The Stock Market's Early Returns

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 election doesn't appear to have resulted in the worse possible outcome for Wall Street, what did occur was interpreted by the market negatively enough to cause a small crash today. So far Obama has won the presidency by a 7% plurality, although based on turnout estimates several million votes seem to be missing from the tally. The Democrats have picked up at least five seats in the Senate and have solidified control, but the filibuster proof majority remains elusive for them. Four seats - Georgia, Minnesota, Oregon, and Alaska - are still undecided however. Currently the Republican is ahead by 500 votes or less in Minnesota and Alaska and recounts will be taking place. All the ballots haven't yet been counted in Oregon's mail-in-only election, but it looks like the Democrat will win when they are. As of now, Georgia is heading toward a run-off election next month because neither candidate got 50% of the vote. Alaska would have to have another election as well if convicted felon Stephens wins, since he will probably be expelled from the senate by early next year at the latest. Current tallies indicate that the Democrats picked up around 20 seats in the House and will have between an 81 an 88 vote majority.

Inexplicably the market rallied while the voting was taking place, with the Dow closing up 305 points or 3.3%. This was the biggest rally since 1980 when the market was first opened on election day. The previous biggest rally was a 1.2% gain in 1984 when Reagan defeated Mondale in a massive landslide that was universally predicted. Today, after seeing the returns all the major U.S. stock indices dropped 5% to 6%. Previously this would have been a headline news, but a drop of this magnitude has become commonplace in the last two months of high volatility trading.

Volatile markets are of course not healthy markets. A 305 point Dow rally yesterday, followed by a 487 point or 5.1% drop today should not inspire confidence. The S&P and Nasdaq were down a slightly greater percentage and the Russell was down the most with a 5.7% drop. Oil dropped $5.23 a barrel after an even bigger rally on election day. When Japan opened, the Nikkei followed the U.S. markets down, ending its morning session with a drop of 5.7%. The Hang Seng in Hong Kong was having an even bigger drop, while the Shanghai Composite hit a two-year low before attempting a recovery. Like the Nikkei, Korea and Taiwan were experiencing crash level drops at mid-day while Singapore and Australia were down somewhat less than 5%. If anything, volatility in Asian markets has been even greater than in the U.S.

In the longer term, there is a lot more to consider than the 5% to 6% drop in the U.S. markets today. Since September 2007, the New York Investing meetup has pointed out how the Federal Reserve and the Treasury have attempted to prevent and cover up economic problem before the presidential election. Well, the election is now over. Some of these actions may now start to unravel. If so, we shall begin to see this in the next month or two.

NEXT: When Stimulus Ceases to Be Stimulating

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.

Landslide Elections and the U.S. Stock 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.

Our Video Related to this Blog:

There seem to be only two things that Americans voters will not forgive their politicians for. In the case of the President it is a failed economy, which led to a Democratic landslide in 1932 and a Republican landslide in 1980. While congressional voting is strongly affected by the economy as well, there is an additional factor of failing to deliver on a political party's core promises. When the Democrats couldn't pass a health care bill (something they had campaigned on for almost 50 years) in 1993, the voters turned on them en mass. This year, there is not only economic turmoil going into the election, but many Republicans in congress abandoned one of their party's most fundamental principals, fiscal conservatism, by supporting the Wall Street bailout bill. Conditions are ripe for a major political shift.

Presidential landslides are usually preceded by shifts in Congress two years earlier. In 1930, the Republicans, who had totally controlled Washington for the proceeding 10 years, lost 52 House seats and 8 Senate seats as the economy started to fall headlong into the Depression. Even with these losses, Republicans still had slight control of the U.S. senate and only lost their majority in the House after further defeats in special elections. While the U.S. economy was allegedly in good shape in 2006 (at least according to the official highly manipulated government figures), Republicans lost 30 House seats and 6 Senate seats in the election that year. This gave Democrats solid control of the House and a bare majority in the senate.

As bad as 1930 was for the Republicans, it was nothing like the political bloodbath that followed in 1932 when they lost 101 seats in the House and 12 seats in the senate. Best guesstimates as of now is that Democrats will pick up another 30 House seats this November. Interestingly, as many as 12 senate seats could also shift from Republican to Democratic hands this year, although the Democrats would only need 9 seats to have a filibuster proof majority. There is probably a slightly less than 50% chance of this happening, so it isn't a done deal yet. Wall Street would not react positively to this outcome and it has almost certainly not been factored into stock prices as of yet.

As for the Presidential election, Obama is clearly ahead of McCain and some perennial Republican strongholds like Indiana, North Carolina, North Dakota, and Virginia may go his way in addition to almost every swing state. Obama has the advantage in ad spending and field operations. Most polls show him way ahead in the race. While there are a few that don't, closer examination of them reveal that they are as statistically suspect as the U.S. governments inflation and GDP figures.

So what has a major political shift said about the prospects for the U.S. stock market in the past? The stock market actually bottomed before the 1932 election and entered a multi-year rally period after FDR's inauguration in March. In 1980, Regan was elected while a recession was already underway (as is the case in 2008) and another recession immediately followed that one.
Two years later though, U.S. stocks started an 18 year secular bull market. Generally, things have to be very bad economically for there to be a large change in the previous U.S. political balance. By the time this happens, the worst is likely to be over soon thereafter.

NEXT: Start Looking for Capitulation

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.

Short Selling Democracy - Senate Ressurects Bailout Bill

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 Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs

http://www.youtube.com/watch?v=UQieE8Ryvk0

Late on Wednesday evening the Senate passed their own version of the Wall Street rescue package by a margin of 74 to 25 . Unlike the House the Representatives where all of the members are up for election this year, only a third of U.S. senators have to face the voters next month. It was therefore easier for them to ignore an irate populace opposed to this legislation and instead follow the lead of their major campaign donors who have paid them the big bucks for their assistance in looting the U.S. treasury.

In order to make the bill more sellable, a small bone or two was thrown to the little guy. A number of tax breaks amounting to a few cents for the populace for every dollar for Wall Street were thrown in to the mix to help buy off some key congressional votes in the house. The provisions have nothing to do with fixing the financial system of course. They include disaster aid for Texas, Louisiana and the Midwest (as if congress wouldn't vote for this otherwise), aid for rural school programs, and tax breaks for people who live in states without state income taxes. Some fixing of the AMT (alternative minium tax), keeping it from affecting several million middle income earners, was also thrown into the bill. Many of the House members that voted against the bailout bill the first time would like these provisions. Only a little over a dozen or so need to change their votes. If they are willing to do so for a few cents on the dollar, their votes obviously come pretty cheap.

Also added to the Senate bill was a provision to raise FDIC insurance on bank deposits to $250,000 per person (already the limit for IRAs in banks). While this may be a good idea, this provision could wind up to be extremely costly to the government. Bank failures will eventually drain the FDIC insurance fund (this would have happened already because of the failures of Washington Mutual and Wachovia, but the banks taking them over are paying off the funds the FDIC would have had to pay, then writing off an equivalent amount of bad loans, and will be reimbursed by that amount through the bailout plan). The government is going to wind up paying $250,000 per account for a large number of depositors of failed banks one way or the other in the future (instead of $100,000). Needless to say, the senate bill doesn't assume these future costs will exist.

The Senate bill is just another confirmation that our representatives in Washington see no limits whatsoever are needed on government spending. They take a break-the-bank expenditure bill and try to pass it be adding more expenditures (the likely amount not adequately reflected in the proposed costs). While the U.S. is not the first government in history to engage in such profligate behavior, the powers that be seem to think it can be the first in history to avoid destructive inflation or even hyperinflation as a consequence of doing so. Just in case reality rears its ugly head at some point, you just might want to pick up some gold and silver.

NEXT: No Assurance in Insurance; Wachovia's Deal is Not a Deal

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.