Will September be the Cruelest Month for Stocks?

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 are set to close out August with the Dow Industrials dropping more than 4% on the month. If the economic numbers continue to indicate a possible double-dip recession however, stocks are likely to fall by a much greater amount in September.

Historically, it isn't crash-prone October when U.S. stocks have their worse performance, but September. Stocks are entering the month in a technically weakened state that began earlier in the summer. In July, all four major indices - the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 - began a bear market trading pattern when their 50-day moving averages fell below their 200-day moving averages (sometimes referred to hyperbolically as a death cross). This is not enough to confirm a bear market however. The 200-day moving average needs to also start moving down. This has happened on the Dow Industrials and the S&P 500 in the last few trading days. The 200-days on the Nasdaq and the Russell 2000 have been moving sideways for a week or more and should start dropping soon. The Dow Transportation Average also needs to have a 50-day 200-day cross to confirm the negative action on the Industrials. As long as there isn't a massive rally, this will happen today. So stocks will be entering September in a technically vulnerable condition.

If more negative economic reports that indicate the economy continues to deteriorate then take place, the mix could be combustible. More hints of a double-dip recession from jobs or manufacturing would be especially damaging. Housing numbers this fall probably won't affect the market as much because things simply can't get any worse (with the exception of housing prices, which still have a lot of room to drop). The bad news on housing from the summer - numbers worse than those at the bottom of the Credit Crisis - may have a delayed impact on stocks though. Jobs have been the perennial weak spot of the attempted recovery and numbers have continually been at recession levels for over two years. Worsening unemployment figures would not be viewed kindly by stock traders. Falling manufacturing numbers won't be either since manufacturing led the economy up from its bottom in the fourth quarter of 2008.

U.S. stocks may also be following Japanese stocks down. The Nikkei dropped 325 points or 3.55% in its last day of August trade. It is now at 8824 and could easily test its Credit Crisis bottom, which is around 2000 points lower. U.S. investors need to watch the key 10,000 level on the Dow Industrials and 1000 on the S&P 500. Stocks moving and staying below these key points would damage sentiment severely. The only thing left at that point to hold up the market would be the Fed's liquidity injections. These might work until the election on November 2nd. If so, you may not want to own stocks later that week.


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.

Japan and U.S. Offer More 'Stimulus You Can Believe In'

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 mainstream media on Monday was hyping a Japanese expansion of a low-interest loan program to financial institutions after talking up Fed Chair Ben Bernanke's statement on Friday that the Fed "will do all that it can" to support the economy. Japanese stocks and U.S. stocks respectively rallied strongly on these essentially negative news items.

The Japanese have been trying to fix their economy for twenty years. They have engaged in one stimulus program after another after another after another after another and it's still dead in the water. Despite the repeated failure of the approach they have taken, this doesn't deter them from engaging in the same behavior again. There is no reason to believe things will be any different this time. Nevertheless, the mainstream media cues the cheerleaders and dutifully reports this as good news, instead of pointing out that the need for a new stimulus program indicates all the previous ones have not worked. That sounds like bad news to me.

The U.S. monetary and fiscal authorities seem to be doing their best to imitate the Japanese. The Fed though has only had three years to follow them on their road to perpetual economic failure. Bernanke's statement on Friday was made from the Fed's annual meeting at Jackson Hole, Wyoming, which the media described as a 'confab' (confab is short for confabulation, which in psychiatry means 'the replacement of a gap in a person's memory by a falsification that he or she believes to be true' - unquestionably an important concept when dealing with establishment economists). What exactly was Bernanke implying when he said that the Fed would be doing all that it can to support the economy? Does this mean that it wasn't doing all that it could have done previously? In at least one sense the answer to that question is yes. The Fed could have opened the floodgates of uncontrolled money-printing and Bernanke was intimating that this is what is going to be happening in the future.

While the Fed and its cohorts in the economic community continue to maintain that there will be no double-dip recession, Intel threw some more cold water on this assumption on Friday. The tech bellwether sharply lowered its third quarter earnings expectations after raising them only a month earlier. PC sales have been running below previous forecasts. This is a strong blow to the U.S. economy since computer and software sales were up 24.9% in the second quarter GDP report. A drop to a negative number for this category could turn the entire third quarter GDP negative. But don't worry, Ben Bernanke will be handling the situation and we all know what an excellent job he's done previously in fixing the economy. Wait, isn't that a confabulation?

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.

Q2 GDP Up Only 0.7% Without Government Spending

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 Bureau of Economic Analysis revised second quarter GPD growth down from 2.4% to 1.6% today. Stimulus spending peaked in the second quarter and despite the big boost that it provided, the U.S. economy only expanded at a rate that indicates the U.S. standard of living isn't declining further.

The U.S. needs GDP growth (adjusted for inflation) at about 1.5% for the well-being of the average person to remain the same. This is because of population increases and other factors including some overstatement of the numbers. Actual growth, meaning more jobs and increased incomes for the American people, only takes place when the GDP number is above that level. The U.S. right now needs a substantial amount of actual growth just to make up for the decline from the Credit Crisis/Great Recession and to get back over eight million lost jobs. Despite $2.7 trillion in federal deficit spending in the last two years, it's just not happening.

At the bottom of the Credit Crisis/Great Recession GDP declined at a 6.8% annual rate. So far during the 'recovery' GDP growth has been:

2009 Q3  1.6%
2009 Q4  5.0%
2010 Q1  3.7%
2010 Q2  1.6%

Most of this has come from changes in inventories -in the first three quarters, approximately two-thirds of 'growth' came from this one factor. Indeed this also would have been true of the Q2 number as well if the inventory component hadn't been lowered. Inventories for Q2 were originally reported as being responsible for GDP growth of 1.05% (divided by the new 1.6% total, this would indicate inventories were 66% of Q2 GDP growth). However the inventory contribution to GDP was revised downward even though according to the BEA, "Private businesses increased inventories $63.2 billion in the second quarter, following an increase of $44.1 billion in the first quarter". The smaller increase in inventories in Q1 was responsible for GDP increasing by 2.64%. This is a peculiarity of GDP math. In 2009 Q4 inventories decreased (yes, decreased) by $36.7 billion and this created 2.83% GDP growth. A decrease in inventories also created a 1.10% increase in GDP in Q3 2009.

Government spending was supposedly responsible for 0.86% of GDP growth last quarter. Subtracting that from 1.6% leaves only a 0.74% increase in Q2 GDP. Describing this as anemic would be an understatement. The federal government however accounts for almost a quarter of the U.S. economy and its spending increased by 9.1% in Q2. This would seem to indicate that the federal government contributed a lot more to Q2 GDP growth than what the BEA claims. It also begs the question as to how good the GDP numbers will be when government spending significantly declines as it is scheduled to do in fiscal 2011.

Q2 GDP would also have also been a lot lower without big increases in 'Gross Private Domestic Investment', which was up a whopping 25%. 'Equipment and Software' was up by 24.9% between April and June. In the recently released durable goods report for July, it had a big drop, as did machinery and other components in this category.  Two years of stimulus spending is responsible for revving up the investment component of GDP in the second quarter, but economic reports from early in the third quarter indicate that its impact is already waning. We will have to wait though until just before the November election to see the first numbers for Q3 GDP.

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.

July Durable Goods Add Support to Recession View

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 an existing home sales report yesterday revealed that the U.S. housing market is currently in worse shape than it was at the bottom of the Credit Crisis/Great Recession, July's durable goods report today further confirmed that the U.S. economy is sinking into a recession.

The headline number, an increase of 0.3%, seemed OK if not particularly good. Only a single item, a huge 76% increase in commercial aircraft sales, was responsible for keeping the number above zero however. Durable goods orders ex transportation fell 3.8% in July. The transportation number, particularly the aircraft sales component, is highly volatile. A strong number one month can be followed by a very negative number the next month. As for the rest of the components of the report, some were eyepoppingly bad.

Machinery orders, which fell 15%, were the weakest number in the report. It wasn't just the extent of the drop that made it so awful, but more importantly it was the biggest decline on record. Yes, the drop was larger than the decline that took place at the bottom of the Credit Crisis/Great Recession when the U.S. economy was falling off a cliff. Computer orders were down 12.7%. Capital goods orders were down 8.0%, the biggest drop since January 2009, just after the Credit Crisis/Great Recession bottom. Orders for electrical equipment and appliances were down 5.9%.

Altogether, July durable goods orders indicate that the manufacturing sector of the U.S. economy is rapidly turning south. This is particularly troubling because it was manufacturing that had the biggest upturn in the last year (the four times larger service sector didn't improve nearly as much). What will provide economic growth, now that manufacturing is weakening? An even more important question is: If some of the manufacturing numbers are as bad as or worse than the bottom of the Credit Crisis/Great Recession and this is also true of the real estate market, how is it possible that the U.S. economy is not currently in another recession?

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.

Existing Home Sales Collapse in July

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.


Existing home sales plunged a record 27% in July, falling to the lowest level in 15 years. Inventories of unsold homes rose by an even greater 40% and were at their highest point in over a decade. A spokesman for real estate industry group NAR described the market's disastrous performance, which took place in every region of the country, as a "pause".

Once again analysts missed the number by a mile, being far too optimistic. Predictions were for a drop of 14%, a pretty bad figure in and of itself, but little more than half the actual result. The severe drop was also well telegraphed by a 30% decrease in pending home sales in May. Pending home sales tend to turn into existing home sales around two months later. May pending home sales dropped because of the expiration of the federal government's home buying tax credit on April 30th. It is now quite obvious that all this credit accomplished was to motivate people who were already going to buy a new home to do so sooner rather than later and it didn't create any additional sales. Just another example of how the federal government is wasting tax payer money on ineffective stimulus programs.

The most amazing thing about July's existing home sales is that they were worse than anything that took place during the bottom of the Great Recession when the U.S. economy was shrinking at more than a 6% annual rate. Even at the bleakest point, existing home sales were around the 4.5 million level. This July they fall to a 3.8 million annualized rate. Moreover the drop from June was severe in every region of the United States - down 23% in the South, down 25% in the West, down 30% in the Northeast and down 35% in the Midwest.  At the same time, inventories of unsold homes rose from 8.9 months supply in June to 12.5 months in July. Year over year, July 2010 home sales were down 26% from July 2009. Despite the across the board collapse in demand, median home prices somehow defied the fundamental laws of economics and rose 0.7% to $182,600.

There are three important messages from the July existing home sales numbers. First, the housing market has not yet hit bottom and it could be a long time before this takes place. Secondly, the numerous government programs to stimulate the housing market- and this includes driving mortgage rates to record lows - have failed to make things better. Third, if the housing market is in worse shape than at the bottom of the Great Recession, then we are either already in another recession or about to enter one.

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.

Japan Leads Global Stock Market Drop

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 Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Japan has been trying to grapple with its real estate and stock market bubbles from the 1980s for over twenty years now. Its approach has been a zero interest rate policy (ZIRP) and an unending serious of stimulus programs (it was recently announced yet another one is being considered). The United States is currently following these same failed policies, but Washington is expecting that somehow they will work here. It is true that the U.S. real estate and stock bubbles in the 1990s and early 2000s were not nearly as bad as those that took place in Japan earlier. So maybe it won't take U.S. stocks 19 years to hit their lows (that would be 2026 by the way) as was the case for the Nikkei - or at least the case for the Nikkei so far. It cannot be said for certain that the 6695 low in March 2009 will hold.

Being the perennially weak sister, problems with global economic imbalances are showing up first in the Japanese market. The Nikkei first broke key support at 10,000 in mid-May.  It managed to trade just above that level for a few days in June, but then fell back and has traded below it ever since. The chart is very bearish.  U.S. investors need to worry about the Dow Industrials holding the same 10,000 level. The Dow is only slightly above this level in today's morning trade. The Dow Transportation Average is also on the verge of a significant breakdown. The Dow Industrials closing and staying below 10,000 at the same time that the Transportation Average gives a sell signal would be a strong negative for U.S. stocks. The S&P500, the Nasdaq, the small-cap Russell 2000 and the Dow Industrials have already given sell signals in July.

The other major development in Japan during its two lost decades was a massive bond bubble, which caused even long-term rates to approach zero. This same type of bubble is now developing globally, although the powers that be are denying that this is taking place. When massive government stimulus causes interest rates to drop, it is because of a liquidity trap - money does not flow into the real economy and so the economy doesn't significantly benefit from stimulus. Eventually a steep depression develops (what has prevented the depression phase so far in Japan is that its population had enough savings to pay for the last 20 years of stimulus - sort of like rich people who have no income, but still manage to live well by slowly selling off all of their assets). The only way out of this depression is to reignite economic growth with inflation. The Japanese have yet to figure out how to do this and U.S. monetary authorities are still reluctant to pursue this option.

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.

FDIC Swan Song: 8 Banks a Week

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 FDIC closed down eight banks last week bringing this year's total to 118 so far. Included in this week's closures was the notorious ShoreBank in Chicago. In a separate report, the U.S. Treasury has disclosed that the Obama administration's HAMP (Home Affordable Mortgage Program) seems to be rapidly falling apart. This could further weaken the U.S. banking system.

The FDIC is operating on both borrowed time and borrowed money. This agency is the bulwark protecting American's savings in the case of failed banks, but the FDIC itself is close to going broke. The eight closures this week alone cost the FDIC’s deposit-insurance fund $473.5 million. The deposit insurance fund was already $20.9 billion in the hole at the end of the fourth quarter in 2009. In order to plug the hole and keep going, the FDIC in December forced banks to prepay three years of insurance premiums and raised about $45 billion by doing so. That money had to pay off the deficit already accumulated and then last for the next 156 months of bailouts. There have been weeks this year when the FDIC has had to shell out close to $1 billion for bank rescues. That $45 billion isn't going to last much longer.

ShoreBank was the most significant bailout this week. The bank was founded in the South Side of Chicago in 1973 and was the nation's first community development and environmental bank. Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), Bank of America (BAC), American Express (AXP), GE Capital (GE), and Wells Fargo (WFC) were investors. The bank has indirect ties to a number of members of the Obama administration. The bank was under a cease-and-desist order from the FDIC for more than a year before it was finally closed down. Its remaining assets will be transferred to a newly created corporation, Urban Partnership Bank. Some of the same executives from ShoreBank will be running this newly chartered bank (once they drive Urban Partnership Bank into the ground, it too will be bailed out). It looks like the investments of the too-big-to-fail, or even lose any money, big bank funders will also be protected under this arrangement by transferring them to Urban Partnership Bank.

Meanwhile, the poorly thought out and even more poorly run HAMP program is not making a big dent in slowing foreclosures. Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have already fallen or more likely been pushed out. Mortgage holders blame the banks for not cooperating and banks blame the mortgage holders. According to RealtyTrac, the nation is headed toward more than one million foreclosures this year - a higher amount than the 900,000 homes repossessed in 2009. Boy, HAMP is certainly doing a great job in significantly reducing the number of foreclosures. Well, I guess it's just too much too expect that something will be accomplished for only $75 billion in taxpayer money.

Based on this week's events, I have written the following theme song for the FDIC (maybe Sheila Blair will sing it at the next board meeting) to be sung to the tune of the Beatles 'Eight Days a Week':

Oh I'll bail out your bank babe,
Guess you know it's through,
Hope you like the money banker,
When I'm funding you,
Spent it, Lost it, Pay Me, Save Me
Don't do nothing but bailouts,
Eight banks a week


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.