Stock prices and short-term interest rates

I reviewed again the historical relationship between the stock market and short-term interest rates.

Conclusions?

1. Investors have to be cautious following a cyclical bottom in short-term interest rates.

2. The markets is very likely to move higher following a decline of a few months in short-term interest rates.

I will show you the graphs from 1955 in the next issue of The Peter Dag Portfolio.

How do you use this information?

First of all you need to have an entry and exit strategy. Then, play the odds.

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

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

Do not despair

Today the market went down more than 192 points.

There were some good signs. Things look up.

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

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

The road to socialism

France. They gave us the French Revolution (1789–1799), a period of political and social upheaval in the history of France and Europe. It was a bloody and heroic challenge to the French structure of government. The monarchy had absolute power with feudal privileges for the aristocracy and the Church.

People died in the name of liberty, equality, and fraternity. These changes were accompanied by violent turmoil, including executions and repressions. The European power structure of the time trembled because the message from France was loud and clear. The chaos caused by the new form of democracy was controlled by Napoleon, the emperor.

This time France is shaken again by the free-market (“liberal”) ideas of Mr. Sarkozy. Recently he was confronted with what some hard-left union leaders promised would be a replay of 1995. On Wednesday, November 14th railway, bus and metro workers brought France to a standstill on the first day of a rolling, open-ended strike against similar plans to end the special regimes. On November 20th teachers, town-hall staff, post-office workers and other civil servants were due to strike. And militant students had put up blockades on 20-odd university campuses. In two cases, riot police were sent in to clear them.

In a democracy the masses ask. The politicians give. Until there is no more money. Stagnation. Changes need to be made. The masses resist. In France, Germany, and Italy people do not want to give up the acquired rights.

Then, a Napoleon or Putin comes, followed by new revolutions to regain the lost freedoms. And, like the ebb and tides of the ocean, political systems come and go. New promises are made and the masses scramble to get a bigger piece of the pie in the name of liberte’, egalite’, fraternite’.

Democracy becomes socialism, which is the dictatorship of the bureaucracy. Europe is ahead of us. But we are moving steadily in that direction as we make every effort to isolate ourselves from the rest of the world.

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

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

The unthinkable.....

This is what no one is expecting in 2008.

1. The stock market will be very strong, up 15%-25%.

2. The dollar will continue to rise.

3. The economy will be strong with no risk of recession.

4. Inflation will continue to rise to 7-8%.

4. Interest rates will rise sharply.

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

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

Comments from an astute observer

>......the Fed has no chance of providing meaningful “liquidity” when the Federal government is issuing Treasuries at ten times the rate the Fed can absorb them. At that point, Americans would see better that the resources we need to invest, compete and become a financially sound nation are being hoarded by the Federal government and sent up in flames. (Highly recommended source: http://hussmanfunds.com/)

Dr. Hussman feels the Fed is adding little or no liquidity, not enough to make a dent on the problems facing the financial system.

It is quite possible, however, that the Fed is in the process of diverting (not adding) liquidity from those who do not need it to financially strapped institutions. In this case it is a worthwhile effort.

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

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

Regulations distort the markets and....

This is how full fledged socialism is born.

Regulations are followed by more regulations, thus distorting the markets. And this situation requires more regulations. More and more groups want to be protected. And the government issues new programs and new regulations. Eventually the economy is so regulated it is stuck in the mud.

Do you need examples? Look at France and Italy.

We have serious problems in the housing sector because it is heavily regulated from the borrower, lender, investor viewpoints.

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

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

This Fed is inexperienced

The markets will force our inexperienced central bank to ease more aggressively because the global system has serious credit/derivatives problems (well beyond the subprime issue).

This situation has major implications for equity markets.

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

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

The central banks are acting...or so it seems

The European Central Bank injected 348.6 billion euros ($501.5 billion) for two weeks to ease the year-end scramble for cash in the money markets. The so-called TED spread, the difference between the rates at which the government and banks pay for three-month loans, slid from last week's four-month high.

The Federal Reserve, in tandem with the ECB and other central banks such as the Bank of England, is adding liquidity to help undo a logjam in credit markets, starting with the first of four auctions of cash to banks yesterday. (Source: Bloomberg).

This is good news for the stock market.

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

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

A timely comment by Dr. Roubini

Some very interesting comments by Dr. Roubini.

Unfortunately, this past week the central banks of the world – instead of using their most powerful and effective liquidity hoses – i.e. a reduction in policy rates – have stared at this most dangerous and spreading fire of a global liquidity seizure and decided to continue to use hand-carried and hand-held buckets of water that have proven ineffective before and have been ineffective again as liquidity spread have remained stubbornly high even after these new monetary injections were announced.

They will realize in due time that much more effective and radical action – in the form of aggressive reduction in monetary policy rates – may be necessary and warranted. But it looks like they are already behind the curve – most of all the ECB – and what they will do ahead will be too little too late to address a fire that is now spreading without control from country to country.

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

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

Mr. Bernanke should resign

The rate on 13-week Treasury bills stands at 2.87%. The Fed funds rate, the rate targeted by the Fed, is sitting at 4.25%. Is the Fed asleep at the wheel?

The Fed is setting interest rates out of line with the markets. Incredible!

The financial markets are in turmoil and the Fed plays by the school book. Too theoretical. The markets need help, not theories. The official interest rate should be much closer to 3% than 4%.

Bottom line. Mr. Bernanke is failing an important test and should be going back to teaching and research!

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

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

As I said before (see below) .....

Times of financial crisis are superb buy opportunities.

Why? Because the Treasury and the Fed panic...and this means more money in circulation....more money into stocks.

This is a great buy opportunity...

Enjoy!

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

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