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.

More 'Good' Pre-Election Economic News

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.


Consumer income had a nice rise in August thanks to extended unemployment benefits (not regular unemployment benefits). The final budget deficit figures for fiscal year 2010 have been leaked and the U.S. is supposedly only in the hole for a massive $1.3 trillion. The ISM manufacturing index came in at 54.4 and the the mainstream press is citing a strong manufacturing sector as the reason the U.S. stock market had its best September since 1939. Altogether, this news could be summed up as 'stupidity you can believe in'.

By almost every measure except the headline number, the ISM report was a disaster. The highest number inside the report was prices paid, an inflation measure, which came in over 70. Prices apparently went up a lot in August. This component had the biggest increase by far, which wasn't difficult because only one other component went up - inventories. Inventories usually pile up because sales are slowing down. The negative big gains were more than matched with negative big losses in the report. Order backlogs, supplier deliveries, employment, and the production components all had big drops. Well, that certainly should have led to a big stock market rally all right.

As for the supposed improved budget deficit figures, as of this August, $1.377 trillion dollars had already been borrowed to fund the federal government in fiscal year 2010. This number would have been $115 billion larger (for a total of $1.492 trillion) if there hadn't been 'financing by other means'. Financing by other means had a big increase in August and is projected to have another big increase in September. There are also substantial 'off budget outlays'. See http://www.fms.treas.gov/mts/mts0810.pdf for the August Treasury report on 2010 fiscal year spending. Makes you wonder if the U.S. government is using the Enron Accounting Manual to do its books.

Finally, some people might argue that an economy that is dependent on extended unemployment benefits for increased consumer spending could just perhaps be somewhat troubled. Few if any of these people write for the mainstream press of course, which generally treated the news of an increase in consumer income and a rise in the savings rate to 5.8% as just more rosy news. If this is such good news, obviously the U.S. should institute ultra super extended unemployment benefits. After all, look at what these policies have done for Europe – riots in the streets and turmoil in the bond markets. The euro has been rising though and obviously this must be due to improved manufacturing in the U.S., if you follow the logic of the mainstream press. If not, you might just conclude that there is a whole bunch of government manipulation of the markets going on.

Disclosure: No positions.

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.