Best to Step Aside and Watch the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While the market drop yesterday didn't seem like anything out of the ordinary, the technicals were more damaged than the price drop indicated. Another down day today will give the market indices an even more negative tinge. The Dow (the weakest of the indices) fell and closed below its 200-day moving average yesterday and the S&P 500 and Russell 2000 are testing that line today. A close below their 200s at any point in the next few days would add even more negativity to the story that the technical indicators are telling. Oil also looks like it could have a strong pull back soon as well. Gold and silver have already begun a correction after hitting strong resistance. The U.S. dollar is trying to rally (with lots of help from the powers that be) and bonds are rallying as well.

It is interesting to note that when the dollar started to rally, almost all other asset classes sold off. My interpretation of this is that the rallies we have been seeing are dependent on the Fed and Treasury's massive liquidity injections into the financial system. Any threat to diminish those will damage stocks, precious metals, and oil - at least in the short term. It will help bonds and the dollar. The 10-year was trading at 3.65% this morning, well off from last weeks high of 4.00% (when bond prices go up, interest rates go down) and the trade-weighted dollar was at 80.84. The Fed independently, and then with central bankers from other countries, has made noises in the last week or two about withdrawing liquidity from the system. The markets are reacting, or perhaps more accurately, foolishly overreacting to this. There is no chance of this happening for a long, long time even though one Wall Street economist stated today the recession was over - and she meant the recession on the planet earth!

The EIA oil storage report came out this morning and the picture was mixed. Oil in storage dropped by 3.9 million barrels, but gasoline increased by a whopping 3.4 million barrels. Gasoline is the prime use for oil in the summer months and at least in the short term there is too much of it around. Light sweet crude had already traded as low as 69.28 a barrel early in the morning. I am still interested in owning oil, but not until it falls to around 60 or so (the charts will indicate where). There should be another rally into the summer after that. As for natural gas, it still looks like a good buy whenever it drops. This may or may not happen after its weekly storage report tomorrow, which comes out at 10:30AM New York time.

Trading is all about playing the probabilities. Stocks or commodities that have gone up for a long time and are close to major resistance points usually do not have a high probability of making you a lot more money. The change of falling prices become much higher than the chance of rising prices. At points like these, you should get out. More aggressive traders might want to even take on some short positions when this happens. ETFs are the best vehicle for doing this. Shorting individual stocks is much riskier and not for the inexperienced.

NEXT: Building a BRIC House; Nat Gas and Market Update

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.

It's Amateur Night at the U.S. Treasury

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:

Markets hate uncertainty and the U.S. Treasury delivered it in spades yesterday. Several days ago, the Obabma administration floated the idea of a good bank/bad bank policy, where the U.S. government would buy up most of the toxic assets on bank balance sheets in order to get them out of the system. This was essentially the original concept for TARP before Paulson turned it into a direct corporate welfare program for Wall Street. The Street of course loved the idea of more bailout money to clean up their mistakes. In the long awaited for announcement by Treasury Secretary Geithner (who formerly ran the New York Fed and who is an admitted tax cheat) on Tuesday, suddenly a whole new approach was announced. The market, not liking surprises, had an almost crash level drop.

Media coverage blamed the stock sell off on the government's new plan - and for once I agree with the media. A number of articles had comments describing Treasury's new plan as 'muddled' and 'short on details', both of which are accurate descriptions. Essentially, the centerpiece of the plan is that the government will team up with the private sector to buy up to $1 trillion in toxic assets from financial firms (the big-money private sector buyers will get their purchases underwritten by the government, in what seems to be a riskless investment). A separate lending program would be expanded to as much as $1 trillion from $200 billion for consumers and businesses. Add up all the money involved (and it won't be enough by the way) to the $800 billion plus Stimulus Plan passed yesterday and the U.S. government is allocating between $2 to $3 trillion in new expenditures. Just think inflation and devaluation of the dollar.

Having read the speech that Geithner gave yesterday, I would say there is little hope that the current administration's economic team will be any more effective than the previous administration's. Geithner himself has been part of creating the current economic mess that we are in and sees the solution as pursuing the same failed financial policies that have lead to it. One of his comments that were particularly outrageous was that the Credit Crisis we are now in is only obvious in hindsight and could not have been predicted (even though probably hundreds of government throughout history have engaged in similar economic policies with similar results). At another point, Geithner stated that historically 40% of loans have been securitized (bundled into bonds and then sold and traded) and this needs to be continued. Where this 40% figure came from is beyond me, although of course it depends on the definition of 'historically' (Geithner's historical perspective may extend to only the beginning of last week based on these two comments). Securitization is what has led to our current problems, so of course we should continue to take the poison that is killing us. Not surprisingly, Wall Street makes a lot of its money from securitization.

While there is a lot of uncertainty in the government's handling of the Credit Crisis, there are some things which an investor can have great confidence in. The continued creation of money out of thin air to get the U.S. economy out of the economic pit it has fallen into is going to create a lot of inflation and a dollar that isn't worth the paper it's printed on. While the government's actions may fail for their intended purpose, they will be successful in creating this even bigger economic problem down the road.

NEXT: Market Doesn't Believe Retail Sales Report

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 Action on Both Sides of the Pacific

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 Japanese are at it again. The Bank of Japan is now instituting yet another program to buy shares of bank stocks. The history of their interference in the Japanese stock market goes way back and has proven to be a failed approach over and over again. Apparently just because something doesn't work is not a good enough reason for the Japanese (or almost any other government for that matter) to abandon it. While the U.S. is close to emulating Japan's disastrous market interference policies, there is a common-sense bill in Congress that would limit Credit Default Swaps. These instruments are more responsible for the financial market collapse worldwide than anything else. The discredited U.S. financial industry of course opposes the bill. Just because it is obvious they have no idea what they are doing, doesn't mean the U.S. government won't follow their suggestions.

When the Japanese government decided it was better than the Free Market in determining stock prices is not clear. It is known that during the 1987 crash, which was less serious in Japan than in other countries, that the Ministry of Finance called all the major brokerage houses to a meeting and told them to buy stocks (with at least a tacit agreement that the government would make good on the losses). After the Nikkei started tanking from its high of 40,000 set the first day of 1990, various schemes were used by the government to funnel money into stock purchases. While these moved the market up for awhile, each one eventually failed, but the market looked like it might have finally hit bottom after a 13 year sell off in spring of 2003 (the Nikkei was in the low 7000s). But this was not the case.

As per usual the Japanese government helped establish the 2003 stock market low by buying banking stocks. This last stock purchase program took place between November 2002 and September 2004. The Bank of Japan began disposing of these holdings in October 2007 (when international stock markets were at their peak). They had to suspend their selling by September 2008 when they still had 1.3 trillion Yen of stock on the books (at least that's the 'official' number). The Nikkei then hit a new 18 year low after that. The Bank of Japan's just released scheme is to buy one trillion Yen of bank shares, but there a plan in the works to add a 20 trillion Yen to that amount. Unfortunately, at some point these Bank of Japan purchased shares will have to be sold, otherwise the Japanese government would eventually wind up owning most, if not all, of the shares of their major banks. It is quite possible any new selling will cause a new market low to be established. If the Japanese government's real objective is to create the longest stock market sell off in history, they might be successful. If it is to fix their financial system, they should realize that they don't know more than the Free Market.

As for the proposed ban on Credit Default Swaps (CDS) in the U.S. This bill would limit the purchase of CDSs to parties that have an underlying economic interest and reduce the size of the market (and associated risk in it) substantially. CDSs, because they allowed huge leverage in the financial system were key components of the implosion that we are currently witnessing. One industry witness testified that this bill could 'collapse' the $31 trillion CDS market. I seem to remember the less than a year ago the CDS market was $62 trillion is size. Looks to me like the CDS market already collapsed by itself.

NEXT: New York Investing Meetup Versus the SEC

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.