EU Deal With Greece Falling Apart

 

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 market lost its rose colored glasses today with Greece announcing a political referendum early in 2012 on the recent EU bailout deal. This could lead to the deal falling apart sooner rather than later.  Stocks sold off on the news in Europe and the U.S. while interest rates rose in Greece and other troubled EU countries.

The deal that the EU put together last week to handle its debt ridden members and to help prop up its banks was essentially smoke and mirrors surrounding a house of cards. It had no chance to work in the long run and the best it could accomplish was to buy more time before the inevitable day of reckoning. The 50% haircut on Greek debt, plus $130 billion euros did provide Greece with enough funds to keep going. It did not stabilize the situation enough however to ensure another debt crisis didn't occur within the next few years. Nor was there any reason to believe that Italy, Spain, Portugal and Ireland wouldn't need a similar bailout in the future. The plans for recapitalizing EU banks were likely to create a credit crunch and send the EU into a deep recession before further steps were taken. The centerpiece of all the bailout operations — the EFSF (European Financial Stability Facility) — was based on essentially printed money that was going to be leveraged. This was how the problem of too much debt was going to be solved.

While stock markets worldwide had huge rallies based on the "good" news that came out of the EU last week (traders like hearing about governments printing more money), they were giving back those gains on Tuesday. Both the German DAX and French CAC-40 were down over 4% in late day trading. The euro, which has held up remarkably well during the entire crisis was down over 1%. Big EU banks were getting slammed hard. France's Société Générale (FR:GLE) was down  almost 17%, Credit Agricole (FR:ACA) fell almost 13% and BNP Paribas (FR:BNP) dropped almost 12% .  Deutsche Bank (DB) was down over 6% and Commerzbank (DE:CBK) down over 10%. The U.S. S&P 500 was lower by a comparatively mild 2% in early going.

Bonds reacted more strongly. The yield on the safe haven 10-year U.S. treasury fell over 6% and the yield was barely above 2% in the morning in New York. Yields on trouble country debt in the EU were moving in the opposite direction. Italian 10-year governments traded over 6.25% (above 6% is considered a critical point of potential breakdown). Only buying from the ECB, which also included Spanish government debt, kept yields from soaring much higher. Yields in Greece were even more telling of the market's true opinion of the EU debt deal and its aftermath. Before the deal, yields on one-year Greek governments reached 193%. They had only fallen to 154% (no solvent country pays anywhere close to this amount) before the announcement of the Greek referendum. This yield peaked at 200% today (November 1st).

Panic was caused by the proposed referendum in Greece because polls show that the terms reached with the EU and IMF are highly unpopular with the Greek people. Even though they have gotten an incredibly good deal, the average Greek is focused on the additionaly years of austerity that would be required on Greece's part.  Apparently, neither the Greeks, nor the markets like hearing that there is no free lunch.

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.

A Terrible Third Quarter Will Be Followed by a Bad Fourth

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 third quarter of 2011 had the biggest drop and most volatility for stocks since 2008.  The fourth quarter may not be much better since the cause of the problem is a new credit crisis and an emerging global recession. Both will continue to be a drag on the market.

Except for small cap stocks, the U.S. markets did somewhat better than many overseas markets during the quarter. The Hang Seng in Hong Kong was down 25.7%, the CAC-40 in France fell 25.6% and the DAX in Germany dropped 25.0%. Only the Russell 2000 in the U.S. was lower by a comparable amount, falling 24.1% from its May 31st close. These indices are all in deep bear territory. Not much better was the Bovespa in Brazil. It lost 19.0% in the third quarter. The Brazilian market peaked in November 2010 and it too is in a bear market.

While the bigger cap U.S. indices weren't down as much, they were severely damaged nevertheless. The S&P 500 was lower by 15.9%, the Nasdaq by 14.8% and the Dow industrials by 13.2%. This was just the drop during the quarter. U.S. stocks in general peaked on May 2nd. From its high back then to its low in the third quarter, the S&P 500 dropped 19.6%. A bear market is defined as a loss of 20%.

Volatility returned to the markets with a vengeance in the third quarter. The VIX index reached a high of 48.00, not much below its peak in the 2000 to 2002 mega-bear, but well off its Credit Crisis peak around 90. Mini-crashes returned to the market, with both the Nasdaq and Russell 2000 experiencing drops equal to or greater than 5% on three different days.  There were four consecutive days in August when the Dow was up or down by 400 points or more. A volatile market is prone to selling and  markets usually need to calm down before they can bottom.

Just as was the case during the Credit Crisis year of 2008, only two major assets were up in the third quarter — treasuries and gold. The 10-year hit an all-time low yield of 1.71% (bond prices go up when yields fall). This was well below the previous low that took place because of the Great Depression in the 1930s. While the price of gold fell by 15% at the end of the quarter, it rallied from the beginning until its peak on September 6th. It wound up rising 5.8% (as measured by GLD) from its closing price on May 31st. Its companion precious metal, silver, had a quarterly drop of 23.1%.

There is no reason to think that the market will bottom until problems in Europe come to some stable resolution. Greece admitted over the weekend that it would not be meeting the budget targets that were part of the terms of the first bailout. Global markets are once again selling off, as if this was somehow surprising news — Greece has misrepresented its financial number repeatedly, it would only be surprising if they turned out to be accurate. Greece may still get its next tranche of bailout money, since the EU has shown over and over again that its standards for the currency union are meaningless. Eventually though Greece will default because too much bailout money will be needed to keep it afloat. Even at that point, Spain and Italy will have to be reckoned with.

The other issue facing the markets is a global economic downturn. While a case can be made that the post-Credit Crisis economy never got out of recession (the unemployment rate and consumer confidence remained at recession levels for instance), the important question is whether or not economic activity is declining now. Last week, even the ECRI (Economic Cycle Research Institute) admitted the U.S. economy was heading down. Since a credit crisis can make an economic decline much worse, this doesn't bode well for the markets in the upcoming months.
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.

Stocks and Commodities Setting Up for a Major Breakdown

 

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.

Global markets were acting like they were on the verge of a collapse on Thursday, the day after the Federal Reserve's Operation Twist announcement. The selling was ugly and is likely to get even worse in October.

In Asian trading last night, the Hang Seng in Hong Kong barely avoided a mini-crash, falling 4.9% (5.0% is the cutoff) or 912 points. The Sensex in India shed 704 points and was down approximately 4.0%. The market is attempting to cover a gap on the charts made two years ago. The chronically- bearish Nikkei in Japan was down only 2.1%.

In Europe, both the FTSE in the UK and the DAX in Germany also almost closed in mini-crash territory. The FTSE was down more than 5.0% at one point, but managed to rally toward the end of day. The DAX closed down 4.96%, just a whisker less than a mini-crash. The CAC-40 in Paris wasn't as fortunate. It closed down 5.3%. European banks were in the forefront of the selling with French banks being particularly hard hit. French banks are heavily exposed to Greek government and corporate debt. UK banks were also down considerably because of problems left over from the 2008 Credit Crisis.

The U.S. markets opened down and got worse as the trading day proceeded.  The Dow closed down 391 points or 3.5%, the S&P 500 39 points of 3.3%, the Nasdaq 83 points or 3.3%, and the small cap Russell 2000 21 points or 3.2%. Banks stocks in the U.S. received bad news with Moody's downgrading the credit ratings of Bank of America, Wells Fargo and Citigroup. Moody's indicated that it believes bailouts will be less likely in the future.

Commodities were not immune to the selling with gold, silver, oil and copper experiencing significant downside action. Spot gold traded as low as $1722.30 in New York. December futures were down as much as $78.50 at one point. Spot silver traded as low as $35.41. Both gold and silver had some recovery from their lows. Crude Oil (West Texas Intermediate) fell to $80.89 and was down $5.03. Economically-sensitive copper was crushed falling as low as $3.46 a pound. It was down 8.6%. Copper has fallen more than 20% from its all-time high in February and is technically in a bear market. The price behavior of copper is supposedly the best indication of global economic activity.

The key levels for investors to watch are the August lows for stocks and commodities. These were tested today on the Dow Industrials and the Russell 2000. If these get taken out, things should really start to get interesting.  These levels have already been broken in France and the major emerging markets. Technical analysts should note that the Dow Industrials, the S&P 500 and the Russell 2000 all formed  a very clear head and shoulders topping pattern in August and September.

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.

Global Markets Slip on Greece

 

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.

Stocks in Asia, Europe and North America are falling as contagion from the Greek debt crisis continues to impact markets worldwide. Until there is some resolution, investors should expect this to continue along with intermittent sharp moves up due to central bank liquidity injections.  

Trouble began in Asia last night with the Hang Seng in Hong Kong falling 537 points or 2.8%. It closed at 18,918, well below the critical 20,000 support level. The Indian Sensex was down 188 points or 1.1% to 16,745. It has been leading Asian markets down and is trading on top of a very large gap made in May 2009. The Nikkei in Japan managed to buck the trend and close up 195 points to 8864 or 2.3%. It has been mostly trading below key support at 10,000 since March when the Tohoku earthquake struck. All three markets are in a technically bearish trading pattern.

No part of the globe can escape what is happening in Europe. EU finance ministers said Friday they would delay authorizing a new installment of emergency funds for Greece until October. Greece is still on its first €110 billion bailout, but the final payments have yet to be made. A second bailout has yet to be fully approved, although the terms have been set.  Greece's fiscal situation continues to deteriorate rapidly despite all the funding it has received from the EU and the IMF.  The bailout money is life support for Greece. If the plug is pulled, the patient defaults.

German stocks have been hit the hardest by the Greek crisis and have fallen well into bear market territory. After rallying from a severely oversold level last week, the DAX was down 157 points or 2.8% on Monday. The French CAC-40 was down 91 points or 3.0%. The British FTSE was down 108 points or 2.0%. UK stocks have been less affected by events in Greece (the UK is not part of the eurozone). As is the case in Asia, all major European markets are in a technically bearish trading pattern.

U.S. stocks have actually held up somewhat better than most other markets. The S&P 500 and small cap Russell 200 have the same negative technical picture found elsewhere, but the Dow Industrials and Nasdaq have so far held just above it. In early afternoon trade, the Dow was down 205 points or 1.8%, the S&P 500 21 points or 1.7%, the Nasdaq 30 points or 1.2%, and the Russell 2000 14 points or 2.0%. A report released in the morning indicated that U.S. investors have pulled more money out of equity funds since April than they did during the five months after Lehman Brothers collapsed. The real history making news however was in the bond market, where the two-year treasury hit an all-time low yield of 0.1491% -- a sign of a global credit crisis if ever there was one.

Investors should expect more market drama from the unfolding Greek tragedy in the coming weeks and months. Unless Germany and France are willing to commit to unlimited bailouts, Greece will eventually default.  Only then will we know how this affects Ireland, Portugal, Spain and Italy and the euro itself.  Stocks are vulnerable to more volatility and downside until this occurs.  

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.

Central Banks Pump Money to Prop Up Europe

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.

Exactly three years after Lehman Brothers filed for bankruptcy and almost brought down the global financial system, central banks in North America, Europe and Asia engaged in a coordinated money pumping operation to prevent the EU banking system from stalling. The move created a sharp stock market rally, especially in financial shares, just as was the case when similar actions took place during the 2008 Credit Crisis.

Involved in Thursday's action were the U.S. Federal Reserve, the ECB, the Bank of England, the Swiss National Bank and the Bank of Japan.  The purpose was to improve dollar liquidity among  European banks struggling because of the Greek debt crisis. The credit markets have frozen up, just as they did after the Lehman bankruptcy, and U.S. banks have been unwilling to lend dollars to European banks. The ECB will now be able to access dollars by swapping assets with the Federal Reserve. It wasn't stated in the announcement what assets were involved, but obviously they are substandard ones that wouldn't be accepted  in free market trading. This operation also increases exposure of the U.S. financial system to the new credit crisis in Europe.

Such coordinated money-pumping operations are a sign of desperation on the part of the authorities. They were commonplace after Lehman's bankruptcy on September 15, 2008. They created significant volatility in the stock market back then as they did yesterday. Both the German DAX and the French CAC-40 closed up more than 3%. Troubled banks had huge rallies, with Lloyd's Banking Group up over 7%. In 2008, even greater volatility took place, but the rallies proved time and again to be only temporary. The market ultimately nosedived.

The Friday before the Lehman bankruptcy, the S&P 500 closed at 1251.70. Lehman declared bankruptcy on Monday. At the end of the week, the S&P 500 closed at 1255.00. The day before however, the S&P rallied off of its intraday low of 1133.50 to a close of 1206.51 (that's a 6.4% intraday rally -- an enormous move for an index like the S&P). So, the first week after Lehman's bankruptcy it looked like the market wouldn't be impacted that much. It turned out that the actions of central banks provided investors with a false sense of security however.

By the end of September 2008, the S&P 500 closed at 1166.36. Then at the end of October it was down to 968.75. At the end of November, it had dropped to 896.24. It actually closed higher the last day of December at 903.25, before falling to 825.88 at the end of January. By the close of February, the S&P was trading at 735.08. It finally bottomed at 666.79 on March 6, 2009. All along the way, there were big moves up that coincided with the latest money injections of the central banks.

While mainstream media reports tend to portray the central bank actions and the big rallies they cause as good news for the market, they are actually an indication that more trouble is on the way. All investors have to do is remember what happened just three years ago. Yesterday's central bank action indicates that more volatility and lower stock prices are in our future. 

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.

EU-Centered Credit Crisis Continues

 

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 2011 Credit Crisis continued Tuesday with the Stoxx Europe 6000 index hitting a two-year low, the Swiss taking desperate measures to control the franc, more record high prices for credit default swaps (bond insurance) on British Banks and yields on 10-year U.S. treasuries hitting an all-time low. Despite the dramatic turn of events, stock losses were somewhat muted.

U.S. markets opened sharply lower, but the Nasdaq and S&P 500 recovered toward the close in a technical move that involved filling the gap down that took place on the open. The Dow however still had a 101 point loss at the close. In Europe, the German DAX was down 1.0% and the CAC-40 in Paris 1.13%. While these losses would have been considered significant only a few months ago, they are minor compared to what has taken place on a number of trading days since late July. The British FTSE up even up 1.06%, despite trouble in the UK banking sector.

The British banks most in trouble are the ones that were nationalized during the 2008 Credit Crisis -- Royal Bank of Scotland and Lloyd's Banking Group. Credit default swap (CDS) rates for these banks are higher than they have ever been. CDS rates for HSBC and Standard Chartered are at one-year highs. The problem with these banks seems to be toxic loans left over from earlier in the 2000s. It is not clear if they were included in a sweeping statement made Monday by Josef Ackermann, CEO of Deutsche Bank, that "numerous" European banks would collapse if they were forced to recognize all losses against their holdings of government debt.   

The most significant market event yesterday was the Swiss capping the value of the franc. The Swiss National Bank (SNB) said it would "no longer tolerate" a euro franc exchange rate below 1.20. The franc then had a significant drop against all major currencies. A similar approach was tried in 1978 and it did succeed in stabilizing the franc back then. Such currency intervention measures generally only work for a short time however. It remains to be seen how long it will take before the franc begins rising again.

The new Credit Crisis is also showing up in U.S. treasury rates just as the one in 2008 did.  The 10-year yield made another all-time low at 1.97%, taking out the 2008 low. Global money flows into U.S. government bonds during periods of financial system instability because they are still seen as safe havens. While the 10-year is only a little below its low in 2008, the two-year at 0.20% on Tuesday is well below its low point back then.

Credit Crises are not very short events. The previous one lasted six months. This one could last that long or even longer. The cause of the problem has to be gotten under control. In this case, it is the ongoing debt crisis in Greece and the emerging ones in Italy and Spain. While a default in Greece could happen this fall and create some finality there, the problems in Italy and Spain are only in their early stages. So, this could go on for some time.

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.

Desert Bubble Bursts, Blows Sand in Market's Face

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.

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America was on holiday for Thanksgiving, but London unexpectedly joined it with a halt in trading for over three hours on Thursday. The LSE (London Stock Exchange) computer system just simply stopped functioning. It couldn't have come at a worse time. Major selling was taking place before the trading halt because Dubai's state-owned Dubai World announced a 6-month 'standstill' for payment of its massive debt. While the mainstream financial media described this action as a potential default, failure to make debt payments in a timely fashion is a default, period. If it walks like a duck and quacks like a duck, it's a duck. It is estimated that Dubai World has $60 billion in foreign debt outstanding with British and European banks holding two-thirds of that. The ever alert U.S. rating agencies Moody's and S&P promptly downgraded Dubai World's debt, once again giving the appearance that they are the last to know when a financial problem exists.

Dubai's problems were already known during Asian trading on Thursday ( Wednesday night in New York) and the Shanghai market dropped 3.6% and the Hang Seng in Hong Kong was down 1.8%. Things got worse in Europe Thanksgiving day. The unexpected technical problems on the LSE (not the first time this happened by the way) caused worry to turn to panic. This is a typical reaction to traders when they can't access a market and there is some bad news floating around. They will sell down other markets which are open and when the closed market reopens, there is a bigger drop than there would have been. Banks stock were particularly crushed on Thursday, bringing back memories of last years Credit Crisis. Royal Bank of Scotland was down 7.6%, Barclay's down 6.7%, ING down 6.4%, Deutsche Bank down 5.7%, and Standard Chartered down 5.7%. The FTSE in England was down 3.2%, the DAX in Germany down 3.3% and the CAC-40 in France down 3.4%

Credit default swaps (insurance on bonds) rates rose precipitously throughout the Gulf region - another blast from the Credit Crisis past. The problems in Dubai have been brewing for a long time and it is hardly the only place in the world where there are financial problems remaining. It is merely the first new blow up. Dubai's faith was sealed with the general global collapse in 2008. The government has been stonewalling its creditors ever since, assuring them everything was fine. Earlier this month, the ruler finally told Dubai's critics to shut up. In February, Dubai received a $10 billion bailout from the UAE central bank. On Wednesday, another $5 billion was forthcoming.

Predictably, money moved into the U.S. dollar as markets reacted to the latest crisis. Considering the the trade-weighted dollar plunged on Wednesday, falling as low as 74.23, a rally was not unexpected as is. The yen hit a 14-year high against the dollar and rumors are rife that the Bank of Japan might intervene to drive the yen down, like the Swiss central bank did on Thursday when it sold francs against the dollar. Spot gold managed to eke out another all time high by a couple of points in early overseas trading Thursday after its strong rally on Wednesday. It then fell as low as $1180, but then bounced back up to $1190.

Stocks in Asia got clocked again in Friday trading. The Nikkei in Japan was down 3.4%, closing at 9082. For those who haven't been paying attention, the Nikkei broke key support at 10,000 a while ago - the weakest stocks market usually sell down first. Shanghai was down 2.4%. Hong Kong and South Korea had the biggest damage though, falling 4.8% and 4.7% respectively. Traditionally, a one drop of 5% or more is considered a crash. .

The global market contagion moved to New York this morning. The Nasdaq gapped down 58 points or 2.7% and the S&P 500 was down 25 points or 2.3%. The Dow, which takes a long time to open when there is major news, was down around 200 points or 2.0% on the first print. The dollar was as high as 75.58 today so far. Oil got hit more than any other asset and was down 5% at one point falling as low as $72.39 a barrel. Gold plummeted to $1139 around 2AM New York time, but has already traded as high as $1178 today. All the major European markets gapped down strongly, but turned positive for the first time around 7:30AM. They will close up nicely.
U.S. markets close early today and volume is incredibly light which allows for large moves in either direction. Monday is the key day to see if there is going to be any long-term impact from the Dubai fallout.

Disclosure: Long gold.

NEXT: Dubai Default Damages Denial

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.

Monday's Ugly Market Action

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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While selling began in the U.S. on Friday, it didn't have a lot of momentum until the Asian markets opened Sunday night. Japan, Hong Kong and China were down between 3% to 5%. Last night the recovery in the East was anemic. The Nikkei was barely up and the Hang Sang was up less than 1%. The major Euro markets were all up around half a percent today. U.S. stocks are rallying as of now, but how they close is the key. The U.S. dollar is selling off and nothing significant has changed for it . It is still in a precarious state.

Basically the only thing that rallied yesterday was the U.S. dollar. Everything else sold off. This has been the common pattern since March. It doesn't make any sense based on the media story of what is going on in the markets and the economy. U.S. stocks should rally if the dollar is rallying. The opposite only occurs in inflationary environments.

The technicals on the index charts have weakened considerably in the last few weeks. The RSI on the daily charts even fell below 50 for the Nasdaq yesterday. The S&P hit 50. The Dow stayed just above it. Bouncing off this level and rallying is an almost automatic market reaction and this is happening today. We will have to see how long this lasts. The MACD is still relatively strong, so this will probably keep the market from falling apart at the moment. The DMI patterns can only be described as twisted looking. They are indicating that the uptrend is endangered.

The market seems to be in a topping pattern, but this can last awhile. As we head into the seasonal week period of September and October, the risk of a major sell off for stocks becomes greater.

NEXT: Stock Market Gappy, Inflation Worries Surface

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.

Markets Catch Swine Flu

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:

The only pandemic that you need to worry about right now is that global markets are being infected by swine flu hysteria. The Asia markets sold off last night, Taiwan and Hong Kong for the second day in a row with both down 1.9%. The Nikkei dropped 2.7% and South Korea's Kopsi was off 3%. As I write this, major European markets are down between 2.1% and 2.8% and S&P futures are down 1.8%. Oil if falling from the above the 50 level again (this has become a recurrent pattern as of late). Most amazingly, gold is down about $20 in the futures market, even though the price of gold should go up during a crisis (is this telling us something about the Fed meeting taking place this week?).

The media's handling of the swine flu news is incredibly irresponsible and outrageous (keep this in mind when reading financial news which is not handled that much differently). You would think that another Medieval Black Plague was about to strike. Just as in investing reporting the facts get buried amid the hype and the news deviates significantly from reality. So far, it doesn't look like there are any deaths outside of Mexico. While flu has been found in 40 people in the U.S. who had traveled to Mexico, the cases seem relatively mild and this seems to be true in other countries as well. The disease seems to be one thing in Mexico, but quite another outside of Mexico. This is a huge inconsistency that doesn't make sense, so there is obviously more to this story than is being reported, or perhaps it would be more accurate to say, less to the story.

So far the most damaged stock groups from the Swine flu news are airlines and hotels. AMR, UAUA, and LCC were all down in the double digits yesterday. They are still not buys however since they were already overextended on the upside when they began selling off. They would have to have about 4 serious days of selling to make them interesting for other than day trading purposes. Anti-viral biotechs were the big winners, most going up well into the double digits. Expect them to come right back down once the crisis blows over. At that point they might be longer term buys. If you want to take a look: BCRX, BTAHY/BTAHF, GNBT, HEB, NVAX, PPHM, and VICL. Only very experienced traders should play with these stocks.

Wall Street reaction to the swine flu is as would be expected. Hearing the word swine, the usual suspects have answered the call. One market analyst is out on the net with a statement that the market could drop 15% (if this turns out to be as bad as SARS that is - it won't be, the two aren't comparable at all). One oil analyst has come out with a prediction that oil will go back to $33 a barrel because air travel is likely to have a huge drop. My guess is this is all going to be much ado about nothing. Even though the swine flu may disappear, don't assume the swine on Wall Street will have done the same. You always need to worry about them.

NEXT: The Stupidity Pandemic; U.S. GDP Tanks

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. Market Tests Low as Global Recession Predicted

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 OECD (Organization for Economic Cooperation and Development) is now forecasting GDP will fall 0.3% overall during 2009 in the 30 market economies it tracks. This is down from this June's prediction of 1.7% growth for next year. According to the OECD, 2009 will be the first time since the mid-70s that the U.S., Europe, and Japan are in recession. In all likelihood the global recession has already been well underway in 2008. Just last night, Germany reported negative GDP for the second quarter in a row. France and Italy should follow with similar results. The U.S. already reported negative GDP for one quarter and now that the presidential election is over the reported GDP numbers should get much worse. China, while not in danger of recession yet, reported a sharp decline in industrial production yesterday with growth slowing from 11.4% to 8.2%.

Despite the dismal economic numbers coming out of China, the Shanghai Composite was up 3.7% last night on hopes of a bigger stimulus package from the government. Hope didn't cross the Chinese border however and all other Eastern indices closed down. The Nikkei in Japan and the Hang Seng in Hong Kong were down 5.5% and 5.2% respectively - technically another crash day, but it would take a much bigger drop than that to get any ones attention these days. Australia lost 5% and Korea was down 7% at the low, but recovered enough to be off only 3.2% at the close. The Yen rallied against the dollar and oil fell as low as $56.06 during Asian trading.

The recession news out of Germany hammered the euro and the pound. The euro was as low as 1.2388 and the pound fell to 1.497 at one point. The DAX has hoovered around the unchanged mark for most of the day so far and the CAC-40 in France is actually up, while the FTSE is down marginally. Oil fell as low as $54.67 (on its way to $50 and probably $40 as mentioned in this blog previously). The dollar has been rallying against euro currencies because the U.S. economy is supposedly in much better shape than the euro zone economies. In reality, the U.S is only better at producing false GDP figures that overstate its economic growth. As long as the market is willing to trade on this fiction, expect it to continue.

The stock markets in the U.S. came close to their recent lows yesterday and should be watched carefully at this point. The Nasdaq was down 5.2% and closed at 1499, just above its 1494 yearly bottom so far (there is support around 1500). The S&P 500 also dropped 5.2% and closed only 12 points above its previous low of 840. The Russell 2000 was the worst hit of all, dropping 6.1% and was only 9 points away from a new low at the close. The Dow was the only major index to have a less than crash level drop (just under 5.0%) and at 8282 was well above the 7774 level it hit in recent trading. Dow companies, Intel and Walmart then both lowered earnings expectations after yesterday's close. This news should propel the market lower. If the market can't hold its yearly lows look for the Dow to hold around 7200 and the S&P 500 around 775 (the 2002 lows). Many traders will be buying if they see these prices.

NEXT: The Trader of Last Resort

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.

When Stimulus Ceases to be Stimulating

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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Apparently Pavlov was right - and a better economist than anyone ever imagined. More than 100 years ago he noted that a stimulus has its greatest effect in the beginning and loses it impact if continually applied. Contemporary central bankers have apparently failed to appreciate the significance of this finding and its application to their field.

Early this morning New York time, the Bank of England cut interest rates 1.5%. While this may not be the biggest rate cut ever in nominal terms, it is enormous by any measure. The old rate was 4.75 and the new one is 3.25. Before the credit crisis began last year, a rate cut of this magnitude would have been enough to rally the market 10%, 15% or maybe even 20% in as little as a few days. However, as the credit crisis has proceeded, central banks rate cuts have lost their efficacy. The rallies that have resulted have become smaller and briefer. Today the FTSE 100 closed down 5.7%. Instead of the expected big rally, the London market crashed.

The Bank of England's grand rate cut gesture was a follow-up to the U.S. Fed's 50 basis point pre-election rate cut last week. While the Fed's cut helped prop up the American stock market into the voting, it could have done even more and there were rumors that it was considering 75 or even a 100 point cut (the remaining 25 or 50 basis point cut will probably be done at the next meeting). The ECB and the Swiss central bank decided to follow this more conservative approach today when they both cut 50 basis points also. Euro zone rates are now at 3.25%, above Britain's new 3.00% and well above the 1.00% in U.S. Counterintuitively, the trade weighted dollar rallied. This pattern has been seen since late July when funds have been flowing from high interest rate currencies to low interest rate currencies - something which seems to defy all logic.

Bourses on the continent suffered even more today than the British market, since they only had a big rate cut, instead of a truly huge rate cut to support stock prices. The German DAX was down 6.8% and the CAC-40 dropped 6.4%. The U.S. markets started selling as soon as they opened and hit a temporary bottom around 1:30, when the Dow was down more than 400 points and Nasdaq down over 70. Oil prices was hit even worse than stocks, with light sweet crude falling to $60.16 at one point. Don't be surprised if oil falls even further to 50 or even 40 in the future, although this may take awhile. In the shorter term, current levels are likely to be broken for stocks.

NEXT: Employment Losses Revealed After the Election

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.

Stock Market Enters Bermuda Triangle

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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In technical analysis, a symmetrical triangle pattern usually indicates a continuation of a trend. The U.S. market indices look like they are making such a pattern on the charts. Triangles aren't the most reliable of chart patterns however and a break on both to the upside and downside is possible. If a downside break occurs, and this has not happened yet, then look for a test of the intraday lows of of around 7850 on the Dow, 840 on the S&P 500 and 1542 on Nasdaq. If successful, this could put in a double bottom and make a rally possible. A break of these levels would indicate a test of the 2002 lows on the Dow and S&P, at 7200 and 775, would likely take place.

While Monday was a good rally day in the U.S. markets, the action took place on below average volume indicating a lack of conviction in the buying. On Tuesday, the Dow was up an hour before the close and then experienced approximately a 250 point drop to end down 232 or 2.5% (It's volatility like this that is preventing the the market from getting anywhere on the upside). The Nasdaq was the hardest hit of all the indices because of bad tech earnings. It dropped 73 points or 4.1% to close below 1700 at 1696. The selling continued overnight in Asia, with Japan, Hong Kong and Korea experiencing another crash day. The Nikkei was down 6.8% or 632 points, but was still well above its 2003 low. Financials bore the brunt of the selling in Japan. The Hang Seng and KOSPI were down 5.2% and 5.1% respectively. Oil fell below $70 a barrel in Asian trading.

Things were a little better in European trading this morning, but not much. The 3 major indices, the FTSE, DAX and CAC-40 managed to hold their losses at the 4% level, just below the criteria for a crash. In a surprise move, Hungary raised interest rates 3% to protect the collapsing Forint. Surprisingly, despite all the global negativity, U.S. stock futures were up early on in pre-market trade. Wachovia's announcement of a $24 billion quarterly loss, the biggest for any U.S. financial company ever, seemed to have turned sentiment highly negative.

By a number of technical criteria, the U.S. markets should have bottomed by now. There has of course been a short-term rally, but the market is having trouble holding it. Not that the monetary and fiscal authorities haven't been trying to assist it, with one new program after another - and you can expect another 50 basis point rate cut from the Fed next week as well, with Fed funds returning to the 1.0% rate that caused the credit crisis in the first place. Right now bad earnings and negative outlooks are causing stocks to sell off. None of the major problems with the financial system have been permanently solved however. Expect them to continue showing up again and again, just when you least expect it.

NEXT: The House of Cards Economy

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.

Stock Market Rallies Like It's 1932

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:

Increases in liquidity show up in the stock market immediately and in the economy months later, but are not fully reflected in the inflation rate until years later. Yesterday's promise of UNLIMITED liquidity for the banking system in Europe (backed up by the U.S. Fed) along with the announcement of several trillion dollars in financial company bailout programs created the biggest global stock market rally ever. The future effects on the global economy remain to be seen. The likely biggest global inflation ever will not be showing up for awhile.

The Dow was up 936 points yesterday or 11.1% to close at 9387. The S&P500 was up 104 points or 11.6% and reclaimed the 1000 level by closing at 1003. Nasdaq rose 195 points to 1844 and was up 11.8%. Small caps, which have held up better than any of the other indices saw the smallest rise, with the Russell 2000 up 48 points or 9.3%. Before the rally, the Dow had fallen 40.3% from the high that it had reached on October 9, 2007 (a bigger percentage loss than in the 2000 to 2002 bear market) and had fallen eight consecutive days for a loss of 22.1%. While the points gains were impressive on Monday, the volume was nothing to write home about. Nasdaq only managed to break just above its average daily volume level at the close. Volume on the Dow was more enthusiastic, but not spectacular. Although yesterday's point rally in U.S. stocks was the biggest ever, in percentage terms it was not. Comparable and even bigger rallies took place in the U.S. during the 1930s Great Depression, but have not been seen since.

A rally of similar magnitude to the one in the U.S. took place in the world's other bourses as well. In Europe, the FTSE 100 in the UK was up 8.3%, the CAC-40 in France up 11.2% and the DAX in Germany was up 11.4%. The Hang Seng in Hong Kong rallied 10.2%. Japan was closed on Monday, but got two days of rallying in by rising 14.2% when it reopened on Tuesday. The Nikkei was trying to test test its 2003 low (which took 12 years of selling for it to reach) of just above 7600 last week. If it can manage not to break it in the next few months, the Japanese stock market may finally have bottomed after almost two decades.

Options expire this Friday and the current rally is likely to be sustained until this support for the market runs out (since August 2007, options expiration week has been the time for major stock rallies in the U.S). Today is already starting out as another big day for stocks, but be ready for any possibility. Extremely big rallies, which are typical of bear markets, are not necessarily good news. They certainly weren't during the Great Depression.

NEXT: So Much for That Rally

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.

Today's Global Stock Market Meltdown

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 Videos Related to this Blog:

A market sell off spread around the globe last night and is about to reach U.S shores as this is being written. This current round of selling was precipitated by a banking crisis in a number of European countries and in Korea over the weekend. Several Eurozone states moved to guarantee bank deposits and large bank bailouts from last week had to be restructured to make them work. The Asian bourses and Israel was the first to open after this news and the pronounced selling took place from the get go, with a number of exchanges recording crash level drops.

The trouble started on Saturday when the a plan for a coordinated bailout of the European banking system fell apart. Sunday, Germany moved to guarantee all bank deposits (Ireland was the first to do so last week). Austria and Denmark quickly followed suit and then so did Sweden . At the same time, Euro governments moved to shore up a number of troubled banks to prevent the problem from spreading. Germany had to restructure the rescue deal for lender Hypo Real Estate (after only one week), BNP Paribas agreed to buy a majority stake in Fortis which had been partially nationalized by Belgium and the Netherlands last Monday, and UniCredit, Italy's second-biggest bank, announced that it needed to raise capital. Tiny Iceland looked like it was about to become the first country with a banking system that completely collapsed. Across the world in Asia, South Korea's finance minister said Korean banks were having trouble securing funds in foreign currencies and that the government would offer loans from its reserves.

When markets resumed trading, the results were ugly. Israel was down 7% at one point, as was Russia. The Hang Seng in Hong Kong and the mainland Shanghai index experienced crash level drops of 5.0% and 5.4% respectively. Indonesia was the worst hit market with a 10% drop. Australia, India, Singapore, South Korea and Thailand were hard hit as well. The Nikkei in Japan was in slightly better shape than China, falling only 4.25% to 10,473 (well below the low of 14,000 plus bottom that it hit in 1992).

Europe, which is still trading as this is being written, followed Asia's lead. The major stock indices - the DAX in Germany, the FTSE in England, and the CAC-40 in France all fell between 4% and 5% after trading opened. Smaller countries were fairing worse with Norway down 6% and Austria down more than 8%. Oil fell to just over $90 a barrel, but gold and silver were rallying as is usually the case during financial crises. As happened last Monday morning, the precious metal rallies were taking place even though the U.S. dollar was up (the euro was down two cents against it).

As has been the case ad nauseum, central banks in Europe were pumping huge amounts of liquidity into the financial system to control the crisis. None of the previous moves have had any lasting effects, nor will this one. The next likely government action is a coordinated global interest rate cut, which we should be seeing soon. When this doesn't work, you should assume that trading bans (such as no short selling at all) will be extended and then no selling at all will be allowed because the stock markets themselves will be closed down for a day or two or even a week or more.

The U.S. markets have just opened with the Dow down almost 300 points and the Nasdaq down more than 50. It should be an interesting day.

NEXT: The New Crash Monday Phenomenon

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.