10/30/08

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

10/29/08

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

10/28/08

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

10/27/08

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

10/25/08

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

10/24/08

Friday's markets, and more


Amazing markets. This is what happened today.

*** The growth of the monetary base is absolutely unbelievable (click on graph to enlarge). It is soaring. It is the Fed's recognition that they have been too tight for too long. This is one of the main reasons we have a recession. Now they are flooding the banking system without sterilizing the injection of liquidity. This is excellent news for the economy (in due time) and for the markets.
*** The US dollar Libor rate declined sharply. This is excellent news and may signal that the aggressive increase of liquidity is unclogging the credit pipelines.
*** The dollar is soaring. This is also great news. It is a vote of confidence of international investors for our actions.
*** Gold jumped, but is still 26.5% below the March highs.
*** Commodities and crude oil were down, following closely the price of gold. This is quite typical.
*** Yields on Treasury bonds declined. Due to flight to safety or lower inflation?
*** Yields on low-grade bonds moved higher. Bad news!
*** Stocks declined.

Bottom line. Slowly and steadily the stars are aligning.

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

Friday morning ... time to look up?


The chart of the S&P 500 is ugly this morning at 10:26 am (click on graph to enlarge).

I like to watch trading volume and the blue line above the price movement.

Volume is positive because it has surged as the market declined. But the blue line spells caution. It is declining too rapidly. What I would like to see it moving sideways and the S&P 500 rise above it.

The fundamental picture also spells caution. I am watching closely bond spreads and yields to give me a clue of the trend.

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

10/23/08

Trading volume patterns

There are two patterns in trading volume. Rising volume in a rising market and rising volume in a declining market.

The favorable pattern that has been taking place since the end of September is rising volume in a declining market. Let me explain.

Investors sell as the market declines. Selling increases with the severity of the correction. Stocks, meanwhile, move from weak hands to strong hands. Eventually sales dry up and the bottom takes place.

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

10/22/08

Today's markets

Incredible!

1. The dollar is very strong. The world is scared and is buying dollars. This is good news for us.
2. The global economy is sliding.
3. Financial risk is rising.
4. Commodities (including gold and crude oil) are declining because of weaker global demand.
5. Inflation is declining.
6. Interest rates of high-grade borrowers are stable to lower.
7. Equities are sinking.
8. Equities have gone nowhere since 1998.
9. Fear has reached extreme levels.
10. The world is not ending (I am pretty sure about this).

Bottom line. The markets work. Social engineering created the housing bubble by convincing us that everyone should own a home. Lending standards had to be relaxed to make it possible. Regulators looked the other way. It could not work. And it did not.

Now the markets are forcing the government to become the landlord of last resort and our banker and our retirement financier and our medical insurer. There is a huge transfer of power and wealth taking place from us to Washington.

This is a major historic change for our country. We are creating a new class of citizens -- the bureaucrats who will be empowered to regulate, regulate, and then regulate. Countries going this route have shown much lower growth rates in business activity. Is it going to happen to us too? Are the markets discounting this shift of power?

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

The problem with the market


The problem with the market is that financial risk is still rising in spite of the aggressive easing of the Fed and Treasury. There is little or no hope for the market to rise as long as financial risk keeps moving higher (click on graph to enlarge).

Furthermore, some surveys show there is too much optimism that we have hit bottom. Well known market technicians pontificate on TV we had capitulation. I hope they are right.

Rising financial risk, however, is not the ideal background for equities.

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

10/21/08

Monday's markets

Wow! Is this the long awaited market rally?

--- The dollar was strong. This is the most impressive feature.
--- Commodities surged. All of them. Very impressive. Is inflation in the cards? When?
--- Gold and crude oil were up. Unusual since the dollar was strong.
--- Small banks were shining.
--- Long bonds remain under downward pressure.
--- Credit markets thawing.

All asset classes were strong. The strong commodities do not fit the deflationary scenario. Or, there is so much money on the sidelines that investors just bought, bought, and then bought. It will be interesting to see what happens in the next few days.

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

10/20/08

The financial orgy is global

Asian money market rates dropped after South Korea unveiled the region's largest bank rescue and Hong Kong and Australia pumped cash into the financial system. (Bloomberg)

Money is being printed aggressively around the globe. The financial intervention is so intense and widespread that it will eventually cause the desired effects in the near term...and another bubble in the long term.

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

10/18/08

The business cycle is alive and well


This is how things work. I am absolutely convinced.

1. Inflation rises.
2. Consumers make less money after inflation and stop buying.
3. The economy slows down.
4. Commodities decline because of slower demand.
5. Inflation declines because of lower commodities.
6. Consumers' purchasing power increases because of lower commodities like crude oil and inflation. They increase their purchases.
7. The economy improves.

Where are we in this sequence of events? Inflation may have peaked (click on graph to enlarge), as I have been expecting. If I am right, then we are in phase 5. above.

A slow economy and declining inflation requires a specific investment strategy in asset classes doing well during such times.

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

10/17/08

Does history repeat itself?

“We have reached a critical point,” John Maynard Keynes wrote in March 1933. “We can ... see clearly the gulf to which our present path is leading.” If governments did not take action, “we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.”

Bottom line. Expect huge government spending in infrastructure projects or anything putting money in the economy and providing jobs! Another level of government intervention is waiting for us.

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

Do you want to outperform the averages? Do not diversify. Invest in a few investment themes. These strategies should be consistent with the type of business cycle we are experiencing. Commodity driven investments, for instance, are attractive only when the economy is strong. Then select the best stocks within these sectors.

If you diversify across many stock sectors, you are bound to perform like the averages, or worse.

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

10/16/08

Money is flowing...big times!

The Federal Reserve's direct loans to commercial banks rose to a record $101.9 billion yesterday versus $98.1 billion a week earlier as still-high money market rates encouraged more borrowing from the lender of last resort.

Borrowing by securities firms through the Fed's Primary Dealer Credit Facility totaled $133.9 billion, up from $123 billion, the central bank said today in its weekly report.

Bottom line. Enjoy. The next project is going to be deflating the bubble we are creating now. And so....we move from bubble to bubble. And then you wonder why the dollar has been weak for four years.

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

Today's markets

The business cycle is alive and well. This is what happened today.

--- Production....weak.
--- Inflation....declining
--- Dollar ....mixed
--- Stocks....broadly strong
--- Commodities...weak
--- Bonds....weak

Bottom line. The strong sectors are those strong in a weak economic environment. Commodities are weak because of the slow growth. Weak commodities are causing inflation to decline. What happened to the nonsense about China and its economic growth? The global business cycle is perfectly synchronized.

A final thought. We are doing all we can to set the groundwork for the next bubble.

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

10/15/08

A ray of hope!


This proprietary indicator is turning up (click on graph to enlarge). This trend is very promising. An increase above the blue line is a confirmation the trend of the market is up. Stay tuned.

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

Incredible!!!


The growth of the monetary base is going off the chart (click on chart to enlarge). This is very good news. Forget about what they say. Watch what they are doing. And they are injecting msssive, let me repeat, massive quantity of money in the banking system.

This is very bullish for the financial markets. Eventually.

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

It does not make sense

Investors agonizing over a faltering economy sent the stock market plunging all over again Wednesday after a stream of disheartening data convinced Wall Street that a recession, if not already here, is inevitable. The market's despair propelled the Dow Jones industrials down 733 points to their second-largest point loss ever, and the major indexes all lost at least 7 percent (Source: AP).

Nonsense. The markets are too smart. We are experiencing panic. Or something else. Only the markets know. Eventually our indicators will turn up, and this will be the time to be aggressive buyers.

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

10/14/08

The most important investment tool ....now

The most important investment tool in the current market environment is a process or model to assess risk. Investment timing rules are not perfect, but are critical in today's markets.

They provide you with an objective and unemotional way to assess the upside potential or downside risk of the markets. As I said, they are not perfect, but they are a must in a market swinging more than 2% in either direction in a single day.

I use them, and quite frankly I found them useful. They help me navigating today's environment. Long-term investing has failed as a long-term strategy with the market at the same levels as May 2002 and February 1998.

Do you remember when Bogle, the former chairman of Vanguard, was selling the idea of index funds? In the last 10 years you would have achieved 0% return. You could have done much better by keeping your money in money market funds.

This is the reason investors should use timing models. If they are too complicated for you, then you should seriously think buying only Treasury bonds from the government (www.treasurydirect.gov) (not bond mutual funds).

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

The best kept secret

Investors have consistently ignored a great asset class. Especially now. It is a fact, however, that well managed high-yield mutual funds are outperforming the market by a wide margin. Some of them achieve this feat also in bull markets.

The one I like had a YTD performance of -11.5% against a -19.9% return of the S&P 500.

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

10/13/08

10/13/08 .... Interesting day

In our last issue of The Peter Dag Portfolio released to our readers on 10/10/08, I said there was -- finally -- some light at the end of the tunnel.

Today the market jumped more than 900 points (11%) in response to the massive injection of liquidity planned by the global central banks. This is how the markets responded.

--- Global stock markets soared.
--- US stock market soared.
--- The dollar was weak.
--- Commodities were strong.
--- Gold and crude oil rose.
--- Bond yields rose and bonds tanked.

Do you see the pattern? Compare it to what happened in previous rallies (see below). Enjoy!

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 bear market compared to the major ones since 1950


How does this bear market compare with the previous ones having at least the same duration? Fig. 18 provides the answer (click graph to enlarge). The current bear market is 13 months long.

The longest bear market was the one of 2000-2002, which lasted a grueling 26 months. The 1972-1974 bear market was the second longest bear market (22 months).

The other three long bear markets were those of 1980-82 (21 months), 1968-70 (19 months), and 1959-60 (16 months).

The bottom line is that this bear market may last between 3 and 13 more months. I think this is an interesting statistical curiosity -- no more, no less.

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

Watch the markets' response to the action of the centrals banks

The response of the markets tell you the impact of the dramatic easing action of the global central banks. As the market gets ready to open in Europe and the US, this is the initial response.

-- Stocks are soaring in Asia.
-- US stock futures are very strong.
-- The dollar is weak.
-- Commodities are strong.
-- Crude oil and gold are strong.
-- European bonds are tanking. (The US fixed income markets are closed.)

The message is loud and clear. This pattern is consistent with previous responses.

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

10/12/08

The markets liked what is going on in Washington

Stock futures rose on Sunday evening as central bankers and government leaders took steps to solve the financial crisis that has been crippling global markets.

S&P 500 futures rose 29.8 points. Dow Jones industrial average futures rose 252 points, and Nasdaq 100 futures climbed 31.25 points. In other words, futures are up close to 3% in Asia.

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

Bullish news from the Swedish experience!

This article was published in the Financial Times. The message? Buy stocks aggressively!

View of the Day: Sweden offers solace
By Tim Bond

Published: October 9 2008 15:26 | Last updated: October 9 2008 15:26

Sweden’s experience during its early 1990s banking crisis has many parallels with current events and offers a “surprisingly upbeat” message for equity markets, says Tim Bond, head of global asset allocation at Barclays Capital.

Sweden was forced to rescue its banks in 1992 after a credit and real estate bubble in the late 1980s. The main intervention came in September 1992 when the government implemented a blanket guarantee for all bank liabilities (excluding shares) and promised capital injections for troubled banks. Mr Bond notes that at that point, Swedish GDP had been falling in year-on-year terms for seven quarters, and the contraction continued for a further three quarters.

Meanwhile, the Swedish stock market fell 45 per cent between July 1990 and October 1992, but hit a low just one month after the government’s intervention. Over the next 12 months, it rallied 43 per cent and then rose a further 20 per cent the year after that. Bank stocks fell 23 per cent in the month after the intervention, but then hit a low before rallying strongly.

Mr Bond says: “The financial system moves well ahead of the real economy. If the past is any guide, the next two or three quarters should see severe declines in GDP in many economies, followed by another three or four quarters of sub-par growth. However, the low for equity markets – if Sweden is any guide – should be within the next three to four weeks.”

Latest news from Reuters on the global financial crisis

- European leaders pledge to pump public money into banks
hit by the worst financial crisis since the 1930s. According to
draft statement, they seek to help or subscribe to debt-raising
by banks for up to five years to complement European Central
Bank efforts to unfreeze inter-bank lending.

- Portugal to offer banks 20 billion euros of financing.
Spain would inject capital into banks if needed.

- IMF backs G7 stabilisation plan, saying debt-ridden banks
were pushing global financial system to brink of meltdown.

- Britain's four largest retail banks -- HBOS, Royal Bank
of Scotland, Lloyds TSB and Barclays -- are likely to announce
plans to recapitalise early on Monday, a source says. A
newspaper says they will ask for a combined 35 billion pound
($60.5 billion) lifeline.

- The United States needs a new economic stimulus plan that
pumps money into infrastructure projects and budget relief for
state and local governments, Democratic lawmakers say.

- Australia, New Zealand to guarantee bank deposits

QUOTES
"If market confidence is not restored this weekend, it's
game over." - Marco Annunziata, chief economist at Italy's
Unicredit bank.
"This needs concrete measures and unity -- that's what we
have today." - French President Nicolas Sarkozy, who hosted an
emergency meeting of leaders from the 15 euro zone countries
plus Britain.
"The measures I have announced today are part of also
international measures designed to unclog the arteries of the
global financial system." - Australian Prime Minister Kevin
Rudd on the decision to guarantee all bank deposits for three
years.
"Ideally, the G20 would have a situation room, such as you
have when you are in a war. Indeed, this crisis is like a war."
- Brazil's Guido Mantega.
"Saying that they'll take all steps necessary leaves
hanging the question of whether they know what is best and
necessary. It was a signature moment for the G7. I think
markets are going to be very disappointed." - Kenneth Rogoff,
former IMF chief economist
"Globalization, America as the center of the globalized
financial markets, was sucking up the savings of the world.
This is now over. The game is out. It does mean a very serious
adjustment for America." - Billionaire investor George Soros

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

Fannie and Freddie. The saga continues.

Federal regulators have ordered Fannie Mae and Freddie Mac to start buying $40 billion of troubled mortgage bonds each month as the U.S. government tries to revive the economy, according to a published report.

Fannie and Freddie were taken over by the U.S. government in early September, in the first of several bailouts the government has launched recently to try to halt the spread of the mortgage-fueled credit crisis.

Regulators initially restricted Fannie and Freddie's growth when they seized control. To "promote stability" and lower mortgage costs to borrowers, Treasury Secretary Henry Paulson said the two companies would be allowed to "modestly increase'' their mortgage portfolios to as much as $1.7 trillion through the end of next year and said they would no longer be run "to maximize shareholder returns."

Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill, Bloomberg said.

Bottom line. These are the companies are the heart of the current problems. Now they are in charge of solving the same problems they created. Wow! And now profit is no objective. I sincerely hope they know what they are doing in Washington. This is the reason investors have a run on the equity markets.

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

Many words, but no action

Pressure mounted at the weekend on the world's leading economies to spell out the specific "urgent and exceptional" steps they have promised to take to stabilise financial markets before they open on Monday.

Should we expect a solution from the same people who caused the problem?

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

A "must read" to understand current problems

This is a "must read" article by Robert. V. Green on the historical reasons that eventually caused the current financial crisis. Clearly written. I am trying to get permission from Mr. Green to post the whole article here. Meanwhile, you can go to this address.

http://www.briefing.com/GeneralContent/Investor/Active/ArticlePopup/ArticlePopup.aspx?SiteName=Investor&ArticleId=NS20080930133404AheadOfTheCurve

Bottom line. Social engineering does not work. The USSR proved it quite clearly. This is not a crisis of capitalism. This is a crisis caused by probably well-meant socialist ideas concocted decades ago.

Now, the same people who caused the crisis, are applying the same or worst ideas to resolve it.

Karl Marx was wrong in predicting the demise of capitalism. History shows that misguided social engineering is the historical failure. Unfortunately the average person believes the glamorised headlines and elects people peddling populist ideas.

And we are witnessing the results of this type thinking.

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

10/9/08

A recap of the global crisis

An excellent recap of the Financial Times of the global government assistance in recent weeks. Please go to the following web page to review it.

http://www.ft.com/cms/s/0/251d855a-8ef7-11dd-946c-0000779fd18c,dwp_uuid=11f94e6e-7e94-11dd-b1af-000077b07658.html

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

Good news for the banks

Paulson told reporters in Washington yesterday that legislation Congress passed last week to rescue financial institutions gave him broad authority that he intends to use, beyond just buying mortgage-related assets on banks' balance sheets. He indicated that an option available may be boosting companies' capital with cash infusions.

``It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,'' Paulson said. ``We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.''

This is good news for the banks. It is clear that the Treasury wants and needs banks to be profitable. This is an absolute necessity if we want our economy to recover. It seems a superb investment theme.

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

10/7/08

Good news for investors

Fidelity Investments's retail and institutional money market mutual funds will participate in the Temporary Guarantee Program offered by the Treasury Department, Fidelity said late Tuesday. "Even though it is highly unlikely that the insurance will be needed for any of our funds, we expect the program to reassure our investors that their money market funds will continue to provide safety and liquidity for their cash investments," said Fidelity. The Treasury's program, which is in effect for three months, provides coverage to shareholders for amounts that they held in participating funds as of Sept. 19.

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

My view

The markets will stabilize when credit spreads across all maturities decline in a visible way.

Until then, volatility will be the name of the game as the economy struggles shackled by the sagging housing market.

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

10/6/08

Question from a reader

Q. If the banks are flooded with money, why there is a liquidity problem? Banks should have enough money from the government to lend consumers and corporate and create credit. So where does the money go?

A. There is a time lag between when the banks receive liquidity from the Fed and the time the banks lend the money and the time the economy finally recovers. The time lags could one to two 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

The problem with rising spreads

There is an inverse relationship between the spreads of the yields of low-grade bonds and Treasury bonds and the economy. The relationship is very simple. Rising spreads are followed by weaker business activity.

Why? Because rising spreads reflect rising financial risk and rising financial risk makes borrowing more costly for business and consumers. And the economy stalls. This is exactly what is happening now. I will show you the evidence in the next issue of The Peter Dag Portfolio.

Bottom line. The economy cannot recover until spreads decline in a visible way.

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

10/4/08

Friday's markets

The rescue plan was passed and this is how the markets reacted.

-- The Dow lost 1.5%. No surprise, the market is a discounting mechanism.
-- Employment was down sharply. The economy remains weak.
-- Commodities were weak, responding to weak demand.
-- The dollar paused.
-- The volatility index VIX soared. Can it go much higher?
-- Long-term bond yields declined. Flight to safety and expectation of lower inflation.
-- Bond spreads keep rising, signalling rising credit risk due to lack of liquidity.

What does it mean? The markets are forcing Washington to act. Short-term interest rates will have to fall further. Banks are being flooded with cash. There is no question this policy is inflationary over the long-term. In the near term we have to face a weak economy and a government pumping money into the system with a vengeance. And this will be bullish for stocks....eventually. Only when financial risk declines. But you have to be in the right sectors. Sectors that are strong in a weak economy.

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

10/3/08

The business cycle is alive and well


The manufacturing sector slumped last month. The ISM report shows the manufacturing index falling deep into recession territory (click on image to enlarge).

The protracted weakness of the business cycle is now followed by weak commodity prices and lower bond yields. Inflation will eventually head down.

There is only one major problem. Real interest rates are unusually low and this will cause more problems when the business cycle strengthens again.

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

10/2/08

Today's markets

* Manufacturing tanked to deep recession levels last month .
* All commodities, and I mean all commodities, collapsed due to sharply deteriorating global economic conditions.
* Long-term Treasury bond yields tumbled (and bond prices rose), reflecting flight to safety and lower inflationary pressures due to declining commodities.
* Low-grade bond yield spreads soared reflecting rising risk.
* The VIX index jumped to 45.26, a level never seen at least since 1990 -- another sign of fear.
* The stock market sank 4%.
* The dollar remains very strong. This is good news.

Bottom line? These trends are well entrenched with stocks unlikely to rise until yield spreads decline in a visible way. Some sectors look much more attractive than others. You guessed it -- they are those doing well in a slow growth economy.

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 view from Europe

There is a common thread in European responses to America’s troubles. It goes like this.

We always knew that unbridled free markets were a mistake, yet we were derided for saying this; and now we are all paying the price for your excesses. In the face of popular consternation at capitalist decadence, the activist state is newly in fashion—and Europeans are taking the credit for it.

Are they right? I am afraid we are moving in their direction in terms of government role in our affairs. Bureaucracy becomes bigger and bigger as we ask for more safety and comfort because we are not tolerating risk anymore. There is no going back.

Until another nation, possibly China, reminds us that we need to change.

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