Bernanke Makes No New Promises at Jackson Hole

 

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.

Stocks underwent wild gyrations on Friday morning. First the Dow was up over 100 points just after the open on hopes that Fed Chair Bernanke would promise more QE in his Jackson Hole speech. Then, as Bernanke gave his remarks almost the entire rally disappeared. Then a few minutes later the Dow was up 100 points again.

Did anything happen to justify these market movements? The answer is no for the first rally and no for the second rally. Only the selling made sense. There was no promise in the speech for any additional QE in the immediate future. Bernanke did say "the Federal Reserve will provide additional policy accommodation as needed" as he has already stated dozens of times. This is a meaningless platitude that he repeats as often as a mindless parrot. He basically can't take any other position.

Bernanke had to admit that the economy wasn't in really awful shape, but he did emphasize that getting the unemployment rate lower was an important consideration for the FOMC. He did not make any case, nor did he offer proof that doing more quantitative easing would be effective in accomplishing this goal.  He did admit however that, "estimates of the effects of nontraditional policies on economic activity and inflation are uncertain". In other words, the central bank is playing a potentially dangerous game that might have very negative unforeseen consequences in the future.

Bernanke did admit that doing QE could disrupt the Treasury market. He stated that, "if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery".  All of the Fed's actions degrade free markets. That's why they are supposed to be effective. History has shown that markets always dominate in the end however.

Bernanke made it obvious in his speech that he doesn't think any underlying changes have taken place in the economy or financial markets. The ever-insightful Fed Chair also thought in the spring of 2007 that a mountain of subprime mortgage debt posed no risk to the economy or markets. This time Bernanke said, "rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds". Consider the Fed has been taking action since August 2007 (yes, it's been five years) and the economy still is not in great shape, you would think it might occur to him that maybe his policies don't work particularly well (note to readers: many economists are not particularly good at reality-based thinking).

Within the last few days, it has become obvious that Bernanke wouldn't promise anything at Jackson Hole. The QE touts were already making media appearances and publishing articles admitting this, but claiming that the Fed would be taking action at its September meeting. The same people said the Fed would be announcing QE at its June meeting and when that didn't happen, they said it would occur at the July/August meeting. Then it was supposed to take place at Jackson Hole. Now it's going to happen in September. Don't hold your breath.

There is no way the Fed can do QE3 before the election (unless Europe has a major collapse). It would just be too much of a political hot potato. While there are those who state correctly that the Fed has acted prior to presidential elections in the past, that was before the "Audit the Fed" movement started and before the Republicans started criticizing Bernanke's money printing. Romney has already said that if elected, he is going to dump Bernanke. Doing QE again with only the flimsiest of justifications would be seen as a blatant act to help reelect Obama and save his own job. Like QE itself, this could have "uncertain" consequences and many of them could be unpleasant.

The text of Bernanke's speech at Jackson Hole can be found here: http://www.marketwatch.com/story/text-of-bernanke-speech-at-jackson-hole-2012-08-31?pagenumber=2


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.

Why Quantitative Easing Won't Happen Now

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.

Quantitative easing is off the table for the Fed at the moment because of Friday's GDP report. According to the Commerce Department U.S. second quarter GDP growth was 1.5%, which is mediocre, but not bad enough to justify another round of money printing stimulus.

The stock market has been juiced up on a number of occasions since June on rumors of impending QE3.  There is always connected to phrase like "the Fed will do more to help the economy." The mainstream press never raises the question of why does the Fed need to do more to help the economy. If its program worked, the economy should have recovered. If they don't, doing more of the same thing isn't likely to accomplish much. A need for a third round of QE certainly implies that the first two weren't effective — at least in creating economic growth.  Could it be that printing money out of thin air doesn't really create lasting wealth?

All the U.S. fans of quantitative easing should look across the pond at what is taking place in the UK. Its second round of QE was started last October. Yet, Britain has fallen into and remains in recession. It doesn't look like it will exit the recession by the end of the year either. So much for QE being a panacea for saving an economy.

The best case for the ineffectiveness of QE though comes from Japan. Japan has maintained a zero interest rate policy since 1999 (the U.S. had done so since 2008). After ten years of economic decline and malaise Japan began implementing quantitative easing in the early 2000s. The ten years that followed were also a period of economic decline and malaise. The Japanese stock market peaked in 1989 and over twenty years later it is still down more than 75% from its high (investors who fought the Bank of Japan are glad that they did). The various stimulus programs raised stock prices temporarily, but they eventually fell to lower lows.

The stimulus bag of tools that central banks use is meant to be effective when there is a cyclical downturn in the economy. However, they will not work if the problem is structural — and that is exactly what Japan has been dealing with since 1990 and Europe and America are dealing with today (and probably since 2000). We are at the end of the Keynesian era, where credit can no longer be extended to greater levels without creating a subsequent collapse and the economy can't grow without continual stimulus from the central banks and massive government deficits. This is sharply evident in the case of Greece and Spain at the moment, but it is just as true in the U.S., UK and Japan.

The Fed can't just cavalierly decide to engage in more QE as is. It will need to do so if there is a major financial incident in the EU and it can't waste its bullets. It is inevitable that there will be such a crisis, and the Fed knows it. Mario Draghi's assertion on Thursday that the ECB will do everything possible to save the euro was nothing but meaningless bravado. The crisis in Europe has been going on for over two years now and despite numerous bailouts and half a dozen support schemes it keeps getting worse. During the entire time, the powers that be in the EU have said that they will do everything to save the euro. Sometimes "everything" isn't enough. 

The Fed also has the problem of looking political if it acts before the election. While it is true that the Fed has acted before elections in the past, it actions weren't being closely scrutinized back then. Nor were its policies politically controversial. The House of Representatives just passed the Federal Reserve Transparency Act of 2012 by 327-98. This legislation would produce a full audit of the Fed. While it might not pass the Senate this time around, eventually it will.

While the Fed will almost certainly be doing quantitative easing again, but it won't happen until either  the problems in Europe become a full-fledge global credit crisis or the U.S. economy is in an obvious recession. In either case, it will not be something to cheer about. 

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.

Spain Bank Rescue — Bailout Déjà Vu

 

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.

After weeks of Spanish officials denying that Spain needed a bailout, eurozone finance ministers agreed on Saturday to up to $125 billion rescue of Spanish banks. Spain is now the fourth member of the EU to seek assistance since Europe's debt crisis began in late 2009.

The precise amount of the bailout won't be determined until June 21st when two consultants finish their assessment of the capital needs of Spanish banks. The IMF is not involved in providing funds (at least not yet), but will help monitor Spanish banks. The rescue money will be funneled into Spain's "Fund for Orderly Bank Restructuring". Aid will supposedly be directed at the 30% of banks with the greatest exposure to property loans. Bankia, which was recently nationalized, would certainly be at the top of this list. After claiming to be profitable, it had to admit to massive losses.  If Bankia was lying about its numbers, what about other Spanish banks?

Apparently, there are few strings attached to this initial bailout. There are no plans to restructure the Spanish economy to make it functional, nor even to stop Spanish banks from lending to builders of empty houses that no one ever buys or lives in (there is already a huge glut of empty houses in the country left over from the building boom in the mid-2000s, but this hasn't stopped the building of more). With the unemployment rate approaching 25% and a large percentage of Spanish homeowners underwater in their mortgages, neither an easy, nor swift solution to Spain's banking mess is possible.

EU and world leaders praised the latest of their bailouts to the sky. The "everything is great and we've solved the problem" litany should sound familiar. After all, the same thing was heard before, during and after the first Greek bailout, the second Greek bailout, and the various schemes to write
down Greece's debt. Even prior to the first Greek bailout, EU officials stated in March 2010, "We recognize that the Greek authorities have taken ambitious and decisive action which should allow Greece to regain the full confidence of the markets. The consolidation measures taken by Greece are an important contribution to enhancing fiscal sustainability and market confidence". It was all downhill from there. Now, they are optimistic about Spain.

Spanish officials, the ones that claimed over and over again that there was no need for a bailout, are just as optimistic. The Spanish Economy Minister claimed that the requested funds would amply cover any need. He continued by insisting that "this has nothing to do with a rescue". It seems that reality perception needs a bailout in Spain as well.

As usual, the EU has done nothing to solve its escalating monetary crisis except to throw money at it. All the problems that led to the crisis are still there and will continue to drain money from the financial system so one bailout after another will be needed. Greece, Portugal and Ireland all got additional funds after their first bailouts. Spain will need another rescue as well. Italy will be next in line. Lessons from the Greek bailout indicate that at first the stock market is euphoric and then when reality sets in later on, there is a big selloff.


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.

Remerging EU Debt Crisis in Spain Will Damage Stocks

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 yield on Spanish 10-year government debt was as high as 6.16% on Monday. Credit default swaps on Spanish debt hit a record even though the peak yield on the 10-year was 6.70% on November 25, 2011. After a big selloff on Friday, stocks were rallying on Monday despite the new emerging crisis in Europe.

The 6% yield level is watched closely because when rates went over that level in Greece, the Greek debt crisis emerged. Spanish 10-year yields were over 6% three times last year. Prior to last November they reached 6.32% on July 8, 2011 and 6.28% on August 4, 2011. The ECB (European Central Bank) has intervened directly in bond markets under its Securities Market Program (SMP) to hold down interest rates in the peripheral countries. At least one Spanish official has called for a renewal of these efforts.

The ECB also established the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Massive money-pumping operations have also been conducted through the two LTROs (Long-Term Refinancing Operations), one for $645 billion and a second for $713 billion.  The massive liquidity coming out of Europe has led to the recent global market rally. This will be just one of its unintended consequences. Later on we will be experiencing a large uptick in consumer price inflation as another.

While the inflation caused by the ECB is likely to last, the lower interest rates aren't. Spain has now broken above the 6% line in the sand four times. Portugal has never even gotten down to that level. Its 10-year governments were yielding 12.7% on Monday. So far they have peaked at 17.4% on January 30th. Italian 10-year governments have also yielded over 7% last November and this January, but were driven back down to below 5%. They are now rising rapidly again and heading toward 6%.

European stock markets were damaged significantly on Friday and the U.S. markets to a lesser degree. Despite the ongoing bad news markets across the pond were rallying today. And why shouldn't they. Another bailout (and another bailout and another bailout and another bailout and even another bailout) is expected. So far, even with the massive amounts of printed money thrown at the bond markets in the peripheral countries, the debt problems keep emerging . And now the global stock market rally looks like it is beginning to fray around the edges.


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.

Behind the Market Drop and Why it Could Get Much Worse

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.

After a sharp rise since last October, the market looks like it is set up for one of its usual spring downturns. Without continued liquidity injections from the major central banks, it won't be able to break through the wall of resistance it's currently facing, nor will there be much support to hold it up.

As has been the case for months, trouble in Greece is currently roiling international markets. The bond swap deal reached as part of the latest bailout settlement isn't going well. With a March 8th deadline looming, Bloomberg is reporting that private investors holding around 20% of Greek government debt have so far agreed to participate. The Greek government has set a threshold of 75% for the deal to go through. While the mainstream media has consistently cheer leaded the success of every bailout deal, the market has never been convinced. Yields on one-year Greek government bonds have been on a strong upward trajectory since last summer and were over 1000% today.

The eurozone debt crisis has resulted in a great deal of liquidity being poured into the market by the Europeans. The  ECB pumped approximately half a trillion euros via LTROs (long-term refinancing operations) last fall. The rise in global stock markets can be traced from this event. At the same time, the Bank of England was on its second round of quantitative easing and examination of the U.S. Federal Reserve balance sheet shows what looks like the beginning of QE3. The monetary base in the United States was also moving straight up the chart last fall and earlier this year. No matter where you looked, liquidity was flowing into the system. Since stock markets respond immediately to extra liquidity, a powerful global rise in markets took place.

The problem with liquidity-driven markets is that if the liquidity dries up, they can wither like a plant that has been denied water. The constant supply of liquidity always has to slow down because eventually the liquidity will flow into the mainstream economy and turn into ugly inflation. The big liquidity pump that started last fall seems to be falling to slow trickle lately and markets are quite vulnerable once this happens. A failure of the Greek bailout deal (and government bond yields indicate that the market expects this to happen), would cause a massive negative liquidity event that would be on the scale of the Lehman default in 2008. It might even be worse.

At the same time liquidity issues are impacting the market, stock prices are stuck at resistance and the technical indicators are deteriorating. The S&P 500 is at its high that it reached earlier in 2011. The Dow Industrials are also at last year's resistance. Only the Nasdaq has managed to break through because of a small number of stocks like Apple Computer (AAPL) -- which is clearly exhibiting bubble-like action.


Recent news indicates deteriorating economies outside the United States. The economy within the U.S. is only being held up by massive government spending with budget deficits of $1.3 trillion last years and projected to be $1.3 trillion again for 2012. This is all borrowed or newly printed money. How big would the U.S. GDP be without these continual massive injections of government pseudo-cash?  Inflation is also clearly showing up in the ISM Manufacturing and Non-Manufacturing (Services) reports. The Prices component is the highest one for both. Prices for services (80% of the U.S. economy) have been rising for 31 months in a row and are listed as accelerating in February.


Stocks usually have a selloff in March or April. This year they are especially vulnerable. There will almost certainly be some type of drop. How big remains to be seen. The possibility for major selling should be kept in mind by investors.

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.

A Terrible Third Quarter Will Be Followed by a Bad Fourth

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 third quarter of 2011 had the biggest drop and most volatility for stocks since 2008.  The fourth quarter may not be much better since the cause of the problem is a new credit crisis and an emerging global recession. Both will continue to be a drag on the market.

Except for small cap stocks, the U.S. markets did somewhat better than many overseas markets during the quarter. The Hang Seng in Hong Kong was down 25.7%, the CAC-40 in France fell 25.6% and the DAX in Germany dropped 25.0%. Only the Russell 2000 in the U.S. was lower by a comparable amount, falling 24.1% from its May 31st close. These indices are all in deep bear territory. Not much better was the Bovespa in Brazil. It lost 19.0% in the third quarter. The Brazilian market peaked in November 2010 and it too is in a bear market.

While the bigger cap U.S. indices weren't down as much, they were severely damaged nevertheless. The S&P 500 was lower by 15.9%, the Nasdaq by 14.8% and the Dow industrials by 13.2%. This was just the drop during the quarter. U.S. stocks in general peaked on May 2nd. From its high back then to its low in the third quarter, the S&P 500 dropped 19.6%. A bear market is defined as a loss of 20%.

Volatility returned to the markets with a vengeance in the third quarter. The VIX index reached a high of 48.00, not much below its peak in the 2000 to 2002 mega-bear, but well off its Credit Crisis peak around 90. Mini-crashes returned to the market, with both the Nasdaq and Russell 2000 experiencing drops equal to or greater than 5% on three different days.  There were four consecutive days in August when the Dow was up or down by 400 points or more. A volatile market is prone to selling and  markets usually need to calm down before they can bottom.

Just as was the case during the Credit Crisis year of 2008, only two major assets were up in the third quarter — treasuries and gold. The 10-year hit an all-time low yield of 1.71% (bond prices go up when yields fall). This was well below the previous low that took place because of the Great Depression in the 1930s. While the price of gold fell by 15% at the end of the quarter, it rallied from the beginning until its peak on September 6th. It wound up rising 5.8% (as measured by GLD) from its closing price on May 31st. Its companion precious metal, silver, had a quarterly drop of 23.1%.

There is no reason to think that the market will bottom until problems in Europe come to some stable resolution. Greece admitted over the weekend that it would not be meeting the budget targets that were part of the terms of the first bailout. Global markets are once again selling off, as if this was somehow surprising news — Greece has misrepresented its financial number repeatedly, it would only be surprising if they turned out to be accurate. Greece may still get its next tranche of bailout money, since the EU has shown over and over again that its standards for the currency union are meaningless. Eventually though Greece will default because too much bailout money will be needed to keep it afloat. Even at that point, Spain and Italy will have to be reckoned with.

The other issue facing the markets is a global economic downturn. While a case can be made that the post-Credit Crisis economy never got out of recession (the unemployment rate and consumer confidence remained at recession levels for instance), the important question is whether or not economic activity is declining now. Last week, even the ECRI (Economic Cycle Research Institute) admitted the U.S. economy was heading down. Since a credit crisis can make an economic decline much worse, this doesn't bode well for the markets in the upcoming months.
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.

Stocks and Commodities Setting Up for a Major Breakdown

 

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.

Global markets were acting like they were on the verge of a collapse on Thursday, the day after the Federal Reserve's Operation Twist announcement. The selling was ugly and is likely to get even worse in October.

In Asian trading last night, the Hang Seng in Hong Kong barely avoided a mini-crash, falling 4.9% (5.0% is the cutoff) or 912 points. The Sensex in India shed 704 points and was down approximately 4.0%. The market is attempting to cover a gap on the charts made two years ago. The chronically- bearish Nikkei in Japan was down only 2.1%.

In Europe, both the FTSE in the UK and the DAX in Germany also almost closed in mini-crash territory. The FTSE was down more than 5.0% at one point, but managed to rally toward the end of day. The DAX closed down 4.96%, just a whisker less than a mini-crash. The CAC-40 in Paris wasn't as fortunate. It closed down 5.3%. European banks were in the forefront of the selling with French banks being particularly hard hit. French banks are heavily exposed to Greek government and corporate debt. UK banks were also down considerably because of problems left over from the 2008 Credit Crisis.

The U.S. markets opened down and got worse as the trading day proceeded.  The Dow closed down 391 points or 3.5%, the S&P 500 39 points of 3.3%, the Nasdaq 83 points or 3.3%, and the small cap Russell 2000 21 points or 3.2%. Banks stocks in the U.S. received bad news with Moody's downgrading the credit ratings of Bank of America, Wells Fargo and Citigroup. Moody's indicated that it believes bailouts will be less likely in the future.

Commodities were not immune to the selling with gold, silver, oil and copper experiencing significant downside action. Spot gold traded as low as $1722.30 in New York. December futures were down as much as $78.50 at one point. Spot silver traded as low as $35.41. Both gold and silver had some recovery from their lows. Crude Oil (West Texas Intermediate) fell to $80.89 and was down $5.03. Economically-sensitive copper was crushed falling as low as $3.46 a pound. It was down 8.6%. Copper has fallen more than 20% from its all-time high in February and is technically in a bear market. The price behavior of copper is supposedly the best indication of global economic activity.

The key levels for investors to watch are the August lows for stocks and commodities. These were tested today on the Dow Industrials and the Russell 2000. If these get taken out, things should really start to get interesting.  These levels have already been broken in France and the major emerging markets. Technical analysts should note that the Dow Industrials, the S&P 500 and the Russell 2000 all formed  a very clear head and shoulders topping pattern in August and September.

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.

Should Stocks be Rallying on Hopes of QE3?

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.  


Stocks have rallied significantly since August 10th on the hopes that the Federal Reserve will engage in a third round of quantitative easing (QE) -- a form of money printing. While QE1 and QE2 were successful in juicing stock prices, this is not what the Fed is supposed to be doing.

The Fed's current mandate was established by the U.S. Congress in 1977 in the Federal Reserve Reform Act. This legislation requires the Fed to establish a monetary policy that "promotes maximum employment, stable prices and moderate long-term interest rates". Manipulating stock prices is not supposed to be on the Fed's agenda. Quantitative Easing was unknown in 1977 and was therefore not specifically addressed by Congress.

If anything,the Fed has significantly overshot in its goal to keep long-term rates moderate. The Fed Funds rate has been kept at around zero percent since December 2008. The Fed has stated it will maintain this rate until 2013. The interest rate on the 10-year treasury fell below 2.00% at one point this August -- a record low. Two-year rates fell below 0.20%, also record lows and well below the bottom rate during the Credit Crisis. Low interest rates indicate an economy in recession and not deflation as is commonly claimed in the mainstream press. Maintaining interest rates at a low level for too long is inflationary however.

The Fed announced its first quantitative easing program in November 2008 (according to an analysis of its balance sheet, it was begun somewhat earlier). The second round ended this June. How has the employment situation changed during the two rounds of QE?  When QE1 started in November 2008, the official U.S. unemployment rate was 6.8%. When it ended in June 2011, it was 9.2%. The high was 10.1% in October 2009. The post-World War II average has been 5.7% and unemployment has fallen to the 3% range when the economy is strong. With respect to employment, quantitative easing seems to have been a failure.

So what about price stability, the Fed's other mandate? While the inflationary effects of quantitative easing are most evident in commodity prices, the typical American consumer has seen them in gasoline, food and clothing prices. The average price of gasoline was as low as $1.60 a gallon when the Fed started QE1 and it almost reached $4.00 a gallon during QE2. A number of commodities, including cotton and copper, hit all-time record-high prices during QE2. Gold, the ultimate measure of inflation,rose to one new price high after another. Silver went from under $10 an ounce to over $48 an ounce. Quantitative easing obviously hasn't led to price stability. In fact, it has resulted in much higher prices and is therefore counterproductive to the Fed's goal of limiting inflation.

There is no question that quantitative easing has helped the stock market and resulted in higher stock prices. This is not exactly a secret however and all Wall Street traders are well aware of it. They will therefore push stock prices higher if they think more quantitative easing is on the way and much of any rally that results will occur before it even takes place. Quantitative easing is also no panacea for stock prices. It doesn't insulate the market from external shocks. While it doesn't make crashes more likely, it will make them worse when they occur. A default on Greek, Spanish or Italian debt and any number of other crises will have greater impact than they would have ordinarily because the market has been pumped up to artificially high levels. The market has also become dependent on quantitative easing and has not been able to rally since late 2008 without it. Almost as soon as it stops, the market drops and those drops will become more serious after each succeeding round.

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.

Economists Don't See The Recession That Has Already Started

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.

A just released survey of 43 mainstream economists polled this month by the AP pegs the chances of the U.S. falling into recession in the next year at only 26% (one in four). As a group, the economists predict the economy will expand by over 2% in the second half of the year. Other news that appeared with the survey results included an article about how food stamp use in the U.S. is skyrocketing - a highly unlikely occurrence during an economic recovery.

When deciding how much credence should be given to the current recession view of the economics profession, investors should consider how accurately they predicted the Great Recession - the worst one since the 1930s. The recession began in December 2007. That same month a survey of 54 mainstream economist was published by Business Week under the title, "A Slower But Steady Economy" (AP could have used the same title for its current survey). How many of these highly-paid top economists realized that the U.S. was in recession?  None, zero, nada, zilch. How many thought that the U.S. was about to experience the worst recession in almost 80 years? None, zero, nada, zilch.
Unless you have reason to believe that establishment economists have been regularly taking handfuls of smart pills in the last three years, it's unlikely that their views are any more accurate today.

Instead of listening to the miss-opinion of mainstream economists constantly being shoveled out by the mainstream media, investors would be wise to look at the hard evidence of what is actually taking place in the economy.  Approximately 46 million Americans (15% of the population) are on food stamps. The number has increased by 74% since 2007. One wonders how big the increase would have been without the economic "recovery" that has supposedly taken place. Many of the people who receive food stamps are employed part-time and sometimes full-time in low paying jobs. If so, they are not part of the unemployment statistics and are considered successful examples of the U.S. pulling itself out of recession.  

Of course having a large part of the country on food-aid is an expensive proposition. How exactly has the U.S. paid for this?  Well, one way is through the approximately $2 trillion in money that the Federal Reserve has printed since 2007. Two trillion dollars of phony money can really juice up an economy. Without it, the GDP would still be in a deep hole from its 2007 levels and the illusion of  economic recovery wouldn't exist. If it turns there's no free lunch after all, the U.S. is going to be hit with a very big inflation bill in the future. Don't expect Fed Chair Ben Bernanke to see this coming though. After all, the Fed remained oblivious to the Great Recession long after it had started. Even in the spring of 2008, their meeting notes indicate that they were still hopeful about avoiding the recession that had begun months before.  

Investors should expect an ongoing stream of articles in the next several weeks or even months about how the U.S. is not going to experience another recession. The stock market is sending a very different message though and even the fluffed up economic statistics the government produces are likely to  look a bit anemic this fall. But don't worry, establishment economists are optimistic as they always are when a recession begins.

Disclosure: None

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. Investing is risky and if you don't think you are capable of doing it yourself, seek professional advice.

ZIRP Failed in Japan, So They're Doing It Again

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.


In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

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.

Are Gold and Silver Breaking Out?

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.


Gold hit an all-time high yesterday. Silver is trying to challenge its high from March 2008. Both are inflation indicators and new highs indicate paper money is losing its value.

Spot gold came within a whisker of $1275 an ounce yesterday and was up 2% at its high. Spot silver traded around $20.54 at its peak and has so far been a bit higher today. Unlike the U.S. stock indices, both gold and silver are in secular (long-term) and cyclical (short-term) bull markets. Their recent rise was based on reports that the Federal Reserve would likely engage in more quantitative easing. The trade-weighted dollar (ETF: DXY) dropped significantly on the news and fell below its 200-day simple moving average. The dollar has been in a secular bear market for many years and usually moves in the opposite direction of the precious metals.

The technical indicators for gold (ETF: GLD) are somewhat overbought and look like they are losing strength. Silver (ETF: SLV), is more clearly overbought than gold, but the technicals look better overall. In strong bull markets, rallies can continue on weakening technicals however. News, as is always the case, can override all other considerations - although it will have to be news about liquidity and central bank money pumping and money printing.

As I have stated many times, there is already a lot of liquidity flowing into U.S. stocks and other investment markets in the last few months. Prices for almost all assets are rising because of this. Stocks continually went up on bad economic news during the summer and while some incorrectly interpret this to mean that the market is forecasting a better economy, this is wishful thinking. Look inside a number of economic reports and you will notice that rising prices are an important reason they don't look worse. The mainstream media does not report this however because the Federal Reserve keeps telling them that 'there is no inflation'. Apparently though, the Fed forgot to inform the gold and silver markets. Perhaps they should get a memo out right away and put 'rush delivery' on it.

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.

Market Going Down With the Ship?

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.


This morning the Baltic Dry Index, a measure of freight rates for international shipping, was at 1700. It hasn't been at this level since April 2009, only four months after its Credit Crisis low and only one month after the stock market was at its bottom. 

Bloomberg News noted a week ago that the index had dropped continuously for the longest period in nine years. Yes, the current drop in the preceding seven weeks (from a high of 4209 in late May) has been bigger than anything seen during the Credit Crisis. The last drop of this magnitude was in August 2001 in the middle of that years recession. Lack of shipping activity from China, the engine for global economic activity, was cited as the main cause for the falling index. Charter rates for all types of ships tracked in the index are falling.

Prices for dry bulk shipping, which doesn't include energy commodities, tend to be very sensitive to economic activity. A sharp drop in rates indicates a significant drop in global trade. Based on historical charts it looks like the Baltic Index can lead, be coincident or lag movements in economic data and the stock market. The index seems to be most closely correlated with prices of industrial commodities and the industrial sector of the global economy. While this is not the largest component of the U.S. economy (the service sector is four times larger), it is the key sector in developing economies. It was manufacturing though that had the biggest rebound in the U.S. since last year. The service sector has remained lackluster.

The stock market will likely be following the Baltic Index down, although perhaps not with such a precipitous decline. The Index has dropped almost 60% since late May. With the exception of the small cap Russell 2000, none of the major stock indices have had even a 20% drop - at least not yet.

Disclosure: No positions.

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.

June Begins With Continued Market Weakness

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.


After a sharp drop on the open, U.S. stocks mounted a rally and remained positive for most of the day. Selling toward the close, a classic bear-trading pattern, clocked the rally however. Small caps were hit particularly hard.

Healthy markets are strong in the beginning of the month. Trading days before major holidays, like Memorial Day, also tend to be positive. Last Friday was a down day however as was the first of June. Bull markets also tend to be weaker in the morning and stronger at the close, when professionals control the market. The market's attempt to follow this pattern failed miserably yesterday. It was also not the first time lately that strong selling occurred toward the end of trading.

The Dow Jones Industrial Average dropped 1.1% or 113 points. It barely held the key 10,000 level, with the low of the day at 10,014. As of June 1st, the Dow has spent time below its 200-day simple moving average for eight days in a row, as has the S&P 500. The S&P was hit harder than the Dow, falling 1.8% or 19 points. Nasdaq, which tends to be more volatile, lost only 1.6% or 35 points. Nasdaq had been trading completely above its 200-day at the end of May, but closed a tinge below it yesterday (this can only be considered bearish). Small caps experienced the biggest damage by far though, with a loss of 3.2% or 21 points on the Russell 2000. Nevertheless, the Russell held above its 200-day line and is still technically in the best shape of all the major U.S. stock indices.

The euro (FXE), which has been the driver for market behavior for months now, moved mostly with the markets yesterday.  Sharp selling on the open and quick recovery just like stocks, but then a slow fade for the rest of the trading day. The euro's loss of momentum was an early warning that stocks would be doing the same later on. The euro closed at 122.03 with an intraday low of 121.51. Its low in the sell off so far has been 121.27. There is support around the 120 level. The trade-weighted U.S. dollar on the other hand has resistance around 88 and closed just above 86.75. During the 2008 Credit Crisis, the euro spent seven weeks around the 125 level and then had an explosive relief rally. We should be seeing just such a rally again sometime during the summer. It will likely fade right back to the low after a number of weeks, as was the case in early 2009. This time the euro may even go lower.

Disclosure: None

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.

Monday Update on the 2nd Global Financial Crisis

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.


It's Monday May 17th and the Euro is heading lower, having broken its low from Friday. The trade-weighted dollar has hit new highs for this move. European stocks are having a mild rally, while U.S. stocks are mostly flat. Asian stocks sold off on Sunday night. The ECB is withdrawing liquidity from the market and this should be a negative for stocks going forward.

If there is to be a near-term recovery in world stock markets, it is important that the euro rallies back to and above the 125 level - its low during the Credit Crisis.  The euro (FXE) traded as low as 123.24 on Friday and today has been as low as 122.71 in New York morning trade. A significant break in support has taken place and this is a major development. In all likelihood it indicates a much lower low in the future. What that low will be and when it will take place are of course the key questions that need to be answered. The euro's next support is at 1.20, and it is now heading to that level. That support is relatively minor however. A number of technicians claim better support around 1.07. The equivalent strong support that existed at 1.25 would be at 1.00 however. What unfolds in the future depend on how the EU continues to handle matters affecting the currency. Up to this point, we have only seen world-class ineptness coming out of Brussels.

For its part the ECB (European Central Bank) announced that it would launch a program on Tuesday to re-absorb the liquidity that it pumped into the market early last week. They intend to withdraw $21 billion (16.5 billion euros) through this operation. If the liquidity injection was good for stocks (the market did indeed have a huge rally coincident with the ECB's move), investors should consider the withdrawal of liquidity should be bad for stocks.

In Asia the Nikkei in Japan was down 2.17% last night and the Hang Seng in Hong Kong fell 2.14%.  European markets had a modest rally today, with the FTSE in England and the DAX in Germany rallying about half a percent. U.S. markets were basically flat in morning trade (they turned down dramatically just around noon). The trade-weighted dollar (DXY) was as high as 87.06.  The U.S. markets had a massive gap up on Monday May 10th. This can be seen most clearly by looking at Nasdaq, where no specialists delay the open to balance buying and selling. Prices fell into the gap on Friday and the very short-term technicals in the day's trading were ugly. The rule of thumb it that once a gap is partially filled, it will be completely filled (prices will go down to the bottom of the gap in this case).

Investors need to realize that the world's central banks are well aware of this crisis. How much comfort this should be to them is open to debate. The central banks all saw the global financial disaster that resulted from Lehman's failure in the fall of 2008. They all know that a small currency crisis in Thailand in 1997 spread throughout Asia and then damaged world stock markets for more than a year thereafter. This knowledge though didn't prevent the ECB from sitting on its hands for more than six months while the situation in Greece escalated into an international problem. The central banks then finally acted with a trillion dollar bailout (likely to be just the beginning). So, we can conclude the central banks haven't learned to react in time to prevent a future crisis, but they do know how to print money - a talent that has some serious downside risks if you don't like inflation.

Disclosure: No positions.

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.

Euro Problems Threaten World Markets

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.


These days a trillion-dollar bailout just doesn't seem to go that far. Spending that amount to rescue the euro made the markets euphoric for only a couple of days. While stocks rose sharply immediately after the announcement, they are now selling off again. The euro itself is testing its low made in the fall of 2008.

The euro is being rattled today because of reports that French president Sarkozy threatened to pull France out of the currency union. This allegedly happened (the French deny that it did) at a May 7th meeting of ministers before the bailout plan had been worked out. If it did happen, it's old news. If you only read the press headlines though, you would think it had just occurred and is a new development. It didn't and it isn't. The source for this news item came from Socialist leaders in Spain. They may wish to see the euro system fall apart to further their own anti-capitalist agenda and to increase their personal power. So can you believe what they are saying?

So far in New York trade this morning, the euro (FXE) has traded as low as 123.24. This takes out the Credit Crisis low of 124.04 on October 27, 2008.  The euro has major technical support around the 125 area. A break of that level is a serious problem. The next step down is to around 120. A nose-diving euro is not just a problem for Europe however. In our globally interconnected economy, it will spread around the world like a financial tsunami. Not only is there a danger of dropping stock markets, but economies will be damaged as well. While the euro was falling this morning so were U.S. stocks. The Dow was down almost 200 points and the Nasdaq 60 points. The trade-weighted dollar (DXY) traded up as high as 86.24.

The euro has gotten to its current troubled state because of a complete lack of planning, an inability to face reality, failure to consider intelligent alternatives and a delay in taking action on the part of the eurozone leadership. Instead of making the hard decisions to handle the problems that began with the Greek debt crisis, they have engaged in stonewalling and dealing with the PR aspects of the problem, instead of solving the problem itself.  Unfortunately, this type of economic leadership is not unique to Europe, but is typical in most of the world today. If the euro blows up, Americans will be very much aware of it because of the big hole it leaves in the U.S. economy.

Disclosure: No euro or dollar postions.

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.

'Recovery' Leads to Double Digit Unemployment

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.

Our Video Related to this Blog:

Just as the mainstream media has lulled the public into thinking we were on a one-way trip to economic happy land, today's U.S Employment Report throws cold water on the whole enterprise. The headline unemployment number came in at 10.2%. October was the first month in 26 years that U.S. unemployment has exceeded 10%. The alternative government unemployment figure, which includes discouraged workers and people who are forced to work part-time, rose to 17.5%. People, such as John Williams from ShadowStats, who adjust the government figures for more realistic numbers, generally add about 3% to that number to get the actual unemployment rate.

There was very little good news in the report. October was the 22nd month in a row that U.S. employment fell. There were large job losses in manufacturing, construction and retail. Retail losing jobs at the beginning of the big holiday selling season tells you just how bad things are. The average workweek is at a record low. The percentage of workers unemployed for over 6 months is at a record high. The labor force participation rate fell and the unemployment rate would have been even higher than 10.2% if this hadn't happened. The good news was that the numbers in August and September were slightly better than originally reported and that temp agencies added 34,000 jobs.

As usual mainstream economists underestimated how bad the report would be. Expectations were for a drop of 150,000 jobs and an unemployment rate of 10.0%. The 190,000 job loss reported is from the payroll survey by the way - and that is the one that is always reported by the media (and the one that shows that the employment situation is better of course). There is a separate household survey (which is a random sample, unlike the payroll survey) and that indicated a loss of 589,000 jobs in October. The government did state that total U.S. unemployment rose by that amount to 15.7 million.

The market reaction to the report was that stock futures, oil and gold dropped (gold had been as high as $1098 in early morning trading). In the long-term, this only means more money pumping, money printing, and dollar pimping by the Federal Reserve. This can only be bullish for gold and the rest of the inflation trade. There is no way that it is politically tenable for the Fed to raise interest rates until the employment picture improves. It is going to be in an increasingly uncomfortable position next year when inflation starts rising, yet unemployment remains high.

NEXT: Market Keeps Going as Stimulus Keeps Flowing

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.

Oil Up; Retail, Economy and Deficit Down

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 had a huge rally yesterday, going up more than 4% on a bullish storage report. It is still over $72 this morning. The oil/natural gas ratio is over 20 and is at the same high that it was in 1990 when it last peaked. There is about a 20 year cycle to this ratio and it should be falling for the next 10 years or so. We shall see. In the shorter term the natural gas storage report is out at 10:30 this morning (New York time). Natural gas can be bought either with the ETF UNG (which is being harassed by the regulatory authorities) or with the ETN GAZ. Natural gas futures are in extreme contango.

The stock market is trying to maintain its rally, which is supposedly dependent on the coming economic recovery. Sears Holdings, which released its Q2 earnings this morning, is going to be a drag on the rally today. The company lost 17 cents last quarter. Analysts expected a gain of 35 cents. Revenue fell 10.3% and was also below expectations. The company's credit rating, which was already in junk territory, was lowered further today by Moody's. Although the financial picture of this major retailer is nothing short of disastrous, the stock has risen 80% this year as of yesterday. At least it is down this morning. This company typifies the market rally - a huge rise in the midst of really bad fundamentals. Who would buy under such circumstances and why?

Weekly job claims also rose this morning to 576,000. This is still deep in recession territory. The rule of thumb for years has been weekly claims at or above 400,000 indicates the U.S. economy is in recession. A healthy economy has weekly claims around 300,000. The market had a good rally a couple of weeks ago when claims fell to 550,000. The "better numbers" were heralded in the press and claimed to be an indication of the waning recession. The press should have waited until claims fall and stay below 400,000 before publishing that story (but that would be responsible reporting, so of course that didn't happen). The press also never mentions that a large percentage of the U.S. workforce isn't eligible to collect unemployment, so when these people become unemployed they don't show up in the weekly claims figures.

The "good news" out this morning is that the Obama administration is predicting the federal budget deficit will be only $1.58 trillion this year. This is still almost 4 times bigger than the previous record budget deficit. Some contingency bailout funds for the big banks won't have to be spent (at least by September 30th of this year). Before you trust any numbers from the White House, consider that their argument for the current stimulus package was it would keep the unemployment rate at 8% or lower. Without it they claimed that unemployment could rise as high as 9%! So the stimulus package was passed early this year and so far unemployment has gotten as high as 9.5% - and that is with a lot of manipulation of the numbers to make them look better. You should assume that all the other numbers coming from the administration are just as reliable.

NEXT: Natural Gas Deconstructed

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.

Monday's Ugly Market Action

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:

While selling began in the U.S. on Friday, it didn't have a lot of momentum until the Asian markets opened Sunday night. Japan, Hong Kong and China were down between 3% to 5%. Last night the recovery in the East was anemic. The Nikkei was barely up and the Hang Sang was up less than 1%. The major Euro markets were all up around half a percent today. U.S. stocks are rallying as of now, but how they close is the key. The U.S. dollar is selling off and nothing significant has changed for it . It is still in a precarious state.

Basically the only thing that rallied yesterday was the U.S. dollar. Everything else sold off. This has been the common pattern since March. It doesn't make any sense based on the media story of what is going on in the markets and the economy. U.S. stocks should rally if the dollar is rallying. The opposite only occurs in inflationary environments.

The technicals on the index charts have weakened considerably in the last few weeks. The RSI on the daily charts even fell below 50 for the Nasdaq yesterday. The S&P hit 50. The Dow stayed just above it. Bouncing off this level and rallying is an almost automatic market reaction and this is happening today. We will have to see how long this lasts. The MACD is still relatively strong, so this will probably keep the market from falling apart at the moment. The DMI patterns can only be described as twisted looking. They are indicating that the uptrend is endangered.

The market seems to be in a topping pattern, but this can last awhile. As we head into the seasonal week period of September and October, the risk of a major sell off for stocks becomes greater.

NEXT: Stock Market Gappy, Inflation Worries Surface

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.

Critical Juncture for Dollar and Stocks

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 dollar began to break down on Friday. Intraday, it fell below the critical 78.33 support level, but managed to close at 78.38. It is hovering just above 78.00 this morning. The next few days should tell whether or not it is making a bottom or just falls apart. This is probably just as important for the stock market because the dollar and stocks have been moving almost perfectly inversely to each other since early March when the dollar peaked and stocks bottomed. A dollar rally should mean a sell off in the stock market.

The close and opposite relationship of the price movements of the dollar and stocks is unusual. The 1990s bull market took place while the dollar was rising, not falling. The same was the case for most of the 1982 to 1987 stock rally. So most of the long secular bull market from 1982 to 2000 was accompanied by a rising dollar. Much of the secular bear market rally that took place between 2002 and 2007 was accompanied by a falling dollar. The dollar dropping to new all-time lows in September 2007 because of the Fed's rate cutting campaign is what finally killed the rally.

A new dollar stock pattern seems to have begun last November when the dollar had a peak and stocks (and a few commodities) made a bottom. The initial relationship was quite jerky however and only smoothed out starting in March. Stocks going up and the dollar going down indicates a trade where people who go long stocks, short the dollar. Only the big banks, brokers and hedge funds are capable of engaging in this trade. It's not mom and pop investor. If the U.S. government is not going to let the dollar break down, this trade is going to have to reverse and stocks are likely to suffer.

While an inverse relationship between stocks and the dollar has taken place, this usual relationship for the dollar and gold has broken down. Gold peaked in late February and the sold off with the dollar until mid-April. It then rallied in early June and sold off again with the dollar until early July. This pattern makes no sense whatsoever. If the dollar rises, there is no reason the decoupling can't continue. August is usually gold's strongest month and gold acted very positively to Friday's GDP Report while the dollar had a vicious sell off. The reaction was so extreme that it looked like dollar traders actually read the report.

NEXT: Dollar Breaks Down

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 News is Bad ... Time to Buy

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 the New York Investing meetup last night, we had a talk on media manipulation of the news in the oil market. The news reported is almost completely negative and is contradicted by the facts. Under such circumstances, it's not surprising investors who rely on the news make bad investing decisions. The headlines today will likely turn out to be another great illustration of this point. When I turned on my computer this morning, there was an unrelenting barage of negative headlines. My initial reaction was that I had better buy quickly after the market opens to take advanatage of this.

What impression would these headlines make on you?

- "Stock Futures Fall on Earning Worries"
-" World Markets Track U.S. Lower Amid Earnings Fears"
-"Oil Falls below $48, Following Stocks Down"
-"Sharp Forecasts Bigger Loss Amid Global Slowdown"

The unrelenting picture of danger and risk painted by the media will keep the average investor far away from the market - and he or she will not make money as a result.

The news is also not actually as bad as the headlines indicate either, but you have already been put into a certain mindset before reading the article (assuming you do, many floor traders only see the headlines). For instance, how bad were the stock futures that were down on earning worries? A quote from the article: "Ahead of the market's open, Dow Jones industrial average futures fell 42, or 0.5 percent, to 7,720, ... Standard & Poor's 500 index futures fell 3.40, or 0.4 percent, to 810.60, while Nasdaq 100 index futures were unchanged at 1,280.75." A more accurate headline for this story might be: "Despite Earnings Worries Market Having Trouble Selling Off". Don't hold your breath in waiting for headlines that provide an accurate picture on what is going on though, it's not going to happen.

Alcoa supposedly set off these earnings worries the media is reporting today. It earnings were a few cents below expectations. Nevertheless, the stock is having trouble selling off in premarket trading. This is extremely bullish and is another piece of evidence that all the bad news has been priced into the stock. That's not the slant in media reports however. Today's stories are emphasizing how bad things were LAST quarter. The market doesn't care about this. It is interested in what is going to happen two or three quarters in the future. If the stock goes higher, the market is optimistic about the future - and its only the market's opinion you should care about if you want to make money.

NEXT: Fed Minutes Take Oil on Roller Coaster Ride

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.