The markets. What are they telling us?

I always maintained, here and elsewhere, that the momentous decline of the dollar since 2004 has a deep and tragic significance for our country.

Being born in a country with a chronic weak currency, I know the message reflected by a weak currency. This is why I consistently wrote that the prolonged weakness of the dollar is reflecting major changes in our lifestyle.

The financial markets are now catching up with what has been anticipated by the dollar. Our standard of living will be impaired as we learn to deal with an aggressive and hungry international market. Globalization is here. Now we have to get organized to deal with it.

We need a leader who is going to explain to the nation what is really happening and what we should do to overcome these challenges. The alternative is an unhappy and confused country trying to understand what should be done.

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

The meaning of regulations

Regulations are the transfer of power from the markets to the bureaucracy.

Regulations give us peace of mind. But they take away our freedoms.

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

Afraid of the market?

A way to protect your portfolio is to keep the strong "long" position and use the extra cash to go "short". In this way you protect the long position in case the market goes down because you make money with the short position.

The ETFs provide a simple way to implement this strategy. I recommend not to use the so-called ultra-short. These ETFs rise or decline twice as fast as the market. Too much risk for my taste.

A partial list of simple inverse ETFs: PSQ, SH, DOG, MYY, RWM, and SBB. Choose those with the highest volume so it is easy to get in or out of a position.

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

Government deficits and oil prices

From the Financial Times......"For decades Washington has seen oil as an issue of national security, worrying that a rogue Middle East country would withhold America’s lifeblood as Arab countries did during the 1973 oil embargo.

Now US and European politicians are linking oil – and record food prices – to a new international strategic threat: instability in developing countries.

During the past few weeks senior officials have quietly begun to shift their emphasis of the fuel and food crisis from viewing it as purely a humanitarian and social problem to a concern that governments could fall as hungry and fuel-deprived people take their anger to the streets."

Our leaders should concentrate more on the level of government spending and the easy monetary policy central banks are forced to follow to finance these deficits. This is what is creating soaring commodities and rising inflation around the world.

The politicians are saying: It's not us, it's their fault. Shame!

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

A trading tip

Buy the trend "that is". Not the trend "you hope".

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

Europe does not want Europe

That's right. The Europeans do not want Europe. The last "No" vote came from the Irish.

The Europeans are dissatisfied with their leaders who, incidentally, have not been voted to lead them.

The European "democratic socialism" cannot work on a Continent-wide basis. Too many vested interests. Too many cultures. Too many languages. Too many tax systems. Too many productivity levels.

Europe cannot function the way it is. I have been saying this for several years.

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

Observations

Meditating is a way to escape. A form of meditation is trying to focus on a mental puzzle (koan) as one sits quietly. Example of a koan: What is the sound of one hand clapping?
Another example. A man walking in the countryside is suddenly confronted with a tiger. He starts running, trying to escape for his dear life. But the tiger keeps coming at him.
Suddenly the man finds himself on the border of a precipice with no escape. Luckily he notices a vine going down the rocks and he grabs it as quickly as possible and starts his descent while the tiger is firmly in place above him. So the man starts his descent.
But no sooner he looks down that he notices another tiger waiting for him under the vine. Bewildered he stops his descent. A tiger on top, a tiger below. What can he do? Terrified he looks up and realizes the vine is slowly breaking up.
What are his options? The vine will eventually break and he will end up being eaten by the tiger below.
In desperate terror he looks around but the only thing he notices is a wild strawberry growing against the wall … lush and ripe. So holding himself with one hand, he reaches for the strawberry, gets it, and calmly eats it.
Now stop reading. What is the point of this koan? What is the lesson?
The lesson is simple. We tend to worry about everything surrounding us. We are prone to recognize the risks of daily events and worry about their implications. We should not, and when everything around us seems to fall apart, well….we should eat a strawberry.
It is an interesting answer. The problem I have is that we cannot put aside the complications of our lives. What keeps us mentally young is what Nietzsche calls “the will to power”. It is about our motivation to achieve, to overcome obstacles, to keep our brain challenged by pleasant and unpleasant happenings. Eating the strawberry should be a reward, not an escape.

George Dagnino

An investment scenario for summer

This is a possible investment scenario for the next several months. It is based on two strong believes I have. The first one is that the markets always win. The second: the business cycle is alive and well and keeps driving all asset classes.

1. Weak economy.
2. Weak commodities... but not too weak.
3. Friendlier news on inflation...eventually.
4. Lower long-term interest rates and strong bonds.
5. Sputtering stock market.
6. The dollar will go nowhere.

This is one of the scenarios I am considering as the financial system continues to heal. The main idea, however, is that low interest rates create opportunities.

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

The markets always win

China, the world's second-biggest oil consumer, will raise gasoline and diesel prices by at least 17 percent as of today and increase power tariffs to rein in energy consumption and slow the economy.

Gasoline will increase 17 percent to 6,980 yuan ($1,015) a metric ton from 5,980 yuan, diesel will rise 18 percent to 6,520 yuan and jet fuel will climb by 1,500 yuan, or 25 percent, to 7,450 yuan, the National Development and Reform Commission said on its Web site yesterday. On July 1, China will boost electricity prices by an average 0.025 yuan a kilowatt-hour and cap thermal coal prices until the end of this year.

The bottom line. The markets always win. The Chinese bureaucrats had to let prices rise to discourage Chinese to consume gas.

The business cycle is alive and well even in China. Let prices rise. Let the market discourage the usage of goods and let the market place downward pressure on prices.

It is happening in the old USA and in China as well.

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

The next move in interest rates? (cont'd)

Financial stocks sagged today. Add this to the list of bear news. The financial markets are far from stabilizing. The last thing they need is higher interest rates.

Time to buy long-term Treasury bonds?

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

The next move in interest rates?

It already happened. In the past two weeks yields on the 2-year T. bond soared 40 basis points. Longer term interest rate also rose.

Global yields spiked as central banks talk a lot about inflation. That's the only thing they know how to do effectively -- talk.

Housing prices are falling.
The unemployment rate is rising.
Non-residential investment is slowing.
Business confidence is slumping.
The U.S. auto industry is dead.
State and local governments are cutting back.
Bank credit has been falling since March.
The Fed's monetary base is barely growing in nominal terms.

This is not what happens before a big rise in market-driven interest rates. Quite the opposite. This is what happens when interest rates head lower. The markets always win and they have spoken. They are telling the Fed to stop spooking them.

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

When you do not know who to blame....

.....blame the Fed.

They are helpless and they know it. They are just trying to justify their inflated role with pomposity.

As I will show in my next issue (I "borrowed" the concept from a very smart money manager-Dr. Hussman), inflation is closely related to government spending.

The Fed's job is just to print enough money to keep the banking system solvent. No more. No less.

We needed a god of finance. And we created it.

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

Is inflation raising again its ugly head?

Unbelievable. The market is rejoicing this morning because "core inflation" is meeting expectations. In other words, inflation is up only 2.3% y/y if you exclude food and energy.

If you dig deep into the BLS release, however, you will find that in the past 3 months (at annual rate) inflation increased 4.9%, food and beverages up 5.9%, housing up 4.9%, transportation up 8.7%, education up 4.2%, energy up 28.2%, and food up 6.2%. The pleasant surprise -- medical costs were up just 1.2%.

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

Challenging news for the market

The market cannot strengthen without a robust financial sector.

Weak financial stocks are telegraphing the idea that conditions are not right for a major move for the stock market.

The dollar remains also an obstacle. Its multi-year decline suggests we are going through a major change. We are becoming a much different country.

We are facing an interesting period. More populist policies, less leverage, much poorer with our assets and purchasing power devastated by soaring inflation (oil and food), declining asset values (homes), and competition from aggressive, emerging, and large countries and educated young people.

How will we react? What will our pro-growth policies be? Or will we continue to focus on social issues?

A tough choice made by a population that it does not have a grasp yet of what is really happening. Will our leaders be willing to lead?

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

Make no mistake about it

The huge run up in oil and the disgraceful weakness of the dollar are caused by cheap money.

Short-term interest rates should be close to 6%. Instead they are below 2% (13-week Treasury bills). This is the main reason for the mess we have in our hands.

Cheap money does it every time!

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

Best sectors

The best stock sectors in the past 3 months:

1. Gas/oil...up about 45%
2. REITs ... up about 30%
3. Semiconductors ... up about 25%
4. Steel and iron ... up about 20%

Although these are broad classifications, they give us a good idea which sectors of the market enjoy the strongest momentum.

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

A worrisome trend

The unemployment rate has jumped to 5.5%. A worrisome trend seen during periods of very slow growth (see chart, click to enlarge). Note that shaded areas indicate recessions.

Long-term Treasury bonds usually benefit during such times.

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

More problems on the horizon

First cheap money. Then a weak dollar. Now this.

'If Iran continues with its programme for developing nuclear weapons, we will attack it. The sanctions are ineffective,' Transport Minister Shaul Mofaz told the Yedioth Ahronoth newspaper.

'Attacking Iran, in order to stop its nuclear plans, will be unavoidable,' said the former army chief who has also been defence minister.

Any attack on Iran would likely see the Islamic regime retaliate by witholding crude exports and targeting key oil transport routes in the Straits of Hormuz -- where some 30 percent of global crude supplies pass through, analysts said.

'The reports of the Israeli comments have seen a huge spike in oil prices,' said Bank of Ireland analyst Paul Harris, though he argued any Israeli attack remained a remote possibility.(Source: Thomson Financial, London)

Not surprisingly crude soared almost $12 in two days. Bad news for consumers. Good news for investors holding energy stocks and energy trusts.

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

A bearish view

Following a detailed analysis of the current situation, Dr. Hussman concludes:

"The evidence suggests that the worst of the credit problems are still well ahead."

"It would be naïve to accept that the amount of writeoffs taken to-date is anything close to what will be required – they are not even keeping pace with the accelerating pace of non-current loans. Financial companies should, and most probably will, get to the task of preserving capital, cutting dividends further, and raising new funds in the not-distant future. The markets probably will not like this, because it will be an admission that credit conditions are still deteriorating (http://www.hussmanfunds.com)."

In other words: there is more to come and a defensive investment strategy should be seriously considered at this time.

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

Financial risk. An update.

Our proprietary measure of financial risk has been sputtering since early May and the market is lower since then.

The big rise in equity prices that took place since March was accompanied by rapidly declining financial risk.

The point is that unless financial risk keeps heading down, the market will have problems in moving higher.

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

The crowd will be wrong....one more time

Headline from the Financial Times: Bond yields hit high as inflation fears mount.

The press is full of stories about rising inflation, commodity shortages, and Malthusian conclusions.

Governments around the globe are busy setting policy decisions to solve yesterday's problems and create tomorrow's crises.

Inflation and commodities have probably peaked. Time to take action ahead of the crowd.

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

Interest rates and stock prices

OK, it may sound crazy, but interest rates are not related to stock prices. This is one of my latest findings after more than 30 years of studying the markets.

Wait, do not jump to conclusions. This is what I found.

Rising interest rates may have two different meanings depending on the economic and financial environment.

Interest rates rise because of an improving economy stimulated by ample liquidity.

Or, interest rates rise because of a strong economy and decreasing liquidity.

The first scenario is favorable to stocks. The second is not.

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

A "black swan"

A "black swan" is an unexpected event that no one knows about it and does not expect.

Europe is going to collapse because of the huge productivity differential between the northern countries (e.g. Germany, the Netherlands, Denmark) and the southern countries (e.g. Italy, France, Spain, Portugal).

Milton Friedman predicted it years ago. I agree with him.

Implications? The Euro would decline sharply. The dollar would soar. When? That's the issue with the "black swans". You do not know what you do not know.

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