Peter Dag & Friends: January 2009

1/30/09

The danger is protectionism

The House approved its version of the stimulus package, estimated to cost $819 billion, on Wednesday, and Senate is set to vote soon on its version, which totals nearly $900 billion. President Barack Obama and Democratic congressional leaders hope to pass a unified bill by mid-February. The House bill has “Buy American” provisions that would require U.S.-made iron and steel for infrastructure projects and U.S.-made TSA uniforms. The “Buy American” push could be expanded in the Senate version.

In 1930, when Congress approved the Smoot-Hawley tariffs, other countries responded by closing their markets. The upshot was a collapse in U.S. trade that turned a sharp recession into the Great Depression.

Those who don’t know history are doomed to repeat it. Let’s not make the same mistakes again, especially now.

If a US company wants to remain competitive in the global markets it has to buy technologies, machines, and components it needs to make products with the quality demanded by the global markets. If it cannot, two options are available. Close the business or move overseas.

Are we going to make the same mistakes made 70 years ago? Are we going to chase foreign and domestic businesses/investors away and force them to move their assets to friendlier countries? I am really concerned by the socialist choices made by the Obama administration. Is this what we voted for? Is this the reason the market sagged almost 2.3% today and gold spiked 2.0%?

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

To find out more about my in depth view of the markets and my strategy just visit our website https://www.peterdag.com/. You can review The Peter Dag Portfolio, free of charge of course. You can also call me at 1-800-833-2782 to discuss your specific money management needs.

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

An ugly outcome of the economic crisis

In France, public transportation workers and other civil servants planned the 36-hour strike over a range of concerns spurred by the world economic crisis.

Specifically, workers are anxious about a range of problems, including low salaries, poor buying power and job insecurity. Their collective strike action challenges the way the French government has handled the economic crisis.

Similar developments have taken place in China, Belgium, Italy, Greece, Ukraine, Iceland,...

As I mentioned in the past, the problem with the mismanagement of the global economy and poor leadership is public discontent erupting in violence.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

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

1/29/09

Watch the bank stocks .....

...and watch their trend. I have been telling you for some time to watch the trend of the banking stocks and our timing indicators. The trend of the financials is still down (click on graph to enlarge).

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

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

1/28/09

A must read

I recommend you read the latest Jeremy Grantham's qurterly letter. Food for thought. Just click on this link 4Q 2008 letter.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

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

An update

I had some great presentations in Florida to different investment groups on how the business cycle impacts the price of various asset classes.

My ideas were well received. The discussion after my presentation convinced me that it pays to listen to what the markets and the business cycle are saying. (I learn listening to the questions of the audience and to my answers. They make me dig deep into the consistency of my thinking).

The choice of asset classes is particularly crucial, especially in current economic conditions. In a weak economy investors should avoid asset classes that perform well during the strong phase of the business cycle.

Our indicators are saying stock market momentum is building up, but the rally may be short lived. As usual, as our subscribers know, we will follow closely what they are saying.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

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

1/26/09

Some sobering findings

New research conducted by Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland looks at the aftermath of past financial meltdowns.

The analysis is based on 14 severe banking busts from the Depression, to the crises of Spain in the late 1970s, Norway in 1987, and Finland, Japan, and Sweden in the early 1990s. The sample also includes seven emerging-market crises.

The paper confirms earlier findings – downturns that follow a financial crisis are typically long and deep. From peak to trough equity prices declined an average of 56%, with bear markets lasting an average of 3.4 years and housing prices declining 36% in 5 years.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

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

1/23/09

Thought of the day #2: the market cannot bottom without a strong financial sector

Financial stocks keep plunging (click on chart to enlarge). The trend is devastatingly down. The stock market cannot improve without a strong financial sector. There are other markets, however, that are attractive in this environment.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

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

Thought of the day #1: The economy cannot recover without an improving housing sector

Privately-owned housing starts in December 2008 were at a seasonally adjusted annual rate of 550,000. This is 15.5 percent below the revised November 2008 estimate of 651,000 (click on chart to enlarge).

Prices of U.S. single-family homes plunged a record 18.0 percent in October from a year earlier, Standard & Poor's said last month, with the drop in prices accelerating as unemployment rose.

Bottom line. The housing downturn is far from over and prices will continue to weaken. The economy cannot improve without a strengthening housing sector.

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

1/20/09

End of American federalism?

The state [of Ohio] has asked workers in its largest labor union to accept a 5 percent across-the-board pay cut, a shorter work week and unpaid holidays to help balance the state's troubled budget, according to a document obtained by The Plain Dealer.

The list of cuts and changes Gov. Ted Strickland's administration has asked the workers to accept, which also includes mandatory furloughs and paying more for their health insurance, would amount to $250 million in concessions, according to a members-only e-mail from Ohio Civil Service Employees Association president Eddie L. Parks.

Bottom line. More and more states are in trouble: OH, CA, NJ, MI, MA, ...and the list grows. Will the government have to bail out the states, practically controlling the budget of the Union?

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

Financial, economic, and religious bubbles

Bubbles are the outcome of vast concentration of power and wealth. This applies to political, religious, economic, and financial bubbles. It is the outcome of the competition between power groups.

As the number of power groups decreases, or one becomes overwhelmingly more powerful, the country’s economy slows down, the population becomes dissatisfied, and violence may erupt.

A classic case is the transition happening in Iran. An article in Foreign Affairs gave me the idea that bubbles do not have to be necessarily economic or financial. They can be political or religious.

The gist of the article is that Iran has become a sultanistic regime. The main issue for Iran is that Ali Khamenei is the supreme leader. The Iranian constitution endows the supreme leader with tremendous authority over all major institutions. Through the years, Khamenei has found many ways to increase his influence.

He is the head of state, the commander in chief, and the top ideologue. He also reaches into economic, religious, and cultural affairs through various councils and organs of repression, such as the Revolutionary Guards, whose commander he himself appoints, according to the writer Akhar Ganji.

The Iranian situation will remain the same as long as the power structure does not change, according to the writer. Over the course of two decades as supreme leader, Khamenei has secured a complete stranglehold on power in Iran. In fact, Iran today is indeed a neosultanate, according to Mr. Ganji.

Any political and economic system eventually moves to extremes because of the blind search for power and wealth of dominant power groups within the system.

The communist idea in the USSR and the capitalist ideology in Europe and USA collapsed because of the relentless search for power and domination by those who believe in wealth redistribution and the power of social engineering. Iran’s bubble will also collapse in due time. This is the disturbing lesson of history.

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

1/19/09

Thought of the day

People have to believe. It is an emotional need. A relief valve. This is especially true when we feel down, when we have a sense we lost our bearing...where we stand...where we are going.

People need to believe. We need an anchor. The main problem is that history is full of anchors lying down in the sea of history ...totally forgotten.

Yet, we need to believe this time is going to be different. And so we move, from anchor to anchor.

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

1/16/09

Another weekend.....time to relax

The markets are going nowhere. Up 2%, down 2%. It reflects uneasiness. Ready to jump in at the latest bailout. Ready to sell when the details are finally known.

This is a good time to relax for the next two days and listen to a superb piece of music (in my humble opinion).

Have a nice weekend.

George Dagnino

Thought of the day

This morning the Dow futures are up 112 because Bank of America received $138 billion government lifeline. Citigroup, the financial-services company that dropped 43 percent this year, added 5.7 percent after announcing plans to form two new businesses and to split the units it wants to keep from other, “non-core” assets.

Bottom line. I cannot trust a market soaring every time the government gives away billions of dollars to companies that have mismanaged their business. The response of the market is very naive and I do not trust it.

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

1/15/09

Bank stocks lead the way

I am a firm believer that the market cannot go up unless bank stocks move to new highs. The enclosed chart (click on graph to enlarge) shows that the bank index is sagging to new lows. This is not what you see when the market is ready to move higher.

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

About trading volume and market bottoms

Important market bottoms take place as trading volume picks up and then soars. This is the time when stocks are transferred from weak hands to strong hands.

This pattern should not be confused with the pattern you see at major tops. As a stock rise, volume increases. Eventually volume rises to above average levels as strong hands distribute shares to weak hands.

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

The ECB cut rates to 2%

The European Central Bank cut its interest rates by a half percentage point to 2 percent on Thursday, moving to protect the continent's economy against a deep recession amid increasingly grim economic data.

Despite some apparent earlier reluctance to cut interest rates significantly in January after reducing them by 175 basis points over the previous three months, the ECB really had little option but to act again given the clear, widespread evidence that the euro zone recession is deepening.

Bottom line. Central bankers, like all bureaucrats, wait until the last minute to act. They are always late in order to avoid big mistakes. They never attempt to anticipate economic or financial events. They react.

This is the main reason why short-term interest rates are highly correlated to commodity prices, which are exquisitely driven by the markets. In other words, the markets always win.

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

Bad news -- financial stocks slumped.

Bad news. Financial stocks are too weak. The market is saying the financial sector (click on graph to enlarge) is not strong enough to justify any optimism about the economy and the equity market.

You can rest assure the government will not stop with its "stimulus packages" until the market turns around.

Timing is crucial in this environment and our indicators have done well for our readers in giving the direction of the market in the past month.

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

Retail sales and the business cycle

More than 2.3 million American homeowners faced foreclosure proceedings last year, an 81 percent increase from 2007, with the worst yet to come as consumers grapple with layoffs, shrinking investment portfolios and falling home prices.

Nationwide, more than 860,000 properties were actually repossessed by lenders, more than double the 2007 level, according to RealtyTrac, a foreclosure listing firm based in Irvine, Calif..

The economy is in a vicious cycle. Fewer jobs, lower income, more foreclosures, lower retail sales (click on graph to enlarge), lower production, fewer jobs, .....

It is no surprise commodities are weak and inflation is heading down. Some asset classes benefit in this environment, others struggle.

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

1/13/09

Thought of the day

The market cannot move higher without a strong regional bank sector (ETF: KRE) ( click on graph to enlarge).

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

1/12/09

About forecasting

This is the time when editors of financial publications try to outsmart each other with their insights and forecasts. I used to save the forecasts that sounded most interesting and compelling – especially those relying on extensive analysis.

Occasionally I checked and reviewed them. After a few years I stopped because I could not use them. Those who were right the previous year were wrong the next one. The batting average was dismal in spite of their resounding names. Do you remember Barton Biggs insisting on CNBC in the Fall of 2007 that the market was ready for a huge move on the upside?

The point is that any forecast taken in isolation is meaningless. When I was managing $4 billion, I subscribed to the best strategy services. The fact that they were wrong was not the issue. I wanted to understand their assumptions so that I could revise my strategies accordingly.

It is difficult to be correct when one has to forecast one year ahead. Furthermore, the more precise the forecast is, the higher are the chances of being wrong. I found that the odds of being right decrease exponentially with the time horizon of the forecasts.

The way I solve these inconsistencies is that I begin with the most reliable starting point, the point with the highest probability of success – understanding what is happening now. This is the reason I look in depth at current financial conditions. The charts are factual. Once you know what is happening, I adjust the portfolio to the risk and opportunities of the present environment.

The drawback with this approach is that one has to make frequent transactions to reflect the changes in the marketplace. For instance, from September 2nd to November 21st the market dropped 37.4%. The outcome was that we were forced to sell aggressively.

Yes, volatility is high, financial risk is beyond the safe limits, the economy is growing slowly. By monitoring closely these developments we will find opportunities. You have to play the game if you want to win.

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

1/10/09

Another weekend....time to relax and smile

Another market week is over. It is time to relax and look outside ...and smile.

Enjoy the music.

George

1/9/09

Thought of the day

The business cycle works. The economy remains weak. Employment is tanking and the unemployment rate is soaring.

The markets reacted as you should expect. Stocks down. Corporates bonds very strong. Commodities weak. Dollar strong (flight to safety). Gold weak, reflecting the trend in commodities.

We let our indicators tell us what to do. Stay tuned.

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

1/8/09

Another Clinton official elected

Nancy Killefer has been named Chief Performance Officer by President-elect Barack Obama:

President-elect Barack Obama has chosen a former Clinton Treasury Department official to head up a new office that will closely follow how well federal programs are working.

Bottom line.Wow! Another level of bureaucrats. The bureaucracy keeps growing as the government increases spending. This is one of the bubbles that will get out control and be a major brake for the US economy.

Another thought. Clinton is firmly in power. Like Putin, he is not the president but more and more people in his administration get a job with Obama. Did we vote for change?

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

A new market indicator

I just developed this indicator (click on the graph to enlarge). I find it interesting. It gives precise market signals when it reaches high or low levels.

It is an example of what I call directional indicators. They tell us what to do when they rise or decline from extreme levels.

Its main feature is that when it turns up from low levels it gives a reliable message that the market has reached an important top.

The market reaches a major bottom several weeks after this gauge declines from high levels. It looks like the peaks of this indicator have a cycle of about six months. For instance, note how this gauge signaled the market bottomed in March and in October.

There are other features which we will examine in details in our next special edition of Market Update available to our subscribers on the website. At that time we will show the latest position of this indicator and its market implications.

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

1/7/09

We do not know when to stop...until it is too late

California, the most populous U.S. state, is suffering from a spike in unemployment and a sharp slowdown in its economy, which has slashed its revenues and put the state's government at risk of running out of cash within weeks. The state's financial situation is so dire that its Pooled Money Investment Board last month halted $3.8 billion in loans for public works so the state could use the money to pay for vital services.

Bottom line. Several states, like California are in trouble. They gave, gave, and gave to the citizens what they citizens wanted. They were all great ideas. Besides, they make bureaucrats more powerful. Eventually, however, the bubble bursts and the markets win.

It is human nature to reach out and want more ..without limits. We do not seem to know when to stop. Until the house of cards we build collapses...and then we start all over again. There is a sense of inevitability in the history of man.

We close our eyes and hope for the best. But the markets always win. No matter how smart we are with all our think tanks and PhDs, we do not learn to say enough is enough. And we all pay the price.

Some would say leadership is hard to find.

To find out more about my in depth view of the markets and my strategy just visit my website https://www.peterdag.com/. You can review The Peter Dag Portfolio, free of charge of course. You can call me at 1-800-833-2782 to discuss your specific money management needs.

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

1/6/09

It's a great rally, but....

What is bothering me is that the defensive sectors, including financials, were weak. The strong sectors were those you would expect to be strong when the economy roars. Quite frankly I do not think this is the case.

I am not convinced about all this optimism. But then, I have been wrong before. Time will tell.

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

A risky development

Dec. 31 (Bloomberg) -- Developing nations plan to sell the most dollar-denominated bonds since 2005, reversing a shift into local debt, as commodities prices fall, foreign reserves diminish and emerging-market currencies weaken.

Bottom line. It is very risky for emerging countries to go short the dollar and long their local currencies. Their currencies will tumble if their economies falter and they have to inflate them more than the industrialized world.

As in 1998, their economies will be put at risk. If their currencies weaken, where will they find the money to pay for maturing bonds issued in US dollars? Is this another bubble in the making?

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

Should we buy junk bonds?

Jan. 6 (Bloomberg) -- Federal Reserve officials are focused on driving down the spreads between U.S. Treasury yields and consumer and corporate loans, after cutting the main interest rate to almost zero failed to revive lending.

The spread on investment-grade corporate bonds is 6.03 percentage points, down from a record 6.56 percentage points on Dec. 5, Merrill Lynch & Co. data show. That compares with an average of 1.23 percentage points in the previous decade.

Laurence Meyer, a former Fed governor and a founder of Macroeconomic Advisors, said purchases of longer-term Treasuries by the Fed would help keep yields down even as the Obama administration implements its planned fiscal stimulus

Bottom line. There is no doubt the economy cannot function with corporate bond yields at current levels. The Fed will have to do something about it. They will have to buy them aggressively as they did Treasuries.

Should we buy what the Fed is buying? Or is it too early to to buy high-yielding corporate bonds? What is a good risk management strategy?

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

1/5/09

An interesting proprietary indicator

In the past 3 years, this proprietary indicator signaled a market top when it dropped below 0.40 (click on graph to enlarge). This gauge declined decisively below 0.40 in the past few weeks. Is it sending a sign of caution?

Something to keep in mind. Market rallies lasting several weeks took place when this indicator was above the 0.90 level.

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

No new faces..same old people

WASHINGTON (Reuters) - President-elect Barack Obama has chosen former White House chief of staff Leon Panetta to lead the CIA.

Panetta has relatively little experience in national security matters, though he did participate in daily intelligence briefings with President Bill Clinton when he served as Clinton's chief of staff between 1994 and 1997.

Bottom line. Help. I do not seem to understand. We were promised change. The next administration is full of old timers (some are octogenarians), Washington insiders, and Clinton's favorites.

It reminds me of a saying that goes something like ...the more things change, the more they stay the same.

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

Is this "change"?

President-elect Barack Obama, seeking to drum up support from both political parties, plans to propose up to $310 billion in tax cuts for businesses and the middle class as part of his massive economic stimulus package, senior Democratic aides said on Sunday.

Bottom line.Politicians are driven by events. Bold statements before election day are just that....bold statements. Eventually events take over and politicians try to solve problems created by previous policies.

Like a big wave, political mood shifts to give the impression to the country that something is being done. But nothing is being done. Now the wave will create other issues, such as the massive role of the government in our life.

Socialism will make us numb, as in Europe. This is a state of general trance in the public. No one will care as the economy stagnates.

The big wave of public opinion will shift again, however, and a new leader will tout change trying to reduce the impact of socialism.

The problem is that once socialism is entrenched (as in most European countries), bureaucracy supported by interested power groups becomes so powerful that changes become impossible. The power groups benefiting form the bureaucracy will resist change because it implies a loss in power and wealth. So you will have two classes, as in medieval Spain -- the bureaucrats and everybody else.

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

1/4/09

The next shoe to drop?

Pacific Investment Management Co., which runs the world’s largest bond fund, said it is postponing two dividend payments to investors in a pair of closed-end municipal bond funds.

The Pimco Municipal Income Fund was to pay an 81 cent dividend, the company said. Its total return is down 42 percent year this year while its peers are off an average of 22.09 percent, according to Bloomberg data. The New York Municipal Income Fund II was to pay a 6 cent dividend. Its total return is down 45.92 percent this year, while the peer group has declined an average 22.05 percent, Bloomberg data shows.

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

1/3/09

...and now this is the time to relax and enjoy this marvellous music

Barber, a great American composer. Adagio for strings, op.11.

Enjoy, relax, forget about the markets and all the problems we face. Your brain needs to be charged to face the new challenges of next week.

Best.

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

Our Saturday meetings

I meet on Saturday morning, twice a month, with a group of friends and we talk about investing -- from the direction of the business cycle to choice of asset classes, stock sectors, and market timing. We are all committed to studying the challenges offered by the markets.

What did the group conclude today? The market will probably go up in the near term. This is good news for the traders. The most conservative of us suggested that it is better to wait for confirmation that momentum has turned up. The indicators we follow will give us the signal. Meanwhile high-yield bonds may provide some interesting returns.

We will find out next week. The most astute people suggested next weak will be crucial.

Stay tuned.

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

1/2/09

Technically speaking

Many analysts are getting excited because the Dow broke out of a range and closed above 9000.

The problem I have with all this enthusiasm is that the breakout took place with little, insignificant volume.

I realize the momentum is up, but a breakout is important if accompanied by strong volume. And volume has not been strong at all.

To find out about my in depth view of the markets and my strategy just visit my website https://www.peterdag.com/. You can review The Peter Dag Portfolio, free of charge of course. You can call me at 1-800-833-2782 to discuss your specific money management issues.

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

1/1/09

Thought of the day

I am reviewing charts, many of them. Different markets. I look at them and sit without thinking. I wait for a pattern to jump at me.

Well, this is what I am am thinking right now. Do not try to catch a falling knife. Avoid assets falling in price. No, it is not so obvious. I know several people buying stocks as they get decimated because they think they are cheap. And prices keep sinking. And investors keep losing substantial amounts of money.

Wait for the price to stop declining. Wait for the price to form a base. Wait for the price to move up. Consistently. Wait for the broad market to confirm the trend.

And above all, be patient.

To find out about my in depth view of the markets and my strategy just visit my website https://www.peterdag.com/. You can review The Peter Dag Portfolio, free of charge of course. You can call me at 1-800-833-2782 to discuss your specific money management issues.

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