Traders Should Watch the Gap

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.


Anyone who rides a commuter rail in the United States is probably used to hearing a message to 'watch the gap'. The advice also holds for stock trading.

A gap is a price level on a chart where no trading took place from one time unit to the next time unit. This happens on daily charts when the opening price is above or below the previous closing price and the market continues to trade in the direction of the gap. Gaps in the stock market on the daily charts invariably show up on Nasdaq because all stocks open at a price determined by market conditions. Specialists try to balance the buys and sells on the NYSE and this can delay the opening of stocks there and smooth out the price. Since most Dow Industrial stocks trade on the NYSE and its stocks frequently open gradually over several minutes, gaps on the opening are rarely seen on the Dow. This also mutes the gaps on the S&P 500, which contains a significant number of NYSE stocks.

Markets move to fill gaps, or in other words trade at the price points that were missed when the gap was created. Most of the time, this happens anywhere from the next day to a few weeks later. It sometimes takes months or even years however to fill a gap. Short-term traders should be aware of all the gaps within the last few weeks on the indices, stocks, and even the ETFs they trade (even commodity ETFs fill their gaps on the U.S. charts even though these gaps are artificial because trading took place at the appropriate price points overnight). Traders with a longer term view should keep in mind gaps from the last couple of years that have remained unfilled.

Trading of U.S. stocks in the last six weeks can be viewed as an attempt to fill gaps. Nasdaq gapped up on August 1st and that gap was filled on August 6th. Nasdaq gapped down on August 12th and that gap still remains unfilled. Nasdaq gapped down again on August 24th and that gap was finally filled when Nasdaq gapped up on September 1st. The September 1st move however created a new gap. Nasdaq gapped up again on Friday, September 3rd and attempted to fill that gap in yesterday's trading, but didn't quite fall low enough to succeed. So Nasdaq has unfilled gaps both above and below where it is currently trading.

A market that gaps up and a down a lot is usually directionless, volatile, potentially unstable, and possibly manipulated. It can be a boon to short-term traders. It is not something however that a position trader or long-term investor should find attractive. Those with a longer view may wish to consider that Nasdaq has a large gap around 1800 that occurred in July 2009 and still remains unfilled.

Disclosure: No positions.

Daryl Montgomery
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.

Why Thursday's Market Crash Was Caused by Computer Failure or Errant Trades

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 trading pattern on the U.S. markets on Thursday, May 6th can be explained by only one of two things - a huge erant trade or a computer system failure.  Even after the market close, the NYSE was claiming that there were no technical problems with its trading system. Citi specifically issued a statement that it had nothing to do with implementing an errant trade. Nasdaq however said that it was investigating possible erroneous transactions executed between 2:40 and 3:00PM.

It wasn't so much the drop that was unprecedented. The waterfall decline that took place for approximately eight minutes somewhat after 2:30PM is common in crashes. Even during crashes however, numerous intra-period gaps on the one-minute chart aren't common. There were four such gaps yesterday in S&P 500 trading. Large market indices almost always trade continuously and the probability of this type of trading pattern is extremely small. Even less probable was the instantaneous recovery of the indices. The S&P 500 also has four gaps on the upside in only eight minutes, when it rose approximately 50 points.  During that same time the Dow Jones Industrial Average was rising around 500 points. None of this represents a normal trading pattern.

The major indices were damaged enough as is on the day.  The Dow was down 348 point of 3.2%. The S&P 500 dropped 38 points or 3.2%. Nasdaq gave up 83 points or 3.4% and the small cap Russell 2000 lost 28 points or 4.0%. Of all the major sectors, financial stocks were hit hardest closing 4.1% lower. The confusion caused the VIX, the volatility index, to spike above 40. It was in the mid-20s only two days ago. It closed at 33.19, up 41% on the day. This type of movement in the VIX is extreme and is likely to be reversed in short order. Gold rallied in the confusion.

Having looked at the charts as the sudden trading plunge and the subsequent recovery that took place during and after the market close, I noted the charts changed over time. Some of the gaps on the charts disappeared and a straight-line trading pattern the existed for a while before and just after 3:00 disappeared on later charts. The straight-line trading pattern only exists if trading has been halted or if there has been a break in the information feed from the exchanges so no data is forthcoming. Either way, traders and investors are entitled to an explanation of what really went took place. Otherwise, they might think there is either a cover-up of a serious technical glitch or collusion by the big players in manipulating the market.

Disclosure: Sold VXX.

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 CFTC and Manipulation of the Silver Market

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 CFTC (Commodity Futures Trading Commission) will be holding hearings on trading in the precious and base metals on March 25th in its Washington, D.C. offices. Possible manipulation of the silver market is on the agenda. Critics have maintained for years now that a few large banks hold down silver prices by having large concentrations of short positions in the market - and this disadvantages the small trader.

The CFTC has investigated manipulation of the silver market by the big banks before in 2004 and 2008. They found nothing. This should provide little comfort to investors however. The SEC, one of the other major U.S. market regulatory bodies, investigated Bernie Madoff many times over more than a decade and also found nothing. Madoff eventually turned himself in when his $50 billion Ponzi scheme fell apart on its own accord. Madoff had never made any trades in his mega sized scam, so the SEC's examination of his trading records couldn't have been very thorough. Running a simulation of Madoff's claimed trading strategy also would have revealed it didn't work. To invest the money that Madoff held in his fund, it would have been necessary for him to hold more than 100% of some S&P futures contracts, an obvious impossibility. Moreover a whistle blower detailed the Madoff scheme to the SEC years before it demise and large numbers of additional investors were bilked out of their life savings. Yet, the SEC still found nothing amiss. Investors should consider what the Madoff incident indicates about the quality of U.S. market regulation.

Silver futures trading is by no means an even playing field in the United States as is. Small traders can be paid in cash when their positions expire. Delivery of actual metal is guaranteed only for commercial users. This was particularly relevant in the fall of 2008, when the price of silver fell to around $9 an ounce on the futures market. The physical metal wasn't available for anywhere near that price in the open market. Prices of bars and coins were much, much higher. The option of getting silver at the exceptionally low futures price was not open to the little guy however. The CFTC, whose motto is 'Ensuing the Integrity of the Futures and Options Market', sees nothing wrong with this.

Silver has been manipulated in the past of course. The Hunt Brothers were convicted on federal charges in 1988 for trying to corner the market in 1980. At one point they controlled a third of the global supply not held by governments. When silver prices went vertical and got to the $50 level, the CFTC ordered COMEX to halt trading in long silver positions. A market that only allows shorting will of course collapse and this is exactly what happened. Silver prices plummeted.  Rumors at the time alleged that a number of well-connected insiders made fortunes by shorting silver just before the CFTC's action. While the authorities were vigilant in prosecuting traders on the long side of the market, their resolve seems to have been non-existent in looking for misdeeds on the short side. The CFTC mandated halt in silver buying, but not selling, also led to the U.S. government bailing out the Hunt Brothers' lenders with taxpayer money to the tune of $1 billion.

Warren Buffett also bought a large amount of silver around 1997. He purchased 20% of global supply, but took delivery of the physical metal and stored it in a warehouse in England. Buffet bought his silver in the UK markets away from the prying eyes of U.S. regulators, or so he thought. U.S. regulators supposedly called up their UK counterparts to find out who was buying so much silver in the British markets and to try to pressure them to stop it. Buffett proved to be a hard person to stop however.

According to a February 25th Financial Times article, 42% of net short silver positions on COMEX were held by four or fewer traders. A similar level of concentration of short positions has been common for a long time. I wonder how would the CFTC react if this amount of concentration existed on the long side of the market?

To find out more about the CFTC hearing on March 25th, you can email them at: questions@cftc.gov, call them at: 202-418-5000, or see their press release at: http://www.cftc.gov/newsroom/generalpressreleases/2010/pr5782-10.html.


Disclosure: None

NEXT: Past Recessions Provide Insight Into When the Fed Will Raise Rates

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.

Bonds, Bernanke and Immoral Hazard

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 U.S. is auctioning off $235 billion in debt this week, which surpasses the $104 billion record set in a week in late June. There is some concern among the participants that foreign demand may be weak - and it probably will be. That doesn't mean the the paper won't be sold. The U.S. will simply print the money to buy it. But don't worry, the mainstream media will as usual assure us that this won't be inflationary even though it has been every other time throughout history.

'No inflation' has been the mantra of the U.S. monetary authories since 2007. One reason that has been cited for the last few days of the stock rally is Bernanke's testimony before Congress last week that the economic recovery is widening (where this is happening I don't know) and it won't likely include inflation. Bernanke also said that there would be no subprime crisis one month before it blew up. He then proceeded to continually misjudge the extent of the problem and mishandle it over and over again. So of course, he knows what he's doing now.

Bernanke also has a town hall meeting in Kansas City on Sunday night to get in touch with the people and to help further misinform them. He was repeatedly asked about the Fed's 'too big to fail' doctrine. His response was that he had to "hold his nose" to rescue such institutions during this crisis. Fortunately, Bernanke isn't Pinocchio or his arm would have had to reach out to the planet Neptune. The 'too big to fail' doctrine was actually established in the U.S. in the early 1980s because of the South American Debt Crisis, when the 17 biggest U.S. commercial banks got into trouble because they had lent substantial amounts of money there. Continental Illinois actually failed in 1984 and was essentially nationalized by the government. The other 16 banks were indirectly bailed out. At that point going forward the big banks knew they could do no wrong. A much bigger bailout was necessary during the Savings and Loan Crisis and a now a much, much bigger bailout has been necessary because of the Credit Crisis (something that Moral Hazard theory predicted would happen). Does the deeply concerned Bernanke have any plans to fix this problem? It doesn't appear so.

The trade-weighted dollar ETF was at 78.50 the last time I checked, just above the 78.33 breakdown point. Something is almost certainly going on behind the scenes. Gold was as high as 956 this morning, but had a sharp drop the moment U.S. trading opened - something that happens over and over and over again. An academic study analyzing the pattern concluded that this could only take place because of market manipulation. The regulatory body CFTC is not likely to hold hearings however even though they recently claimed that they were out to stop market manipulation (it's similar to Bernanke being concerned about bailing out the big banks). Apparently though, they can't find it if it is being done by the big players, just as the SEC couldn't realize that Bernie Madoff was a crook.

NEXT: Durable Damaged Goods

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 Sachs - Earnings and Market Manipulation

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:

Goldman Sachs posted earnings today and it made $3.4 billion, or $4.93 a share, in the second quarter, up from $4.58 a share a year earlier. Wall Street's expectation were for $3.54. Excluding TARP expenses, the company would have had a profit of $5.71 a share. Revenue came in at $13.8 billion, way beyond the consensus estimates of $10.7 billion. The stock has been rallying big time the last few days. Certainly it couldn't have been because Wall Street insiders got the good news before it was publicly released. Even if they did and admitted in on a neon sign in Times Square, the SEC still wouldn't investigate.

In case you are wondering how Goldman makes all that money, there are two exposes available that can help clarify it for you. The first is "Inside the Great American Bubble Machine" by Matt Taibbi in Rolling Stone Magazine, which details how Goldman has helped create and profit from every major bubble since the Great Depression. While I consider Taibbi's grasp of economics and market forces to be extremely weak and his article too much in a naive 'the speculator did it' genre, there are things that Goldman has done that are indeed questionable. Taibbi should have concentrated on them. For those who don't recall, it has previously been reported that Goldman shorted subprime bonds while advising its clients to buy them. It made money from client fees on one side and gains from trading against its clients on the other. What must it have been up to last quarter that made it so much money? It may not have been something so benign.

In a truly fascinating story that has gotten almost no media coverage (I wonder why), a former Goldman employee was accused of stealing proprietary software from the company that, according to prosecutors, could be used to manipulate the market in unfair ways if it 'fell into the wrong hands'. This description is from court proceedings. See the You Tube video before it gets censored: http://www.youtube.com/watch?v=lrlQSMCx-aE

The accused former Goldman employee went to work for a group of former Citadel employees who set up their own company, Teza Technologies. Interestingly, Citadel is suing this new company for industrial espionage and this is related to the alleged theft of software from Goldman! “Defendants’ activities, particularly Teza’s decision to hire [xxxxxx], an accused software thief, create a substantial risk that they have stolen, or may be planning to steal, Citadel’s proprietary code,” the hedge fund firm said in court papers. Citadel, like a handful of other big Wall Street firms and hedge funds, also has a long history of making extremely high profits like Goldman Sachs and uses similar sophisticated software involved in the Goldman case. Thank god this software that could be used to 'manipulate the market in unfair ways' is in the hands of these fine upstanding corporate citizens - and we can be assured that the authorities plan on keeping it that way.

NEXT: So Much for No 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.

Market Doesn't Believe Retail Sales Report

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:

As we have reported in this blog many times, the U.S. government has been blatantly manipulating its economic reports for years now. Nevertheless, the market generally believes them despite their internal inconsistency or the existence of other information that is strongly contradictory. This willingness to believe seems to have broken down today with the release of the Retail Sales Report for January. The numbers were good and way above expectations. Instead of rallying as it should have, the stock market tanked.

According to the government statisticians, retail sales rose 1% in January. The forecast among economists (who can't be trusted either) was for a drop of 0.8%. Perhaps this discrepancy was just too great for the market to buy it. The report furthermore had a big gain in apparel purchases, even though same store sales data for clothing chains showed a big decline. A number of retail industry watchers commented on this discrepancy and other anecdotal evidence that seemed to contradict the government's view. There seemed to be a consensus that the numbers would just be revised downward next month.

Looking inside the report, this is indeed what happened for December's numbers. Originally reported down 2.6% (not 2.7% as most media stories stated), the drop for December is now an even more horrendous 3.0%. The January rise of 1.0% would be from this lower number, or only up 0.6% above the number first reported. The news media always fails to point this out and this leaves a gaping loophole for creating good news where none exists. The real numbers, which are much worse, only come out a month or two later and the media pays little attention to them. There have been cases in other government reports where the revisions downward were so significant that even though there was a 'rise' in the numbers for the current month, the total was actually lower than the first number reported the month before. So even though the numbers are actually declining, they were reported as going up. This does not appear to be the case for the January Retail Report however. The good numbers seem to rely more on the falsification of the figures.

There was one another oddity in this Retail Sales Report as well and that is how it was covered by the news services. Articles were unusually short and details limited - this immediately made me suspicious of course. I had to search to find more extensive coverage (filled with negative commentary from everyone interviewed) and this has not happened before. It will be interesting to see if the new scepticism on the market's part spreads to the even more absurd inflation, jobs, and GDP reports. If it does, when the economic news actually does become better, no one will believe it.

NEXT: Deepening Global Recession Means More 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.

Volatility is Back

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 market was up yesterday almost completely erasing the large losses from the day before. The beaten down financial stocks led the way up as if insolvent banks and brokers are now suddenly doing better. Well they're not, but their stocks were doing better in what is obviously a short covering rally that was pushed to the max by media reports of insider buying (more accurately portrayed as insider manipulation of the media, with full cooperation of the media itself).

The Dow was up 3.5% to close at 8228, above the psychological important level 8000. Nasdaq was up 4.6%. IBM reported (please note the use of the word reported as opposed to had) good earnings. Bank stocks were the big gainers however and this was true in Europe as well as the U.S. Both Citigroup and Bank of America were up 31%, not so difficult when you are selling in the single digits (the low single digits in Citi's case). Bank of New York was up 24%. And Tuesday's poster child for stock market disaster, State Street, managed a 15% rally. The rallies were more muted in Europe however. Barclays, which has lost half its value since the beginning of the year, was up 5% and Bank of Scotland only 9%. In Germany, Deutsche Bank was up 10% and Commerzbank 13%. Belgium's bailout baby, KBC, was still falling though after already losing 70% in the last three weeks and receiving a two billion euro cash injection.

The rally in bank stocks started out as the usual dead cat (or more appropriately dead bank) bounce. It really got going when news hits the wires about top management buying their own beaten down financial shares. Anyone who might think this was a case of blatant manipulation would have a lot of evidence on their side. When was the last time you saw a blaring headline, 'Insiders Dumping Bank Stocks', especially if it happened the day before? Lot's of luck in finding that one. Yet, yesterday's news trumpeted, Bank of America and JP Morgan insiders buying their stock. You would have had to read well into any article however to find out that in the case of JP Morgan, the buying took place last Friday before the stock was pounded down even more on Tuesday. As for the insight of bank management insiders, these were the people who brought us the current Credit Crisis and didn't see it coming. The head of Bank of America thought it was a brilliant move for the bank to buy Countrywide Financial and later on agreed to buy Merrill Lynch, two purchases that are destroying the bank. Now, we should assume his judgement has suddenly sharpened. Yeahhh ..... that can happen!

The earnings of financials are so bad they are disproportionately responsible for dragging down the earnings of the S&P 500. For Q4 of 2008, a 20% drop in corporate earnings is now expected. Before earnings season began a 15% drop was projected, but results have been worse than orginally thought. Wall Street analysts have once again underestimated how bad things are, just as Wall Street economists have done with the economic figures. I have never heard of anyone on Wall Street being fired for being continually and consistently inaccurate. In fact, it seems to be the ticket to getting to the top there. Something to think about for anyone who relies on insider purchases to indicate banks are turning around.

NEXT: Britain Points the Way to U.S. Economic Future

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 January 8th Meeting of the New York Investing meetup

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 monthly meeting on January 8th had a record turnout of 200 people. The first talk was our view for the stock market in 2009. This was followed up by an excellent talk by Jeff Glenn on manipulation in the gold and silver markets. The final talk was on the latest scandals, including Madoff, Dryer, and Saytam compter, recent economic figures and then a review of some Saint Louis Fed charts that clearly show the financial sytem is in serious trouble.

While the indicators for the U.S. stock market were highly negative in the beginning of 2008, they were essentially neutral for 2009. A comparison was made of the charts for the major stock indices at the beginning of 2008 and 2009. In 2008 there was a large drop, while in 2009 almost everything went sideways. One way of interpreting this is that the market will move in an overall sideways pattern this year, albeit with possible big moves up and down. This does not mean the market can't go lower, it most certainly can. Our long term prediction is that it will. The Dow still has not hit major support at 7200 and this could happen even in the earlier part of this year. Lower lows are also possible. A flat market for the year can include the scenario of significant selling and recovery toward the opening price at the end of the year.

Jeff Glenn's talk on gold and silver manipulation helped clarify how central governments try to control the price of gold and silver through leasing. How much gold the U.S. actually owns is not really known, since there has been no audit since 1955. A lot of government action seems to take place with precious metals, but there is little transparency. Investors should ask themselves, "Why the need for secrecy?" Jeff also stated that he thought it very possible that gold could skyrocket one day because of a sudden revaluation by the government. I agree that this is indeed a realistic possibility. You will need to own gold and silver before this day arrives if it does occur.

The final talk was on the Madoff scandal and how incredible it was the SEC missed this obvious scam that seems to have gone on for decades. We also reviewed the accusations of major security fraud against Drier, the head of one of the largest New York law firms, and how Satyam Com hid its declining sales by lying about it cash holdings (something that is almost impossible to do because it requires multiple parties outside the company to be involved with the fraud). After that we warned the employment report and the GDP figures this month would be ugly. We wrapped up by showing updated charts on the Monetary Base and Banking Reserves from the St. Louis Fed.

Our next general meeting will be February 3rd and we will be having a guest lecture on investing in art.

NEXT: The U.S. Trade Deficit - There's Good News and Bad News

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 Euro, Oil, Retail bankruptcies, and GMAC

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:

Oil, energy companies, the precious metals and the mining stocks are doing well in European trading this morning (the U.S. markets are not open yet), in a hint of what should be expected next year. The inflation linked investments are doing well as retailers in Britain seem to be crumbling, along with the UK economy. In the U.S., there is a question of whether GMAC actually qualified to become a bank holding company. The Euro turns 10 on January 1, 2009 and its impressive performance against the U.S. dollar in the last couple of years is likely to continue.

The Euro traded around 1.42 against the U.S. dollar last night in Europe, well off its historical low of 0.82. While it didn't do well in its first couple of years and required global central bank intervention to prop it up, that story has reversed in the last couple of years. Global central bank intervention (which the New York Investing meetup documented starting in August 2008) has been needed to hold it down and the U.S. dollar up. The Euro has so far hit an all time high of 1.6038 last summer, but was trading in the mid 120's only recently. Driving it down has led to falling oil prices (oil is priced in U.S. dollars). In the long run, the currency of the inflation avoidant eurozone is likely to be a better bet than the currency of the 'print as many dollars as possible' U.S. Fed.

Nymex oil was as high as $40.27 in electronic trading overnight (and in an unusual price inversion that has been going on for awhile, lower than the Brent contract which hit $41.35) Tensions in the mid-East were cited as the reason for oil rising today. Reading the commentary, many analysts seem to assume that global tensions are a rare exception and are likely to disappear in the future. Any reasonable historical analysis indicates that this is unlikely. Global financial distress tends to translate into higher levels of conflict because governments shift the blame for their own incompetence to 'outside influences' being responsible. Not only does oil pricing benefit in the long run from this, but so does safe haven gold. Gold was up about $15 in Europe until the time the U.S. markets opened and then it was up only around $8. The drop when U.S. trading begins is a common occurrence that has lasted a long time. It has even been documented in academic studies that concluded it could only be the result of market manipulation.

As the inflation-linked trade was doing well in Europe, the retail trade was sliding further toward oblivion in the UK. Children's clothing chain, Adams, filed for a certain type of bankruptcy protection today. This followed the failure of the 99-year old general retailer Woolworth's, tea and coffee seller Whittard and music chain Zawi - all around the height of the holiday buying season. There are predictions that as many as 15 'major' UK retailers will go under early next year. Don't expect retail will be in much better condition in the U.S., it won't. You can expect a wave of failures on this side of the pond as well.

It is not likely that the Federal Reserve will bail out U.S. retailers (but don't rule out this possibility for any big chains with large credit operations) as it is trying to do with GMAC, the credit arm for General Motors. GMAC is trying to convert to a bank holding company as brokers Morgan Stanley and Goldman Sachs did in the fall. It is not clear it successfully did so however. Conversion to a bank holding company is the latest government scam to allow the Federal Reserve to pump money into a failed company. If the company is not a bank, but has anything to do with the credit markets, then turn it into a bank and give it a government bailout. Currently nothing succeeds like failure in the U.S. -the bigger the failure, the bigger the reward. And this is supposed to fix our economy? Right.

NEXT: A Nasty ETF Surprise

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.

Ron Paul on the Wall Street Bailout Plan - Part 2

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.

Today's Blog: Congressman Ron Paul's insights on the proposed Wall Street bailout

Washington's current approach to today's credit crisis is the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years [late 1920s], all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the [1930s] depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose (calls to the capitol have been running up to 100 to 1 against the bailout). The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

NEXT: Three Bank Monty - Monday's Global Bank Failures

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.

Pump up the Market, Pump up Inflation

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 posting:

If you examine the press coverage about the government bailouts of banks, brokers, insurance companies, Fannie Mae, Freddie Mac and now the first major system wide bailout ($700 billion to handle $13 trillion in toxic bonds somehow just doesn't seem enough), you will see little coverage of any possible consequences. Just as always, there will be no free lunch even though you aren't hearing it from the media. Lunch in fact will not only not be free, but its price will be skyrocketing.

While it is possible for governments to manipulate markets in the short-term, it is not possible in the long term. Markets will always return to their equilibrium points eventually. Blatant government interference in the U.S. stock market began last August when the Fed announced a reduction in the discount rate one hour before the futures expired, causing a dramatic reversal in their prices and wiping out the profits of the shorts. Last Friday, just before options expiration, the SEC just out and out banned shorting (of financial stocks) and then the Treasury announced a massive bailout for financial companies. If you look back you will see major Fed and/or Treasury actions around options expirations during the market meltdown in January, the Bear Stearns bailout in March and the Fannie and Freddie bailout in July (and there is other activity during other expiration dates as well).

While manipulation results in the biggest bang for the U.S. buck during an options expiration, the impact has lasted at most two months and usually not even that long. Over time, even though the government's market interference has become more desperate and more extreme, the effects are nevertheless becoming more transitory. The short-selling ban and announcement of the biggest government gift in history to financial companies rallied the Dow 369 points and the Nasdaq 75 points on Friday. The Dow then fell 373 points and the Nasdaq 95 points on Monday completely wiping out Friday's gains. The market was still off the bottom though because the big rally began Thursday, the afternoon before this major news came out. Of course, only the most cynical would think that this news was leaked to the big Wall Street players so they could take advantage of it at the expense of the small investor.

While the U.S. government on one hand is busy trying to support the collapsing floor of the stock market, it is blowing off the roof in the commodity markets related to inflation. The biggest one-day rallies ever had already taken place in gold and silver last Wednesday with gold up over 11% and silver up over 14%. Oil though put them to shame Monday when it was up $25 a barrel (or 24%) at one point . . It closed up 16.37 or 16% on the day (even more amazing than it seems since the easily manipulated U.S. dollar was also rallying). The price then fell on Tuesday after the September contract had settled and the October contract became the front month. Commodities simply do not go up these amounts in one day, but it's happening right before our eyes. While the government has done everything possible to juice up the stock market, there are reasons to believe that it has done the opposite with gold, silver, and oil, or at the very least turned a blind eye to manipulations by the big players to drive down prices in these markets. Gold, silver and oil though will have to return to their equilibrium points just like stocks. They are gushing upwards because the inflation pressure cooker, filled with government bailouts and seemingly limitless money pumping, looks like it's about to explode.

NEXT: Buffet Sacks Goldman

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.

Bernanke Shoots Down the Dollar; New York Investing Predicts Out of Control Inflation

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.

After the Federal Reserves surprise discount rate cut on August 17, 2007, oil and wheat hit all time highs. The U.S. dollar hit an all time low against the euro. Even though these markets were screaming rising inflation to anyone who would listen, two Fed governors gave speeches emphasizing that "inflation is under control". One talking-head economist after another made appearances in the financial media supporting the Fed's reality denying view. Spokesmen for Wall Street's special interests and politicians of both political parties started to loudly demand a flood of easy money from the Fed to 'save the economy' (and more importantly, their own personal skins). The Fed gladly complied and lowered both the funds rate and the discount rate by 50 basis points on September 18th.

It was clear to the New York Investing meetup that the Fed had chosen to try to save the economy in the short-term, no matter what the cost to the U.S. dollar and no matter how much inflation resulted from their actions. At the meeting held the very evening of the rate cut, it was stated flatly that, "The Fed lowering interest rates will cause the U.S. dollar to drop further and inflation to get out of hand" and "Lower Fed rates mean higher gold and oil prices" going forward (see: http://investing.meetup.com/files). This was followed up by an impassioned plea to get out of the U.S. stock market, get out of the U.S. dollar, and get into gold and silver.

While the New York Investing meetup had little confidence in the Fed's ability to rescue the economy or hold up the stock market, it was convinced that the Fed's liquidity binge would be the death knell for the reserve currency status of the U.S. dollar (Please see our video about this, "Saving the Economy be Destroying the Dollar" at: http://www.youtube.com/watch?v=s9K1lSA9AHE). The long-term implications for inflation hedges such as gold, silver, oil and food commodities were obvious. Even though the Fed and many mainstream economists were worried about potential deflation from collapsing housing prices and the stalled bond market, New York Investing staked out a clear position that the falling dollar was highly inflationary (also denied by many mainstream economists) and that this was the important investment theme for well into the future.

Next: The Markets React to Helicopternomics and so does the New York Investing meetup

Daryl Montgomery
Organizer, New York Investing meetup

For more information about the New York Investing meetup, please go to: http://investing.meetup.com/21