Dollar Watch; Bad Earnings are Good; Natural Gas

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 no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural Gas

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.

No Assurance in Insurance; Wachovia's Deal is Not a Deal

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:

Apparently you can't rely on anything that U.S. government officials say, whether it comes from politicians or federal agencies. As is the case for those with severe psychological disturbances, reality has no permanence, but can change from moment to moment. Today's illustration of this 'Washington psychosis' comes from the Democratic leader of the Senate, Harry Reid, and the FDIC, the people who are supposed to be protecting your bank deposits. Reid publicly stated that a major insurance company was about to go under and then later backtracked (apparently the amnesia drugs had kicked in by that time). The FDIC announced on September 29th that Wachovia had been purchased by Citibank and provided detailed terms of the transaction. This morning, Wells Fargo announced that it was taking over Wachovia in an all stock deal. This leads to the immediate question of who paid whom a bigger bribe to make this happen.

Reid's statement was, " We don't have a lot of leeway on time. One of the individuals in the caucus today talked about a major insurance company. A major insurance company -one with a name that everyone knows that's on the verge of going bankrupt". Insurance stocks were already down before this comment because of exposure to AIG, Lehman, and Washington Mutual debt, not to mention derivatives. The selling accelerated after Reid spoke. In a very carefully worded statement (note the italics), a spokesman for Reid later stated, "Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy], nor has he talked to any insurance company officials." There were four insurance companies, which might be considered household names, that had double digit sell offs on Thursday - Hartford Financial Services (down 32%), MetLife (down 15%), Prudential (down 11%), and Lowes (down 10%). Both Met Life and Hartford released statements that they were not on the verge of bankruptcy (one wonders why they felt a need to do so).

Below is all the U.S. listed insurance companies with a market cap over one billion that had 10% or greater sell offs on Thursday:

Hartford Financial Services (HIG) - down 32%
Principal Financial Group (PFG) - down 16%
MetLife (MET)- down 15%
AXA (AXA) - down 12%
State Auto Financial Corp (STFC) - down 12%
Delphi Financial Corp (DFG) - down 12%
Prudential Financial (PRU) - down 11%
Unitrin (UTR) - down 11%
Everest Real Estate Group (RE) - down 11%
Loews (L) - down 10%
Cincinnati Financial Corp (CINF) - down 10%

The Reid insurance bankruptcy comments were just a moment of truth accidentally slipping out. The takeover of Wachovia by Wells Fargo after there was a done deal with Citibank is far more serious however. This represents a fracturing of the capitalist system in the U.S. Such niceties as contract and property rights no longer seem to be necessary, as indeed is the case in backward, undeveloped economies (which remain backward and undeveloped because these underpinnings for successfully doing business are missing). Of course, things may not actually that bad. This could merely be a case of the FDIC publishing completely false information about its activities and what is going on in the banking system. Well, that's certainly a reassuring thought.

NEXT: The House Caves in, but it's the Market that Collapses

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.

Three Bank Monty - Monday's Global Bank Failures

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 nationalization of the world's banking systems took a big step forward on Monday, with major bank failures happening in the U.S., England, and the European continent. In all cases, the respective governments are getting a piece of the action. While it is generally acknowledged that socializing anything will lead to inefficient operations, general dysfunctionality, and substandard practices, apparently the governments of a number of developed economies have decided that socialized banking is an important component of the solution to the current economic crisis. These are of course the same geniuses that created the government policies that allowed the current economic crisis to take place and then remained completely oblivious to them as they unfolded.

In the U.S., Wachovia now no longer exists. Only last week it was the fourth largest American bank. Over the weekend the FDIC 'facilitated' troubled financial giant Citigroup's purchase of Wachovia's banking operations. Wachovia's own demise can be traced back to its takeover of mortgage lender Golden West Financial in 2006. Citigroup is supposed to be absorbing $42 billion in Wachovia's losses, but this will not happen if the banking bailout plan passes because the bill states that the taxpayers pick up the tab in such circumstances. The FDIC is supposed to cover any remaining losses and in exchange for doing so will get $12 billion in preferred stock. Nevertheless, in a statement that seems to lack both truth and consistency, the FDIC said that the Wachovia bailout won't cost its deposit insurance fund anything. Even though Wachovia's stock fell to 91 cents in Monday's before the bell trading (under one dollar is the market's statement that a company is insolvent), the FDIC claimed the Wachovia did not fail. If you believe that, you are also likely to believe that a pile of manure is a mountain or roses. Wachovia is indeed the largest bank failure in U.S. history (at least for now).

While Wachovia was collapsing in the U.S., the Benelux countries (Belgium, Luxenbourg and the Netherlands) had to bailout Fortis NV with a $16.4 billion cash infusion. In return, the three governments will get a 49% stake in the bank. The demise of Fortis should be seen as a derivative implosion similar to that which brought down U.S. insurance giant AIG. Fortis has had to write down its credit default swaps (CDOs) by 78% so far and this essentially made it insolvent. As was the case for Wachovia, the downward spiral for Fortis was also caused by it taking over a financial company with a dicey lending book. Fortis was part of a three bank consortium that purchased ABN Ambro in October 2007 (long after the credit crisis was front page news). The lead bank in that consortium, Royal Bank of Scotland, is on New York Investing's likely to fail bank list and its stock was down 11% in early Monday trading.

England doesn't have to wait for a future bank failure however. The British government on Monday was forced to nationalize Bradford and Bingley, taking over its $91 billion mortgage operation. The Brits also paid Spain's Banc Santander $33 billion to 'facilitate' its purchase of Bradford and Bingley's savings business. Bradford and Bingley specialized in mortgages for rental properties and it was reported that there had been no income verification for at least 17% of its loans. This was the second bank nationalization in England, Northern Rock was the first, and followed the government arranged purchase of HBOS Plc by Lloyds TSB Group only nine days ago. It is quite obvious that it will not be the last either. Total mortgage lending in Great Britain has fallen 95% (yes 95%) in the previous month. A credit collapse of this magnitude makes the dislocations of the 1930s Great Depression pale in comparison.

NEXT: A Bridge Loan to Nowhere - The Wall Street Bailout Plan

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.

Banks and Brokers Most Likely to Fail - The Big Players

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 for this posting can be found at: http://www.youtube.com/watch?v=sBhEO14lwMg

Other videos on this topic: http://www.youtube.com/watch?v=ZIxTlP5FU_Q

At our September 8th meeting, the New York Investing meetup presented a talk on the 'Banks and Brokers Most Likely to Fail'. This was a follow up to material that was already presented in our April meeting 9th meeting talk, 'The Dirtiest Dozen Financial Companies' (the notes for both of these talks were posted on our web site at: http://investing.meetup.com/21/files). Putting together all the criteria that should be considered in determining whether or not a bank of broker could be insolvent or heading in that direction the following list of large banks or brokers resulted (how much their stock was down from the high is the figure next to their name):

Washington Mutual -down 93%
Lehman - down 91%
Wachovia - down 87%
Merrill Lynch - down 78%
Citibank - down 75%
UBS - down 73%
Royal Bank of Scotland - down 73%
Keycorp - down 82%

With the exception of Wachovia, the Royal Bank of Scotland and Keycorp, these companies had already appeared on our April list.

Washington Mutual and Lehman were obviously both in desperate shape and jocking for the number one position of who would be gone first. Washington Mutual had the highest one-year CD rates in the U.S and the willingness to pay a lot more for funds than its rivals indicated how urgently it needed funds. It could also not raise capital because it had sold stock at $8.75 a share with an agreement to reimburse the buyer for the price difference if it sold stock again at a lower price. It's price had fallen so low (it's price dipped to $1.75 a share the day of our meeting) that if it sold new stock, it would have to pay more to this purchaser per share than it would from the sale. Lehman on the other hand, had been in serious trouble since March and would have gone under right after Bear Stearns failure except for Federal Reserve cash infusions into the company from the newly established PDCF (Primary Dealer Credit Facility). It had just released its earnings and had lost $5.62 a share in the third quarter versus $5.19 a share in the second quarter. Its stock was falling rapidly and would close at $3.65 on Friday.

Lehman had been trying to sell some of its operation or part of the company for the previous several weeks. The Korean Development bank finally withdrew from negotiations claiming they were asking too much. Lehman had deteriorated so much that an emergency meeting was held at the New York Fed's office starting Friday evening and going into Sunday. The Treasury secretary and all of Wall Street's movers and shakers were there. Even then, nothing could be worked out for Lehman. For the first time, the Treasury refused to offer government guarantees. This should not be interpreted as the Fed and Treasury finally realizing the danger of Moral Hazard, or that no one voted for the U.S. becoming a socialist state, but rather that they themselves are out of funding sources.

Without a government rescue, Lehman was forced to declare bankruptcy Monday morning. Ironically, Bank of America agreed to buy Merrill Lynch as a result of the emergency meeting (both were there), apparently with some prodding from government officials. Elsewhere, insurance giant AIG requested access to the Fed's lending facilities, in order to stave off its own impending bankruptcy.

NEXT: Lehman, Merrill Lynch, and AIG - the Morning After

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.


























































































































NEXT: The Banks and Brokers Most Likely to Fail








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.