Mark to Model GDP

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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The 3rd quarter U.S. GDP figures were out this morning and they came in slightly above expectations. GDP was supposedly up 3.5%. Almost half of this, 1.7%, was accounted for by increases in auto production. This in turn can be traced to the Cash for Clunkers program and government spending. Overall spending on durable goods was up 22.3%. Housing investment was up even more at 23.4%, also thanks to government tax breaks and FHA mortgage insurance backing loans that a subprime lender wouldn't have touched at the height of the housing bubble. Federal government spending was up 7.9%. On the flip side, business investment fell, net exports fell and inventories fell. In other words, any part of the economy not manipulated by government spending is still declining. Even though they went down, inventories still added 0.9% to GDP growth, because they didn't go down as much as they did previously (no that doesn't make any sense to anyone except a government statistician).

An economy that is only robust because of government spending is essentially dead in the water. This is the same picture as Japan in the 1990s and first decade of the 2000s. The headlines this morning trumpeted that the U.S. is out of recession. Those headlines were common in Japan during the last two decades as well. The U.S. can only avoid this fate by coming up with one Cash for Clunkheads program after another. After all why have only a trillion dollar yearly budget deficit when you can have a two trillion dollar yearly budget deficit? Just as a reference, the Dow Jones Industrial Average was at 2753 the day the Nikkei peaked at just under 40,000 at the end of 1989. Both averages are around 10,000 at the moment.

How long the stock market continues to buy the current U.S. econo-fantasy remains to be seen. There is serious technical damage in the stock charts. The Russell 2000 (small cap stocks) has made a confirmed double top as of yesterday. The usual sell off scenario is small caps go down first, the Nasdaq next and the big cap Dow the last. This pattern was writ large in yesterdays action. The Russell 2000 dropped 3.5%, the Nasdaq 2.7%, the S&P 500 2.0% and the Dow 1.2%. Of the indices, only the Dow has held above its 50-day average. We have seen this picture before in July by the way. The market was significantly technically damaged, but managed to rise from the ashes and rally for the following few months. Things may not be so rosy this time. If there is a rally on low volume that fails to get the indices to a new high, the current rally is likely over and a good shorting opportunity is presenting itself.

There are two assets that have experienced no change in their technical pictures - the U.S. dollar and gold. The dollar is just as bearish as it has been for months and gold is just as bullish. Even with its recent small rally the dollar didn't even go up enough to reach its 50-day moving average. It's 50-day moving average is trading well below its 200-day moving average in an extremely bearish pattern. The gold chart is almost the mirror image of the dollar's chart. It is trading above its 50-day moving average, which in turn is well above its 200-day moving average in a very bullish pattern. Spot gold bounced off its breakout point of $1025 yesterday (a normal action which takes place about 50% of the time) and has traded as high as $1040.40 this morning. Spot silver has also tested its breakout level at $16 and has stayed in its $16 to $18 trading range. So far, so good.

NEXT: The Long and the Short of It

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 Tumbles While Washington Fumbles

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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If it doesn't seem to you that anyone is in charge in Washington, you're not hallucinating. While President Obama is busy worrying about lobbyists attacking his 2010 budget proposals and Treasury Secretary Geithner still fails to realize his job has something to do with the markets, U.S. stocks are tanking. The decline in financials, Citigroup was just above penny stock status at its low of 1.15 yesterday, is sending a clear message that Washington's piecemeal plan to deal with banks is ineffective. While the actions of the Bush administration failed to prevent further erosion of the financial system, the conclusion that the Obama administration seems to have come to is that if they do even less of the same ineffective things, this will solve the problem.

The action in U.S. stocks yesterday was brutal. The Dow was down 4.4% and traded below 7000 for the first time since 1997. The new low of 6737 is still well above a band of strong support that ranges from 5600 to 6200 or so. The S&P 500 was down even more, dropping 4.7% and traded briefly at 699, also for the first time since 1997. The Nasdaq held up better the other indices, falling only 4.0% and its close of 1322 is still above its November low of 1295. The small cap Russell 2000 was hit the worst of all with a crash level 5.4% plunge. It finally broke its November low by a couple of points.

The market drop is not isolated to the U.S. and is a resounding vote of no confidence in the handling of the Credit Crisis by world leaders. The sharp sell of in the U.S. was exacerbated by the S&P 500 breaking its November low last Friday. This confirmed that the S&P made a huge double top in 2000 and 2007. The neckline low set in 2002 was actually violated last November, but the markets rallied immediately. We were not so lucky this time. The next strong support for the S&P is in the 600 to 630 range. The S&P at 600 roughly translates to Dow 5600 and Nasdaq 1100 (the low set in 2002 was 1108). This would be a strong floor of support that the market would have trouble breaking.... certainly the first time.

In the near term, a rally can take at any point from here on in. The oversold level of the market is at extremes. What will set this rally off and what day it will start won't be known until it happens. You can assume that it will only be temporary as well. The ultimate low is way off in the future.

The monthly meeting of the New York Investing meetup is tonight at 6:45PM and it will be held at PS 41, 116 West 11th Street (at 6th Ave).

NEXT: Stocks Looking for a Bottom, Oil More Bullish

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.