Something new is brewing

The influx of vast sums of money to accumulate long positions in the commodity markets is representative of hoarding and may constitute the making of a "market corner." This is effectively what the Pimco Commodity Real Return Strategy Fund (PCRAX) and other long-only index funds like it are doing.

Inadvertently, each time retail or institutional investors invest in a long-only commodity-linked vehicle, they have actually created additional demand for that commodity, driving up the price of that commodity to be delivered in the future, in the same manner that additional demand for the immediate delivery of the physical commodity drives up the price on the spot market.

How? As far as the market is concerned, the demand for the physical commodity that results from the purchase of a futures contract by a speculator is just as real as the demand for the physical commodity that results from the purchase of a futures contract by a commercial buyer or other user of the commodity.(Source: safehaven.com)

In others words: are there enough physical commodities to meet the demand generated by the long future contracts?

Wow!

More, much more on https://www.peterdag.com/.

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

On commodities

Commodities have resumed their relentless rise following the March correction. The reason natural gas, gold, food, long-term interest rates, metals, burlap or any other commodity you can think of are rising is because of cheap money.

There are no shortages for the same reason there were no shortages last year.

Cheap money is the main culprit.

More, much more on https://www.peterdag.com/.

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

A different viewpoint

Malpass Says U.S. Economy Is at `Beginning' of Recovery -- April 23 (Bloomberg).

David Malpass, chief economist at Bear Stearns & Co., talks with Bloomberg's Tom Keene in New York about the outlook for the U.S. economy, global central bank monetary policies, and the link between currencies and gold and rice prices.

Malpass is bullish on the economy.

Please go to http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vgme4sa4eZE0.asf to listen to a very interesting conversation.

More, much more on https://www.peterdag.com/.

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

Commodities

Are commodities (and I mean all of them) headed up or down?

One view is that the slow global economic growth will reduce demand for all commodities. The outcome is lower commodities.

Another view is that money is cheap. Interest rates are well below inflation. Cheap money, therefore, will drive commodities higher.

A third view is that commodities will decline in the near term (say, in the next six months) because of the slow economy, but eventually will head higher because of the current low real interest rates.

More, much more on https://www.peterdag.com/.

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

About the job of central banks

There seems to be a consensus that central banks should do many things: keep the economy growing, keep inflation low, keep unemployment low, keep a watchful eye on asset prices .....

My view? Nonsense. What they should not do is to keep interest rates too low. They should set short-term interest rates at close to 1.5 times inflation (or 5%-6%). Let the rest of us figure out how to cope with them.

Low interest rates relative to inflation create asset bubbles. Central banks are the main culprit.

More, much more on https://www.peterdag.com/.

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

Remember why you make an investment decision

Why do you make an investment? What are the reasons you decided to invest in a stock?

It is crucial you have a solid answer to these questions. If you know why you are buying, you also have identified why and when you should sell.

Let me give an example. Let’s say you decide to buy financial stocks when the economy is slow, short-term interest rates are declining or have stabilized after falling for several months, and financial risk is declining.

These are solid reasons why you should buy financial stocks. They also alert you when you should reduce your exposure to financial stocks. You have to consider selling financial stocks when the economy strengthens, short-term interest rates are rising, and financial risk deteriorates.

These reasons may not be perfect, but they guide you in establishing your investment strategy. In time, you will improve them and become more reliable.

More, much more on https://www.peterdag.com/.

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

Forcing dreams down our throat ... and creating a mess in the process

The government convinced us the American dream was to own a house. They were so convinced that it has orchestrated to sell houses even to those who cannot afford it, thus creating a mess.

We do not need the government to intervene in our dreams.

It is like our “love affair” with the car.

Nonsense. We need sound public transportation to solve our energy problems, which have been created in the pursuit of our “love affair” (blessed by the auto industry).

The government should convince us that one of our “dreams” should be to ride a cost efficient fast train.

More, much more on https://www.peterdag.com/.

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

Financial risk is declining

Our proprietary measure of financial risk has been declining in the last few weeks. The Fed seems to have stabilized the markets, at least for the time being.

The decline in financial risk is very positive for the financial markets and bank stocks (among others).

Real interest rates, meanwhile, remain unusually low, favoring very specific sectors and asset classes.

More, much more on https://www.peterdag.com/.

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

The Europeans keep quoting oil in US Dollars. It does not make any sense.

European newspapers keep quoting oil in US Dollars. It does not make any sense.

Oil is up about 57% in US Dollars since early 2007. So, they panic. It is stupid!

Their currency is the Euro, which appreciated about 30% relative to the US Dollars in the same period. It does not take a genius to figure out that oil in Euros is up only 27% in the same period.

I agree, it is a big rise, but certainly not as much as for us US citizens owning the US Dollar.

By the way, this is one of the many advantages of having a strong currency like the Euro. Commodities costs much less in Euros because commodities are quoted in US Dollars.

More, much more on https://www.peterdag.com/.

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

Pessimism is rampant

Investment advisors are very bearish according to the latest data released by Investors Intelligence. Unusually bearish. The most bearish they have been at least since 1996.

This bearishness is bullish, in my humble opinion. Why? Because it is a historical fact that there cannot be so many people right at any point in time.

Do no despair. Keep your eye on the ball. The risk is being left behind the next move...on the upside, of course.

When? Our proprietary indicators will give us the green light.

More, much more on https://www.peterdag.com/.

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

Do we need the Fed?

This is an excerpt from an article in Barron's by M. Mayer, guest scholar at the Brookings Institution and author of numerous books about finance and banking on April 14, 2008.

The truth is that the Fed had plenty of authority to take the steps that would have avoided today's dangers and its own embarrassments. The problem was that the Fed lacked the will to supervise. Before we can restore the self-confidence of the market, we will need to create a Federal reserve that believes in its own regulatory mission more than it believes in prudence at the banks.

It is a classic. When the bureaucracy fails it seeks more power (and more people and more money) to get the job done. This is what is happening right now as proposals are submitted in Congress to take care of future problems. This is how power is transferred from the people to a few bureaucrats.

The country has a financial problem because the authorities were asleep at the wheel.

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

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

What you did not know about the dollar and were too afraid to ask!

Nonsense. Nonsense. Nonsense.

The President and the Treasury Secretary are criticized for not speaking more forcefully in favor of a strong dollar. Other pundits pontificate in various media making us believe our low interest rates are the cause of the weak dollar.

Nonsense. In the 1970s Brazil had the highest interest rates in the world. Yet, its currency was falling apart. In the same decade, the USA had interest rates rising at much higher levels than Germany and Japan. Yet, the dollar collapsed against the Yen and D-Mark.

I was fortunate to grow up and finish my master studies in Italy. In those days the Swiss, the Germans, and the Dutch had very strong currencies against the Italian Lira. Their cars were bigger and the Italian government was giving them special coupons to buy gas at their home price, not at the outrageously expensive Italian prices.

It was not difficult for me to learn that a country with a strong currency is a wealthy country. No doubt about it.

The dollar has been in a downtrend since 2002. Why? Because there is more demand for non-US Dollar denominated goods and services than US Dollar ones.

Since 2004, exports of emerging economies among themselves increased a steady 22% per year. Exports to the USA slowed from 23% to 5%, according to The Economist.

Developing nations, in other words, are learning to live without the USA.

Technology is easily transferable if you have the money to buy it. The steady decline of the dollar is a strong indication that we are becoming a lesser player in world trade as the rest of the world raises its standard of living.

A currency reflects the productivity differential between two trading areas. Our politicians are ignoring this. We have to produce goods with the quality and performance required by our foreign partners. The decline of the dollar reflects our failure to achieve this endeavor. A strong currency is a challenging feat in a global market. You just do not "talk it up".

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

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

The Fed is too tight

The Fed is lending money to institutions in financial difficulty.

Then, they turn around and sell Treasury bonds and drain reserves form the banking system. The outcome is that the monetary base has been growing very slowly (see graph).

The point is the Fed is much tighter than generally believed. The monetary base should be expanding at a pace close to 6%-7% y/y (its long-term average growth -- see graph) instead of the recent 1.5% y/y.

They should add much more liquidity to the banking system, not just give a helping hand to institutions with problems.

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

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

Two Fed chairmen under attack

Paul Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben Bernanke, for toeing "the very edge" of the bank's legal authority in orchestrating the bailout last month of the beleaguered investment bank Bear Stearns.

"Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank," Volcker said a speech on Tuesday to members of the Economic Club of New York.

His remarks came on the same day that Alan Greenspan, Bernanke's immediate predecessor as chairman, deflected criticism of his tenure, dismissing as "unfair" claims that his policies stoked an untenable housing bubble.

What is going on? Are our financial leaders capable of tackling the many issues facing the financial markets? Are they part of the problem?

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

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

What is troubling America? Read this one!!!

Please read the testimony of Bill Gates before the Committee on Science and Technology, U.S. House of Representatives. The address is
http://www.microsoft.com/Presspass/exec/billg/speeches/2008/congress.mspx

We need to wake up. We need to recognize the importance of science and engineering.

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

A late Sunday afternoon thought

I just checked the dollar. It is strong against all major currencies.

So, I asked myself: what asset classes will perform best if the dollar keeps strengthening?

My guess is that financial stocks will be strong. Why? A stronger dollar is a sign the international community is more comfortable with what is going on in our financial system. In other words, it is a sign the worst of the credit crisis is over.

It is just an educated guess. We will see.

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

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

Bullish for the market

(Bloomberg) -- New York Federal Reserve Bank President Timothy Geithner said capital markets are still ``substantially impaired'' and policy makers and financial industry leaders must ``act forcefully'' to stem the crisis.

``What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises,'' Geithner said in testimony to the Senate Banking Committee. He cited ``a self-reinforcing downward spiral'' of asset sales, ``higher volatility, and still lower prices.''

The Fed is scared. They will have to continue to add liquidity. And increased liquidity is bullish for the market.

In an environment of low real interest rates, however, some market sectors will be stronger than others.

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

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

The markets always win

(Bloomberg) -- Federal Reserve officials signaled the central bank will keep lowering interest rates because financial markets remain distressed even after the fastest reduction of borrowing costs in two decades.

Fed Chairman Ben S. Bernanke told lawmakers yesterday that the central bank is ``ready to respond to whatever situation evolves,'' and cited ``considerable stress'' in markets. New York Fed President Timothy Geithner said policy makers must ``continue to act forcefully.''

The weak economy (not the Fed) has forced the rate of 13-week Treasury bills down to 1.34%. The Fed target rate is still 2.25%. It is still too high relative to market rates. It will have to come down to 1.5%.

The markets always win!

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

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

The road to bigger governemnt

The Foreclosure Prevention Act, is a proposal by Representative Barney Frank and Senator Christopher Dodd to expand government mortgage guarantees and the Federal Reserve-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co. Senate leaders agreed on April 2 on the legislation aimed at curbing home foreclosures, dropping a provision that would have allowed judges to alter mortgages for borrowers in bankruptcy proceedings. (Source: Bloomberg)

Every crisis is an opportunity for the government to intervene. There is nothing wrong with this idea. The objective is to protect the economy.

The problem is new legislation and regulations are added to old ones. New agencies are added to improve the level of protection that this great country deserves. Old and anachronistic agencies, however, keep staying.

It is in the nature of governments to get bigger and bigger. Let's hope someone in Washington recognizes the risk.

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

Interesting market today

The market is flat, but some sectors are very strong.

These sectors are strongly correlated to cheap money. Cheap money, as measured by low short-term interest rates relative to inflation, is driving stocks that benefit from a cheap dollar and higher inflation.

The strength in gold is a strong message that our problems are far from over. Th strength of gold reflects our loss of purchasing power. Other sectors behaving like gold stocks and providing a generous dividend offer protection from a weak dollar.

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

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

Factors driving your investment strategy .... now

These are the most important developments that should drive your investment strategy.

1. A slow economy.

2. Low interest rates because of the slow economy.

3. Declining financial risk because of the aggressive action of the Fed.

4. Inflationary bias because of low interest rates relative to inflation, now close to 4%.

Only a few sectors will shine in this environment and will outperform the broad market as they did beginning in 2003-2004.

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

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

A new trend?

Commodities have been weak in the past few weeks.

Is this the beginning of a new trend? Is the weaker global economy forcing commodities down?

It is too early to say whether this is a new trend or not. The trend of the dollar, however, is inversely related to the trend of commodities. And the dollar is still weak against all major currencies.

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

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