Dollar Clears Resistance as Euro Falls Below Support

 

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

As the U.S. trade-weighted dollar (DXY) breaks out from a four month consolidation pattern, the euro (FXE) is falling below major support. The movements of these currencies have important implications for the rest of the market.

The dollar has been stuck trading roughly between 79 and 82 since January. There is strong chart resistance at these levels both from recent times and two decades ago. In the last couple of years, the dollar made a double top at just under 82 in late 2010 and early 2011. In the late 1980s and early 1990s the dollar made a triple bottom at three different points in this year's trading range. The dollar finally broke above 82 on May 23rd. While there is minor resistance just under 84, major resistance is from 88 to 89 — the highs during the Credit Crisis in late 2008 and early 2009 and in mid-2010 during the first phase of the Greek debt crisis. It should be assumed the dollar will get to that level again (and possibly higher). How long it takes to do so is still an open question.

As is almost always the case, the euro is moving opposite to the dollar. The euro has strong support at and just above 125. It made a double bottom at this level while the dollar was peaking during the Credit Crisis. Recently in January, it made another low at this level. There was a clear break below on May 24th. Next stop for the euro is the low around 119 established in June 2010 when the dollar was just above 88. If the euro breaks this support, it will try to head toward parity with the dollar. The powers that be will of course do everything possible to try to prevent this.

The commodity markets are heavily influenced by the dollar/euro price actions. All commodities are priced in dollars, so a rising dollar will lower commodity prices all else being equal. Oil (USO) and gold (GLD, IAU) are generally at the forefront of this price dampening. This is one reason spot gold was down 30% during the Credit Crisis, despite its safe-haven status. WTI Oil dropped almost 80% at the same time. Stocks of the commodity producers usually fall even more than the commodity itself. Multinational stocks in general are also negatively impacted by a rising dollar because their earnings are mostly made in other currencies.

Since large moves in major currencies are destabilizing, central bankers are always concerned when they happen. They will continue to do everything possible to prop up the euro, although the currency union cannot continue to exist in its current incarnation. There is a long history of governments trying to prop up weakened currencies however and while devaluations can be delayed, they can't be avoided altogether.  

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.

Market Selloff Might Pause Despite EU Debt Crisis

 

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 should soon find support on their current selloff, but this will only be temporary.  Europe's debt problems, which are at the epicenter of the current financial crisis, are not going to go away, they are only going to get worse until some realistic solution is found.

Stocks in Europe have been selling off for days and so have the euro and gold and silver. Only on Thursday did the U.S. markets start to drop significantly. Gold (GLD) and silver (SLV) managed to rally off deeply oversold conditions after reaching chart support around their lows from late last year. Even the euro (FXE) was trying to rally after getting close to its low from January. The major U.S. market indices are all approaching their 200-day moving averages (the Russell 2000 has already reached it). Some bounce should be expected at or just above those levels. Any upward movement should be considered to be a just a relief rally for now.

Once again the debt crisis in Europe has reared its ugly head. Greece is going to have new elections in June and an anti-bailout party is expected to win. Its credit rating was downgraded to CCC by Fitch on Thursday. An exit from the euro is now being seriously discussed in the halls of European power. At the same time, interest rates are rising in Spain and Italy to the levels where the Greek problem initially began.

Spanish 10-year government yields were as high as 6.38% this morning. The same Italian interest rates had reached just above 6.00% yesterday. Italy's rates were over 7.00% from last November to early January and Spain's were close to that level in November. The ECB then began a massive effort funded with money printing to drive them back down. It worked for a while, but as soon as the printing presses are paused, the market takes right back over.

The more serious problem is with the European banking system itself. Moody's downgraded 16 Spanish banks Thursday night and Spain had to partially nationalize Bankia last week. There was a run on Bankia Thursday and massive amounts of funds have been withdrawn from the entire Greek banking system. Contagion spreading to the major banks in the rest of the EU is a real danger. The LTRO (Long-Term Refinancing Operation) programs of the ECB have encouraged them to load up on the government debt of the failing peripheral countries. Many of the banks that did so were barely solvent as is.

More bailout programs from the central banks should be expected, but they aren't likely to work either. The real problems are with the non-functional economies. Spain is still building empty houses that no one buys and the Spanish banks are funding this activity.  Adding more debt to the problem is only going to make matters worse. Printing money to pay for that debt takes the problem to an even higher level. It all has to give at some point and it looks like the new few months will be one of crisis. 

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.


 

JP Morgan: The Whale Wagging the Dog

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.

JP Morgan Chase revealed yesterday that one of its traders, Bruno Iksil (known as the London whale), was responsible for a $2 billion loss in the last six weeks. Apparently, little has changed since 2008, when the irresponsible activities of the big banks and trading houses almost brought down the world financial system.

Iksil's trading was hardly secret. His positions were well-known among traders and Bloomberg published an article about their high-risk nature on April 5th. Jamie Dimon, the CEO of JPMorgan Chase (JPM), dismissed the report as overblown. Amazingly, the massive losses took place in a portfolio that was supposed to hedge against risks. Because of this, the company claims that these trades would not have violated the Volcker Rule — designed to curtail risky trading by banks and prevent just such occurrences. The Volcker Rule is not scheduled to be enforced by the Federal Reserve until 2014 as is. Jamie Dimon has been one of its major critics.

Jamie Dimon does as he pleases as is. He jumped the gun on the Fed's stress test announcements in March by announcing JPMorgan Chase had passed. The Fed was then forced to release the rest of the information early. Communication's problems were cited for the foul-up. Apparently, Dimon didn't read the memo about the announcement schedule. He sits on the board of the New York Fed (for a list of directors, see: http://www.newyorkfed.org/aboutthefed/org_nydirectors.html). All of the Fed's regional boards have three representatives from the banks they "regulate".

JP Morgan was quick to point out that no laws were broken by the activities that led to the $2 billion trading loss ($2 billion so far that is). The public should be very worried about this. When banks are considered "too big to fail" and expect bailouts when they screw up, the public is the one that pays. The liquidity that JP Morgan Chase and all the other big banks are trading with comes directly from the Fed, supported by its zero interest rate policies (free money) and quantitative easing (fake money). Even though the trading loss indicates serious problems in the financial system, the U.S. stock market was up minutes after it opened. And why not?  It knows the Federal Reserve will make up the losses one way or the other and if that's not enough, it expects more government bailout money for the banks. 

The Fed followed the same strategy in 2008 and still a major collapse took place. Central banks do not have unlimited resources and when the rot builds up too much in the system, everything falls apart. The public today is also not likely to put up with another massive bank bailout. In 1998, it took only one overleveraged hedge fund — Long-Term Capital — to almost bring down the financial system. Today, there are potentially any number of banks and hedge funds that represent major risks.  JP Morgan's trading losses indicate little has been done since 2008 to prevent the next market meltdown. 

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.

April 2012 Jobs, Labor Force Continues to 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 BLS release the employment situation for April 2012 this morning. The report showed that 115,000 jobs were created last month and the current unemployment rate is 8.1%. The big story however was the incredible number of people leaving the U.S. labor force  — almost ten million in the last five years.

Looking at any of the macro numbers since the Great Recession began in December 2007 indicates that the employment situation in the United States is severely challenged. People are leaving the labor force in droves. The participation rate continues to fall as well. This does not happen during economic recoveries. It happens during recessions and depressions. Not only have these numbers trended in the wrong direction since the "recovery" supposedly began in mid-2009, but there has been an acceleration.

These trends are hidden because large numbers of people enter the labor force because of school graduation and immigration. When balanced against the number of people retiring, the U.S. needs to create approximately 150,000 new jobs every month to keep the employment situation steady. It has rarely met or exceeded this number in the last four years, yet the unemployment rate reported by the BLS has declined significantly. This can only happen because large numbers of people have left the labor force (a sign of economic stress).

According to Table A of the BLS employment reports, there were 78,711,000 Americans not in the labor force in April 2007. In April 2008, four months after the Great Recession began, this number had risen to 79,241,000. In April 2009 just before the supposed recovery started, 80,554,000 Americans were not in the labor force.  This loss of less than two million during a recession isn't surprising . What is surprising is what happened during the recovery.

After almost a year of recovery, the number of people not in the labor force grew to 82,614,000. This was an increase of more than two million, a number greater than the loss during the previous two years that included the recession. Then in April 2011 after another year of recovery, 85,726,000 Americans were not in the U.S. labor force — an increase of over three million in only one year. Now in April 2012, 88,419,000 were not in the labor force. This was an increase of almost three million in one year.

In the five years since April 2007, 9,708,000 Americans have left the U.S. labor force. During this period the labor force should have grown approximately 9,000,000 (60 times 150,000). The picture these numbers present are one of an economy in severe decline. Don't expect to hear this from the U.S. government however. Politicians don't get reelected by reporting bad news.


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.

Bidirectional U.S. Stocks, Spanish Bonds and the ECB

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 new mantra for the U.S. markets appears to be "if it's Tuesday, it must be bidirectional market day".  Once again the Dow went up strongly, while the Nasdaq was trading in negative territory. Events in Spain seem to be connected with this unusual and bearish market action.

At one point during the trading day, the Dow Industrials were up 123 points. Nasdaq on the other hand was down by 20 points at its worse. The S&P was caught in the middle. The same strange behavior took place last week. Spanish bonds and the euro rallied both times and money pumping from the ECB (with perhaps some dollar swap activity from the Fed) explains these seemingly unrelated events.

The yield on the 10-year Spanish government bonds exceeded the dangerous 6% level last week and suddenly heavy buying came in and drove yields back down to around the 5.86% level. Today, the yield on the Spanish 10-year reached 6.049% and suddenly buying came in and drove the yields down to 5.86%. The Euro rallied both times. As measured by the ETF FXE, it rose to 131.19 today. There is no reason investors should be buying either one. Spain is at risk of developing a full-blown debt crisis just like Greece and the Dutch government fell and the French election went badly over the weekend.

Money pumping causes markets to rally. It is directly being aimed at the Spanish bond market and the euro however. It spills over into other markets though. Since the Dow consists only of very liquid big cap stocks it will be impacted the easiest. The rest of the U.S. market has serious problems though. Tech stocks have led it up and now they are struggling. The ECB money pumping isn't enough to counteract the forces driving them down.

Money pumping can't go on forever and every time there has been a pause, stock prices have suffered. Problems in Spain are merely part of a much larger ongoing debt crisis in Europe. The balance sheet for the ECB has already been increased by much more than has been the case in the U.S. and the chart line is going straight up. A pause will eventually take place and when it does stocks will weaken globally -- and this includes the Dow.

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.

Stock Market Goes BiDirectional

 

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. stock market action on Monday was highly unusual with the Dow Jones Industrials rallying strongly while the Nasdaq experienced major selling. This behavior is bearish and indicates lower stock prices in the future.

The open set the tone for the day with the Dow up over 100 points shortly thereafter and the Nasdaq down more than 20 points. The Dow rallied even further and the Nasdaq sold down to even lower levels. By the close however, not much had changed from the open. The Dow was up 72 points to 12,921 and the Nasdaq down 23 points to 2988. The S&P 500 and the small cap Russell 2000 were caught in the middle and were barely changed. The S&P 500 fell 0.69 points to 1369.57 and the Russell 2000 rose 1.79 points to 798.08.

The explanation for the Dow Industrials rally was the supposedly good retail sales numbers (fueled by inflation with rapidly rising gasoline prices leading the way) and bailout poster child Citigroup's (C) mediocre earnings report. The culprits on the Nasdaq were easy to spot with big selling in Apple Computer (AAPL) and Google (GOOG) dragging the index down. Apple closed at 580, down $25 (4.2%) , and Google was lower by $19 (3.0%) for a final price of 606 at the end of the day. It was the second day of major selling for Google. Both drops indicate the big money is getting out of these stocks.

All the major four indices closed below their 50-day simple moving average (a strong technical negative). This was the first time the Nasdaq has done so this since last December. The Dow has done this for six days in a row however and the Russell 2000 for seven. If a stock or index moves below its 50-day moving average and stays there for several days, it should be assumed that it will eventually fall to its 200-day.  This is still in the realm of normal bull market activity.

Non-confirmation in a bull market should always be considered a negative for stocks. A bullish behaving Dow and a bearish acting Nasdaq is not a good sign. The Dow Industrials itself has a separate non-confirmation problem with the Transportation Average. Even though the Industrials went to new highs in the last few weeks, the Transportation Average has not. Perhaps it still will, but it doesn't look like it will happen. This has been a reliable market sell signal for over 100 years.

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.

Remerging EU Debt Crisis in Spain Will Damage 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.

The yield on Spanish 10-year government debt was as high as 6.16% on Monday. Credit default swaps on Spanish debt hit a record even though the peak yield on the 10-year was 6.70% on November 25, 2011. After a big selloff on Friday, stocks were rallying on Monday despite the new emerging crisis in Europe.

The 6% yield level is watched closely because when rates went over that level in Greece, the Greek debt crisis emerged. Spanish 10-year yields were over 6% three times last year. Prior to last November they reached 6.32% on July 8, 2011 and 6.28% on August 4, 2011. The ECB (European Central Bank) has intervened directly in bond markets under its Securities Market Program (SMP) to hold down interest rates in the peripheral countries. At least one Spanish official has called for a renewal of these efforts.

The ECB also established the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Massive money-pumping operations have also been conducted through the two LTROs (Long-Term Refinancing Operations), one for $645 billion and a second for $713 billion.  The massive liquidity coming out of Europe has led to the recent global market rally. This will be just one of its unintended consequences. Later on we will be experiencing a large uptick in consumer price inflation as another.

While the inflation caused by the ECB is likely to last, the lower interest rates aren't. Spain has now broken above the 6% line in the sand four times. Portugal has never even gotten down to that level. Its 10-year governments were yielding 12.7% on Monday. So far they have peaked at 17.4% on January 30th. Italian 10-year governments have also yielded over 7% last November and this January, but were driven back down to below 5%. They are now rising rapidly again and heading toward 6%.

European stock markets were damaged significantly on Friday and the U.S. markets to a lesser degree. Despite the ongoing bad news markets across the pond were rallying today. And why shouldn't they. Another bailout (and another bailout and another bailout and another bailout and even another bailout) is expected. So far, even with the massive amounts of printed money thrown at the bond markets in the peripheral countries, the debt problems keep emerging . And now the global stock market rally looks like it is beginning to fray around the edges.


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.