Peter Dag & Friends: April 2007

4/27/07

Recent data point to recession

Business fixed investments are expenditures by firms on equipment and structures.
The growth over 12 months in this important segment of the economy is negative as of the last report available on 4/27/07. In other words, fixed investment declined in the past 12 months.
The graph (click on graph to enlarge) shows the growth pattern since the 1940s. The message: growth at this levels has almost invariably be associated with recessions or very slow growth.
Implications? The Fed will have to ease because of the sharp deceleration in business optimism. Inflation is likely to decline. The financial markets (stocks and bonds) will respond favorably. This scenario favors specific asset classes and stock sectors.
More on https://www.peterdag.com/

George Dagnino, PhD
Editor, The Peter Dag Portfolio Strategy and Management
Since 1977

4/26/07

What you hear on TV does not make any sense!

The big story on TV is that a weak dollar is good news for large companies having a large business overseas. The implication is that what is good for them is good for the country.
Nonsense.
It is easy to weaken a currency. Just inflate, spend, give away money to specialized groups, forget about education and productivity, let the money supply grow as there was no tomorrow.
Yes, this is the picture of most Latin America countries a few years ago and of countries in total disarray. Does this mean they were doing fine because they had a weak currency?
A weak dollar is bad news for profits. Whatever the companies make overseas, they lose it here. And then some.
We should not accept the positive slant in the news because we have a weak currency.
Nonsense! Nonsense! Nonsense!
A weak currency points to slower economic growth and loss of competitiveness. This requires well-thought investment strategies because it implies increasing risk for the financial markets.
More on http://www.peterdag.com/

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

4/24/07

A strong currency is a formidable asset

This graph (click on graph to enlarge) shows the CRB commodity index in Euros.
Look at it closely. It shows no increase in commodity prices in Euros in the past three years. In other words, European business has experienced no increase in raw material costs since 2004.
In the same period US business has seen raw material costs soar almost 15%.
My point is rising commodity prices reflect a devaluation of the dollar and a loss of competitiveness against foreign business.
More on http://www.peterdag.com/

George Dagnino, PhD
Editor, The Peter Dag Portf0lio
Since 1977

4/17/07

Inflation remains a problem

I do not understand why the markets get excited because core inflation was up only 0.1%.
In the last three months food and beverages rose 7.4% (at annual rate), transportation jumped 8.3%, and medical care costs soared 5.6%.
In other words: if we do not get sick, do not move from the house, and do not eat and drink inflation is under control.
I am confused. Is there an angle I do not understand?
The foreign exchange markets do not seem to agree with the rosy story because the Euro continues to rise against the dollar and gold is strong.
Keep in mind higher inflation reduces our purchasing power and forces interest rates to rise. The end result is a sharp slowdown (see above chart; click on graphs to enlarge).
Eventually this is good news for bonds (but only when inflation declines because of the sharp slowdown).
And stocks? You can guess the outcome.

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

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

4/16/07

Do not get too excited!

Retail sales, published today, sent the markets (stocks and bonds) soaring.
Now, look at the chart shown here (click on the graph to enlarge) and what do you see?
Retail sales after inflation have been slowing down and are now growing at a zero (yes, zero) percent pace year on year.
This is the reason stocks jumped, financial stocks soared, and bonds rose. Why?
The markets assumed the Fed is bound to lower short-term interest rates because the economy is slowing down to a pace close to a recession (see above chart).
The problem remains the weakness of the dollar (see my blogs below on this subject).
More on www.peterdag.com

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

4/13/07

Inflation cannot decline until ....

The Fed says inflation is not a problem. The latest PPI news, however, shows inflation is rising at an impressive pace.

Sure, when you take out food and energy there is no inflation. What do they expect us to do? Stay in the house and starve?

Inflation cannot decline as long as commodities are rising and the dollar keeps falling.

Bond yields are rising reflecting the risk of higher inflation. And what is bad for bonds cannot be good news for stocks.

The message of the markets is quite different from that of the Fed.

4/10/07

The weakness of the dollar is bad news

The Dollar is sagging as the Euro (FXE) reaches new highs (see above chart; click on the graph to enlarge).

Strong commodities, soaring money supply, rising gold prices, and inflationary pressures are all pointing to one main issue.

Fed's monetary policy is too easy. Are the markets saying the Fed should raise short-term interest rates?

A weak currency is bad news for the US because it gives too much competitive advantage to our competitors.

Furthermore, it is a bearish sign for stocks and bonds.

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

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

4/8/07

Liquidity is soaring. Is it time to tighten?

There is plenty of liquidity in the system. The growth of the money supply is soaring. This is a very important trend (click on above chart to enlarge).

The growth in MZM has been rising since late 2006. Its trend will help cushioning the economic slowdown. It is anticipating a pick up in business activity in late 2007 or 2008.

The strength in commodities, the weakness in the dollar, stronger stock prices, and the pick up in inflation could very well be the markets reaction to too much liquidity.

Are the markets saying the Fed will have to eventually tighten to reduce the monetary stimulus?

4/6/07

Latest employment data: implications for the markets

Employment was very strong last month, up 180,000 as the unemployment rate fell to a low 4.4%. Wages rose north of 4% over twelve months. Good news for consumers.

Employment in construction and goods-producing sectors (see chart above; click on graph to enlarge), however, is growing at a pace usually associated with recessions.

The growth in wages is particularly meaningful when accompanied by a declining unemployment rate. They reveal a strong consumer sector and shortage of labor in many areas.

Rising commodities (especially gas prices), inflation on the upside again, tight labor market, and accelerating money supply are the kind of developments associated with rising, certainly not lower, interest rates.

Sagging bond prices reflect this underlying state of affairs.

Will the stock market notice these crosscurrent?

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

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

4/1/07

Is the world moving away from dollars?

(Bloomberg) -- The dollar's share of global foreign-exchange reserves fell to the lowest level in at least eight years as central banks accelerated their purchases of euros, the International Monetary Fund said.

Dollars accounted for 64.7 percent of reserves last quarter, down from 65.8 percent in the prior three months, the IMF said today in Washington. The share of euros climbed to 25.8 percent from 25.1 percent, reaching its highest proportion since the single currency was introduced in 1999.

My Point. This shift has been accompanied by a steady appreciation of the Euro. You can hedge your portfolio by buying FXE, the ETF for the Euro.