The message? (click on graph to enlarge) The channel trending down suggests the market will continue to try to find a bottom. But it will take time. Market timing indicators are essential in the next few months. You have to be flexible and quick.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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What is happening? Does anyone know? I get the feeling no one knows. We are confused. This is why we voted for change. Anything, just anything different from what goes on. The volatility of the markets confirms it.
Nobel Prize winners. Think tanks. We have the smartest brains in the world. Have we learned anything? Are we learning? What’s the relevancy of winning a Nobel Prize? Where were they when we created the problems? Now we want to give everything to everybody. Even if we cannot afford it. Is it feasible? Why not. But do we generate the wealth we want to distribute? We cannot tax ourselves to wealth. Something has to give.
The USSR collapsed. The US and the world are imploding because of gross policy mistakes. The vision was free markets. The reality was wealth re-distribution. We continuously seem to strive for solutions to ancient problems. The only thing we hear is change. Will we find what scientists call the steady state? We fluctuate endlessly trying to find the Aristotelian golden mean.
Do we need Plato’s philosopher-king, who recognizes and understands the needs of a country? Without squandering pork to interest groups? Leadership is groomed, not elected. This is the main theme of the major world thinkers. Nietzsche thought average people vote for average leaders. Do we have average people in Washington? Given the results, it looks that way.
We tend to solve yesterday’s problems. Are we getting into new ones? Are we going to get wealthier? Poorer? Safer? What do we want? Do we need “to want” anything and everything? The American dream.
Ideas are not set in stone. What seems right today is wrong tomorrow. Therefore, the world painfully and tragically strives to find the next great idea only to face new dire consequences. Heraclitus was right. We live in a state of flux and the only truth is that by seeking change we give ourselves a drug. It gives us an illusion. But eventually the markets always win. Always and everywhere. Make no mistake about it.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Sales of new one-family houses in October 2008 were at a seasonally adjusted annual rate of 433,000. This is 5.3 percent below the revised September of 457,000 and is 40.1 percent below the October 2007 estimate of 723,000.
The median sales price of new houses sold in October 2008 was $218,000; the average sales price was $272,300. The seasonally adjusted estimate of new houses for sale at the end of October was 381,000. This represents a supply of 11.1 months at the current sales rate.
Bottom line. Home sales continue to sink (click on graph to enlarge). Prices continue to decline. Because of the huge inventory of unsold homes these trends will continue for at least the next 12 months.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Meanwhile, home prices, down more than 16% from a year ago, will continue to decline (click on graphs to enlarge). It is going to be a long and painful ride created by a policy driven by the idea that everybody should own a home. Even if people could not afford it.
The magnitude of the destruction of wealth in the real estate sector is bound to have a deflationary effect in the near term.
The markets always win.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The above chart shows the graphs of low-grade bond yield spreads relative to the yields of Treasury bonds and the S&P 500 from January 2007.
The market peaked in 2007 when spreads moved higher. Since 2007, all the declines in the market have been accompanied by higher spreads. Reason: spreads reflect credit risk and when credit risk rises stocks tumble.
This is one of the many indicators we follow to determine when the market finally bottoms.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The above graphs show the growth in employment and consumer sentiment (click on chart to enlarge). Consumer sentiment and employment are closely related. Consumers are likely to remain cautious as long as we have a weak labor market.
Bottom line. Retail sales will continue to suffer.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The growth of the economy continues to decline (see graph, click on chart to enlarge). Economists expect a big drop in GDP in the fourth quarter.
Implications. A slow economy will continue to depress prices and increase the risks of deflation.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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This is a vicious bear market, no doubt about it. These graphs compare this bear market to the worse bear markets since 1950 (click on graph to enlarge).
In this episode stocks declined as much as the two worst bear markets (those of 1972-1974 and 2000-2002). The collapse, however, took only 14 months. The other too bear markets lasted 22 and 26 months respectively.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Exciting markets.
... Stocks soared 6.47% with the S&P 500 hitting an important resistance level (see graph, click on chart to enlarge).
... Crude oil soared 9.41%.
... Gold jumped 4.02%. Is oil more precious than gold?
... Bond prices declined.
... Bank stocks leaped 7.61%.
... Regional bank stockssoared 10.94%.
... Last, but certainly not least: the dollar slumped close to 3% against all major currencies.
Do you see the pattern? A strong market accompanied by strong oil and a weak dollar with regional banks one of the star performing sectors.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The nurse screamed. We ran upstairs. We were looking at each other as we climbed the steps. Rapidly. Anxiously. We knew the solemn time had come.
Then we all started to count in absolute silence. One, two, three, …fast. One, two, three, … not as fast. One, two, three … more slowly. One, two, three … even more slowly. We were holding hands, looking at what was happening in front of us.
Then one … two … three … It seemed an eternity. One .. two. We were waiting. Finally … three. The count resumed. Painfully slow. One …. The next count never took place.
Time stopped. The finite and infinite were in front of us. The time had stopped as we witnessed a magnificent moment. Our own very personal moment.
Gloria, the loyal Philippine nurse, closed his eyes. When people left I opened them again. He was looking at me. His eyes were still. A door into infinity in a finite world.
Finite and infinite were in front of me. Finally merged. Peacefully. In complete stillness. Shivering immobility. It was solemn and absurd. Yet true. I saw something I had never seen before. A sense of beauty and peace. A sense that something enormous was happening.
I was overwhelmed because in that brief moment I understood something exceptionally unique. Beautiful. Solemn. Universal. Through the emptiness of his eyes. I was part of it. I was in it. For a short moment, through his eyes, the gate between life and death had opened and I was allowed to stay on its threshold.
It was the last grand lesson my father honored me with as he died on September 3, 2001 at 10:06 pm. There. In front of me.
So long, Captain.
Retails sales after inflation are sinking (see graph, click on chart to enlarge). Consumers are cutting spending in response to higher unemployment and the disarray in the housing market.
The weakness of the economy is good news for some asset classes (some bonds are particularly attractive) and bad news news for others (cyclical stocks striving in a strong economy).
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The unemployment rate keeps rising, up to 6.5% (see graph, click on chart to enlarge). The trend reflects a weak labor market and recessionary times. A declining unemployment rate will signal the recession is over.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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Make no mistake about it. Gold is a commodity and peaked at the same time as all the other commodities (the CRB on the graph does not include gold) (click on graph to enlarge). As long as the business cycle heads down, commodities will remain weak.
Commodities will strengthen when the business cycle turns up and the economy grows at an above average pace.
Gold and crude oil and interest rates (the price of the commodity money) follow the trend of all other commodities, from metals to agriculturals.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The trendline on the graph (click on graph to enlarge) will give the signal when the market turns up. The Dow will have to break on the upside the trendline. It will be the signal the market is likely to head higher in the medium-term.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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This momentum indicator (click on chart to enlarge) may be saying the market is entering a period of consolidation. Its trend must be confirmed by other important events.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The Group of 20 yesterday urged a ``broader policy response,'' citing the potential for additional interest-rate cuts and fiscal stimulus, in a statement after meeting in Washington. The group set a March deadline for recommendations on strengthening accounting standards, derivatives markets and oversight of hedge funds and debt-rating companies.
The call for an overhaul of the world financial industry indicates leaders want future expansions to be smoother than the boom and bust of this decade. A lack of any specific pledges to stimulate growth may disappoint some investors, analysts said.
Bottom line. More regulations. More words. No action. What can you expect from the people who were players in causing the problems we are enduring? What can you expect from the people who knew about the problems two years ago and ignored them?
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The prospect of accelerating declines in production at individual oilfields is adding to uncertainties. The findings of an unprecedented field-by-field analysis of the historical production trends of 800 oilfields indicate that decline rates are likely to rise significantly in the long term, from an average of 6.7% today to 8.6% in 2030.
Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline.
Bottom line. We would need to find an additional 60 million barrels per day of new oil supply in 20 years to meet global demand. It is highly unlikely that we will be able to find new supply of 60 million barrels per day in 20 years time. In light of these data the 60% decline in crude oil since June seems to offer attractive investment opportunities in selected stocks.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The evidence suggests that we are going through this incredible crisis because of two main reasons: social engineering and Fed tightening. Yes, since 2004 the Fed has tightened aggressively to bring down inflation and harness the housing bubble. They made a huge tactical mistake and we are paying for it.
Greenspan encouraged the housing bubble by bringing interest rates down to 1% and discouraging Congress to regulate derivative products. The Fed then increased interest rates to levels high enough to cause a recession and precipitate a credit crisis.
Beginning in 2004 the Fed started tightening (click on graph to enlarge). Two things happened: interest rates went up from 1% to about 5% and the monetary base (the money banks can lend) started slowing down. Let me focus on the monetary base.
The long-term growth of the monetary base is close to 6%. This is the growth rate of stocks, GDP, profits, income, and all the major economic variables. By forcing the growth of the monetary base well below 6% from 2004 to 2007, the Fed purposely starved the economy (click on graph to enlarge). They tightened because of the fear of inflation. They forgot about a derivative bubble exacerbated by rising housing prices due to the social engineering policy of Congress. In other words, they tightened too much and for too long and at the wrong time. As they did in 1929!
So, what are they doing now? They are panicking! They are flooding the banking system with money, with the monetary base soaring at the incredible pace of close to 40%! Again, you should remember that the monetary base has grown at an average pace of about 6%. Now they are making it grow at a 40% pace, covering up a gross miscalculation. They should have stopped raising interest rates when they were 3%.
In other words, they acted as true bureaucrats. In spite of their PhDs, Nobel prizes, and academic achievements, they are reacting to the problems they created rather than attempting to anticipate them. This is the predicament of the bureaucrat. Why stick the neck out and be bold?
It is the curse of a country allowing bureaucracy to grow. The issue is not what should the ideal political system and political belief be. The issue for any country is the size and power of the bureaucrats on the payroll of the government.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Europe's economy fell into its first recession in 15 years in the third quarter, paving the way for deeper cuts to interest rates and taxes amid the worst financial crisis since the Great Depression.
Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said today. The two quarters of contraction -- the result of this year's surges in the cost of credit, the euro and oil prices -- mark the first recession since the single currency was introduced almost a decade ago.
More, much more when you read older posts and subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
This is a summary of an excellent article by R.V. Green on how social engineering created the credit crisis. The complete article can be found on briefing.com.
1. The government created the current credit problem when it wanted to ensure every American could buy a home.
2. The Glass-Steagall Act required that commercial banks hold these mortgages until maturity or the debt was repaid. The down payment was 20%.
3. Since banks were required to hold a mortgage for the duration, they were very selective. Outcome: cry for government policies to increase home ownership was a strong and powerful voice.
4. In 1938, a government agency called the Federal National Mortgage Association was created to guarantee mortgage loans by banks, so that ordinary Americans would be able to obtain home mortgages.
5. In 1968, the Federal National Mortgage Association was split into two entities. Ginnie Mae retained the role of guaranteeing mortgages issued for "special assistance programs."
6. The second was Fannie Mae, whose role was to create new mortgage capital. Fannie Mae was also "privatized" at that time. In 1981, in order to expand the capital markets for mortgages, Fannie Mae began selling mortgage backed securities, or MBS. A mortgage backed security is a pool of mortgages with roughly similar characteristics (term, interest rates, credit quality of borrowers) that is sold as a single entity.
7. To make MBS securities attractive, Fannie Mae guaranteed payment of the interest rate coupons on MBSs. This guarantee would also later become the downfall of Fannie Mae.
8. Home ownership increased from 55% of U.S. homes in 1950 to 63% in 1965 to 69% in 2006.
So what did go wrong?
• Standards for mortgage issuance declined
• MBS securities were restructured into new securities, to accommodate the riskier loans
• A sharp rise in interest rates, reversing a 20-year trend of decline
• Overbuilding of new houses, leading to pricing pressures.
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
In the 1980-1982 recession oil declined about 70% (click on chart to enlarge). This recession is probably going to be deeper. Oil could decline more than 70% from its peak, down to at least $45. This type of decline could offer interesting investment strategies and opportunities.
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
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
Bottom line. They have the control of the purse. We do not have any say about it. Why, did you think we did?
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
China and the rest of the world announce more stimulus plans.
The markets soar, commodities (including oil) jump, yields of long Treasury bonds rise, and the dollar sinks.
Do you see a pattern?
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
Auto sales are sinking (click on graph to enlarge) as consumers refrain from spending. This is a strong deflationary development creating solid investment opportunities.
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
Finance ministers and central bank presidents from the Group of 20, which includes wealthy and developing nations, agreed the world must work together to address the current crisis. But they approved no specific plans ahead of a meeting of G-20 heads of state set for Washington next week.
Ministers urged governments to increase spending or cut taxes as they can to help reverse an economic downturn that is expected reduce global trade next year for the first time since 1982.
Meanwhile....China unveiled a $586 billion stimulus package Sunday in its biggest move to inoculate the world's fourth-largest economy against the global financial crisis.
The Cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government's Web site said.
Bottom line.This is a great opportunity to make money! These people are not joking. They are planning to throw a lot of money at the problems they perceive. Even if they may not be problems. Just to make sure.
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
The Fed keeps pouring money into the banking system at a very aggressive pace (click on graph to enlarge). This is good news for the financial system and the economy. Eventually.
As far as the long term is concerned, all this money is likely to create other bubbles. The stock market should be the great beneficiary of this fantastic inflow of money.
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
This graph shows the behavior of the major bear markets since 1950 (click on graph to enlarge).
The current bear market is the most severe in terms of price decline. It declined 40% in just 14 months. If this bear market follows the pattern of the 2002-2004 bear market, prices should stabilize and rise in the next 6 months. The market could then decline again for the next six months. Time will tell. Stay tuned.
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
The unemployment rate soared to 6.5% (click on graph to enlarge). The economy is still in a recession. Is this environment creating investment opportunities? I believe so.
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
Nonfarm payroll employment fell by 240,000 in October, and the unemployment rate rose from 6.1 to 6.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.
October's drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised. Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months. In October, job losses continued in manufacturing, construction, and several service-providing industries. Health care and mining continued to add jobs.
Our leaders keep scrambling to find stimulus packages. They are still talking about them. Talk. Talk. Talk. And throwing money at any problem it surfaces from banks to auto manufacturers. Improvising.
What intrigues me is that we knew last year of a credit crisis. We knew last year that it would have affected the economy in a negative way. Yet no plans were drawn for these emergencies. In fact, a presidential candidate was running on the idea of increasing taxes. It tells you how these people live in a different world.
It shows once again that bureaucrats react to the news. They do not try to anticipate. They cannot do it. It is not in their job description.
Social engineering created this mess. The markets always win and correct in a dramatic way the policy mistakes of any country. The bigger the mistake, the bigger the correction. The ultimate example is the USSR. Given what we are enduring, the attempt to provide a house to all of us independently of our means, was not the right policy.
A restrictive Fed from 2004 to 2007 precipitated the crisis and made matters much worse than they could have been.
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
It is difficult to be optimistic these days. Every day there seems to be new bearish developments.The latest news is that the global economy is in deep trouble, as documented in detail every month in The Global Business Cycle as part of our service to clients.
The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The Global Manufacturing Index dropped to 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.
Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.
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
Financial stocks are among the strong performers (click on table to enlarge).
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
Jean-Claude Trichet is extending the European Central Bank's powers just as it gears up for what may be the fastest round of interest-rate cuts in its 10-year history.
President Trichet has pushed the central bank's reach into the euro region's neighboring economies as they struggle to cope with the financial crisis, and has approved record lending to banks. Economists predict the ECB will slash its benchmark rate, currently at 3.75 percent, to 2.5 percent by April after reducing it for the second time in a month on Nov. 6.
Bottom line. The global central banks are aggressively easing. Good news for some assets classes, bad news for others.
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
In 2007 this proprietary indicator soared (click on graph to enlarge), suggesting the market had reached high risk levels. The message was quite correct.
A decline of this gauge to lower levels is a reliable signal the market has declined to a profitable entry point for the next several months.
I will discuss the behavior of this indicator in the next issue of The Peter Dag Portfolio.
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
