Back from sailing and....

It was fun. Strong winds in the 25-30 kts range. My Sabre 38 handled them quite nicely. The cool temperature made the winds a bit heavier than usual, however.

Anyway, now I am back. What is the first thing that captured my attention?

Yields on Treasury bonds have been rising steadily since March. This is the kind of development the market sooner or later pays attention to.

The good news? Financial risk is receding.

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

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

About shortages

Nonsense.

How can we have shortages in just about everything? Oil. Gas. Aluminum. Steel. Wheat. Corn. Soybeans. Scrap steel.

The real reason is cheap money! Short-term interest rates should be close to 7% with the current inflation rate of 4%. But the economy would collapse. The reason is that there are major structural weaknesses in our system.

Cheap money is debasing our currency. Foreign investors are hoarding commodities (priced in dollar) at a discount.

A strong dollar will end all the shortages!

More, much more if you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

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

...and now a few relaxing days

I have a nice sailboat, a Sabre 38, in Annapolis. In a few hours I am going there.

Sailing and cruising the Bay is a wonderful way to forget financial crises, market exuberance, volatility, financial risk.

Just in case, however, I am going to take the phone with me -- my umbilical cord.

Have a nice Memorial Day week-end.

George

Observations

Election times. The media are bombarding us with the candidates’ ideas on how to resolve most of our problems. They have great strategies to solve the credit crisis, to protect us from defaults and foreclosures, to eliminate social and economic differences, to make us healthy with first class health care, increase our income, stop the dollar debacle, and provide us with a great retirement.

Do you believe them? Who has the better chance of delivering what no politician could ever accomplish? It is the fault of my party. No, it is the fault of your party.

As I keep reading the worldly philosophers and digging into my personal experiences, I have to conclude that everything we talk about is futile unless we focus on one major issue.

The philosophers’ contribution is to propose an ideal system. Rousseau, Sartre, and Marx (among others) told us we are equal and we should live happily as a group.
The French revolution tried to institutionalize Rousseau’s ideas. But the tribal instinct of men took over and massacres ensued. Until Napoleon, the Emperor, took control and brought peace.

Workers should be treated with justice. Marx also had great ideas on how to achieve this feat. But Lenin and Stalin got into the picture and bastardized Marx’s ideas to extremes. You know the results -- human misery.

My point. Elegant and convincing social schemes, as for instance the French and the Russian revolutions, are debased by men because of their personal interests and drive to achieve power. Power, the ultimate goal.

The solution of this dilemma is provided by a small and great country: Switzerland. The solution: above average education. Educated citizens perform miracles as in Switzerland, a country with no resources. Yet, it is one of the wealthiest in the world!

Governments have to empower their citizens with the knowledge and decision process capabilities to be able to stand on their own feet. Give them the tools to accomplish. Not to receive handouts. Build their will to be and remain independent.

More, much more if you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

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

Industrial materials are going nowhere

The business cycle has a strong impact on commodities.

Slower growth in business activity reduces demand for goods. Producers reduce demand for raw materials because they have to produce fewer products. The outcome is stable or lower raw material prices.

Raw industrial commodities have been weak since February in response of slow economic growth (see above graph, click to enlarge).

Commodities seem to be behaving like in all previous business cycles.

More, much more if you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

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

Oops!

I have been bullish since February because of two reasons.

One. My indicators turned up telling me the market would rise for a few months. And they were right.

Two. Financial risk (our proprietary indicator) started declining.

The problem is that financial risk has stopped heading lower in the past several days. And the market did not like it. So, I am watching this trend very closely. Stocks may go nowhere if financial risk keeps rising.

More, much more if you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

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

The message of the markets

Today oil is soaring to $129. Airline stocks tumbled. Railroad stocks are one of the strongest sectors.

It does not take much to understand that our energy policy should be directed toward developing new modes of transportation such as train who can be propelled with electric energy generated by inexpensive nuclear reactors.

The markets always win.

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

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

Did you notice......?

Did you notice that the market and bank stocks are weak when oil and energy stocks soar?

When oil and energy stocks are weak, on the other hand, the market and bank stocks are strong.

This relationship should give you some ideas on how to structure your portfolio.

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

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

Financial crises are bullish for stocks (cont'd)

In the issue of 2/18/08 of my The Peter Dag Portfolio I wrote the market had bottomed. Our proprietary indicators were pointing up.

In this space I wrote several times that financial crises are bullish for stocks. I was right.

Why? Because our leaders are there to protect the system. If the system gets into trouble they have to make sure things do not get out of hand. The system needs to be lubricated.

How? By printing money and lend it to those who need it.

So? All this money eventually is parked in equities before being used in the real economy. Until then stocks are bound to rise.

Again, financial crises are great for stocks. And we are seeing what I predicted. Enjoy!

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

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

Investment volatility reduces returns

If you are chasing a volatile investment you are bound to under perform the investments with lower volatility.

Why? The common sense way to understand this is that high volatility investments increase risk and make returns less reliable. In other words, the risk adjusted returns decrease with the increase in volatility.

Another way to see this point -- it is difficult to find the correct entry or exit level in a volatile investment.

A practical application. If you believe the market is going to go down, short the market by buying SH and not SDS (the ultra short ETF).

High market volatility, on the other hand, is a sign investors are panicking and could be a great buy point.

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

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

Diversification does not work

If you diversify, you are bound to perform like an index. So, do not waste your time (and money) and just buy a stock index like SPY.

If you want to outperform the market (on a risk adjusted basis), you have to focus on specific investment ideas. I use three steps.

1. Market timing indicators over the intermediate term (6 months).

2. Sector selection based on economic conditions (yield curve, real interest rates, strength of the economy, position of the business cycle, and financial risk).

3. Invest in the strongest stocks of a given sector.

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

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

Bullish news

Our proprietary indicators are pointing to lower "financial risk".

This is good news for the financial markets and for the economy.

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

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

Sunspots and world climate

The output of the Sun (sunspots count) is the primary controller of climate on the Earth.

Solar scientists predict that, by 2020, the sun will be starting into its weakest Schwabe solar cycle of the past two centuries, likely leading to unusually cool conditions on Earth. Beginning to plan for adaptation to such a cool period, one which may continue well beyond one 11-year cycle, as did the Little Ice Age, should be a priority for governments.

It is global cooling, not warming, that is the major climate threat to the world.

For more info go to: http://capnbob.us/blog/2006/08/23/correlating-sunspots-to-global-climate/ or just Google "sunspots and world climate".

My point. There is so much nonsense going on and unfortunately we believe it. This evidence seems overwhelming.

Investment opportunity? Coal and any energy sources.

George Dagnino, PhD

Observations

I was sitting in the cockpit of my boat, resting after doing many little chores to get her ready for the sailing season. They are all important and they all need to be done.

Time flows at a different pace at the marina, almost in slow motion. It allows you to think about many things away from the pressure of the markets.
Why do we do what we do? We have many choices, of course. But we end up doing things that we may not like.

Two people walked on the dock. We began talking. The first one lives on his boat close to mine. He is a retired businessman. Satellite TV and wireless computer connect him to the world.

He was also working on his boat. Planning to go somewhere? Yes, Bermuda. Perhaps for a few months and then he will come back.The second gentleman, the executive type, sails in the Bahamas in winter. He comes north in summer and works at a marina.

I told him I envied him. Just do it, he answered. Time flies. Do it before it is too late.

These chats, sipping a cup of hot coffee early in the morning watching the sun rise, made me think about choices and how we decide what we do.

Often we complain about what is happening to us. We should be taking some action, but we fall asleep at the wheel. We exclude all the alternatives because we are comfortable with what we have. It is about security.

I watch SNS closely. His life is about doing new things. New projects. He solves the problems as they present themselves. Just do it. Simple words implying staying at ease with risk-taking. But it is not only risk-taking. You need to have an unlimited passion for what you do. My passion is navigating the financial markets.
Passion and risk-taking give you the adrenaline rush that makes you look forward to the next day, with all its uncertainties and challenges. It is like going sailing to Bermuda or the Bahamas. It depends on you. Just do it.

George Dagnino, PhD

Globalization.....now what?

We have been talking about globalization for years. Now we are in the midst of it.

We did not prepare for it. We are confused and asking ourselves what is going on. It is quite simple: we are not ready for it. So, we find excuses and some think about protectionism.

Nonsense. We have to fight back. How? We need leadership.

Hello, is there a leader out there? This is our real problem.

Meanwhile, the Fed keeps easing. But easy money does not solve our competitive position.

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

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

The sectors most likely to outperform

Recent surveys show that analysts expect technology, health care, and financials to be the star performers in the next 6-12 months.

Our indicators, which have been quite correct since February, are still showing the green light.

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

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

Bubbles and big governments

Being raised in Italy, I have first hand knowledge of the damage created by big governments. Italy is collapsing. Spain, with the same malaise as Italy, is following the same path. France is also in trouble.

Our housing bubble was caused by big government and an amazing network of regulations and agencies. And yes, by cheap money.

This is what Ron Paul writes. "The House passed two bills attempting to rehabilitate the housing and mortgage market this week. There doesn't seem to be any shortage of criticism and blame for the bad decisions, and rightly so. Lenders and banks do share much of the blame for the overheated market.Lending standards were relaxed, or even abandoned altogether, creating an exaggerated pool of home buyers that led to ballooning home prices that many, especially real estate investors, expected to continue forever. Now that the bubble has burst, the losses are staggering."

"However, many in Washington fail to realize it was government intervention that brought on the current economic malaise in the first place. The Federal Reserve's artificially low interest rates created the loose, easy credit that ignited a voracious appetite in the banks for borrowers. People made these lending and buying decisions based on market conditions that were wildly manipulated by government. But part of sound financial management should be recognizing untenable or falsified economic conditions and adjusting risk accordingly. Many banks failed to do that and are now looking to taxpayers to pick up the pieces. This is wrong-headed and unfair, but Congress is attempting to do it anyway."

My point. Big governments create problems and then they become even bigger as they attempt to solve the problems they created. This is the lesson of history.

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

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

About foreign investments and sovereign wealth funds

Research shows the foreign-owned firms in the United States employ 4.5% of the work force and account for 5.7% of output, 19% of US exports, 13% of research-and-development spending, and 19% of all US investment in plant and equipment.

These firms also pay more than 30% higher compensation (wages and benefits) on average than do their counterparts in the rest of the US economy. And 30% of these jobs are in manufacturing, compared with fewer than 10% of all US jobs (source: Foreign Affairs).

In other words, foreign investment has contributed to improving our overall productivity and thus to rising US living standards.

The biggest threat to us is protectionism.

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

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

About food prices and commodities in general

It is the same old story. When everybody worries about something it is always too late.

As I mentioned in space over and over again, commodity prices rise because of cheap money and a strong economy.

Commodity prices decline following weak economic conditions.

The US economy has shown little or no growth in the past 6 months. The outcome is that commodities are beginning to show signs of fatigue as shown in the above graph (click to enlarge). Including grains and oilseeed.

The slow economy will place a cap on commodities for several months. This is good news for the consumer because inflation will abate thus increasing our purchasing power.

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

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

Financial crises are good news for the market

The reason is that our leaders, who were asleep at the wheel when the current crisis was brewing, are forced to remedy the situation.

How? The only way they know. They print money. And money is good news for Wall Street (as I have been saying for some time in this space.)

Here we go again.

The Federal Reserve, seeking to prevent a deeper economic slowdown, took another stab at coaxing banks into lending at lower rates.

The Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50 percent to $75 billion and expanded the collateral it takes from bond dealers through loans of Treasury securities. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.

This is the reason the market is going up, while the crowd worries.

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

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

About food shortages

Nonsense. All commodity prices are going up. There is no shortage of land as there was no shortage of land last year.

All commodity prices are rising from wheat to copper, steel, oil, burlap, and just about anything. They are all rising at the same time and at the same relentless pace.

The experts are busy trying to explain this trend because of shortage of capacity. How can we have shortage of capacity when the economy is not growing for the past 6 months and the global economy is slowing down?

Nonsense. Al commodities are going up because of the bad policies of the US. The outcome of these policies is a sagging dollar and soaring commodities (the other side of the coin).

We have had two very poor leaders at the Fed. They have been late in recognizing the problems and agreed that the only way out of difficulties is cheap money.

But cheap money creates inflation.

Rising inflation has caused a recession. Lower commodities will follow the recession. And the commodity experts will be out of business as the populace becomes worried about something else.

Then, as in 2002, some will start talking about deflation.

And the business cycle and its consequences will be repeating on and on (please read my book Profiting in Bull or Bear Markets for details or subscribe to my service), keeping the experts busy on why we have commodity booms and busts.

When everything fails, they will bring up China.

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

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

The business cycle works like clockwork

This is what our work on the business cycle shows.

Slower growth in business activity is followed by lower short-term interest rates and declining commodities (energy, metals, foodstuff, ….) .

Why? Because weakness in the economy reduces demand for money and for commodities.

This is what is happening right now.

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

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