well. Three sectors are well ahead of the pack - Energy, Financials and Basic Materials. Of these, only Basic Materials has hit new yearly highs, which it did on both the first and second trading day of the year. The interest rate sensitive utilities are the only sector that is down so far from its December 31st close. Health Care has traded essentially flat and Consumer Staples have had only a muted rally. Performance of each sector measured by the ETFs, XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, and XLY for the first two trading days was as follows:

Energy                             XLE         +4.1%
Financials                         XLF         +3.8%
Basic Materials                XLB         +3.5%
Industrials                        XLI          +2.1%
Technology                      XLK        +1.4%
Consumer Discretionary   XLY         +1.1%   
Consumer Staples            XLP          +0.7%
Health Care                     XLV          +0.1%
Utilities                            XLU          -0.1%

Investors should look for stocks in the top performing sectors. Trading in the beginning of the year gives an indication of what the big money is buying and selling and what they are likely to support or continue to sell in the following months. So far the market is not indicating any significant preference for small caps versus big caps, so investors can be market cap neutral in the size in their selections. U.S. stocks are not the only place to look either. Foreign stocks and commodities offer some better alternatives. So far, the Russian market and silver have been two outstanding performers in these asset classes.

Disclosure: Long silver.

NEXT: The Third Trading Day of  2010 - The Message of 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.

A Comparison of Major Currencies in the Last Decade

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.


One of the most consistent messages from U.S. Treasury Secretaries in the last decade was that America has a strong dollar policy. During that period the trade-weighted dollar (the U.S. dollar measured against a basket of six currencies proportional to U.S. trading activity with the respective countries) fell approximately 21%. The value of the dollar went down against the Euro, the Yen, the Swiss Franc, the Canadian dollar and the Australian dollar. It traded flat against the British Pound. One wonders what would have happened if America had had a weak dollar policy.

The U.S. trade-weighted dollar opened in 2000 around 99. It then rallied in the beginning of the decade (this was a continuation of a rise that began in 1995) and peaked with a double top just above 120 in 2001 and 2002. It was mostly downhill from there until it hit bottom in the 71.50 area in 2008. A flight to safety during the Credit Crisis rallied the dollar back to 90. It closed out the decade at 78.22. The decline of the dollar in the first ten years of the 2000s was merely a continuation of a much longer drop that began in 1985, the year that the trade-weighted dollar peaked at over 160. In the twenty-five years since then, it has lost more than half of its value.

As the dollar fell, other major currencies rose. The Swiss franc was the big winner during the decade with a 49% rally. The euro was up 37%. The Japanese yen had a more modest rise and the value of the British pound remained essentially unchanged against the dollar. The commodity-based currencies, the Australian and Canadian dollars, were up 39% and 41% respectively during the decade. In general, other major currencies bottomed against the dollar in the early 2000s. The euro was the first in 2000, it was followed by the Australian dollar in 2001, then the Canadian dollar and the Swiss franc, which made a double bottom in 2001 and 2002. The Japanese yen also hit its low value for the decade in 2002. The one exception was the British pound, which bottomed during the Credit Crisis in 2009. All the majors had significant sell offs against the dollar late in the decade because of the problems in the global financial system and if they hadn't, their rallies would have been much greater than the final numbers indicate.

For the last twenty-five years, not just the last decade, the dollar has been losing ground against the other major fiat currencies (all backed only by the credit of their issuing governments). The market has made its opinion quite clear about U.S. budget deficits, trade deficits, and monetary policy compared to those of other nations. If the U.S. dollar wasn't the reserve currency for the world, the dollar would have devalued much more than it did. Unless the U.S. puts its fiscal house in order - and just the opposite is occurring - expect dollar devaluation to not only continue, but to accelerate in the next decade.

Investors who want to invest in currencies can purchase FXA, FXC, FXE, FXF, and FXY,  ETFs which hold the Australian dollar, the Canadian dollar, the euro, the Swiss franc and the Yen respectively. UDN can be used to take a short position in the trade-weighted dollar.

Disclosure: No currency positions.

NEXT:

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.

Interest Rate Rally Portends Inflation in 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.


U.S. treasuries closed out 2009 with their biggest loss since 1978. It was the first loss since 1999 and only the fourth loss in 31 years. Interest rates at the long end of the curve are now almost double what they were at the height of the Credit Crisis. It was quite a turnaround from the end of 2008, when bonds managed to rally and survive the market slaughter that took down almost every asset class. 2009 witnessed a complete turnaround when treasuries went down and almost every other asset class went up. The rally in bonds in 2008 and the severe drop in interest rates was used as a key piece of evidence for those who argued the deflation would be a problem. They ignored that inflation-sensitive gold and farmland were the other two assets that had gone up in price that year (gold was up again in 2009 with a 25% gain - it's ninth straight annual gain; final figures for farmland are not yet available).

Very short-term interest rates are still close to zero in the U.S. As long as Fed Funds stay at that level, 3-month T-bills will not be much higher. Long-term rates themselves were kept down by the Fed purchasing 10-year treasuries as part of its quantitative easing program. This ended on October 31st. Once the Fed was no longer propping up the government bond market, December became one of the worst months for treasuries in a long time.  The case for deflation, although  questionable from the start, collapsed right along with treasury prices. Deflationary environments are characterized by low short-term rates and low long-term rates, as was the case in Japan starting in late 1990s and the U.S. during the 1930s Depression. The yield on the 10-year Japanese government bond fell below 1% in 2003, not far above the near zero rates on shorter dated paper. Rising long-term rates indicate inflation and the bigger the spread between them and short-term rates, the higher future inflation is likely to be. That spread is now already wide and widening even further in the U.S.

The problem isn't isolated to one side of the Atlantic either. Rates for 10-year gilts in the UK are already over 4% and are higher than government bond rates with the same maturity in Italy. The UK is engaging in major money printing and its policies are perhaps even more inflationary than those of the U.S. The yield on the 10-year U.S. treasury at the end of 2009 was 3.84%. The 30-year yield was 4.64%. This was not the high for 2009 though. That took place in June when the 10-year yield was around  4.00% and the 30-year yield around 5.00%. It was already clear by then that deflation was not going to happen. Nevertheless, the Federal Reserve, the Treasury and a number of prominent economists continued to maintain otherwise. The same thing happened in Weimar Germany, with the equivalent cast of characters claiming deflation was a problem - not inflation - right up to the point where prices exploded. There is no reason the script should be different this time. It rarely is.

Inflation is devastating for long-term bonds. Their prices have to drop substantially, so yields can go up enough to induce potential purchasers to buy them. These were some of the worst investments during the 1970s (until the final peak in interest rates in 1980, when they became excellent investments). Back then, the average investor's only option to deal with a dropping bond market was to stay away from it. Now we have the ETFs TBT and TMV, which have portfolios that represent leveraged shorts on long-term U.S. treasuries. Long-term treasuries are approaching resistance on the charts, so a pull back should be expected in early 2010. This could prove to be an excellent buying opportunity.

DISCLOSURE: Long gold, farmland, TBT and TMV.

NEXT:

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.