Peter Dag & Friends: March 2007

3/31/07

The US is no longer technology king

The US has lost its position as the world's primary engine of technology innovation, according to a report by the World Economic Forum.

The US is now ranked seventh in the body's league table measuring the impact of technology on the development of nations. China fell from 50th to 59th place out of 122 nations.

A deterioration of the political and regulatory environment in the US prompted the fall, the report said.

The top spot went for the first time to Denmark, followed by Sweden, Singapore, Finland, Switzerland, and the Netherlands.

My point. The political and regulatory environment suffocated Europe for decades. They have been dismantling the socialized system they created. The process is still going on.

The US government, on the other hand, is increasing the effort to protect and regulate our life.

The outcome is that business is slowly moving to Europe, away from the US. The strong Euro (ETF: FXE) and rising gold prices in US dollars (ETF: GLD) confirm the improving competitive position of Europe relative to the US.

Profits are slowing down as expected

Corporate profits are slowing down and will continue to slow down (see above chart; click on the chart to enlarge).

Why? Productivity is slowing down and wages are growing faster. The outcome is higher labor costs squeezing margins as discussed in the blogs below.

Profits will improve again when productivity rises and wages stabilize. It will take some time for this to happen.

Bottom line: business will keep cutting costs (employment, production, and borrowing) to improve margins. This process will slow down the economy.

This is the kind of environment favorable to bonds.

3/29/07

Question from a reader: Have business cycles been repealed?

Answer: Absolutely not.

Business cycles will never be repealed because to every human action there is a reaction. Sometimes it takes time to experience the "reaction" (feedback), but you can rest assured it will come.

For example, easy money is always followed by boom times in some asset classes (stocks, real estate, commodities). Their action, however, will cause strains in the system (feedback), and the system will correct.

This is exactly what we are experiencing right now as a result of the easy money policy following the stock market debacle of 2001-2002.

Question from a reader: Are we in a major bull market?

Answer: Yes.

As long as short-term interest rates stay close to current levels or move lower, the odds favor rising equity prices.

Some sectors, however, will be much stronger than others during this time.

3/28/07

Investment is down to worrisome levels

Business is investing less and less in machinery and software.

The growth in non-defense orders (excluding aircraft) has declined to levels that in the past coincided with very slow economic growth or recession (see above chart; click on graph to enlarge). Good news for bonds.

An increasing number of data point to slow growth ahead. Food for thought.

Inventories point to slower growth ahead

The point is very simple. Business needs to cut inventories because sales are growing too slowly relative to inventories (see above chart; click on the chart to enlarge). The only way to do it is to cut production.

This is one of the reasons I believe business is going to slowdown for some time until the growth of inventories is in line with sales growth.

This environment should be attractive for bonds.

3/25/07

Employment points to a recession

Employment in construction (see above chart; click on the chart to enlarge) is growing at a rate in the past has coincided with a recession. This time it may different. But the above graph points to very slow business growth ahead -- at best.

The Fed will be forced to lower short-term interest rates, and this is good news for the stock market.

More on https://www.peterdag.com/

George Dagnino, PhD
Editor, The Peter Dag Portfolio
at https://www.peterdag.com/
Since 1977

3/21/07

What are the markets telling us?

The Fed did not raise interest rates. The markets soared. This is what I think they are telling us.

Gold was strong.
The dollar was weak.
The yen was weak.
The $NZ was strong.
Materials and energy stocks were strong.
The financials were strong.

What does it mean?

The action and the wording of the Fed decision has been interpreted by the markets as inflationary. This is why the dollar was weak and materials, energy, and gold were strong.

Furthermore, the carry trade is alive and well.

Borrow yen. The yen was weak.
Buy high yielding currencies ($NZ jumped).
Buy stocks and commodities. They all soared.

What about the strength of the financial stocks? I would be careful. The inflationary bias suggested by the markets (strong commodities and weak dollar) cannot be good news for financial stocks. The lukewarm reaction of the bond market is a warning the action and wording of the Fed has an inflationary bias.

3/18/07

Production jumped in February

Industrial production jumped 1.0% in February. It supports the idea business activity remains strong.

According to the above graph growth in production over a 12-month period has not weakened enough to support the idea we are close to a recession (click on the graph to enlarge).

Implications.

The economy is still too strong to force the Fed to lower short-term interest rates.

The strength of the manufacturing sector will place upward pressure on commodities. This is bad news for bonds.

3/16/07

Inflation, gold, and the dollar

Food prices at the retail level are rising at a faster clip -- more than 3% over the past twelve months as shown in the above chart (click on the chart to enlarge). This is bad news because it is going to hurt the purchasing power of most of us.

An important feature of inflation is that it peaks after a serious economic slowdown or a recession are underway. See above chart.

Another big jump took place in medical care costs. They are now up 4.3% over the previous year and 6% over the previous three months.

Headline inflation is up only 2.4% in the past twelve months.

Energy had no impact on inflation in the same period.

We are witnessing a rotation in how inflation is reducing our purchasing power. First energy. Now food and medical care.

These developments cannot be good news for the consumer. Rising inflation, incidentally, is bearish for the dollar and bullish for gold.

Add the subprime scare facing the economy and you cannot believe business activity is on a sound footing.

The lesson of history is that the higher inflation goes, the more severe the slowdown will be.

This is the bad news. The good news is that the Fed will eventually be forced to lower short-term interest rates to place a cushion under the economic slowdown.

Thank you for visiting my blog.

George Dagnino, PhD

Editor, The Peter Dag Portfolio on https://www.peterdag.com/

Since 1977

3/14/07

Three issues bothering the markets

The markets are becoming more volatile. Why? Three issues need to be resolved.

1. The economy may be heading for a recession. The above chart about the growth of retail sales is really worrisome. (Click to enlarge the graph). There is nothing terrible about a recession. We will come out of it. The unknown is what kind of damage it will create.

2. The credit crunch caused by the subprime lending is unfolding. No doubt about it. A credit crunch is bad news for the banking sector in the near term. Eventually the Fed will lower aggressively interest rates (as Greenspan did after the 2001 market debacle) and we will enjoy another bubble.

3. Another excess being brought under control is the yen carry trade. I talked about it in another blog. The yen will keep strengthening as Japanese short-term interest rates continue rising. Stocks and commodities will have to be sold to repay the yen loans.

We are witnessing the unfolding of three major crises. I wrote several times here that the market is going to reflect these uncertainties. It looked like a top and walked like a top. It must be a top. I have been talking about it since December 2006 in my service.

Bottom line: be careful. In my The Peter Dag Portfolio I have suggested how to use my indicators.

More on The Peter Dag Portfolio on http://www.peterdag.com/.

George Dagnino, PhD

Editor, The Peter Dag Portfolio

Since 1977

3/12/07

Good news and bad news from wages

The good news. Wages are growing at a 4% pace. (Click on chart to enlarge). This is good news since inflation is close to only 2%. Consumers have the money to spend. And their purchasing power will keep the economy growing.

The bad news is that if productivity growth declines (as it usually does when the economy slows down), the growth in wages will translate into higher labor costs for business and lower profits. This trend may have a negative impact on the stock market.

More on www.peterdag.com.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

3/10/07

Manufacturing employment points to a recession

The growth of employment in manufacturing has declined to levels in the past signalled the beginning of a recession.(Click on the chart to enlarge).

This is the time when the Fed starts lowering short-term interest rates.

More on www.peterdag.com.

George Dagnino
Editor, The Peter Dag Portfolio

Since 1977

Federal government receipts soar

Federal government receipts continue to soar, reaching 19.2% of GDP. Why should we care?

Because we cannot pay more than 19% of GDP in taxes. Just look at the above graphs.

The issue is not increasing taxes (we will never pay more than 20% of our gross income). The issue is to re-distribute federal receipts more wisely without giving excessively to special interest groups.

Look again at the above graph. The real issue is not taxes. They are coming in the Treasury coffer at record pace! The real issue is how we spend this money.

More on www.peterdag.com.

George Dagnino
aka Peter Dag
Editor, The Peter Dag Portfolio
Since 1977

3/9/07

How to tell tops and bottoms of the market

These are two great indicators I developed using the tools of Stockcharts.com.This is how I use them.

When these gauges turn down for a few weeks from overbought levels they are warning me the market is entering a top formation. This is an important event, as I discussed below.The odds favor a consolidation period lasting several months.

The market reaches a buy opportunity when the two indicators fall to oversold levels.

George Dagnino, PhD

Editor of “The Peter Dag Portfolio Strategy and Management” at https://www.peterdag.com
Since 1977

Author:
“Profiting in Bull or Bear Markets” (McGraw-Hill, Professional Series). Now translated in Chinese and distributed in China by McGraw-Hill Education.

“Investment Strategies using Stock Sectors” available free (unedited) on our website https://www.peterdag.com

An interesting stock market pattern

The pattern is quite simple.

The market has declined/consolidated several months every year at least since 2002(exception:2003). When the market enters one of these periods you know you have to wait several months before buying aggressively.

When do you start buying aggressively? When our indicators (such as the one shown above) fall into the oversold area.

When do you know when the market has entered one of these periods?

Our proprietary indicators told us in December the market was entering into one of these periods.

More on The Peter Dag Portfolio on www.peterdag.com.

George Dagnino, PhD

Editor since 1977.

Economic softness in the trucking industry

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index fell 3.6 percent in January after surging a revised 6.2 percent in December.

This information confirms that the economy keeps slowing down.

It is a favorable trend for bonds.

More on www.peterdag.com.

George Dagnino
aka Peter Dag
Editor, The Peter Dag Portfolio
Since 1977

3/5/07

Correction blues. Why?

At least two reasons.

Investors borrowed yen because of low interest rates in Japan. And they bought stocks and commodities with the money they borrowed. As the Japanese economy gained strength, interest rates and the yen rose. Being short yen, investors started losing money. Outcome: raise cash by selling stocks and commodities, and re-pay the yen loans. And stocks and commodities dived.
The housing debacle is causing a subprime lending crisis. It could spread to major banks. Outcome: credit crisis. And the market sagged.

What to do? Raise cash and become defensive. This is the time when stocks decline and bond prices rise. But not for long. Why? Because stable or lower short-term interest rates have always been good news for stocks...eventually.

More on www.peterdag.com.

George Dagnino
aka Peter Dag
Editor, The Peter Dag Portfolio
Since 1977

3/4/07

Interesting pattern about the global market debacle

All asset classes are declining -- with the exception of bond prices.

Gold is very weak. What happened to the ultimate store of value? All other commodities are also tumbling.

Are these markets telling us we should be worried about deflation?

If so, bonds are much more attractive than gold.

And stocks? They will offer a great buy opportunity. When? I invite you to follow my proprietary indicators.

Best.

George Dagnino, PhD

Editor of “The Peter Dag Portfolio Strategy and Management” at https://www.peterdag.com/
Since 1977
Author of two books:
“Profiting in Bull or Bear Markets” (McGraw-Hill, Professional Series). Now translated in Chinese and distributed in China by McGraw-Hill Education.
“Investment Strategies using Stock Sectors” available free on our website https://www.peterdag.com/