Bond yields and stock prices (cont'd)

I was right. The relationship between bonds and stocks remains valid. (See previous blogs on the detailed discussion and explanation).

I was right when I said that lower bond yields are followed by higher stock prices.

I was right when I noted that stocks, once they reach a bottom, continue to rise as long as bond yields keep declining.

What should you look for? The market will continue to move higher as long as bond yields remain close to current levels.

Rising bond yields will signal that risk is increasing. At that time we will rely on my trusted indicators to tell us when we should start reducing our exposure to stocks.

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

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

The next bubble

Comment from a reader. Any ideas on the next bubble? Soros and Jim Rogers will short it at the top and Buffett will buy it just after the panic. So what are we mere mortals supposed to do?

The dollar is collapsing and commodities (all of them, without any exception) are soaring. This is the new bubble in the making.

They are two sides of the same coin called the demise of the purchasing power of the US consumer.

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

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

Stock prices, bond yields, and financial crises

Yes, I was right!

I gave you three main ideas in this blog (see below for detail).

1. Financial crises are a great buy opportunity. And it happened in August-September.

2. A rise in bond yields is followed by a peak in the market. And it happened in May-June.

3. A decline in bond yields is followed by a rise in the stock market. And it happened in August-September.

Now enjoy the trends. Until when?

The charts I showed and the relationships I discussed in the past in this blog between bond yields and stock prices suggest that the stock market will have a pronounced correction following a protracted rise in bond yields.

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

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

The Fed is irrelevant and creates opportunities

In an interview on Bloomberg TV the well known Jimmy Rogers stated the Fed is irrelevant because they follow the market. They are always behind the curve.

Greenspan, in answering a question from M. Bartiromo on why he lowered interest rates to 1%, said (and I quote): the markets did. In other words, he followed the markets.

Make no mistake about it. The Fed follows the markets trying to fix the problems the policy makers create. Their main objective is to protect the banking system at any price, whatever the consequences.

What is the price we are paying with the latest Fed easing? The dollar tanked as the Dow jumped 335 points. Oil soared above $82. Gold surged past $735. And last, but not least, long bonds weakened.

What does it mean? The price we will pay is lower purchasing power. The Fed is creating the next bubble. And I am planning to profit from it.

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

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

What the Fed does on Tuesday is irrelevant

These are some comments from Dr. Hussman (more of his insightful comments can be found on www.hussmanfunds.com). Several times I wrote about the irrelevance of the Fed. Dr. Hussman ideas offer reasons to pause and think.

".......... it's unclear exactly how changes in the Federal Funds rate presumably cause changes in market interest rates – statistically, market rates lead and Fed Funds typically follow. We can of course argue that, well, the markets are anticipating the Fed. But why do we really need so badly to believe that a government entity that influences an overnight interest rate on a $41 billion pool of money (this is the entire amount of U.S bank reserves) is actually in tight control of a $13.8 trillion economy?......."

"Ultimately, what's really going on is that we in free market economies are very uncomfortable with the idea that there's nobody in control. As Voltaire said, “If there were no God, it would be necessary to create him.” And since we can be pretty sure that God's first priority isn't bailing out the mortgage market, we look to the Fed. When things are going smoothly, we understand that the economy is complex, and diffuse, and driven by millions of individual decisions. But when trouble strikes, we want to believe that there's somebody up at headquarters with their hands firmly on the controls of the entire operation."

My personal view is that the markets have already "eased". The rate on 13-week Treasury bills has sagged below 4%. The Fed will have to acknowledge the signals given by the markets.

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

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

Wealth and health

Fromm was a psychoanalysis professor who wrote many books on what life is all about. You do not necessarily have to agree with him.

For instance, people with to have personalities have a main focus: to have, to own, money, power, control of people and things. Even parents may have a to have personality. The children are the object of their power.

A to be personality is creative, projecting what is known. You act without thinking about possessing. If you are, the world is yours. You own something no one will have. It is something only you can understand. It transcends time. It sounds crazy, but it is not.

Asian thinkers go beyond to have and to be. They say that if you focus on achieving the to be personality, you will also achieve wealth as a by-product.

Fromm made an interesting comment in this regard. Spinoza (Dutch philosopher 1632-1677) was the first modern Western thinker to say that health and mental energy are the outcome of how we live. In other words, mental sanity, he says, is a manifestation of living well.

What is the right way to live? He believed that a to have personality, concerned mostly in accumulating wealth and achieving power, develops symptoms similar to sickness. This state eventually affects his/her health. These thinkers do not condemn wealth. What they are saying is that wealth (however you define it) is the outcome, not the objective of living.

George Dagnino,PhD

Editor, The Peter Dag Portfolio

Since 1977

Question from a reader

Question: If the Fed cuts rates on September 18, will the dollar just free fall? And where is all this liquidity going and what are the ramifications of a soaring money supply and added liquidity by the world's Central Banks?

The trend of the dollar does not depend only from the level of interest rates. It reflects also productivity trends, financial and government infrastructures and regulations, economic dynamism of the country, and protectionist tendencies (see for instance what happened here when China tried to buy an oil company or Arab interests tried control of west coast ports).

Interest rates are a very small part of the equation. When Brazil had 60% interest rates in the 1970s it also had the weakest currency.

As far as the increased liquidity is concerned, as I mentioned in several blogs below, it is good news for the financial markets. But not for all of them.

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

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

Our sinking purchasing power

The dollar is sinking. Oil is hitting new highs. Commodities are strong. Foreclosures are soaring.

I have been writing about this for ages. These trends are different aspects of the same issue: our purchasing power is falling precipitously.

When you go to Europe and you find everything so expensive it is because your purchasing power has fallen dramatically relative to the European purchasing power.

And nobody seems to care.

Hello, is anyone listening? The weak dollar is a sign we have serious problems facing us. Economic problems. Productivity problems. Rising protectionist tendencies. Complete failure of our diplomatic efforts to gain the trust of our allies. Our military adventures.

And Bernanke did not answer the question about the dollar. That's the Treasury problem, he said.

I respectfully suggest that a collapsing dollar is everybody problem.

Hello, does anyone care?

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

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

Central banks are acting

The Bank of England (BoE) has acted to ease the continuing credit crunch hitting financial markets. It has increased the amount of cash banks can deposit with it and then use when they need overnight funding.

The move could ease the rates banks are charging each other for short-term loans, which have soared on worries about risky investments.

However these Libor rates remained high despite the intervention.

The Bank's action comes a day before it sets the UK's base interest rate, which is forecast to stay at 5.75%.

The BoE's move means that when banks need additional funds they will be able to draw on the extra money they are now effectively saving with the Bank of England.

The Bank is basically providing additional cheap finance to the banks to meet any short term requirements they might face.

Will our timid Fed become more aggressive? I think so. They will have to undo the damage created by a too aggressive easing (by Greenspan) and a prolonged tightening under Bernanke.

I believe the current crisis will have beneficial effect on the financial markets.

Bonds have acted as I predicted and providing superb returns. Equities will be next.

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

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

OECD predicts a sharp US slowdown

The US economy will slow sharply in the second half of the year and the risk of it going into recession cannot be ruled out, the OECD has warned.

The 30-nation group of top economies said the global financial fallout from the current US sub-prime mortgage crisis would continue for some time.

It is now forecasting economic growth to fall to 2% in the third quarter and 1.5% in the fourth quarter from the 4% recorded between April and June.

European leading economies are less vulnerable to a housing-led slowdown. This was because their mortgage markets had fewer structural "imbalances" while inflationary pressures were generally lower.

This environment, if it happens, is bullish for the financial markets as the global central banks try to revive the economies of the industrialized world.

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

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

Comment from a reader

With the need for credit in the current economy, how high does the rate of inflation need to be for the FED to decide against a rate cut?

At this stage of the game inflation is not an issue. The issue is convincing lenders to provide liquidity to business. (See comments below).

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

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

Credit problems are spanning the globe

Worries about credit problems in UK banking have risen after the rate at which banks lend to each other hit its highest level since December 1998.

On Tuesday the rate, - known as the London Interbank Offered Rate or Libor - reached 6.7975% for a loan over a three-month period.

It suggests that banks are reluctant to lend money to each other.(Source:BBC News)

Growth, meanwhile, has halved in the 13-nation eurozone between March and June 2007, following weaker investment. The area's economy grew 2.5% on an annual basis, or 0.3% from to the previous quarter, official data showed.

Bottom line. Global central banks will have to lower interest rates. The global economy cannot function without a sound banking system.

This is, of course, good news for the financial markets. Unless the central bankers fall asleep at the wheel.

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

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

The markets are tightening! Where is the Fed?

The markets are tightening because risk keeps rising. Why?

The 3-month Eurodollar rate is climbing because of rising risk due to lack of liquidity (click on chart to enlarge).

This is what is happening (source: Bloomberg).

The U.S. commercial paper market shrank for a third week, extending the biggest slump in at least seven years and signaling that the Federal Reserve's attempts to lower borrowing costs have had a limited impact so far.

Asset-backed commercial paper, which accounted for half the market, tumbled $59.4 billion to $998 billion in the week ended yesterday, the lowest since December, according to the Federal Reserve. Total short-term debt maturing in 270 days or less fell $62.8 billion to a seasonally adjusted $1.98 trillion. The yield on the highest rated asset-backed paper due tomorrow rose today 0.11 percentage point to a six-year high of 6.15 percent.

The Fed lowered the interest rate it charges to lend to banks to encourage buyers of commercial paper after the market seized up for Thornburg, Countrywide Financial Corp. and other mortgage lenders.

The Fed ``failed to bring money markets back to normal,'' John Lonski, chief economist at Moody's Investors Service in New York, said in an interview. ``Credit markets are obviously in need of a rate cut.''

In a sign that buyers are still favoring safer assets, an $18 billion auction yesterday for two-year U.S. government debt drew the most demand since 1992.

Bottom line. The markets always win. The markets are telling the policy makers they are behind the curve in handling what is happening. The markets are tightening. This is bad news.

The global central banks will be forced to lower short-term interest rates in a major way and inject large amounts of liquidity.

Of course this situation will have a major impact on all financial markets from commodities to stocks.

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

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

Corporate profits are declining

After tax corporate profits of non-financial corporations have declined 0.03% in the past twelve months (click on graph to enlarge). Why should we care?

Because business will soon start cutting costs. So?

Well, it will increase the chances of recession.

How can we take advantage of this?

This trend will have a positive impact on inflation and bond yields.

Some stock sectors will do very well in this environment.

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

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

Are we commoditizing knowledge?

I was driving and decided to change station. An NPR station was interviewing the author of the book Dark Ages America, if I am not mistaken.

What caught my attention were some statistics about the educational level of the population and the idea we are “commoditizing” knowledge. In other words, students are the customers and we are trying to please them, not necessarily challenge them.

This comment reminded me of various interesting situations in my teaching assignments as an adjunct professor in colleges and universities.

I taught for several years a course on management decision making and business cycles. Students recognized my enthusiasm for the subject and gave me an A as an instructor (one of the few A’s I might add).

In one class I had a mature lady who wrote the final essay (I still believe essays are better than multiple choice tests). She wrote all the right words, but the whole paper did not make any sense at all. I just could not give her a passing grade. No way.

Well, I got in trouble with discrimination issues. I had to write a 40 page document explaining my reasons to the president of the college. It was a painful experience.

I changed the tests and made them multiple choice. The right answer, however, was a combination of true and false within the same question. Students loved to hate me for this “innovation”. But they still respected me and told me they appreciated the challenge.

Then the professor evaluation form was introduced. At the beginning students enjoyed my style. Then, as I tried to implement the students’ suggestions, my evaluations began to deteriorate rapidly. I was changing into someone I was not and the students did not like it. I became unhappy.

I could not give too many C’s. I had to please the students. I had to be careful about their ethnicity. I could not give them tough tests. Conclusion. I quit teaching. It was not fun for me anymore. Too much pressure in trying to please the market. Education was not a priority. This is the risk of “commoditizing” knowledge.

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

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