Bank Bankruptcy Bonanza

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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CIT filed for bankruptcy in New York on Sunday. This is the fourth biggest bankruptcy in U.S. history, just behind number three General Motors (Lehman Brothers was number one). The CIT bankruptcy filing followed nine bank failures on Friday, which coincidentally involved the 4th largest bank failure this year. The FDIC Insurance fund which pays off depositors of failed banks is itself bankrupt. CIT itself is a bank holding company and became one last year in order to TARP funds. It will not be countered as a failed bank since it is expected to come out of bankruptcy.

The amount of money the government put into CIT was a small $2.3 billion (compared to $45 billion put directly into Citibank). CIT was not deemed too big to fail. It has actually been on the verge of collapse for several months now and almost went under in July. Lots of parties have been holding it up, including Goldman Sachs, with temporary measures since then - and for good reason. CIT is the largest loan provider for small and medium sized business in the U.S and 300,000 retail outlets are at least partially dependent on it for their merchandise. Imagine the impact on the holiday shopping season (goods are already at the stores by this point) if CIT had failed in the summer? The U.S. economy would have taken a major hit since retailing is its largest industry.

The federal government's indifference to CIT puts the lie to Bernanke, Paulson and Geithner's claims that the TARP government bailout money was to restore lending and support the economy. The biggest U.S. lender to small and medium size businesses has been allowed to fail. Before the failure, its was drastically cutting its loans to try and stay afloat. CIT lent $11.3 billion in the first half of 2008, but only $4.4 billion in the first half of 2009. While this was taking place the large banks, who got copious amounts of TARP money to increase lending, were cutting consumer credit sharply. So the U.S. has moved toward an economy where only big businesses and the rich are supplied with adequate credit (a third-world model). There is no way an actual economic recovery can take place given this situation.

Of course the government will probably come up with a plan for the CIT post-bankruptcy. I imagine a Cash Loans for Clunker Businesses program where huge amounts of money are lent to insolvent subprime businesses that don't have a chance of every making any money (businesses with Washington connections will be at the top of the list and get 99% of the funding). Bernanke is probably starting up the printing presses right now to pay for it. Just as a reminder, Bernanke claims he and the other central bankers 'saved' the financial system last year and he has been heralded by Obama for preventing another depression. With 115 bank failures this year and counting, a major financial company bankruptcy, and an insolvent FDIC bank insurance fund, the financial system isn't looking so 'saved' lately. Well, at least we've got the stock market, which just had its best seven month performance since 1933 . Hey, wasn't that during the Great Depression?

NEXT: Markets Roller Coaster Ride Powered by Media Hype

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.

Gold, Oil, Dollar and Market Update

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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Gold and silver had sharp sell offs this morning, while the dollar rallied. If you believe the press reports (and in general, you shouldn't), gold and silver sold off because the dollar was rallying. The dollar was supposedly rallying because of bad figures on Eurozone industrial production. Are they likely to be worse than the U.S. production figures after GM's bankruptcy (production is being closed down during the summer)? Probably not. If you look, you will see despite the screaming headlines the dollar was not up that much. As of now, the trade-weighted dollar is trading at 80.07, up from yesterday's close of 79.36. The breakdown point is 78.33.

The drop in gold and silver is more than overdone. Gold closed strongly yesterday at $962. Optimism for the U.S. dollar is also being fueled because the treasury auction went well this week and there was supposedly heavy demand for long-term U.S. treasuries from foreign buyers (I had difficulty not laughing as I wrote that last statement). What outrageous claims will the government make next? For those not paying attention, interest rates on the 10-year bond hit 4% yesterday, double the low of 2%. Not exactly and indication that these bonds are experiencing increasing demand relative to supply (interest rates would be falling if this was true, looks to me like they doubled).

Oil was over 73 yesterday and I began taking some profits in ERX and to a lesser extent DXO. The oil rally has been going on four months now and seems to be losing steam as we approach major resistance around 77. Stocks are likely to get into trouble when the S&P gets to 1000. Resistance is very strong at that point. When you have large profits, its always a good idea to take some money off the table.

For those who don't want to hold U.S. dollars, there are a lot more options in ETFs than there used to be. While we have mentioned FXA and FXC (the Australian and Canadian dollar ETFs) previously, you can now buy New Zealand (BNZ) dollars as well. You can even buy emerging market currencies such as the Brazilian Real (BZF). For a more complex trade, you can consider DBV. This ETF is double long the three G20 currencies with the highest interest rate and simultaneously short the three currencies with the lowest interest rate.

NEXT: G8 Hot Air Inflates Dollar

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.

Market at a Key Juncture

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 Dow finally pierced and closed above its 200-day moving average yesterday, the last of the major indices to do so. This could be a possible end to the rally that began in early March, but we don't know for sure yet. The trade-weighted U.S. dollar hit major long-term support overnight and has so far managed to bounce off of it. Gold reached as high as 990, once again bumping up against its major resistance at a 1000. Oil has traded well above 68 and is close to important resistance at 70. At least a short term reversal of trends is possible for all of these markets. It will take awhile though to determine if this will turn into something bigger.

In many ways the dollar is key to all the other markets. The trade-weighted dollar fell as low as 78.40 last night and made a double bottom on the short term charts. Major support is at 78.33, which was the low point of a large reverse head and shoulder bottom pattern made between 1991 and 1993. This support was broken in 2007 and the dollar then fell to around the 72 area. The dollar traded as low as 79 at the end of last year before recovering. What saved the dollar from the precipice last night was 'unnamed sources' telling Reuters that "a downgrade in the U.S. sovereign credit rating would not discourage Asian central banks from buying U.S. treasuries." Now I wonder who could have planted that story at such a convenient time? You should also be wondering are these Asian central bankers really that dumb or should they be suing Reuters for libel?

The short term key to whether or not stocks can hold their gains and go higher is whether or not the Nasdaq can hold above its 200-day moving average. Nasdaq was the first to break through this key resistance and has been leading the market up since the bottom. The Dow is the market laggard, although its position might improve in a few days when major losers GM and Citigroup are removed from the index and replaced by Cisco and Travelers. The Nasdaq 200 line is currently at 1684 and still falling. Nasdaq is holding above 1800 this morning.

At this point, whether or not gold can finally make the break above the magic 1000 level will be determined by how the dollar holds up. If the dollar breaks below 78, gold will be breaking above a 1000 and will rally until the dollar fall is broken. Expect major government manipulation behind the scenes to try to prevent this scenario. If they fail here, they will try for a reversal lower down. A weak dollar will also boost oil to higher levels, although a good hurricane could do the same.

NEXT: Dollar Sage Continues; Commodities Take a Hit

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.

GM Bankruptcy End of an Era; Oil Rally Continues

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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GM will declare bankruptcy this morning, striking a major blow to the prestige of American manufacturing. This is one more step, and a major one at that, in the end of the economic dominance of the U.S. In the future, historians will look back and cite this as a key event that represented a turning point and a significant failure in U.S. policy. GM is the largest industrial bankruptcy in American history. The new 'improved' GM that emerges from bankruptcy will be a socialized company with the federal government owning 60%. The government will be paying for its stake with $30 billion of newly printed money under the TARP program.

GM's bankruptcy is not an isolated event, but will be taking down a host of associated companies and this will have ripple effects throughout the economy. Two parts suppliers already filed for bankruptcy on Friday. The first major dealership, Chevrolet-Saturn, of Harlem, declared bankruptcy this morning, expect many more to follow. The problems are not limited to the U.S. either. There are apparently over 100 Japanese companies that have significant exposure to GM. There could be quite a few in other countries as well (I am sure they will all be delighted to do business with U.S. manufacturing firms in the future). The company will cut 21,000 employees or 34% of its work force during a time of rapidly rising unemployment, reduce dealerships by 2600 and close 11 manufacturing facilities.

Markets in Asia last night and Europe this morning were rallying. U.S. stock futures are up a the moment in the pre-market. Oil broke over $68 a barrel last night, breaking through resistance at 67. It was recently trading at 67.69 in mid-morning European trading. Once oil can hold above 67, the next stop is chart resistance at 70, which was the top during hurricane Katrina. Gold was as high as 988 and silver was in the 15.80s pre-market, both close to major breakout points. Silver is overextended on the technicals however, so it should have trouble getting to and staying above 16 at the moment. The trade-weighted U.S. dollar was priced at 78.79 this morning and is in danger of a major breakdown. There should be at attempt on the part of the authorities to try to save it, which might work for awhile and cause a temporary pause in the rise of gold and silver. It will be interesting to see how this plays out.

Markets which are bullish tend to go up the first few trading days of the month (and down when they are they are bearish). While oil, gold and silver look like they are in good shape, so do stocks for the moment. Nasdaq traded convincingly above its 200-day moving average four days last week (as this blog predicted it would). The Dow and S&P are both about to hit this line though and this will lead to stickiness at the very least. A failure of the stock rally is possible at this point, but that is by no means definite. The next week or two will be a key period for all markets which should tell us a lot.

NEXT: So Far This Doesn't Look Like a Top

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.

Oil Takes Gas, Silver's Shining Moment, GM Watch

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 oil inventory report was delayed this week and it was bullish big time for the third week in a row. The natural gas report was just better than expectations, but even this minimal accomplishment proved a combustible mix that caused UNG (the natural gas ETF) to shoot upward. SLV (the silver ETF) traded over 15.00 this morning, removing all doubt that a breakout has taken place from strong resistance around 14.50. News reports are indicating that some progress is being made with GM bondholders in a last minute effort to avert the largest industrial bankruptcy in the history of the United States.

Analysts expected that U.S. oil inventories would rise 1.8 million barrels last week. Boy did they get a surprise! Inventories fell by 5.4 million barrels. Gasoline, the major use for oil during the summer months, had 600,000 less barrels in storage. Year over year U.S. gasoline demand is down only 1.2% despite the troubled economy, yet oil is still 47% off of last year's high. Despite dropping supply and the barely lower demand for gasoline compared to the much lower price of oil, you can still find bearish comments on oil in media coverage. Our favorite oil ETF, DXO, has continually told an opposite tale however - and when in doubt, the market is always right. DXO broke above 4.00 today and should be heading higher until light sweet crude reaches at least $75 a barrel. Triple leveraged energy company ETF, ERX, is having an even better day after consolidation around support between 29 and 30 level.

While oil may have only a month or so left of its rally (frequently when the most money is made), natural gas is still putting in its bottom and I have been accumulating UNG since it fell back to the low 14's. Unlike oil, the fundamentals of natural gas are indeed negative and have been for a long time. Moreover, the favorable seasonal for natural gas can begin as late as July as opposed to February for oil. The peak is most likely in late October, early November, while oil statistically peaks in early August. This week, analysts expected U.S. storage of natural gas to increase 111 bcfs (billion cubic feet), but the increase came in at only 106 bcfs. In a heavily shorted market, that was enough to generate a big move up.

In the precious metals, SLV trading above 15.00 today was quite impressive. At the moment silver is doing better than gold, but it has a lot of catch up to do. Gold is only 4% off its recent highs of 1000, while silver is about 30% lower than it previous high around 21. SLV has another point of resistance at 16. After that, SLV testing 21 is almost certain.

Some progress seems to have been made with GM bondholders this morning. It is still too early to tell if this will come to fruition. Whether or not GM declares bankruptcy (allowing this to happen will be one of the biggest economic mistakes that the U.S. government has ever made) is obviously going to go down to the wire. The stock has not fallen below a $1.00 today however and is actually up 10% at the moment. When the market thinks a company is going bankrupt, it pushes its price into the penny level. Watch to see if this happens. While a GM bankruptcy will weigh on the market, the avoidance of bankruptcy would cause a big rally next week.

NEXT: Silver, Oil , Gold - Market Screams Inflation

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.

GM Saga Continues; Gold Becomes the New Oil

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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This is the last week for GM to arrange a deal with its bondholders in order to avoid bankruptcy - and things don't look good at the moment. While this has been weighing on the market for some time, it didn't prevent a huge rally yesterday that saw the Nasdaq zoom and close well above its 200-day moving average. This picture would be extremely bullish, if volume had been heavy instead of just average. Gold and silver were down slightly in the stock rally and this was odd behavior to say the least considering the Korean nuclear test. News coverage on the precious metals is beginning to resemble the negative coverage that oil experienced from February to just recently. Oil wound up basically flat on the day Tuesday, but was as high as $63.45 in European trading this morning. Look for $67.00 as the next resistance.

What has been going on with GM in the last few months highlights the extent of recent government incompetence in handling the U.S. economy. Federal policy from the last several presidential administrations has undermined our industrial base and built up the FIRE (Fire Insurance Real Estate) economy to replace lost manufacturing. Obama claims he wants to restore the balance. Unfortunately, none of his actions support his rhetoric. GM, which is the first major opportunity to help revive U.S production, has been handled disastrously. The Obama administration has interfered with the operations of the company as if somehow they know more about how to run a large industrial enterprise than people in the industry. They don't. While GM has been poorly managed for decades, it is still run better than the U.S. government.

Furthermore Obama's people have made demands that are improper and unlikely to be met in order for GM to get more bailout funds. No such demands were made on any financial institution that received TARP funds. While the unions have been more than cooperative, the unsecured bondholders have balked about accepting equity in exchange for their holdings. This was inevitable since they would be entitled to more in a bankruptcy, either through distribution of assets or by cashing in their credit default swaps - an action that would cost the financial companies receiving TARP funds a lot of money. Trying to force bond holders to accept equity is also an attempt to violate their rights under law. Who would want to lend capital in a country that does this? If the Obama people sat down in a room and tried to figure out an economic policy that would lose in the short term, lose in the intermediate term, and lose in the long term, they couldn't have done any better.

Lack of confidence, along with the massive money-printing operations of the major central banks, will continue to drive up the price of gold and silver. Don't expect to hear this from the mainstream media however. Some tidbits from today: 'Gold off for second day amid broad metals selling' (gold was down $2.20, a minor intra-day blip); 'The strong dollar has sapped some of the resilience that gold has been showing' (a quote from someone who has a $600 price target on gold and has been wrong about the price direction of gold for months, but that's not mentioned in the article and doesn't keep the media from quoting him); and 'silver skidded 4.5 cents' (but was still above the key breakout level of $14.50). I also particularly liked the coverage in the Wall Street Journal yesterday that said 'gold could go to a $1000 by the end of the year'. Now that's an earth shattering prediction. And to think investors who get their information from the media have trouble making money in the markets. I can't imagine why.

NEXT: Oil Takes Gas, Silver's Shining Moment, GM Watch

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.

The Scamdemic in Insurers, Autos and 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.

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While I have often criticized the U.S. government for sloppy and corrupt economic policy, it is really outdoing itself lately to reach news highs on the stupidity meter. Essentially, federal government policy can be described as reward the incompetent. If a choice must be made between rewarding the extremely incompetent versus the very incompetent, reward the extremely incompetent. Better yet still if maximum unemployment and long-term economic damage can result from a policy choice, which should also costs ten times more in the long run. Unfortunately, as the latest news on swine flu reveals, this problem isn't limited to economic policy, but effects life or death health issues for the American public. If there was a movie analogy for the last two U.S. presidential administrations, it would have to be "Dumb and Dumber".

Today's news included bailouts for the life insurance companies and the simultaneous winding down of the American auto industry. The Treasury department has agreed to provide at least $22 billion in TARP funds to six life insurers, including Hartford Financial, Lincoln National, Allstate Corp., Ameriprise Financial, Principal Financial Group and Prudential. Like all bailouts that have taken place so far, expect more to be paid out in the future. While the insurance companies were being saved from their financial profligacy, the auto companies are being allowed to flounder.

Chrysler announced it was closing a quarter of all of its dealerships and GM is eliminating 1100. GM faces a June 1 deadline for bankruptcy. The Obama administration has done everything possible to push GM over the edge. While the costs of a bailout would be minimal compared to the financial companies, the costs of not bailing out the auto companies will be staggering. These will include paying off CDSs (credit default swaps) for GM bonds, unemployment insurance, health care costs, state and local government bailouts, etc, etc, etc. The administrations attempt to get the bondholders to accept worthless equity in the company sets another bad precedent as well. This will damage the ability of all U.S. manufacturing companies to raise capital in the future (especially from foreign sources). It was long term government policy initiatives to build up the FIRE (finance, insurance, real estate) economy at the expense of manufacturing that led to our current difficulties. Is the government trying to fix this mistake? Not at all, they are trying to compound it.

Some more interesting news on the swine flu debacle #2 (the first debacle was in the mid 1970s) came out in the last 24 hours. A report from Bloomberg News stated the World Health Organization is investigating a claim by an top flu researcher and one of the developers of Tamiflu, Adrian Gibbs, that the swine flu virus currently circling the globe may have been created in a medical lab as a result of human error. Presumably, it was accidentally released. In reaction to the report, a spokesperson for the CDC in Atlanta vehemently denied the possibility of swine flu being man made even though the CDC has yet to review Dr. Gibbs data (hmmm, I wonder who could have operated a lab where this could have taken place). Regardless of what may have happened in the past, there is no need to have doubts about whether or not the CDC's operations will be in competent hands in the future. The Obama administration has just announced that it is appointing New York City Health Commissioner Thomas Frieden to head the CDC. In case you have forgotten, Frieden was the one who stated there were hundreds of undiagnosed cases of swine flu in the city (there weren't) when the flu first appeared. While doing everything possible to unnecessarily spread panic, the NYC health department was busy botching the early testing of potential swine flu cases. The extremely incompetent Frieden will be replacing the merely incompetent Richard Besser.

NEXT: Market Meltup in Mumbai

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.

Stress Test Mess; Hard Assets Conference

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:

Over the weekend, the Wall Street Journal reported that banks were given major concessions on the Stress Test and their needs for capital were reduced considerably from first estimates. This blog already reported last week that you couldn't believe the stress test numbers. We are glad the mainstream media is trying to keep up with our reporting only days later, instead of the usual weeks or months later as has been the case in the past. Reports were also out this weekend that bankruptcy for GM is inevitable. Surveys show people became more reluctant to buy GM cars once president Obama, in a kick them while their down moment, said the government would force them into bankruptcy unless a number of concessions from bondholders, unions and management were made. Great way to handle the problem of a declining U.S. manufacturing base and make the current deep recession even worse. GM should just convert itself to a bank (its credit arm GM capital already did) and then it would be permitted to lie about its financials and receive unlimited government handouts - it's the American way (unfortunately).

The New York Hard Assets Conference is today and tomorrow and I will be covering it in the blog.

NEXT: Hard Assets - the Good, the Bad and the Sleazy


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.

Geithner Talks, Market Drops ... Again

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:

Treasury Secretary Geithner appeared on Face the Nation on Sunday. Stocks in the U.S. are selling off this morning (even though there was a decent rally in Asia last night). Stock selling seems to be the most likely response whenever Geithner speaks and anyone long the market should worry whenever Geithner's mouth is about to open. The interview dealt with the administration's latest imbroglio, the attempt to force GM into bankruptcy and how well the various current bank bailouts are going. Geithner did state, "we want greater lending". He didn't come up with any reason why this might happen.

When Geithner was asked whether the government will force banks to sell their toxic assets to improve conditions for lending, he said that "banks have a large incentive to clean up their balance sheets." A news item released in Europe (please note that this news was not originally published in the U.S.) last Thursday certainly brings that into question. It was reported that a number of large banks including Citigroup, Goldman Sachs, Morgan Stanley, and JP Morgan Chase were considering buying toxic assets to be sold by rivals under the U.S. Treasury’s latest one trillion bailout plan. The purpose of this plan is of course to get toxic assets off the bank's books. Nothing in the law apparently said the banks couldn't participate in the this free money government give away. So of course, they want the goodies too. The result of this congressional oversight could be a huge amount of government spending that results in just moving the toxic assets around the banking system instead of getting them out of it. Geithner also made it very clear in the interview that Treasury's "obligation is to apply the laws passed by Congress".

As for GM, Geithner stated multiple times that "GM is going to be part of this country's future." He followed up with "We want to see a strong automotive industry emerge from this recession," , and added that the government must be sure that GM "can emerge strong enough without having to have government help on an ongoing basis." As to whether GM will have to file for bankruptcy protection, Geithner said "there's a range of options. They've made some progress on restructuring but they're not there yet." What was not stated in the interview is what would the costs be of GM going bankrupt versus it being bailed out.

Bailing out GM will probably be many, many times cheaper than letting it go bankrupt. But hey, when dealing with taxpayer money, why not consider the most expensive option possible. The much higher costs of not bailing out GM are a consequence of the government already having bailed out the banks and the need to increase those bailouts if GM fails. Although the auto companies have been badly managed for years, the idea that the U.S. government knows better about how the auto industry should be run is ridiculous. How they've handled the bank bailouts is a good indication of just how much the government knows about anything to do with business.

NEXT: How to Handle Earnings Season

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.

Surgery Done by a Bull in the China Shop

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:

Today is the beginning of the spring quarter and the new fiscal year in Japan. Last night, most of Asia rallied and the Nikkei was up smartly (the Nikkei never hit a new low in the market sell off this spring by the way). A bailout plan in Taiwan for semiconductor manufacturers was bullish for tech stocks throughout the region. A Chinese manufacturing report was dismal, although off the low established last November (when the prices of many commodities also bottomed). European bourses are down this morning and the U.S. market indices gapped down after gapping up yesterday. The market is worried about the G20 Meeting tomorrow and the Jobs Report on Friday. The U.S. government possibly forcing GM into bankruptcy has also reared its ugly head again as well.

The government's current handling of GM is incredibly destructive economically. News has been leaked that Obama thinks a 'surgical bankruptcy' is the best option. If so, that surgery is being conducted by a bull in a China shop. A recapitulation of what is going on:

1. The U.S. Economy has been losing its manufacturing base for the last 30 years and has moved increasingly to a FIRE (Finance, Insurance, Real Estate) economy and this has led to the current implosion of our financial system.
2. Instead of trying to revive manufacturing, the government is trying to drive a top manufacturer into bankruptcy - and somehow this is going to improve things.
3. Sales for automakers are down as much as 50% year over year because of the economy. The U.S. government then tells reluctant car purchasers that we are trying to drive GM out of business and make them worry that if they buy a GM car they will ever be able to get it fixed (this may not be realistic, but it is something that will give the consumer pause and hurt GM sales even more).
4. No one knows how many credit default swaps there are on GM bonds, but the number is probably substantial. A bankruptcy would put them in the money and require that they be paid off. Most of them would have been sold by insurance companies and brokers that are already getting government bailouts and this will require more bailout money (probably many times what it would cost to bailout GM) to make up for the losses.
5. The U.S government just spent $5 billion bailing out auto part suppliers and is undermining that bailout if it forces GM into bankruptcy.
6. There are a large number of current and former employees of the auto industry, its suppliers, its shippers, etc that will be negatively affected by this action.
7. The GM announcement stopped a nascent stock market recovery in its tracks, wiping out billions more from retirement portfolios. The Dow was up over 20% (technically a new bull market) and the government apparently couldn't wait to drive it right back into bear market territory. Treasury Secretary Geithner already caused a major market sell off previously with his handling of Citigroup. If the Obama administration's goal is to keep stock prices down, they are achieving outstanding success.

While I am not a fan of bailouts, I am even more opposed to incompetent business practices combined with unlimited government stupidity. As we have said in this blog before you can bailout no one or you can bail out everyone, but doing some bailouts and not others produces the worst results. What the Obama administration is doing with GM makes no sense on any level - and it does not bode well for the handling of economic matters going forward.

NEXT: The Bull Heard Around the World

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.

Government Thinks It Knows Best, Market Disagrees

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:

If the Obama administration is trying to crash the U.S. stock market they are doing an excellent job. If not, they should all take a class in PR 101. The U.S. government announced that it is displeased with the progress the automakers have made with their restructuring plans (like somehow the government knows how to run an auto company), got the CEO of GM to resign, and is threatening to withhold bailout money from them and force them into bankruptcy. This would be devastating to the economies of the politically important swing states of Michigan and Ohio and for this reason it is not likely to happen. Nevertheless, all investors are paying this morning for this political cat and mouse game, with both the Dow and Nasdaq selling off around 4% as I write this. A crash level drop of 5% is a real possibility at the moment.

When the automakers received their first bailout in the fall, this blog stated it was only a stopgap measure to tide them over until after the election and a new bailout would be needed then. This has indeed happened right on schedule. While we constantly say, there is no such thing as a single bailout for an insolvent financial institution, the same is obviously true in many other industries as well. There is also no question that the automakers have been some of the worse run companies in the U.S. for decades, at least until the banks and brokers took the lead in this respect in the 2000s. Bailouts almost always have long term negative consequences, but this has not stopped the U.S. from establishing a de facto 'too big to fail policy' and it now seems to be moving toward state directed corporate socialism. Government management is an oxymoron if ever there was one. This is out of the frying pan into the fire economics.

Also weighing on the market is the upcoming G20 summit. Other countries, being led by Germany, are not interested in printing an endless stream of new money for economic stimulus plans and the BRIC countries want an alternative reserve currency. A coordinated policy for global stimulus is not likely to result from the meeting later this week as was hoped for by the Obama administration. This leaves the U.S. and Britain, the big money printers, holding the bag. Consequently, both are likely to have to print more money in the future. The BRIC (Brazil, Russia, India and China) countries want to establish a new reserve currency, at first consisting of a blend of dollars, euros, yen and pounds. No immediate policy shift will officially take place at the summit, but this likely represents a sea change in international currency policy. Both pieces of news are devastating for the U.S. dollar, which somehow ignored reality this morning and rallied strongly.

While it would be nice to do so, investors can't ignore politics. Deep down, there is really very little difference in a number of respects from the current administration and the last administration. Spending huge amounts of taxpayer money on bailouts was and is part of the agenda. If the spending can't fully be funded with taxpayer money (and this was a reality from the beginning), any amount of money necessary will be printed to cover the costs. The dollar will eventually lose a lot of its value because of this and there will be a lot of inflation. The Bush administration though was at least aware of the sensitivities of the stock market, while the Obama administration seems oblivious at best. The drop this morning, taking place during a nascent rally, is not the first time the current administration has stuck its foot in it and it probably won't be the last.

NEXT: Next Few Trading Days Are Important

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.

Stocks Looking for a Bottom, Oil More Bullish

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 New York Investing meetup had its March meeting last night and it was marked by controversy and intense audience reaction. Even during my first talk about the history of the Credit Crisis, two people walked out and one of them demanded their money back. While this was common a year and a half ago when we were one of the first groups to discuss the Credit Crisis and people continually left the group because they could just not believe what we were saying (almost everything we discussed at that time has since come true), it is surprising that there are still some people that want to live in denial... but there are. The second talk on Hyperinflation by Jeff Glenn was the real lightening rod for controversy however. This was indeed way over the top at certain points and one audience member attempted to shout Jeff down more than once. Other members of the audience then attempted to shout the heckler down. Fortunately, a riot didn't break out.

The market is attempting a rally as I write this, but it is probably not done on the downside in this move. The minimal requirement for this is that the Nasdaq fall to its November low of 1295. In the meetup last night we went over why a low in the month of March is likely because of the extreme oversold values of the RSI on the monthly charts. This line is below 20 for the Dow and S&P500 for February and is likely to reach the same level this month that the S&P 500 did at the market bottom in 1974. Just how oversold stocks are can be seen in a few eye popping statistics:

1. January and February marked the U.S. markets' worst first two months on record.
2. Last month marked the S&P's worst February since 1933, with the index posting a 10.9% monthly loss.
3. The Dow is down 38% in the past six months, its worst six-month return since 1932, when it plunged 41% (this was around the market bottom during the Great Depression).

Don't forget that big rallies invariably follow big drops.

The economic news is about as gloomy as it can get too and everyone is waiting to see just how bad the jobs report is going to be Friday (predictions are for around a 700,000 loss in jobs). Car sales came out yesterday and General Motors' sales fell 53 percent, Ford sales fell 48 percent and Chrysler's 44 percent year over year (the major Japanese automakers fared only slightly better). If the U.S. automakers are to survive, they will do so only with the help of continual government bailouts. Housing still isn't in good shape either, with a report this morning stating that that 20% of U.S. homeowners owe more on their mortgage than their home is worth and this number will go up substantially if house prices fall just another 5% (they are likely to fall much more than that).

While stocks may not be done on the downside, it looks like oil is. So far a double bottom has been put in on the near term futures in the 33 range in December and February. Nymex oil dropped below $40 a barrel yesterday, but popped back up above this level shortly thereafter just as it has done many times in the last two months. The market has repeatedly told us that it wants oil at 40 or above and we should be listening to it. At our introductory technical analysis seminar on Tuesday, February 17th, I recommended people start picking up DXO (200% long Nymex oil). At least one person got it a the very bottom price of 1.73 and several got it around 1.75. It went to 2.50 thereafter and provided quick short term profits for a few that cashed out. Others are holding out for bigger returns, which they will likely get.

NEXT: Quantitative Easing Today, A $50 Cup of Coffee Tomorrow

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.

Market Must Hold in Here

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 major U.S. stock indices hit five year lows yesterday. The Dow and the S&P 500 are now going to test their 2002 lows, also the 1998 low in the case of the Dow, around 7200 and 775 respectively (mentioned many times in this blog as the target price to look out for). Nasdaq is heading toward a support level in the 1250 to 1300 range, the shoulder area of the reverse head and shoulder pattern that it made in 2002 to 2003. Its stronger support is around 1100. This would be the next place to look for a market sell off to stop. The Dow, and even more likely the S&P, would be below their 2002 lows if this happened. The charts offer little guidance for any significant breaks of the 2002 lows, since there is no significant support until much, much lower levels.

Once again yesterday was a crash day, with all the major U.S. indices closing down 5% or more. I have lost count how many times this has happened in the last three months. The gains from last Thursday's mystery rally were completely dissipated in four trading days. The Dow held up the best with only a 5.1% drop, but closed at 7997, the first close below 8000 since 2003. Small caps were the hardest hit, with the Russell 2000 falling 7.9%. The S&P 500 and Nasdaq were in between with 6.1% and 6.5% drops respectively. Financial stocks had the biggest losses, with Citibank leading the way down with a 23% loss (the New York Investing meetup has been saying since fall of 2007 that Citi is insolvent and the market is now realizing it). Bank America, JP Morgan, Wells Fargo, and Goldman Sachs all had 10% or greater drops. GE, the next major bailout prospect, fell 10%. Autos of course were also hit hard, with GM falling 10% and Ford 25%. Ford barely remained above penny stock levels.

What is currently roiling the market, other than the usual unrelentingly bad economic news, was that the bailout prospects for the auto industry fell apart on Capitol Hill yesterday. Members of congress grilled the auto chieftains on their extravagant spending, including the private jet trips they took to the hearings. While there is certainly profligacy in auto company spending, it can't compare to Wall Street. The TARP legislation failed to eliminate multi-million (or even deca-million) bonuses given to Wall Street management, their high salaries, lavish executive perks as was revealed recently with AIG, nor the dividends they are paying to their shareholders with government bailout money. Suddenly Congress has discovered that taxpayer money shouldn't be wasted irresponsibly with auto companies (whose political contributions can't match Wall Street's). While overall this is certainly a good thing, the economic impact of all the major U.S. auto companies going into bankruptcy should not be underestimated. Market action yesterday made that very clear.

Having a policy of selective government bailouts is the worse of all choices. A government can bail out no company if it wants to maintain a free market system or it can bailout every company if it doesn't. The government certainly shouldn't do bailouts based on political favoritism. At hit or miss bailout policy also is likely to insure the least results for the most money spent -. something the U.S. government has proven particularly adept at in the last several years.

NEXT: Five Year Lows are Bad, Eleven Year Lows are Worse

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.

Auto-Asphyxiation - GM, Ford Gasp for Bailout

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:

No industry better symbolizes 20th century American commerce and culture than does autos. It was in the U.S. that mass production of cars were perfected by Henry Ford and the idea that the average person could own their own vehicle first took hold. It was widespread ownership of automobiles that allowed the post-World War II U.S. to become a suburban chain store nation. Now, the three remaining major U.S. auto companies no longer seem to be viable businesses and the implications are not just economic, but social and political as well .

The problems with the auto companies didn't just happen overnight, but first became evident in the 1970s. When oil prices started to soar, the American consumer turned away from the huge gas guzzlers that Detroit manufactured and the Japanese car companies with their fuel-efficient products gained major footholds in the U.S. market. Chrysler eventually needed a $675 million bailout in 1980 to continue operating. Detroit failed to heed the warning however and the lesson it learned from the events of the 1970s was that the government would bail it out if it messed up and it should try harder to get government restrictions and limitations on foreign imports. Auto industry lobbyists also subsequently did everything possible to overturn federal laws that mandated Detroit produce fuel efficient cars. So in the last ten years, this allowed them to saturate the U.S. market with low gas mileage SUV behemoths and pickup trucks. Now another completely predictable surge in fuel prices has taken place and the Japanese along with Korean auto manufacturers are there to pick up the pieces. An industry that has repeatedly lambasted government interference in its operations and used its political power to undo government programs that could have preserved its economic viability, now is begging the government to interfere by bailing it out.

This is not to imply that auto sales aren't hurting all around because of the economy - they are. Year over year industry sales were down 32% last month and while Ford was in line with a 30% drop, GM had a much worse 45% fall. Similar figures can be found for 1930, the first year of the Great Depression by the way (read that sentence again). GM has has been bleeding red ink since the end of 2004 with a total loss of $73 billion. Ford hasn't been much better off, but managed to report a surprise profit in the second quarter of this year. At that time the New York Investing meetup pointed out that this supposed profit was completely bogus, although the financial media trumpeted it with blaring good-news headlines. For a few days Ford's stock surged, but within weeks began to collapse. The low in Monday's trading was a $1.90 and GM had fallen to a new 50 plus year low of $3.02. GM stock dropped almost 25% on the day because it had announced that its 49% owned GMAC credit arm was likely to go under and its spun off part's supplier Delphi might not emerge from bankruptcy.

Bad earnings are not what forces companies into bankruptcy though. Running out of cash is what pushes them over the edge. By this criteria, GM is likely to go under sometime next spring and Ford might last a little longer. A massive government bailout for the entire industry is of course inevitable. The bailout actually started last year with $25 billion in loans in the 2007 energy bill and an additional $25 billion loan attached to a bill for funding for the Iraq and Afghanistan wars this September. Detroit now wants part of the Wall Street bailout bill money, although the Bush administration is hostile to this suggestion, so Detroit may have to wait until early 2009 to be saved from itself by the federal government.

NEXT: AIG - Bailing Out the Bail Out ... Again

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.