Market Rallies on Bungled Stress Test News Release

 

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 Federal Reserve released its stress test results of 19 banks two days early yesterday. JP Morgan Chase forced its hand by making a public announcement that it had passed the test. Although the news was not particularly good, nor the results completely believable, U.S. stocks had their best day all year.

The Fed said on Tuesday that 15 of the 19 banks tested would have enough capital, even if they suffered a financial shock.  Citigroup (C), Ally Financial, SunTrust (STI) and MetLife (MET) failed the test. It should be considered shocking that any bank would fail a stress test after all the lavish government bailout and support programs that have funneled considerable amounts of money to them.  The U.S.  government had to semi-nationalize Citigroup and owned 27% of its stock by the time the Credit Crisis was over. Citi received approximately $45 billion in TARP funds alone and when it started paying them back, it got a $38 billion federal tax credit. And it still can't pass a stress test?

Of course, if Citi did pass a stress test, it might bring too much attention to the test's credibility. The Fed claims it set tough conditions and major banks complained that the tests were made too rigorous by considering a scenario where unemployment reached 13% and housing prices dropped 21% (presumably the Fed meant the official unemployment rate being 13% and not the actual rate). While these conditions sound tough, they aren't comprehensive, nor where the attention should be focused.

What prevented hundreds of U.S. banks from failing in 2008 and 2009 was a government willing to provide an effectively unlimited amount of money to keep them afloat.  The feds also propped up the housing market with minimal interest rates and mortgage relief programs and kept the unemployment rate (at least officially) out of double digits by running trillion dollar deficits. It should be expected that these policies will continue, so how could there be any risk to the U.S. banking system?

The policies themselves are creating the risk. Easy money is inflationary and always has been (and no, things will not be different this time). Inflation devalues financial assets and destabilizes banks.  The Fed however denies that inflation exists and that it will exist, so it is not politically tenable for it to do ever include any realistic inflation scenario in its bank stress tests.

Stress tests do not exactly have an unblemished record as is. The ECB tests in Europe passed Dexia bank with flying colors. Only three months later, it was in serious trouble and then it collapsed. Major Irish banks also passed the test, although Ireland itself had to be bailed out shortly thereafter to prevent its financial system from collapsing. Central bank stress tests are essentially public relations gambits meant to tell the public how good things are regardless of the actual state of affairs.

The release of the U.S. stress test also inadvertently revealed the true relationship between the Federal Reserve and the banking system that it supposedly regulates.  Even though the Fed was scheduled to release the stress test results after the market closed on Thursday, Jamie Diamond  announced that JP Morgan Chase (JPM) has passed the stress tests while the market was still open on Tuesday. He also stated that his bank would be raising its dividend and doing a stock buyback. Shortly thereafter, U.S. Bancorp (USB) and American Express (AXP) raised their dividends and announced stock buybacks. Wells Fargo (WFC) and BB&T (BBT) announced that they would be raising their dividend. 

Diamond's announcement forced the Fed's hand and it had to take emergency measures to move its own announcement up. The imbroglio was described by the mainstream media as a "miscommunication" between the Fed and Jamie Diamond. Oh really?  This is quite difficult to accept considering Jamie Diamond sits on the Board of Directors of the New York Fed. A more plausible scenario is that the big banks do what they want and the Fed follows their lead.  This nicely explains how the Credit Crisis came about in 2008 and why the banks will get into trouble once again.

The market rallied strongly on the news starting around 3:00PM with the Dow Jones industrials closing up more than 200 points. Anyone who knew that the accidental "miscommunication" was going to take place made a lot of money.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Next Five Days Critical for Stock Rally

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 healthy market the first four trading days of the month should be up in the aggregate. This month, it's the first five trading days in the U.S. because Friday is the day before a major holiday and stocks usually go up on those days. The seasonals are negative for stocks, with September historically being the weakest month. U.S. money supply has been contracting lately and investor sentiment has turned sharply down, both also negatives for the market. Whether this can outweigh the U.S. government's invisible (and not so invisible) hand in the keeping the market rally going remains to be seen.

The Chinese markets had a dead cat bounce last night, being up only a fraction of a percent after dropping around 10% in the previous two days. European markets are weak this morning. Unemployment is increasing in the Eurozone even though France and Germany supposedly pulled out of the recession with their positive recent GDP reports. In the UK, the manufacturing sector went back into contraction in August after being positive for one whole month in July (there was much celebrating about how UK manufacturing had recovered when those numbers came out). Even more problematical for the British economy is that consuming lending in the UK dropped last month for the first time since records have been kept. Like the U.S., the UK is highly dependent on consumer spending to keep its economy going. Also like the U.S., their solution to produce economic recovery is money printing.

In the U.S. auto sales are predicted to be the best since last September thanks to the Cash for Clunkers program - just one of many U.S. government programs that reward people who engaged in irresponsible and stupid economic behavior (and paid for by those who didn't). The ISM manufacturing report out this morning is predicted to turn positive because of the improvement in the auto industry. Unless the U.S. government has some new program every month to buck up the manufacturing sector, it might quickly turn negative again as happened in the UK. The biggest beneficiaries of the Cash for Clunkers program have been Toyota and Honda (Why doesn't the federal government just shoot the American auto manufacturers and put them out of their misery?). Interestingly, Japanese auto sales were reported up for the first time in a year last night.

Manufacturing activity has been up for the last 5 or 6 months in China (depending on which report you read). While internal demand was cited as one reason, exports are supposed to be up. Who is buying more of their exports? The major economies are all in bad shape and despite a positive economic statistic here and there thanks to government stimulus programs and jiggling of the figures, they will remain in bad shape for some time. Eventually, global stock markets will figure this out.

NEXT: Global Stock Markets Weaken

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.

Is It 1998 All Over 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:

In some ways the market reminds me of 1998. Energy prices had hit a low in the spring and rebounded, but then dropped off again in the summer. Stocks were deteriorating into the summer, but rallied strongly in July for no really good reason. Low prices caused energy production to be curtailed and this eventually led to higher prices for the next 10 years. That scenario is quite likely to repeat itself. Whether or not the stock market collapses in August as it did in 1998 remains to be seen. Is there a contemporary version of Long-Term Capital out there?

The future of oil and natural gas prices is clearly laid out in Schlumberger's earnings report today. Like Halliburton earlier this week, Schlumberger said a sharp drop in natural-gas drilling in North America caused an earnings decline. Drilling in the U.S. and Canada reached a five-year low in recent months and no rebound is likely to take place in the foreseeable future. The reduction in drilling activity has also effected oil and has done so globally. While energy companies have scaled back oilfield activities worldwide, the number of rigs operating in the U.S. oil patch is off roughly 55 percent from last summer. If you also consider that a number of large-scale multi-year projects to increase productivity from declining fields (many of the world's biggest producers) were cancelled when oil prices were at lows in the winter, the future becomes easy to predict. There will be shortages of oil in a year or two. The U.S. is particularly vulnerable to these shortages because our energy production is dropping precipitously. The authorities will be surprised when this happens and they will blame greedy speculators and scheming by foreign producers for causing energy prices to skyrocket when these shortages appear.

As for the stock market, it has been going up no matter what. There has been a 10-day rally as of yesterday - a long time for an uninterupted rally. There was a big move up yesterday on fairly heavy volume. The Nasdaq has also just closed a gap on the weekly charts made last September. On the daily charts the RSI is about to hit the max. According to the mainstream media all of this is taking place because of good earnings. Even a cursory analysis of the earnings reports indicates that earnings are actually in very bad shape however. The earnings news out last night was uniformly bearish, but the European markets still rallied and U.S. stock futures were up this morning. So, it looks like the market goes up no matter what. This only happens when large amounts of liquidity are being poured into the financial system by the authorities. Why are they doing this now is a good question.

Reports have started to appear about how the Credit Crisis is over and the U.S. housing market is recovering. The worst of the Credit Crisis is indeed over, but this however doesn't mean recovery is taking place, nor that the economy is getting better - it isn't. As for housing recovering, this really strains credulity. Once a bubble collapses, it needs to have a long and severe drop to correct the excesses and housing has not gotten anywhere near that point yet. British GDP statistics were out overnight and the economy there shrank 5.6 percent year over year, the biggest drop since quarterly records began. Yeah, things are getting better all right.

NEXT:

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 Bull Heard Around the World

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:

Almost every market throughout the world rallied on April 1st. In the morning (New York time) things didn't look promising. While most Asian markets had closed up nicely, all European bourses were down well into their trading day. Stocks in New York then gapped down sharply. Within a relatively short time, both New York and Europe reversed and then closed with good numbers. Today has been even more bullish. In Asia, the Hang Seng rose over 1000 points, closing up over 7%. The Nikkei went up over 4%. The Dax in Germany closed up more than 6%.

The European rally was helped by the ECB cutting interest rates by 25 basis points to 1.25%. They are also considering buying up toxic assets which the Fed in the U.S. has been doing for sometime now. At the G20 meeting in London, France and Germany pursued stronger financial regulation aimed at tax havens, hedge funds and rating agencies. European leaders said they had no need for stimulus plans because their more generous welfare systems kick in automatically with benefits for more people as the economy deteriorates. Obama kept emphasizing that 'we are all in this together'.

Meanwhile in the U.S., the financial accounting standards board FASB gave companies more leeway when valuing assets and reporting losses, providing a potential boost to battered banks' balance sheets. The mark to market system, will now be replaced with a mark to fantasy system. FASB made its move because of pressure from Capitol Hill. Our elected representatives are demanding rules that help companies mislead investors. In case you had any doubt whose side they are on, it should be pretty obvious with this action. If this was actually something that worked, Enron would managed to have avoided imploding and still be in business because it lied about its financial numbers. The banks may be able to carry on however since they have an apparently unlimited supply of freshly minted federal money available for continually bailing them out. Of course, like every other free lunch program the Feds have come up with, the costs for this one will be heavy indeed.

Money has flowed into stocks globally in the last two days and this indicates the big money is supporting the current rally - at least for awhile. The media has been filled with reports in the last week about how the rally was going to end any moment and investors had better get out. When it comes to deciding whether or not to listen to some know nothing windbag media pundit or the market, always chose the market. There is still a lot of danger in the financial system however with a lot more blow ups awaiting us. Enjoy the party while it lasts, but don't stay too long. The U.S. Employment Report tomorrow may trim the sails of this rally temporarily.

NEXT: U.S. Unemployment Rises to 15.6%

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 Look for Bottom, Oil Rallies

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 is going up and down like a yo-yo today, alternating between negative and positive. Stocks are trying to find a bottom and will probably do so soon. No matter how negative the outlook is for the economy and earnings, stocks can only go so low before having a rebound because the selling gets exhausted. At this point media reports have gotten about as gloomy as they can get, with each person making a more negative price low projection than the last (Everyone is always about as bullish as they can get at a top also). While stocks grope for a bottom, oil looks like it found one last month.

On Friday the Dow hit a new low of 6443 and the S&P500 hit a new low of 667. Nasdaq broke its November low of 1295 (the last index to do so) and traded down to 1269 at one point. The close wasn't as bad because heavy buying came in at the end of a day. Professionals tend to trade at the close and their willingness to load up on stocks on a Friday is a bullish sign that indicates they think the risk of an upside surprise is becoming bigger than the risk of a downside one.

Oil is behaving particularly bullish. The near term futures were up 4.4% on Friday despite the horrendous jobs reports. For months the media pundits have been telling you that oil can't go up until the economy shows signs of recovery. The New York Investing meetup has maintained this is not the case, but you should focus on the supply picture instead. Supply has been dropping and the economic news has only gotten worse. In the last few weeks, oil has rallied from the $33 a barrel range to over $48 this morning. New York Investing recommended DXO (200% long NYMEX light sweet crude) at one of its classes on the evening of Feb 17th. You could have picked it up the next day at the bottom (and some people did). The position has been profitable ever since (almost 50% at its best) despite the horrendous market sell off.

The stock indices are sitting above important support levels. The Dow has a band of support between 5600 and 6200. The S&P 500 has a band of support between 600 and 630 or so. Nasdaq has support at 1240. The Russell 2000 at 325 and 300. Even the upper end of these prices might be enough for a bottom at the moment since the market is itching to rally. At the very least you might want to start picking up some of the many bargain stocks out there when the indices fall to these levels.

NEXT: Stocks - the Good, the Bad and the Ugly

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.

Stocks/OIl Trying to Bottom, Gold at Resistance

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 news is filled with a fearful vision of the future. All you see in print and hear on TV is how the economy and financial system are imploding everywhere. It is under exactly such circumstances that market bottoms take place. Once everyone knows the news and agrees on the situation, there is no one left to sell. The opposite happens at market tops. The last time I watched CNBC News on a frequent basis was in September 2007. Everyone was confident. Fed rate cuts were going to fix everything. It was going to be clear sailing ahead. The U.S. stock market peaked three weeks later.

So far the Dow has held above the low of 7181.47 that it reached on October 10, 2002. A significant break of that number would have serious implications, although not necessarily immediately. The Dow is severely oversold on a monthly basis. The monthly RSI has actually fallen a tinge below 20 (where 20/80 are the oversold/overbought extremes). The has not happened since 1971, which is as far back as my data goes. You should assume that this did occur in the 1930s during the Great Depression and that the RSI on the monthly charts dipped even lower. This doesn't mean that the Dow can't go any lower right now, but any major selling would be met with buying almost immediately. An announcement of the newest bank bailout plan will be the impetus for the market to rally (selling could take place first for a short time if the market's reaction is negative).

While the long-term chart picture indicates a rally will be coming soon, this rally is a tradeable event. You can not buy and go on vacation. When you get your profits, you need to take them. The most likely scenario for the next several months is a lot of volatility on the Dow and the other stock indices. Profits one month can disappear the next. The 200-month moving average, around 8600 right now, should be considered strong resistance. The market needs to break above it and stay above this line for a number of months before any type of sustainable rally pattern can be established.

While stocks are are hitting support, gold is hitting resistance and you almost always get selling at resistance. Gold got to at least 1007 in intraday trading on Friday. Just as stocks are in a long-term bear market, gold is in a long-term bull. Its previous all time high is at 1033. When this level is breached, the long term uptrend is confirmed and you should be looking for 1200 as the next stop. Meanwhile, don't take your eye off of oil. The March contract expired on Friday. In the last few months, there has been a lot of selling during the first few days of a new contract. So far today this is not happening and this would be one sign that the oil could be getting ready to turn around.

NEXT: Dow Breaks Key Support Indicating a Much Lower Low

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 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.

Our Video Related to this Blog:

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.