The Trader of Last Resort

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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Yesterday, a spectacular market rally took place once again. This is the third time in approximately a month that the Dow has had close to a 1000 point intraday rally. The last such rally took place on October 28th and conveniently rallied the market right into election day. That rally fell apart the moment the voting was over, with the market experiencing the biggest two-day back to back price drop since 1987. While the Fed rate cut was allegedly the reason for the late October move up, the motivation for yesterday's out of the blue rally is not immediately evident.

The economic news was bad before the market opened and only got worse during the day. Big caps Intel and Walmart had already lowered earnings expectations. The weekly unemployment report showed a way above expectations 516,000 new claims for unemployment, which matched the post-911 figures when the U.S. economy briefly ground to a halt. Continuing claims hit a level last seen during the deep recessionary early 1980s. Next came the Trade Deficit. Its figures showed that even though there was a drop in imports last month, the drop in exports was even bigger. The drop in the price of oil was a major cause of the import drop, while the export drop seemed to be more the consequence of a declining global economy. The impact of the rising U.S. dollar, already reflected in oil prices seems to have yet to have fully impacted U.S. exports. Expect that it will be doing so in the not too distant future. Finally, the Budget Deficit numbers for October were released and there was a record monthly deficit of $237 billion (actually $662 billion or 55% of GDP if you exclude the money looted from the social security and other trust funds). For fiscal year 2008, which ended on September 30th, the entire yearly deficit was only $455 billion.

It is not surprising in the least that the market sold off on this news and that a rally attempt in the morning failed. By the beginning of the afternoon, the Nasdaq, S&P 500, and the Russell 2000 all hit new yearly lows and the Dow was getting close to doing so. Market stalwarts, like Citigroup, General Electric and Goldman Sachs were in collapse mode, falling to 8.27, 14.58, and 61.02 respectively. The technical picture was breaking down. Suddenly at 1:00 o'clock the market turned around. Was major support hit? No. Was there release of some good news? No. Could things have become much worse if something wasn't done? Yes. Was the PPT involved? In all likelihood.

The quasi-secret Plunge Protection Team (PPT), officially known as the Working Group on Capital Markets, was created by a presidential executive order from Ronald Regan shortly after the 1987 market meltdown. It's purpose was originally to prevent similar crashes in the future. This Regan/Greenspan effort expanded the Fed's role as the lender of last resort to include 'trader of last resort'. It should be assumed that a lot of seemingly illogical trading behavior that has taken place since the credit crisis began can be traced to the efforts of the PPT. Yesterday's rally has many of the earmarks of recent PPT behavior. Timing in the afternoon at 1:00, 2:00, 2:15, 2:30. Rallies starting for no reason or for reasons that are already known. Rallies starting after chart support is broken with the market becoming vulnerable to a much bigger drop. Rallies taking place at politically convenient times. While there are major ethical problems with the government interfering with free-market trading, there is also the problem that it only works short-term. Any PPT generated rally will inevitably lead to lower lows as the Japanese have discovered over time with their government based market interference. Their stock market has taken 18 years so far to hit bottom - and the U.S. may be setting itself up for a similar future.

NEXT: T & A and the GS-20 Summit

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. Election's Impact on the Markets

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:

In a perfectly free market, politics has no impact on trading and prices. The U.S. not only doesn't have a free market, but since the credit crisis began has veered increasingly toward dominant government control of the financial system. The election tomorrow is not likely to reduce that control, but instead shift it to other areas. The Bush administration has created de facto corporate socialism in the U.S. with the Wall Street bailout bill being the culminating event. An Obama administration will change the emphasis of programs toward the individual. Expect profitability for financial companies to be squeezed for at least the next four years and probably beyond as a result.

Obama is not only going to win tomorrow, but is likely to receive a mandate larger than the 6% plurality predicted on average by the polls (the New York Investing meetup predicted an 8% margin last Wednesday, the win could be even larger). While the presidential election is a forgone conclusion, a filibuster proof senate is still up for grabs. Legislation can be delayed or even stopped by a filibuster in the senate, unless 60 votes can be put together to end it. The chances of the Democrats achieving this goal have increased substantially in the last week. Three more Republican senators, - Dole in North Carolina, Coleman in Minnesota, and recently convicted felon, Stevens in Alaska - look to be in trouble. Chamblis in Georgia is still incorrectly considered safe, although his support took a nosedive after he voted for the bailout bill, by the political pundits. Early voting in Georgia indicates a well-above average African American vote in the election so far and this will defeat him if the numbers stay high. Seats could be lost by the Republicans in Mississippi and Kentucky as well. Whatever happens with the senate seats on election night, don't expect any improvement in 2010, since most seats that will be up then are now held by Republicans and a shift toward the Republican party that year would only manage to preserve the balance of power that was established in 2008.

A Democratic lock on the election process will not be considered a positive by the U.S. stock market. Even as of today though, it doesn't appear that this has been priced in. Only the trading on Wednesday and to some extent on Tuesday (information from supposedly secret exit polls flows to the major Wall Street players) will let us know. Any sell off should help to firmly establish a market bottom. Failing to break the lows of October 10th in the days following the election should be interpreted as a confirmation that an intermediate term bottom was already put in (the absolute bottom could be a year or even several years off however).

Voters don't leave the comfort of their homes to stand in line for four or more hours to express an opinion if they are happy with the status quo. This behavior has been seen throughout the United States in early voting and indicates an electorate that is angry and demanding change. Turnout is heading toward a record percentage for a modern U.S. election (ignore all comparisons before 1920 when women didn't have the right to vote), which would be anything above 135,000,000 votes. Since there are 187,000,000 registered voters (out of an eligible population of 213 million) as of the latest count, this target is more than possible. Expect the political shift that is taking place to create a shift as to what works in the markets as well.

NEXT: The Stock Market's Early Returns

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.