Expect a poor fourth quarter. The first quarter of 2009 will also be very slow, according to Dr. Wyss, chief economist at Standard & Poor.
This forecast has important implications on which sectors will outperform the market.
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The fire which gutted Rome in 64 A.D. could not possibly have been Nero's doing; at the time it broke out, Nero was at his villa in Antium 30 mi. away. Besides, the violin wasn't even invented until the 16th century, although in some versions of the tale Nero plays a lute or lyre.
We seem to enjoy, however, the glamor of the VP nominations and the TV nonsense associated with it.
Incomes, meanwhile, dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. Adjusted for inflation, spending plunged 0.4 percent, the biggest drop in four years.
Price-adjusted purchases of durable goods, such as autos, furniture, and other long-lasting items, dropped 1.6 percent. Spending on non-durable goods decreased 0.9 percent, and services, which account for almost 60 percent of all outlays, were unchanged.
Rising unemployment, falling stock and house prices and stricter lending rules ``were viewed as pointing towards weak growth in personal consumption expenditures during the second half of 2008,'' minutes of the Fed's Aug. 5 meeting released this week showed.
Is the country and our leaders aware that Rome is burning?
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
My friends have given up on the market. They are fed up with losing money. They have decided to stay on the sideline and wait. I am not sure what they are waiting for. How are they going to decide when to pull the trigger and join the dance? They did not act at the top. Who says they will be able to pull the trigger at the bottom? They know better. Or so they think.
I do not want to make fun of these investors. Absolutely not. The main reason is to make them think.
If you are committed to managing your money, you cannot afford to give up. You cannot afford to leave the table because you will have to spend the time to figure out the new players and what game they are playing when you go back to the game.
This is the key word: “game”. Investing is like a sport game, a card game, a business game. You are trying to make money. You are trying to win so that you increase your winnings and ultimately your capital.
The point, however, is that others, including myself, have the same objective – to increase their capital. And the only way to do it is to take it away from you. In other words, you are playing against all of us. I am playing against all of you.
Investing is a two-person game – you against all of us, you against the market. Winning at any game, especially the investment game, requires concentration. It requires playing the game and building up the psychological stamina to hang on, especially when you get tired.
Losing money should not depress you and force you to leave the table. If you leave, you will never be able to catch up with those who did not leave. You have to have a process that allows you to ride the exciting as well as the depressing phases of the market. Losing money should not scare you. You cannot play a game when you are scared to lose. You refine your game by playing it, to improve your techniques. But you need to have a discipline. Discipline is what you need to profit in a big way when the band finally starts playing.
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
Commodities are at an important support level (see chart, click to enlarge). They are oversold and may be holding up at these levels. Their strength, however, may have a negative impact on the financials and the overall market.
This is an important asset class and it offers great profit 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
Small cap stocks are outperforming the market (ETF: IWM). This is not unusual according to some research.
There are other sectors, of course, such as financials, insurance, aerospace and defense, health care services, and a few others.
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Do you agree with this? Wouldn't this send the market into a free fall? Hamezi Analytics report: High Short Interest in Financials tells us the worst of Credit Crunch is ahead of us and it is not fully priced in yet. Remember this is the season: CEOs, regulators and politicians will try to prop up the stocks so they can concentrate on the General Election. We will hear some good announcements designed to push the stock prices up. Don't be fooled. The problem remains in the Credit Markets. Get More Defensive.
Answer. They could be right. But they could be wrong. I rely on my indicators. And when they tell me to sell, I will sell. So far, they have been right, and I am "long". I cannot ignore them.
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Coal, by far (click chart to enlarge). Up 32% over one month, up 22% over 3 months, up 63% over 6 months, and up 105% over 12 months.
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
......... When will we see “the light at the end of the tunnel” on these adjustments? Let’s consider the magnitude of existing imbalances and extrapolate recent trends. Over time, house prices and their rental equivalent value should generally converge. From the mid-1990s through 2005, home prices soared above a measure of rental equivalence. With the dramatic declines in the Case-Shiller index, prices remain approximately 14 per cent above a measure of rental equivalence. At their recent pace of decline, by year-end, national home prices will have fallen a total of nearly 30 per cent and be close to rental equivalence. This expected decline would involve larger declines in the problem regions.
Similarly, even without a pick up in new home sales, by year-end, the inventory of unsold new homes will have receded toward their long-run average. Construction has already begun to decline at a moderating pace, and with inventories approaching manageable levels, new construction will stop falling round year-end. The story is different for existing homes: although further price declines are expected to boost purchases, trimming undesired inventories will take longer.
As these trends unfold, the widespread uncertainty about future home prices will begin to dissipate. Although prices likely will fall further into 2009, trough levels will be closer in sight and expectations will converge toward more modest further declines. This lifting of widespread uncertainty and fears of further dramatic declines will have pervasive implications for financial markets and beleaguered financial institutions..........
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Europe is heading into a recession from which it will struggle to recover, while America may have got away with a relatively minor economic contraction from which it may rebound sooner than expected.
Take, for an overall picture of activity in the “real economy”, last month's chart from the Institute for Supply Management in the US and compare them with eurozone purchasing managers' index.
On both sides of the Atlantic, business is difficult, beset by higher costs, uncertain demand, inflation worries and fear of further nasty surprises in financial markets.
But in the US, the manufacturing PMI has held remarkably steady through the turbulence, with only short dips below the 50 per cent equilibrium level it is registering. The sector is adding jobs, and, at 54 per cent, export orders are healthy.
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
Congress if thinking of bailing out Detroit after bailing out Freddie Mac and Fannie Mae.
We are gradually nationalizing major sectors of the economy. What is happening to us? My sense is that we are desperately ignoring we have to regroup and consider the fact that we are not generating the wealth we used to produce. Yet, we do not want to give up what we are accustomed to use.
The country is downshifting in a painful way. We look at the government for the ultimate answer. The only thing they can do is to print more money and give us the illusion we still have the standard of living we used to have.
The bottom line is that we are losing gradually and steadily our freedoms with every new bailout. What is amazing is that no one is asking how we are going to pay for it. My answer? More inflation, as in the 1970s. It is a form of hidden tax everyone seems to accept.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
https://www.peterdag.com/.
Crude oil is soaring!
On my comments of 7/11/08 on the price of oil on this blog I suggested crude was oversold and may be close to a bottom.
The comment I had on my thoughts was the it was "crazy". I wonder what is the visitor thinking now about what I wrote.
People are looking for market leadership. Could it be we are staring it in the eyes? And that is energy, materials,....?
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.
Kenneth Rogoff's comments came as shares in Fannie Mae and Freddie Mac sank on a report that the home lenders would, in effect, be nationalised.
"We're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks."
In this case gold should be much stronger and the dollar will head down again. Something to watch carefully.
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
Yes, according to Birinyi Associates, Inc.
"As the energy sector declined financials firmed, this was a short-term phenomenon. As the last week has shown, the bad news has not ended in the financial sector and the energy correction is drawing to a close. The defensive stocks have been the best names, with health care leading and consumer staples closely following. Energy however is likely to offer the best opportunity in the coming months."
When financial stocks are strong, energy stocks tend to be weak. And viceversa. When energy stocks are strong, financial stocks underperform the market. This is one of the several strategies followed by Peter Dag & Associates, Inc.
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
I am listening to an interview on CNBC with a US government official about Russia's invasion of Georgia.
The interviewers lead the officer to condemn Russia and he was adamant on how Russia cannot invade a country and must respect the rule of international laws and pursue those of freedom and democracy, etc., etc, .....
Of course, what comes to my mind is what the west has done to Iraq. Of course we have good reasons. They, of course, do not.
What am I missing? Is it just a matter of who is interpreting what?
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
https://www.peterdag.com/.
Long-term Treasury bond yields are likely to decline (and bond prices are likely to rise) as long as the market is volatile as it has been in the previous trading sessions.
An interesting trading strategy.
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
Isi and I studied at the University of Rome. We were good friends and we enjoyed watching movies by famous directors such as Fellini, Pasolini, Bergman, De Sica, or Visconti. Legendary directors.
We had our special place where we saw Rome at night. We took the top of the car down and discussed the movie we just saw. At one point of our conversation we used to say: “Can you imagine if we were behind a camera and were filming us – right now”.
Next frame. Two years ago, I met Piero in Auckland, New Zealand, when I went there to visit my uncle. At 45 Piero sold his upscale and successful restaurants in London and retired. Since then he has spent his summer in Auckland and our summer in Ibiza, Spain.
In Ibiza he lives on a boat and his friends, like him, follow the sun. He keeps track of them with Skype and a webcam. His spirit and positive attitude are fascinating.
We kept in touch for two years and two weeks ago, having a few days off, I decided to go and visit him in Ibiza. What a fascinating world! A simple and relaxing life but full of color and excitement. Gorgeous homes overlooking a breathtaking coast (see picture).
His friends accepted me and made me part of their life. We met at 11:30 at the “office”, a local café at the edge of the marina. People were coming and going. The language switched depending on their nationality. A coffee. An orange juice. A beer. At 2:00 pm it was time for lunch. Siesta at 3:00 pm. Dinner at 9:30.
One of the group was a retired airline captain who flew with my father in Bangkok. Incredible! Our eyes were shining when we realized the connection and hugged.
Things were happening fast. I felt like in a whirlwind. I began to understand their attitude. Their approach to life. Suddenly I saw myself behind the camera filming their lifestyle and complete nonchalance. I realized we should go more often behind the camera and see if we still like what we see. Thank you Piero and Fabio and Ivano!
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
https://www.peterdag.com/.
Manfred and I were studying for our PhD at Case Institute of Technology. He was a genius, I thought. He chose to write his thesis on artificial intelligence. He proposed to design a system handling all types of data and develop the best way to analyze them. The introduction to his thesis referred to Kant, a major German philosopher born in 1724.
I always wondered why Manfred used Kant in his thesis. As I move on in my investigation of the history of philosophy, I can say – as an amateur – why he wrote about him. Each philosopher adds something to our knowledge base – whether we agree with him or not.
Kant proposed a model of how we think. (I can see SNS graciously yawning. Bear with me SNS. I have a point.) His model suggests how sentences and knowledge are developed and is, in my humble opinion, the framework used to make computers work and think.
Hegel, another German philosopher, provides a new sense of history. His concept of state was for the benefit of the King of Prussia – the state is omnipotent and progress can only happen through struggle. Nothing comes easily. We have to fight for it. Simple and innocuous ideas. But they were the seed for major global changes and the beginning of nationalism.
Nietzsche also believed in a strong leader. People are average and can only elect average people. For this reason, leaders belong to an exclusive class. His strong and exciting writings dealt extensively with the idea of defining the above-average man. This ideal person is someone who stands on his own feet, does not believe in anything. Only in himself. Anyone trying to tell him what to do is just trying to exercise power – the driving force of any group -- over him. And this is inadmissible if you want to be an above-average man. These concepts were also used by later philosophers.
Engels was dismayed by how workers were treated in England during the Industrial Revolution, as we are now about China. He documented what he saw. But he did not recognize the wealth being generated. Karl Marx used the information to revolutionize the world but this lead to the collapse of the USSR. And so ideas come and go.
Thinkers come up with new ideas. We test them, thinking the next politician has all the answers.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
https://www.peterdag.com/.
This proprietary indicator (click to enlarge) has a solid batting average. It tells you the stock market is going to rise when the indicator rises above the blue line. The odds favor lower prices when it falls below the blue line.
Bottom line: the position of this gauge is bullish on the market. Stay tuned.
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 strength of the dollar against all major currencies, confirmed by the weakness in gold and most commodities, is very good news for the US economy and financial markets.
Why? It means international investors are buying dollars to invest in US assets because they have confidence our economy will grow and generate wealth.
The implication of the strong dollar, if you believe it will continue, is that strategies that worked until a few weeks ago need to be changed.
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
China invades Tibet and the press condemned China for her action.
Russia is attacking Georgia and destroying cities...and no one really cares.
Why?
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
Growth of the seven biggest economies in the world is set to weaken further, the OECD signalled on Friday, pointing also to a mixed outlook for big emerging economies.
The warning fits the picture of sharp slowdown in many advanced countries which has emerged so far this year as the repercussions of the credit crisis, and high oil prices.
A similar signal for the euro zone from European Central Bank on Thursday, when the bank held its key rate steady, pushed down the euro against the dollar, a movement which continued on Friday.
The weaker global economy, declining commodities, and a strong dollar are all trends suggesting the investment strategy so successful in the past few years needs to be changed into one reflecting the emerging economic 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
Merrill Lynch's David Rosenberg was on CNBC, discussing the current Bear Market. He noted that the rally on 8/6/08 was the sixth 300 point rally to occur since September 2007 (markets peaked the next month).
Even more intriguing, he observed that every 300 point DJIA rally has occurred only during bear markets.
This is very interesting and it is the main reason it is important to have a disciplined investment strategy. Following indicators giving you a sense of how much the market is oversold or overbought is also essential.
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
This indicator (click on graph to enlarge) has a good batting average in recognizing near term market moves --up or down.
It rose in April to signal a market rally was underway.
In May it turned down to confirm the market was correcting.
In the past few days it jumped again. It is acknowledging the market is strong.
The time to worry is when this gauge declines below 0.5.
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
It is a mistake to think that the dollar will bring down inflation.
It is the other way around. The expectations of lower inflation in the US, driven by lower commodities (caused by a weaker economy), are the main forces driving the dollar up.
Lower inflation makes our economy more predictable and more profitable. This is what makes our country attractive to foreign investors. For this reason they are buying dollars to invest in the USA.
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 dollar is strong not because of Trichet's comments. Not because of interest rates differentials (Europe and the UK have much higher interest rates than we have).
The reason is that our assets are compellingly cheap. They are a great buy for overseas investors.
Our country is on sale because of the bad policies of the past. Investors are swarming the US to buy, buy, buy. This is good news because is going to reflate an economy on the verge of disaster.
The idea that our exports are going to be more expensive is true, but the reason the dollar is strong -- if it continues -- is because we are becoming a stronger country -- economically, of course. So, we should not fear the impact of the strong dollar on exports.
A strong currency is a blessing and something we should strive to achieve. We should welcome foreign investors.
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
There are new trends developing.
A strong dollar across the board, weak commodities (including gold), and lower bond yields are setting the stage for a different investment strategy.
What worked in the past will not work in the future -- as long as the dollar is strong. Time to think differently. The business cycle seems to have entered a different stage. A more bullish one. Time will tell.
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
Commodities are declining. Why?
The global economy, as documented in detail in The Peter Dag Portfolio, has been slowing down for several months. The weakness in demand is now causing commodities to decline. The next development is lower inflation.
The main issue facing the markets in the next cycle is low real interest rates. The markets always win.
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
Some interesting statistics from The Investment Scientist.
Since 1960, there have been ten bear markets. Following a decline of 20%, the worst bear market took one-and-a-half years to reach bottom. Four reached bottom within a month. The remaining five hit bottom between one and ten months. On average, it took 4 months to reach bottom.
From the day the S&P 500 entered a bear market, on average it returned 14% in one year and 31% in three years.
Among the ten one-year returns, two were negative, yet three were over 30%. As for the three-year returns, only one was negative but three were over 50%!
Bottom line? It pays to start looking for a bottom. And do not give up. Our indicators will help us avoiding major setbacks. Why? Because the odds are beginning to favor those investors who go long.
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 City of Oakland, California (approx pop 350,000) announced that it would be cutting all departments except fire and police by up to 10% due to revenue not meeting expectations. The shortfall of $50,000,000 is about 10% of the overall city budget. The police dept was already undermanned and not spending its allocated budget.
Governments and politicians can promise anything they want. Eventually the citizens have to have the incentive to deliver the wealth to finance all the promises. If the government squanders the public money, the outcome is cuts, cuts, and more cuts in public spending.
If California had a California dollar, their currency would tumble. Since they cannot devalue their currency, the alternative outcome is a severe recession until conditions are so enticing to attract new wealth-producing investments.
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 unemployment rate keeps rising, now standing at 5.7%. It reflects further weakening of the economy.
There is a strong relationship between unemployment rate and short-term interest rates (those supposedly controlled by the Fed)(click on graph to enlarge).
Rising unemployment rate is accompanied by lower interest rates.
Declining unemployment rate is accompanied by higher interest rates.
The bottom line: short-term interest rates will not rise as long as the economy remains weak and the unemployment rate keeps rising.
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
