Lessons for Investors from the Massachusetts U.S. Senate Race

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 markets can be thought of as a daily poll showing support from two competing sides - the bulls and the bears. Election day is the date an investor sells. What is really taking place in the markets or a political campaign is never completely clear because there are always conflicting pieces of data. The losing side will be prone to using the mainstream media to bolster their case and they will always have something to work with, even if they have to produce the supporting numbers themselves. Investors need to sift through the numbers to pull out the most relevant ones and ignore the numbers that are questionable or that are just not that important.

The numbers produced by political polls as well as economic figures constantly confuse people. One reason is that both are subject to manipulation. The best rule for helping to sort out what is going on is 'the trend is your friend'. This rule instantly makes clear what is going on in today's Massachusetts Senate race for Ted Kennedy's old seat.  The Democrat, Martha Coakley started out 30 points ahead in the polls in the fall and has dropped to negative numbers in a number of polls taken just before the election.  While the specific numbers for each poll vary, the trend is unmistakable: Coakley in losing ground fast and her Republican opponent Scott Brown is surging. Nevertheless, the media has had a number of articles trying to downplay this story by finding problems with one poll and talking up another poll (which was usually more error prone than the poll being attacked) with somewhat different results. All this is just noise, just like much of investing coverage is.

The handling of the Massachusetts race also highlights a constant problem with investing - starting from preconceived notions. Massachusetts is one of the most Democratic leaning states in the U.S. Ted Kennedy, and President Kennedy before him, held the senate seat being contested for 56 years. It is quite reasonable to think that a Republican could not win this seat and this was indeed the conventional wisdom right up to the week before the election. The early statistical evidence indicating this could happen was ignored because of unwillingness to consider the alternative. Only when the evidence became overwhelming did it get people's attention. There are times when it can be dangerous to think something has to be one way because it has always been that way. Investors need to be alert for these possibilities. The demise of General Motors, Bear Stearns and Enron are good examples of this. Legions of people insisted that General Motors could never go bankrupt, but it did. Right up to the last week of its existence, Bear Stearns had its cheerleaders telling the public that everything was fine with the company. Enron also had it supporters trying to get investors back into the stock almost to the very end.

Just like in politics, a strongly entrenched bull or bear view can always result in a counterattack against the changing status of an investment. In Massachusetts, the Democrats finally realized an impending loss was imminent in the Senate race. Money and political operatives started flooding into the state from Washington, D.C. President Obama himself came to Massachusetts to try to rouse the base in favor of Coakley. Obama's volunteer lists were tapped and phone banks set up across the U.S. to call into Massachusetts to get Coakley voters to the polls. After being promised a big tax break in the health care bill, big labor has bussed in a number of foot soldiers to work the vote on Election Day. The entrenched interests do not give up easily and investors should always keep this in mind. A counter-trend rally is the best stock market analogy and the price movements of the U.S. dollar have similar underpinnings to the reaction counter-reaction that is taking place in Massachusetts politics.

There is also an important lesson on short versus long-term trends in the Brown Coakley race. With the exception of short-term momentum traders, most investors need to keep the long-term trend in mind. One race for the senate in and of itself represents a short-term event. In context it can have much broader implications. A loss for the Democrats in Massachusetts will follow loses in statewide races in Virginia and New Jersey in 2009. These were downplayed by the pundits as being caused by special circumstances. It will much harder to deny a third loss is not part of a bigger trend (although this will indeed happen, expect the excuse machine to be revved up to full power after the election). In the markets, a major sea change appears to be taking place in long-term U.S. interest rates. They are trying to break a three-decade downtrend. It is likely when this takes place it will be explained away by a number of investing pundits.

The implications for the Brown Coakley race in Massachusetts are very significant for U.S. politics going forward. Obama will be severely depowered by a Coakley loss, both in the short and long-term. The Democratic supermajority in the U.S. Senate will be gone. Republicans will be energized in the November elections and are likely to gain a significant number of House and Senate seats. Investors should pay attention to how the markets react the day after the Senate election and to Obama's State of the Union address on January 27th. The market will tell you what it thinks of this turn of events.

Disclosure: Not applicable

NEXT: Big Bank Earnings Contradict Economic Recovery Claims

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

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

Toothless CFTC Tries to Bite Gold and Silver

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


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

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

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

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

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

Disclosure: Long gold and silver

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

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

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

2009 Retail Sales Deconstructed

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. retail sales for December 2009 were down 0.3%. News outlets reported this as a surprising turn of events. While I am tempted to agree with that viewpoint, it is only because there is enough inflation in the system to make retail sales look better. The retail numbers are not adjusted for price increases and this should always be kept in mind when viewing them. Higher retail numbers don't necessarily mean a better economy.

The Commerce Department reported retail sales were up 5.4% year over year. It would have been almost impossible for them to be lower, since December 2008 was when the Credit Crisis was close to its worse point. Nevertheless, three major retail categories - Electronic and Appliance Stores, Building Materials and Garden Equipment and Supplies, and Furniture and Home Furnishings - had lower sales in December 2009 than they did a year earlier. These three retail sectors are dependent on the health of the real estate market. 

So what went up to improve the numbers?  Gasoline sales rose 34% year over year and by themselves accounted for almost 50% of the total increase in the raw numbers.  This is pure inflation. It is not likely that actual gasoline use is up, especially with the Cash for Clunkers program having subsidized more fuel-efficient vehicles for American motorists.  Sales for Motor Vehicle and Parts Dealers were up 6% from 2008 and this accounted for another 19% of the increase in the yearly total. Government bailouts and stimulus programs are responsible for this increase. If you removed the inflation factor, and gasoline sales represent  only some of the inflation that might be in the numbers, and government programs that directly created higher sales, how much improvement would there have been?  Not much and there may have been none at all - so much for economic recovery.

There was one other important piece of information in the report for December that has significant ramifications. Sales at non-store retailers were up over 10% in 2009. Shifting of buying to the Internet is a strong negative for retailers doing business in physical stores, which are still struggling because of the economic downturn. This indicates that commercial lending, currently one of the major weak points in the U.S. banking system, will be even more troubled than it would have been from just the recession alone. Investors should assume more bailout money will be needed and this problem will go on longer than anticipated. However, as the retail sales report shows, government money can prop up an ailing sector of the economy, can make the economic numbers look better, and can create inflation, but it can't necessarily buy a recovery.

Disclosure: Not applicable.

NEXT: Toothless CFTC Tries to Bite Gold and Silver

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 China in a Bull's Shop

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.


After its own stock markets closed on January 12th, the PBOC (People's Bank of China) ordered a boost in the yuan reserve requirement ratio for banks by half a percentage point. U.S. stocks immediately sold off on the news, gold dropped $15 in only minutes, and the U.S. dollar also declined. The market viewed this as the beginning of a tightening cycle on the part of the Chinese. While analysts are debating this, it is almost certainly true. Claims that China beginning to tighten monetary policy now will be able to head off future inflation however are grossly overstated and can be put in the category of wishful thinking.

When it comes to bank lending, China has the opposite problem of the United States. Banks in the U.S. have yet to start lending again despite half a dozen support and giveaway programs from the Federal Reserve and Treasury Department that are meant to encourage them to do so. Bank lending in China is surging out of control though. Lending in the first week of 2010 was greater than the entire month of November 2009, which in turn was already strong. Analysts claim that PBOC's move will remove 200 to 300 billion yuan from the banking system. Bank lending in the first week of this year was 600 billion yuan, so the drop in liquidity caused by the new rules represents taking away half a week of lending. That should be about as effective as trying to take down an elephant with a fly swatter.

Only a significant change in monetary policy is going to have any impact on future economic numbers. Central bank interest rates are either zero or close to zero in most major economies. Raising that number half a point, a point, even two points still indicates an easy money policy. Even that is not going to happen in the foreseeable future. China itself uses interest rate hikes to cool down its economy and last did so in 2007. It has yet to start a new tightening cycle. Starting that cycle won't be enough to stop inflation either. Inflation is an insidious phenomenon that takes years to work its way through an economy. There is as much as a four-year lag between a period of easy money and a first peak in the inflation rate. That takes us at least to 2012. In the 1970s U.S., money supply expansion peaked in 1971 and inflation peaked nine years later in 1980. Trying to control inflation after money expansion has occurred doesn't work, unless severe measures are used.

Governments also fail to control inflation because they fail to focus on the cause. In China's cases, they froze their currency at the beginning of the Credit Crisis, so it is extremely undervalued. Keeping a currency at too low an exchange rate is highly inflationary. When inflation shows up in China in the not too distant future, the key to stopping it will be to significantly value the yuan upward. Other measures will prove to be ineffective, but like most government throughout history, China is likely to take the easy way out and avoid taking the necessary steps needed to reduce inflation.

As an interesting aside to China's bank announcement, it should be noted that the yen is selling off against the U.S. dollar. Almost every other currency is rallying against the dollar and some very strongly. It is quite clear that this was part of some central bank maneuver to drive down the yen. The large drop in the price of gold, which took place in minutes on the 12th, also required a large amount of capital backing it. Central banks have that large amount of capital. This ordinarily would have rallied the U.S. dollar strongly, but didn't. Manipulating the gold market is one of the old reliable techniques governments use to support the U.S. currency. Central bank actions rarely impact the markets for too long if there is no fundamental support backing up their moves. When the U.S. stops borrowing and printing money and raises interest rates substantially, real support for the dollar will exist. Until that happens, the long-term downtrend will continually reassert itself.

Disclosure: Long gold.

NEXT: 2009 Retail Sales Deconstructed

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

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

The U.S. Dollar in Early 2010 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.


The U.S. trade-weighted dollar began a significant sell off in early March 2009 from the 89.00 level. By November 25th (the day before Thanksgiving), it hit its yearly low at 74.23. Almost as if on schedule, a rally began in December and lasted until the 22nd (right before Christmas). Trading was mostly flat in the first week of 2010, but off the December highs. Gold, which sold off as the dollar rose, rallied strongly in the first trading week of the year. The dollar is struggling and the technical picture now looks negative in the short-term. The December rally did nothing to reverse the intermediate or the long-term downward trend in the dollar. The currency hit its high in the mid-1980s.

The Euro and Swiss franc both peaked the day the dollar bottomed and bottomed the day the dollar peaked. The British pound, which should be a weak currency considering the extensive money printing taking place in the UK, peaked earlier on November 16th and bottomed later on December 29th. The Japanese yen, which rallied strongly starting in early April 2009, peaked on November 30th and bottomed so far on January 7th. The commodity-based currencies the Canadian and Australian dollar behaved somewhat differently. The Australian dollar peaked with the pound, but bottomed with the euro. The Canadian essentially traded flat.

The selling in the yen was sharp and powerful in the first few days of December and had the fingerprints of central bank intervention all over it. Export driven economies in Asia are becoming increasingly desperate to keep their currencies from rising against the dollar since this makes their goods more expensive and hurt their economies. On January 11th alone, at least four Asian central banks - India, South Korea, Singapore and Indonesia - bought U.S. dollars in the currency market. Unlike other currencies, the Chinese yuan doesn't float and this is negatively impacting its Asian neighbors and all other exporters. The Chinese are engaging in jawboning however to try to talk down the dollar. An investment strategist for the Chinese government sovereign wealth fund just commented that the U.S. dollar had bottomed, but the yen should be selling off. He further stated, "China now has a voice in influencing the dollar's exchange rate and the interest rate on U.S. government debt." For some reason, a laugh track didn't accompany the Internet postings of this news.

It is not surprising that the U.S. dollar rallied in December, even if the cause was central bank intervention. No asset, no matter how weak, can drop in price every day. There are always counter rallies, just as there are counter sell offs for assets that are going up most of the time. The underlying problem with the U.S. dollar is irresponsible monetary and fiscal policy. Until these are corrected, and it looks like they will only be getting worse for the next several years, a sustainable rally in the dollar against hard-assets is not possible. Central banks can intervene all they want, but the results will only be temporary. It should be kept in mind that exchange rates in and of themselves are not the only thing that is important. We are in an era when all fiat currencies globally are losing their value against gold. Unless something is done to stop this, paper money will eventually get to its intrinsic value, which is zero.
 
Disclosure: Long gold.

NEXT: A China in a Bull's Shop

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.

Sun Shines on Solar Stocks in Early 2010 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.


Some of the biggest gainers in the beginning of 2010 were solar stocks. While the rest of the stock market rallied starting in March 2009, these stocks were left behind. Some solar stocks are still not that far off their  lows, so they are long overdue for a bounce. Solar power ETFs, TAN and KWT, were up 10.0% and 9.9% respectively in the first week of trading. Many individual stocks were up much more, with the biggest gainer being SolarFun Power (SOLF) - up 32%. This powerful first week rally is justified if you think energy prices are going up in the long run or that inflation is in our future because of all the government money printing taking place globally.

The news has also been good for the solar sector recently. On January 8th, private company eSolar signed an agreement with China to build a series of solar thermal power plants with a 2000-megawatt capacity. Last September, First Solar (FSLR) also inked a contract with China to build an equally large photovoltaic plant. JA Solar Holdings (JASO) helped wake the sector up in December when it announced that it expected its 2010 product shipments to increase 50% in 2010.

As a young industry, solar will be prone to consolidation. This energy source is still not economically viable without government subsidies and support. These are likely to continue however until rising oil prices turn solar into a self-sustaining industry. While the risk of bankruptcy was at its height in the fall of 2008, it is still a good idea for intermediate to longer-term investors to weed out stocks that might face a liquidity crunch. Running out of cash is the biggest risk for insolvency. To avoid this, look for stocks with a Current Ratio (short-term assets divided by short-term liabilities) greater than 2.0 and keep an eye on this number. Solar industry stocks that met this standard at the end of 2009 are:  Ascent Solar Technologies (ASTI), Energy Conversion Devices (ENER), Evergreen Solar (ESLR), First Solar (FSLR), JA Solar Holdings (JASO), MEMC Electronics (WFR), and SunPower (SPWRA). Solarfun Power (SOLF) is on the cusp.

The solar stocks that performed above average for the sector in the first trading week of 2010 were:

Solarfun Power                    (SOLF)       Up 32%
ReneSola                             (SOL)         Up 21%
Energy Conversion Devices  (ENER)      Up 19%
China Sunergy                     (CSUN)      Up  19%
Evergreen Solar                   (ESLR)       Up  19%
JA Solar Holdings                (JASO)       Up  16%
Yingli Green Energy             (YGE)         Up  14%
Ascent Solar Technologies   (ASTI)        Up  14%
LDK Solar                          ( LDK)        Up 14%
Canadian Solar                    (CSIQ)       Up  13%
Trina Solar                           (TSL)         Up  13%

Except for momentum traders with very short-term trading horizons, it is generally not a good idea to chase performance. Pullbacks almost always take place after a good rally. Investors interested in the sector should wait for these and take advantage of them.

Disclosure: Long ASTI, ENER, ESLR, and WFR.

NEXT: The U.S. Dollar in Early 2010 Trading

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

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

U.S. Employment Numbers Indicate More Stimulus Ahead

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 December 2009 Nonfarm Payroll report (released January 8th) indicated that the U.S. added jobs for the first time since the recession began two years ago. This didn't take place in December however. Payrolls last month fell 85,000 with most of the damage coming from drops in construction and manufacturing. Revisions for past months made by the BLS indicate that the U.S. added 4000 jobs in November, instead of the 11,000 loss initially reported. At the same time that 15,000 extra jobs appeared in the November totals, 16,000 were subtracted from the October totals. Certainly, some would think this was suspicious.

While the BLS (Bureau of Labor Statistics) may be playing tricks with the numbers to make the U.S. employment situation look better, it is still quite obvious that the overall picture is pretty dismal. The best spin they could put on the recent news was that the drop in the numbers in the fourth quarter of 2009 was much less than in the devastating first quarter. This 'we are still falling off a cliff, but at a slower rate' message shouldn't reassure anyone. While it is true that there are less layoffs now than there were a year ago, the numbers literally couldn't have gotten much worse. Looking inside recent U.S. employment reports, it can be seen that large numbers of temporary workers added to payrolls have prevented the job loss numbers from being lower than they would have been otherwise. Another 47,000 temp workers were added in December. People have also been leaving the labor force in large enough numbers to keep the top line unemployment rate at only 10.0%. According to the BLS another 661,000 people supposedly exited the U.S. labor force between November and December 2009. While people who aren't in the labor force obviously don't have jobs, they are not considered unemployed.

There were only three industries that added employees in December. Professional and Business Services added 50,000 employees, but this seems to be mostly temporary workers. Education added 13,000 jobs. Health Care added 22,000 jobs and has been the one perennial bright spot in U.S. employment since the recession began. It has added jobs every month in the last two years. A vibrant health care sector can't be the cornerstone of a healthy economy however. The goods producing sectors are needed for this and they are still hemorrhaging jobs. Another 53,000 jobs were lost in construction and 27,000 in manufacturing in December. The loss of construction jobs is not surprising since other statistical reports indicate that U.S. real estate activity is weak. Reports on Durable Goods and the ISM Manufacturing index though indicate U.S. manufacturing has been doing well for many months. There seems to be a disconnect there.

Unemployment is perhaps the most sticky of political issues and something that politicians watch closely. Their automatic reaction is to spend more money to tackle the problem. First they borrow it, and when the credit lines run out, they print it. The U.S. is already well along in this scenario. Investors can also expect a continuation of the Fed's zero interest rate policy until there are real improvements in the employment numbers. It is estimated that it will take the creation of 200,000 jobs a month to lower the U.S. unemployment rate. December's report indicates that this won't be taking place in the near-term future.

Disclosure: Not applicable.

NEXT: Sun Shines on Solar Stocks in Early 2010 Trading

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

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