Economic Statistics are Yesterday, Stock Prices are Tomorrow

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Fed Beige book was released yesterday and the media reported that it saw a glimmer of hope for economic recover in the U.S. That glimmer is not yet showing up in the economic statistics, which are gloomy worldwide not just in the U.S. However the economic statistics are backward looking and usually dated on top of that by the time they are released. While the report may say March, those numbers really might be from February (or even January). Reports of Q1 activity might actually be data from Q4 at the end of the previous year (this became glaringly obvious in the 3rd quarter of 2005 when hurricane Katrina devastated the U.S. economy and the GDP figures for the quarter then came out higher than had originally been expected, but the 4th quarter GDP was much lower). People get confused when the stock market is already going up when the news is at its worse, but this makes perfect sense. The economic news you are seeing may be from two quarters in the past, while the market is being priced for what it it thinks is going to happen two quarters in the future. When making investing decisions you too should always look forward.

To make investing even more difficult for the average investor, the media constantly inaccurately states that the stock market (or oil market or some other market) can't go up until the economy improves. Historical analysis indicates that this is simply not true. Liquidity drives stock prices. The more money available for buying stocks, the more the market goes up - and this can happen when the economy stays in bad shape for a long time. Liquidity almost always revives the economy as well so eventually a recovery takes place there too (a hyperinflationary depression would be the one exception). The amount of liquidity being pumped into the financial system currently is massive by any historical standard. This is going to be reflected in the stock market first and much later on at Starbucks, where you will be paying $50 for a cup of coffee.

No matter how bad things are, markets also can't go down forever. Eventually there comes a point where everyone who is going to sell has sold. When that happens one little piece of even insignificant good news can drive the market up suddenly and sharply (look for this behavior in the natural gas market in the future). This type of rally is short-covering or if it takes place around an important support level (it doesn't have to) will be called technical. For extremely oversold markets like the one we have now, a rally to the 200-day moving average is common. You should certainly consider taking profits around that level. Also watch for stocks or sectors with a lot of stocks that manage to break through and stay above the 200-day. These are the leaders for the future.

History (something completely unknown to most U.S. financial reporters) tells you a lot about how to successfully make money in the market. Go back and read the news from June 1932. You will see the worse economic news imaginable. The U.S. economy and banking system were in total collapse. And the banking crisis didn't finally bottom until the spring of 1933, when many insolvent banks were closed down during the banking holiday, and the system wasn't stabilized until the implementation of deposit insurance in 1934. Should you have bought stocks in July 1932? If you did, you would have made around 100% in a few weeks.

NEXT: Bull Markets Climb a Wall of Worry

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.

Landslide Elections and the U.S. Stock Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

There seem to be only two things that Americans voters will not forgive their politicians for. In the case of the President it is a failed economy, which led to a Democratic landslide in 1932 and a Republican landslide in 1980. While congressional voting is strongly affected by the economy as well, there is an additional factor of failing to deliver on a political party's core promises. When the Democrats couldn't pass a health care bill (something they had campaigned on for almost 50 years) in 1993, the voters turned on them en mass. This year, there is not only economic turmoil going into the election, but many Republicans in congress abandoned one of their party's most fundamental principals, fiscal conservatism, by supporting the Wall Street bailout bill. Conditions are ripe for a major political shift.

Presidential landslides are usually preceded by shifts in Congress two years earlier. In 1930, the Republicans, who had totally controlled Washington for the proceeding 10 years, lost 52 House seats and 8 Senate seats as the economy started to fall headlong into the Depression. Even with these losses, Republicans still had slight control of the U.S. senate and only lost their majority in the House after further defeats in special elections. While the U.S. economy was allegedly in good shape in 2006 (at least according to the official highly manipulated government figures), Republicans lost 30 House seats and 6 Senate seats in the election that year. This gave Democrats solid control of the House and a bare majority in the senate.

As bad as 1930 was for the Republicans, it was nothing like the political bloodbath that followed in 1932 when they lost 101 seats in the House and 12 seats in the senate. Best guesstimates as of now is that Democrats will pick up another 30 House seats this November. Interestingly, as many as 12 senate seats could also shift from Republican to Democratic hands this year, although the Democrats would only need 9 seats to have a filibuster proof majority. There is probably a slightly less than 50% chance of this happening, so it isn't a done deal yet. Wall Street would not react positively to this outcome and it has almost certainly not been factored into stock prices as of yet.

As for the Presidential election, Obama is clearly ahead of McCain and some perennial Republican strongholds like Indiana, North Carolina, North Dakota, and Virginia may go his way in addition to almost every swing state. Obama has the advantage in ad spending and field operations. Most polls show him way ahead in the race. While there are a few that don't, closer examination of them reveal that they are as statistically suspect as the U.S. governments inflation and GDP figures.

So what has a major political shift said about the prospects for the U.S. stock market in the past? The stock market actually bottomed before the 1932 election and entered a multi-year rally period after FDR's inauguration in March. In 1980, Regan was elected while a recession was already underway (as is the case in 2008) and another recession immediately followed that one.
Two years later though, U.S. stocks started an 18 year secular bull market. Generally, things have to be very bad economically for there to be a large change in the previous U.S. political balance. By the time this happens, the worst is likely to be over soon thereafter.

NEXT: Start Looking for Capitulation

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.