There are different types of bubbles

As I travel and read about events, I put them in a “bubble” context. Let me explain.

I was in Rome to visit my mother and witness the sale of a property she owned. We met at 12:00 pm and left at 2:30 pm. The seller, the buyers, the two lawyers were present. So far nothing unusual. There was another important authority: the notary.

A notary represents the government and makes sure the transaction follows the law. There are only a few thousand notaries in Italy (population: close to 60 million). It is very difficult to become one and the tests are almost impossible to pass. This is how the guild protects itself.

All guilds, I call them power groups, make sure the government passes laws to protect them by making the entry into the guild as difficult as possible. They increase the bureaucratic apparatus by requiring new “regulations”. By doing so, however, the incentive to innovate wanes and the economy stagnates.

The bureaucrats have every incentive to increase rules, regulations, and filing of reports because the more paper they receive the more important they feel. Southern Italy is following closely this script.

Taxes have to be raised to feed an ever-increasing bureaucracy and a new “bubble” takes shape. However, this bubble cannot increase forever. I witnessed a transaction in Italy for 400 Euros “without receipt”, but 800 Euros with receipt. In other words, as the bureaucratic bubble increases, the economy goes underground, and people become discontent.

Outcome? I went to a library to buy some books. I found, to my surprise, many books about Mussolini. Large bubbles create discontent and discontent leads to violence. Bubbles (political, economic, administrative, religious, and financial) create their offsetting forces that will make them implode.

It will be interesting to see what happens to the bubbles “Putin” and “China” now that people begin to realize their lifestyle is at risk. The markets always win.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

I am baffled

I keep seeing on TV the sequence of politicians that, to their dismay, condemn the greed of the financial executives. How could they have done such horrendous actions? they ask. We need more regulations. We need new agencies. We need to spend more to fix the problems.

The reason I am baffled is that I do not know how to answer this simple question. What were they doing in Washington when this bubble was in the making? Weren't they supposed to be in charge of our affairs? How can we trust the people who were in charge when the bubble was growing to solve the very problems they helped creating?

The philosophical answer is: that's the way the world works. If you do not like it go and hide yourself on a sunny Caribbean island. The altenative is to fight it the best you can.

Happy New Year to all of you and thank you for visiting this blog.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Close to the bottom, but....

This chart of SPY (ETF for the S&P 500 - click to enlarge) suggests we are close to an important bottom. The MACD, however, indicates we need to be patient because major bottoms take months to complete.

What to do in the meantime? Do not commit all your cash in the next rally, no matter how impressive it may look. Save some liquidity for the real bottom. Why? Because investing is all about probabilities.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Is China a bubble?

China needs to devise more policies to boost consumption among the nation’s 1.3 billion people to counter the impact of falling exports on economic growth, central bank Governor Zhou Xiaochuan said.

“Although the government has pledged to boost consumption to sustain growth, we still face difficulties in identifying which areas and which measures we should take to spur spending,” Zhou told a conference in Beijing today. Economic policies have failed to rebalance growth away from trade and investment, with the share of consumption in gross domestic product falling to less than 50 percent from 60 percent a decade ago, he said.

China's income per capita is about $5,500. How can you expect the government to expand consumption when the Chinese are making little or no money in the first place? China was booming because the industrialized world was booming. Now they have to show what they can do it by themselves. And with $5,500 a year per person I think they cannot do much. They are in a hole like the rest of the world. Probably a deeper one. Is the Chinese bubble imploding?

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Relax and enjoy this superb music by Boccherini

How can I say anything about this music. Just listen, get excited, relax, and dream.

Monday the markets will bring us back to reality.

George Dagnino

Bad news...if you believe it

Question: What happens to the stock market when stocks fall more than 10% in the 4th quarter?

Bad news. The market could fall substantially in 2009, if history repeats itself. The interesting study has been prepared by J.K Harris.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Do you have an investment process? Here are some ideas.

I like to learn from my investment experiences. I asked myself: What did I do right and, above all, where did I fail? What happened during the 2008 bear market offers thought provoking lessons. Listening to my friends is a privilege. Their ideas and plans are eye-openers. Each one follows different approaches. These experiences can be condensed as follows.

1. Have a short list of stocks. A short list of stocks in your portfolio makes the management task easier. 15 stocks or 5 ETFs should be enough. Refrain from adding positions just because a friend gives you a special insight. Every time you feel like you have to buy a stock, check it against your existing portfolio. Which one should you sell if you decide to buy the latest suggestion?

2. Diversification is bad. Too many stocks across many sectors will make your portfolio perform like the averages. If you feel you have to diversify, make your life simple. Just buy the S&P 500 (SPY). However, if you want to outperform the market, follow a selective strategy. Use only 2-3 investment themes. This approach will keep your list of stocks from becoming unmanageable.

3. Long-term investing is grossly misunderstood. In October 2008, the market is at the same levels as May 2002 and February 1998. In 1982 the market was almost at the same levels as in 1969. Long-term investing is great only when you look at history, but it does not exist. If you enter one of those long periods of market stagnation, you are bound to have a portfolio showing little or no returns. You have to believe an important tenet: things do not last forever. John Maynard Keynes once said: In the long term, we are all dead.

4. You need a timing model. Market timing models are imperfect, but they provide a sense of risk. They are important and there is no excuse for not using them. The main issue is that market risk changes and your portfolio has to reflect changes in risk.

5. The business cycle works. The global business cycle is perfectly synchronized. All foreign stock markets have the same turning points at major tops or bottoms. A corollary is that when you buy emerging foreign markets you buy volatility. When you buy foreign illiquid markets, the performance of your portfolio becomes highly unpredictable because of its volatility.

6. Choose your investment wisely. You cannot ignore the crucial relationship existing between asset classes and business cycle. Commodity driven stocks (materials, energy, agriculturals, infrastructure, transportation) strive in a strengthening economy, not in a slowing business cycle. Interest sensitive sectors perform well when the economy weakens and grows below par. Your portfolio needs to reflect business cycle developments. In other words, your portfolio has to reflect changes in risk and changes in the business cycle.

7. Momentum works. The odds favor a strong sector to remain strong and a weak sector to remain weak as long as economic conditions do not change. Changes in business cycle conditions change the momentum of stocks. Choose stocks in strong sectors. Rising water lifts all boats and minimizes the odds of being wrong.

8. Do not try to catch a falling knife. Do not even think to buy a stock on a free fall. It is financial suicide. Buy stocks that go up, not down.

9. Hedging your portfolio. The introduction of “short” ETFs such as SH, PSQ, or DOG allow you to hedge your portfolio and make it less volatile. Avoid the “ultra” short. They are too volatile. Leave them to the gamblers.

10. Investment strategy. Act slowly, but act. Inaction will produce losses and profound pain in a down market.

11. Does it sound too complicated? If all these thoughts sound complicated, you should buy TIPS (inflation-protected bonds) from the Treasury by accessing their website www.treasurydirect.gov. You will avoid frustrating and time-consuming work and will gain peace of mind.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

from all of us....Peter Dag & Friends

Commodities remain weak

Commodities peaked when the business cycle weakened. Commodities will bottom when the business cycle strengthens.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

An interesting chart

I realize that no indicator is perfect, but this chart of the S&P 500 suggests it pays to be patient and wait for the two moving averages to cross.

The lesson is it is much easier to recognize a bottom after it has completed than to anticipate one.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Political and economic bubbles

I have been writing about political and ideological bubbles. They can implode and cause chaos.

The Putin bubble. Riot police detained protesters during a rally against a steep rise in car import duties in Russia. Everything was fine as long oil was rising. Now they have to face the hard facts and they are not pretty. A political bubble is imploding.

China. China's top priority is to tackle unemployment among university graduates, as fears grow of student unrest in a faltering economy. China sounded great as long as Europe and the USA were buying from them. Demand for Chinese goods is now faltering. China is an underdeveloped country with per capita income of less than $5,000. A political and economic bubble is imploding.

Bottom line. There are several bubbles of different types: political, bureaucratic, financial, economic, and religious. They eventually all implode.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The nonsense you hear about the dollar

A currency reflects the weaknesses and the strengths of a country relative to other countries.

The dollar has been collapsing since 2004 in anticipation of the dire events we are experiencing in the US.

A currency is never inflationary. It is the other way around. A currency reflects projected productivity and inflation differentials with respect to other countries. The country with the lowest productivity growth and highest inflation will have the weakest currency.

Interest rates have nothing to do with a currency. In the 1970's Brazil had the highest interest rates in the world and yet the real (their currency) was one of the weakest currencies.

The countries with the lowest inflation, highest productivity growth, and soundest economic policies have the strongest currencies. Make no mistake about it!

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

What happened to the energy crisis?

The average national price of gasoline fell 9 cents in the past two weeks, bringing it to its lowest point in nearly five years, according to a national survey released Sunday.

The average price of regular gasoline Friday was $1.66 a gallon, oil industry analyst Trilby Lundberg said. The price of mid-grade was $1.80 a gallon and the price of premium was $1.92 a gallon.

The last time gas prices dipped so low was in February 2004, Lundberg said, when the national average for regular was also around $1.66 a gallon. The all-time high was on July 11, 2008, when the price peaked at $4.11 a gallon.

Bottom line. Interest groups (or power groups as I like to call them) take advantage of special situations to scare us and take advantage of us. They invent the energy crisis to peddle the idea of efficient cars or alternative energy like ethanol and ask the government our money to work on some crazy idea, totally uneconomical.

Then they forbid us to import the superbly engineered and energy efficient cars the US car manufacturers build in Europe. I drove them recently. At 90 miles/hour they are smooth and fun to drive, holding the road in an exceptional way.

Let the markets work. Why do we need an electric car? Because someone is going to make a lot of money from it. Why do we need ethanol? Because someone is going to make a lot of money at our expenses. But make no mistake about it. The markets always win.

If we are in this mess it is because we have been conned in a series of crazy ideas that have not worked out.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The real danger is not recession...is revolution!

Greek students are in revolt as conditions deteriorate in Greece.

A recent visitor to Moscow told me there is growing discontent with Putin's policies.

"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," the head of the IMF said.

Protectionism sentiment is growing. Russia has begun to shut down trade as it adjusts to the shock of Urals oil below $40 a barrel. It has imposed import tariffs of 30pc on cars, 15pc on farm kit, and 95pc on poultry (above quota levels). "It is possible during the financial crisis to support domestic producers by raising customs duties," said Premier Vladimir Putin.

Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licences" to choke off imports.

The omens are not good in China either. Taxis are being bugged by state police. The great unknown is how Beijing will respond as its state-directed export strategy hits a brick wall, leaving exposed a vast eyesore of concrete and excess plant.

Last, but certainly not least. I was shopping for books in Rome and I was surprised to see so many books about Mussolini. Why? Because Italian bureaucracy is taking advantage of the masses and the masses are growing unhappy. They need strong leadership.

Bottom line.The problem with what is going on in the world is that people will eventually revolt against the entrenched incompetent leadership and ask for a strong hand. This is what our leaders should worry about and why they should do everything they can to get the economy going.

The problem is that government power in the US will grow at an unprecedented pace. This is one more reason for discontent. People do terrible things when they smell failure and incompetence in their leaders! History is full of examples.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Food for thought

Interest rates are tumbling across the board. It looks like, let me repeat, it looks like the Fed is succeeding in clearing the credit pipelines.

The next step is to revive the stock market. They will succeed, of course. For investors, however, timing is of the essence.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The markets always win

California Governor Arnold Schwarzenegger today ordered all state workers to take two days of unpaid leave each month to conserve money amid a record budget deficit and a legislative impasse over how to fix it.

The furloughs will begin in February and will last through June 2010, Schwarzenegger said in an executive order. He also ordered all departments to cut 10 percent of their workforce costs, through firings if necessary.

“Every California family and business has been forced to cut back during these difficult economic times, and state government cannot be exempt from similar belt tightening,” Schwarzenegger said in a letter to state workers.

The furloughs would amount to a 10 percent pay cut, Chris Voight, executive director of the California Association of Professional Scientists, a group that represents about 3,000 scientists working for the state. The association and the Service Employees International Union announced they will sue to block the furloughs and any layoffs, which they said would violate collective-bargaining deals.

“We don’t think it’s right, and we’re prepared to file an unfair practices charge against the governor,” Yvonne Walker, SEIU Local 1000 president said today at a news conference in Sacramento. “We think it’s regressive bargaining. For him to do this outside of existing negotiations is improper.”

California, the biggest borrower in the municipal-bond market, has $54 billion in general-obligation debt. It’s rated A+ by Standard & Poor’s and Fitch Ratings, the fifth-highest grade, and an equivalent A1 at Moody’s Investors Service.

Last week, Standard & Poor’s said it may cut the rating on $54 billion of California bonds because of the fiscal problems, and investors have pushed down prices on the debt.

A California bond maturing in 2038, which pays 5.25 percent interest, traded at 79.4 cents on the dollar yesterday to yield about 6.89 percent. That’s 1.8 percentage points more than similar trades three months ago, according to Municipal Securities Rulemaking Board trade data.

Bottom line. We have to produce the wealth the government gives away. The alternative is economic and financial collapse. The markets always win. Even in California.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Question .. and I do not know the answer

This is what is bothering me.

Is the Fed printing new money or just replacing some of the wealth destroyed by a collapsing housing sector and all that is associated with it?

I do not know, quite frankly. My sense, however, is that net net, they are replacing the incredible wealth destruction that has taken place in the past 18 month. If so, their action is not terribly inflationary as most people think.

Just watch the price of commodities, gold, and crude oil. They are sinking. The time to worry about inflation is when they start rising.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Housing, employment, and what to look for

This chart (click on chart to enlarge) shows the real problem for the economy. Housing starts continue to tumble and employment is on a free fall.

Business will contine to be a mess until the housing sector stabilizes.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Deflation?

The latest consumer prices declined 1.9% last month, up 1.1% y/y and down 10.2% in the last 3 months at annual rate.

Producer prices declined 2.2% last month, up a mere 0.4% y/y.

Bottom line. Prices will continue to decline as long as the economy is weak. See, for instance, the previous 2000-2002 episode. There is no question we are in a period of deflation (click on chart to enlarge), and in a period of deflation only one asset class is king -- cash.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Good news and bad news

The business cycle keeps working perfectly, as it should. You just need to know what to look for.

Slower economic growth causes commodities to decline. Lower commodities are the main reason for inflation to decline (see graph below; click on graph to enlarge).

This is good news because lower inflation increases our purchasing power.

The problem is that we are becoming less efficient. Productivity growth is declining. Why to we care? Because when productivity growth declines, unit labor costs start rising faster.

Why do we care? Because when unit labor costs start rising faster, profits decline.

Why do we care? Because when profits decline, business cuts costs by borrowing less, making fewer investments, and hiring fewer people.

Bottom line. We need to make investments that increase our productivity. We can have as many stimulus plans as we wish, but if they do not increase our productivity it is like throwing money down the drain!

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

Employment is sinking (click on graph to enlarge). The negative news on employment will have a negative impact on consumer confidence and consumer spending.

The economy will remain weak and will continue to have a depressing effect on interest rates, commodities, and inflation.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

The manufacturing sector is in a free fall, like the rest of the economy (click on graph to enlarge).

My suggestion? Do not try to catch a falling knife.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Average people trying to solve problems they cannot comprehend

These are the thoughts crossing my mind as I watch the politicians assaulted by the press asking questions about the car industry and what is going on.

Average people, trying to solve the problems they created, problems beyond their comprehension. They look lost and confused. Sweating. How can we even dream they have the mental power to come up with the solution?

The only planning guide you should use is....The markets always win. Do not put your head in the sand. Listen to the markets. Follow what they are telling you.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

A painful sight

I am watching the 3 CEOs of the car companies asking for money from Congress. They are sitting like three schoolchildren. Clearly embarrassed, being reprimanded by the politicians and the public.

Very sad. What happened to capitalism? What a sad and painful sight. We have changed as a country, we have changed. Are we seeing ourselves? Are we recognizing the enormity of what is happening?

It will take a few years before the rough waters settle down. At that time we will be a different country. Possibly more humble and more realistic about our strengths.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Watch the trendline

A rise of the S&P 500 above the trendline in the above graph (click on chart to enlarge) is going to be a significant message the momentum of the market is gradually changing on the upside. Stay tuned.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Question

Is federalism dead?

The states of New Jersey and California are asking for help from the government. Michigan is doing the same to keep the car industry afloat.

The states are asking the government to help them because they followed the idea that governments have to give to the citizens what they ask. Even if they cannot afford it.

The USSR followed the same approach. Eventually revolution (such as in Hungary and Poland) destroyed the system.

I do not want to sound paranoid. History is full of disastrous examples of governments becoming too big. The implosion of big governments is an historic reality. As in the case of any bubble: the credit bubble of the 1930s, the inflationary Great Society/Vietnam war bubble of the 1970s, the Asian bubble of 1998, the tech bubble of 2000, and the real estate/credit bubble of 2008.

There have been other major structural bubbles such as the Roman Empire, the English Empire, the Church in the middle ages, the monarchy of France causing the French revolution, the Italian Renaissance, and the communist Russia after Karl Marx. These are the most dangerous bubbles caused by excessive concentration of power. Are we moving in that direction?

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

A terrible day

Today the market sagged almost 9%. I follow closely the trend line shown on the chart (click on chart to enlarge). A violation of the market on the upside will provide an important signal suggesting the market is close to a bottom.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

A simple proposal to Mr. Obama

Dear Mr. Obama,

The economy is in a mess. Consumers are in deep trouble. Asset prices are collapsing. Jobs are disappearing at a fast pace.

I have simple idea.

Instead of all the myriads of stimulus plans, why not cutting tax rates by 50% across the board. The budget is in a mess anyway. Cutting taxes will stimulate investing and spending immediately.

Sincerely,

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

Food for thought

The message? (click on graph to enlarge) The channel trending down suggests the market will continue to try to find a bottom. But it will take time. Market timing indicators are essential in the next few months. You have to be flexible and quick.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

What's going on?

What is happening? Does anyone know? I get the feeling no one knows. We are confused. This is why we voted for change. Anything, just anything different from what goes on. The volatility of the markets confirms it.

Nobel Prize winners. Think tanks. We have the smartest brains in the world. Have we learned anything? Are we learning? What’s the relevancy of winning a Nobel Prize? Where were they when we created the problems? Now we want to give everything to everybody. Even if we cannot afford it. Is it feasible? Why not. But do we generate the wealth we want to distribute? We cannot tax ourselves to wealth. Something has to give.

The USSR collapsed. The US and the world are imploding because of gross policy mistakes. The vision was free markets. The reality was wealth re-distribution. We continuously seem to strive for solutions to ancient problems. The only thing we hear is change. Will we find what scientists call the steady state? We fluctuate endlessly trying to find the Aristotelian golden mean.

Do we need Plato’s philosopher-king, who recognizes and understands the needs of a country? Without squandering pork to interest groups? Leadership is groomed, not elected. This is the main theme of the major world thinkers. Nietzsche thought average people vote for average leaders. Do we have average people in Washington? Given the results, it looks that way.

We tend to solve yesterday’s problems. Are we getting into new ones? Are we going to get wealthier? Poorer? Safer? What do we want? Do we need “to want” anything and everything? The American dream.

Ideas are not set in stone. What seems right today is wrong tomorrow. Therefore, the world painfully and tragically strives to find the next great idea only to face new dire consequences. Heraclitus was right. We live in a state of flux and the only truth is that by seeking change we give ourselves a drug. It gives us an illusion. But eventually the markets always win. Always and everywhere. Make no mistake about it.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

Sales of new one-family houses in October 2008 were at a seasonally adjusted annual rate of 433,000. This is 5.3 percent below the revised September of 457,000 and is 40.1 percent below the October 2007 estimate of 723,000.

The median sales price of new houses sold in October 2008 was $218,000; the average sales price was $272,300. The seasonally adjusted estimate of new houses for sale at the end of October was 381,000. This represents a supply of 11.1 months at the current sales rate.

Bottom line. Home sales continue to sink (click on graph to enlarge). Prices continue to decline. Because of the huge inventory of unsold homes these trends will continue for at least the next 12 months.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The markets always win

Inventory of unsold homes is still a high 10 month supply. It will take some time before the inventory of unsold homes falls to a typical 4-5 month supply.

Meanwhile, home prices, down more than 16% from a year ago, will continue to decline (click on graphs to enlarge). It is going to be a long and painful ride created by a policy driven by the idea that everybody should own a home. Even if people could not afford it.

The magnitude of the destruction of wealth in the real estate sector is bound to have a deflationary effect in the near term.

The markets always win.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The problem with the bear market of 2007-200?

The above chart shows the graphs of low-grade bond yield spreads relative to the yields of Treasury bonds and the S&P 500 from January 2007.

The market peaked in 2007 when spreads moved higher. Since 2007, all the declines in the market have been accompanied by higher spreads. Reason: spreads reflect credit risk and when credit risk rises stocks tumble.

This is one of the many indicators we follow to determine when the market finally bottoms.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

The above graphs show the growth in employment and consumer sentiment (click on chart to enlarge). Consumer sentiment and employment are closely related. Consumers are likely to remain cautious as long as we have a weak labor market.

Bottom line. Retail sales will continue to suffer.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

The growth of the economy continues to decline (see graph, click on chart to enlarge). Economists expect a big drop in GDP in the fourth quarter.

Implications. A slow economy will continue to depress prices and increase the risks of deflation.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Bear market monitor

This is a vicious bear market, no doubt about it. These graphs compare this bear market to the worse bear markets since 1950 (click on graph to enlarge).

In this episode stocks declined as much as the two worst bear markets (those of 1972-1974 and 2000-2002). The collapse, however, took only 14 months. The other too bear markets lasted 22 and 26 months respectively.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

An interesting day

Exciting markets.

... Stocks soared 6.47% with the S&P 500 hitting an important resistance level (see graph, click on chart to enlarge).
... Crude oil soared 9.41%.
... Gold jumped 4.02%. Is oil more precious than gold?
... Bond prices declined.
... Bank stocks leaped 7.61%.
... Regional bank stockssoared 10.94%.
... Last, but certainly not least: the dollar slumped close to 3% against all major currencies.

Do you see the pattern? A strong market accompanied by strong oil and a weak dollar with regional banks one of the star performing sectors.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Stillness

The nurse screamed. We ran upstairs. We were looking at each other as we climbed the steps. Rapidly. Anxiously. We knew the solemn time had come.

Then we all started to count in absolute silence. One, two, three, …fast. One, two, three, … not as fast. One, two, three … more slowly. One, two, three … even more slowly. We were holding hands, looking at what was happening in front of us.

Then one … two … three … It seemed an eternity. One .. two. We were waiting. Finally … three. The count resumed. Painfully slow. One …. The next count never took place.

Time stopped. The finite and infinite were in front of us. The time had stopped as we witnessed a magnificent moment. Our own very personal moment.

Gloria, the loyal Philippine nurse, closed his eyes. When people left I opened them again. He was looking at me. His eyes were still. A door into infinity in a finite world.

Finite and infinite were in front of me. Finally merged. Peacefully. In complete stillness. Shivering immobility. It was solemn and absurd. Yet true. I saw something I had never seen before. A sense of beauty and peace. A sense that something enormous was happening.

I was overwhelmed because in that brief moment I understood something exceptionally unique. Beautiful. Solemn. Universal. Through the emptiness of his eyes. I was part of it. I was in it. For a short moment, through his eyes, the gate between life and death had opened and I was allowed to stay on its threshold.

It was the last grand lesson my father honored me with as he died on September 3, 2001 at 10:06 pm. There. In front of me.

So long, Captain.

Recession monitor

Retails sales after inflation are sinking (see graph, click on chart to enlarge). Consumers are cutting spending in response to higher unemployment and the disarray in the housing market.

The weakness of the economy is good news for some asset classes (some bonds are particularly attractive) and bad news news for others (cyclical stocks striving in a strong economy).

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

The unemployment rate keeps rising, up to 6.5% (see graph, click on chart to enlarge). The trend reflects a weak labor market and recessionary times. A declining unemployment rate will signal the recession is over.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Is gold a commodity?

Make no mistake about it. Gold is a commodity and peaked at the same time as all the other commodities (the CRB on the graph does not include gold) (click on graph to enlarge). As long as the business cycle heads down, commodities will remain weak.

Commodities will strengthen when the business cycle turns up and the economy grows at an above average pace.

Gold and crude oil and interest rates (the price of the commodity money) follow the trend of all other commodities, from metals to agriculturals.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Watch the trendline

The trendline on the graph (click on graph to enlarge) will give the signal when the market turns up. The Dow will have to break on the upside the trendline. It will be the signal the market is likely to head higher in the medium-term.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Is this indicator flagging an important signal?

This momentum indicator (click on chart to enlarge) may be saying the market is entering a period of consolidation. Its trend must be confirmed by other important events.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The bureaucrats at work

The Group of 20 yesterday urged a ``broader policy response,'' citing the potential for additional interest-rate cuts and fiscal stimulus, in a statement after meeting in Washington. The group set a March deadline for recommendations on strengthening accounting standards, derivatives markets and oversight of hedge funds and debt-rating companies.

The call for an overhaul of the world financial industry indicates leaders want future expansions to be smoother than the boom and bust of this decade. A lack of any specific pledges to stimulate growth may disappoint some investors, analysts said.

Bottom line. More regulations. More words. No action. What can you expect from the people who were players in causing the problems we are enduring? What can you expect from the people who knew about the problems two years ago and ignored them?

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Energy realities from the International Energy Agency.

The prospect of accelerating declines in production at individual oilfields is adding to uncertainties. The findings of an unprecedented field-by-field analysis of the historical production trends of 800 oilfields indicate that decline rates are likely to rise significantly in the long term, from an average of 6.7% today to 8.6% in 2030.

Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline.

Bottom line. We would need to find an additional 60 million barrels per day of new oil supply in 20 years to meet global demand. It is highly unlikely that we will be able to find new supply of 60 million barrels per day in 20 years time. In light of these data the 60% decline in crude oil since June seems to offer attractive investment opportunities in selected stocks.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The second reason for our financial and economic problems: aggressive Fed tightening

The evidence suggests that we are going through this incredible crisis because of two main reasons: social engineering and Fed tightening. Yes, since 2004 the Fed has tightened aggressively to bring down inflation and harness the housing bubble. They made a huge tactical mistake and we are paying for it.

Greenspan encouraged the housing bubble by bringing interest rates down to 1% and discouraging Congress to regulate derivative products. The Fed then increased interest rates to levels high enough to cause a recession and precipitate a credit crisis.

Beginning in 2004 the Fed started tightening (click on graph to enlarge). Two things happened: interest rates went up from 1% to about 5% and the monetary base (the money banks can lend) started slowing down. Let me focus on the monetary base.

The long-term growth of the monetary base is close to 6%. This is the growth rate of stocks, GDP, profits, income, and all the major economic variables. By forcing the growth of the monetary base well below 6% from 2004 to 2007, the Fed purposely starved the economy (click on graph to enlarge). They tightened because of the fear of inflation. They forgot about a derivative bubble exacerbated by rising housing prices due to the social engineering policy of Congress. In other words, they tightened too much and for too long and at the wrong time. As they did in 1929!

So, what are they doing now? They are panicking! They are flooding the banking system with money, with the monetary base soaring at the incredible pace of close to 40%! Again, you should remember that the monetary base has grown at an average pace of about 6%. Now they are making it grow at a 40% pace, covering up a gross miscalculation. They should have stopped raising interest rates when they were 3%.

In other words, they acted as true bureaucrats. In spite of their PhDs, Nobel prizes, and academic achievements, they are reacting to the problems they created rather than attempting to anticipate them. This is the predicament of the bureaucrat. Why stick the neck out and be bold?

It is the curse of a country allowing bureaucracy to grow. The issue is not what should the ideal political system and political belief be. The issue for any country is the size and power of the bureaucrats on the payroll of the government.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

Europe's economy fell into its first recession in 15 years in the third quarter, paving the way for deeper cuts to interest rates and taxes amid the worst financial crisis since the Great Depression.

Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said today. The two quarters of contraction -- the result of this year's surges in the cost of credit, the euro and oil prices -- mark the first recession since the single currency was introduced almost a decade ago.

More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The first reason for our financial and economic problems: social engineering

This is a summary of an excellent article by R.V. Green on how social engineering created the credit crisis. The complete article can be found on briefing.com.

1. The government created the current credit problem when it wanted to ensure every American could buy a home.

2. The Glass-Steagall Act required that commercial banks hold these mortgages until maturity or the debt was repaid. The down payment was 20%.

3. Since banks were required to hold a mortgage for the duration, they were very selective. Outcome: cry for government policies to increase home ownership was a strong and powerful voice.

4. In 1938, a government agency called the Federal National Mortgage Association was created to guarantee mortgage loans by banks, so that ordinary Americans would be able to obtain home mortgages.

5. In 1968, the Federal National Mortgage Association was split into two entities. Ginnie Mae retained the role of guaranteeing mortgages issued for "special assistance programs."

6. The second was Fannie Mae, whose role was to create new mortgage capital. Fannie Mae was also "privatized" at that time. In 1981, in order to expand the capital markets for mortgages, Fannie Mae began selling mortgage backed securities, or MBS. A mortgage backed security is a pool of mortgages with roughly similar characteristics (term, interest rates, credit quality of borrowers) that is sold as a single entity.

7. To make MBS securities attractive, Fannie Mae guaranteed payment of the interest rate coupons on MBSs. This guarantee would also later become the downfall of Fannie Mae.

8. Home ownership increased from 55% of U.S. homes in 1950 to 63% in 1965 to 69% in 2006.

So what did go wrong?

• Standards for mortgage issuance declined
• MBS securities were restructured into new securities, to accommodate the riskier loans
• A sharp rise in interest rates, reversing a 20-year trend of decline
• Overbuilding of new houses, leading to pricing pressures.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Food for thought

In the 1980-1982 recession oil declined about 70% (click on chart to enlarge). This recession is probably going to be deeper. Oil could decline more than 70% from its peak, down to at least $45. This type of decline could offer interesting investment strategies and opportunities.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Welcome to the worst aspect of socialism

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Bottom line. They have the control of the purse. We do not have any say about it. Why, did you think we did?

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Interesting response of the markets

China and the rest of the world announce more stimulus plans.

The markets soar, commodities (including oil) jump, yields of long Treasury bonds rise, and the dollar sinks.

Do you see a pattern?

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

Auto sales are sinking (click on graph to enlarge) as consumers refrain from spending. This is a strong deflationary development creating solid investment opportunities.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Get ready...They are planning to print a lot of money.

Finance ministers and central bank presidents from the Group of 20, which includes wealthy and developing nations, agreed the world must work together to address the current crisis. But they approved no specific plans ahead of a meeting of G-20 heads of state set for Washington next week.

Ministers urged governments to increase spending or cut taxes as they can to help reverse an economic downturn that is expected reduce global trade next year for the first time since 1982.

Meanwhile....China unveiled a $586 billion stimulus package Sunday in its biggest move to inoculate the world's fourth-largest economy against the global financial crisis.

The Cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government's Web site said.

Bottom line.This is a great opportunity to make money! These people are not joking. They are planning to throw a lot of money at the problems they perceive. Even if they may not be problems. Just to make sure.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Money is flowing...big times!

The Fed keeps pouring money into the banking system at a very aggressive pace (click on graph to enlarge). This is good news for the financial system and the economy. Eventually.

As far as the long term is concerned, all this money is likely to create other bubbles. The stock market should be the great beneficiary of this fantastic inflow of money.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Bear market monitor

This graph shows the behavior of the major bear markets since 1950 (click on graph to enlarge).

The current bear market is the most severe in terms of price decline. It declined 40% in just 14 months. If this bear market follows the pattern of the 2002-2004 bear market, prices should stabilize and rise in the next 6 months. The market could then decline again for the next six months. Time will tell. Stay tuned.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

The unemployment rate soared to 6.5% (click on graph to enlarge). The economy is still in a recession. Is this environment creating investment opportunities? I believe so.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The US economy continues sinking

Nonfarm payroll employment fell by 240,000 in October, and the unemployment rate rose from 6.1 to 6.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.

October's drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised. Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months. In October, job losses continued in manufacturing, construction, and several service-providing industries. Health care and mining continued to add jobs.

Our leaders keep scrambling to find stimulus packages. They are still talking about them. Talk. Talk. Talk. And throwing money at any problem it surfaces from banks to auto manufacturers. Improvising.

What intrigues me is that we knew last year of a credit crisis. We knew last year that it would have affected the economy in a negative way. Yet no plans were drawn for these emergencies. In fact, a presidential candidate was running on the idea of increasing taxes. It tells you how these people live in a different world.

It shows once again that bureaucrats react to the news. They do not try to anticipate. They cannot do it. It is not in their job description.

Social engineering created this mess. The markets always win and correct in a dramatic way the policy mistakes of any country. The bigger the mistake, the bigger the correction. The ultimate example is the USSR. Given what we are enduring, the attempt to provide a house to all of us independently of our means, was not the right policy.

A restrictive Fed from 2004 to 2007 precipitated the crisis and made matters much worse than they could have been.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The global economy is in trouble

It is difficult to be optimistic these days. Every day there seems to be new bearish developments.The latest news is that the global economy is in deep trouble, as documented in detail every month in The Global Business Cycle as part of our service to clients.

The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The Global Manufacturing Index dropped to 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

The strongest stocks of the S&P 500

Financial stocks are among the strong performers (click on table to enlarge).

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Global central banks continue easing

Jean-Claude Trichet is extending the European Central Bank's powers just as it gears up for what may be the fastest round of interest-rate cuts in its 10-year history.

President Trichet has pushed the central bank's reach into the euro region's neighboring economies as they struggle to cope with the financial crisis, and has approved record lending to banks. Economists predict the ECB will slash its benchmark rate, currently at 3.75 percent, to 2.5 percent by April after reducing it for the second time in a month on Nov. 6.

Bottom line. The global central banks are aggressively easing. Good news for some assets classes, bad news for others.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Is the market too high?

In 2007 this proprietary indicator soared (click on graph to enlarge), suggesting the market had reached high risk levels. The message was quite correct.

A decline of this gauge to lower levels is a reliable signal the market has declined to a profitable entry point for the next several months.

I will discuss the behavior of this indicator in the next issue of The Peter Dag Portfolio.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

A must read!

I highly recommend you read the following by Jeremy Grantham. He is a superb observer and a successful investor. There are too many gems to be mentioned here.

Please go to http://www.gmo.com/websitecontent/JGLetter_3Q08.pdf and enjoy his perspective and wisdom! It will give you an excellent perspective on what has happened, what is happening, what will happen, and the players.

More, much more of my analysis and recommendations when you read older posts in the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Wednesday...interesting day

In a nutshell.....

*** The Fed lowers interest rates….a symbolic gesture
*** Stocks down 1%, including financials
*** The dollar weak
*** Commodities strong
*** Gold stocks very strong
*** Energy complex really strong
*** Low grade bonds very strong
*** Long term Treasuries (prices) down
*** The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore to boost the liquidity of dollars in emerging markets.

Bottom line. Money is sloshing around the globe. It is good news for some asset classes. Not for others.

More, much more of my analysis and recommendations when you read the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

After more than a year ......

....the Europeans are attempting to get organized and do something about the credit problems.

UK PM Gordon Brown and French President Nicolas Sarkozy have warned urgent action is needed to prevent the current financial malaise spreading, according to BBC news. The two leaders were meeting in France.

Mr Brown said the first priority was "to stop the contagion to other countries, including in eastern Europe" where there were "problems emerging".

He said the IMF would have to create a new fund to help struggling nations.

And Mr Sarkozy also wants a crisis fund for EU member states expanded from 12bn euros ($15bn;£9.6bn) to 20bn euros.

My thought is that the Europeans still need to be convinced that this is not only America's problem. The also needed to be convinced that terrorism was a global issue after 9/11. Not just an American event.

More, much more of my analysis and recommendations when you read the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Tuesday's markets

Wow! Will it last? Let's hope so. This is what happened today.

*** Stocks were very strong. Wonderful! The market did in one day what it used to do over one year in the good old days. Times have changed. Or did they?

*** The dollar was mixed. Surprising. Probably not for my readers.

*** Commodities were strong across the board. Crude oil and gold included.

*** Long bonds (Treasuries) were weak.

*** Low grade bonds were weak.

*** Sectors performing well in a weak economy soared.

Bottom line. A great day. It needs confirmation.

More, much more of my analysis and recommendations when you review the blog archive and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

What to do if this is the bottom?

Remember the lessons of past if your do not want to repeat the same errors.

What goes up fast, will come down fast!

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Recession monitor

Weekly hours worked has been declining (click on graph to enlarge). This is what happens during a recession.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

This is the problem with big governments...favoritism!

Money is going to pour on the world problems! Get ready for the next bubble.

Asian and European leaders said Saturday they have reached a broad consensus on ways to deal with the global financial meltdown and will present their views at a crisis summit next month in Washington.

"I'm pleased to confirm a shared determination and commitment of Europe and Asia to work together," EU Commission President Jose Barroso said at a closing news conference.

Meanwhile in our USA ......

First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.

Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.

There is a big party going on in Whashington. Enjoy! Money is dropping from the sky. I mean .... our pockets.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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

Investment ideas and guidelines

I like to learn from my investment experiences. I asked myself: What did I do right and, above all, where did I fail? What happened in the past 17 months offers thought provoking lessons. Listening to my friends is a privilege. Their ideas and plans are eye-openers. Each one follows different approaches. These experiences can be condensed as follows.

1. Have a short list of stocks. A short list of stocks in your portfolio makes the management task easier. 15 stocks or 5 ETFs should be enough. Refrain from adding positions just because a friend gives you a special insight. Every time you feel like you have to buy a stock, check it against your existing portfolio. Which one should you sell if you decide to buy the latest suggestion?

2. Diversification is bad. Too many stocks across many sectors will make your portfolio perform like the averages. If you feel you have to diversify, make your life simple. Just buy the S&P 500 (SPY). However, if you want to outperform the market, follow a selective strategy. Use only 2-3 investment themes. This approach will keep your list of stocks from becoming unmanageable.

3. Long-term investing is grossly misunderstood. In October 2008, the market is at the same levels as May 2002 and February 1998. In 1982 the market was almost at the same levels as in 1969. Long-term investing is great only when you look at history, but it does not exist. If you enter one of those long periods of market stagnation, you are bound to have a portfolio showing little or no returns. You have to believe an important tenet: things do not last forever. John Maynard Keynes once said: In the long term, we are all dead.

4. You need a timing model. Market timing models are imperfect, but they provide a sense of risk. They are important and there is no excuse for not using them. The main issue is that market risk changes and your portfolio has to reflect changes in risk.

5. The business cycle works. The global business cycle is perfectly synchronized. All foreign stock markets have the same turning points at major tops or bottoms. A corollary is that when you buy emerging foreign markets you buy volatility. When you buy foreign illiquid markets, the performance of your portfolio becomes highly unpredictable because of its volatility.

6. Choose your investment wisely. You cannot ignore the crucial relationship existing between asset classes and business cycle. Commodity driven stocks (materials, energy, agriculturals, infrastructure, transportation) strive in a strengthening economy, not in a slowing business cycle. Interest sensitive sectors perform well when the economy weakens and grows below par. Your portfolio needs to reflect business cycle developments. In other words, your portfolio has to reflect changes in risk and changes in the business cycle.

7. Momentum works. The odds favor a strong sector to remain strong and a weak sector to remain weak as long as economic conditions do not change. Changes in business cycle conditions change the momentum of stocks. Choose stocks in strong sectors. Rising water lifts all boats and minimizes the odds of being wrong.

8. Do not try to catch a falling knife. Do not even think to buy a stock on a free fall. It is financial suicide. Buy stocks that go up, not down.

9. Hedging your portfolio. The introduction of “short” ETFs such as SH, PSQ, or DOG allow you to hedge your portfolio and make it less volatile. Avoid the “ultra” short. They are too volatile. Leave them to the gamblers.

10. Investment strategy. Act slowly, but act. Inaction will produce losses and profound pain in a down market.

11. Does it sound too complicated? If all these thoughts sound complicated, you should buy TIPS (inflation-protected bonds) from the Treasury by accessing their website www.treasurydirect.gov. You will avoid frustrating and time-consuming work and will gain peace of mind.

More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.

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