Peter Dag & Friends: February 2009

2/27/09

Mr. Obama programs and the stock market

The sharp decline of the equity market has a precise, crystal clear message.

When a government takes over a company (and this is true in any country), the equity value of the company drops to almost zero. Look at what happened to Citi and Bank of America.

The relentless decline of the stock market is the reaction to the grandiose programs of Mr. Obama. Equity values go to zero because the profit maximizing activity of corporations disappear under bureaucratic control.

The ensuing slow economic growth will be a frustrating experience for this country. It has happened in Europe. We are heading in the same direction. Our animal spirit will fade as we seek safe government jobs.

The markets always win. They will offer new opportunities in specific asset classes. You just have to think differently. Meanwhile, follow closely transportation and financial stocks. They are providing exceptional signals.

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

Will the government solve our problems?

This administration is committed to solving our problems by forcing the private sector to execute the government playbook. These are the same people, by the way, who invented Freddie and Fannie.

The economy is crashing. It is "their" fault, they say. My sense is that these policies will continue to bring a slow economy until a new Reagan or Thatcher appear on the political scene. The pendulum is swinging the wrong way, however.

The government will find the right solutions for us -- so they say. They will tell the private sector how to run their business. The problem is that they are all professors and academicians who have never run a business. They only know how to pontificate. The tragedy is that people believe them!

We will be a different country. But changes bring opportunities. The continued painful decline of the equity markets is telling that these policies are unacceptable to the free market. Other assets, however, are offering good returns.

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

House prices

Housing prices are down in the 3 countries where the bubble was most severe: US, UK, and Spain. Spain has to correct much more.

Global financial and economic issues will end when housing prices will stabilize. The problem is that the inventory of unsold homes is still too high for prices to firm.

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

2/25/09

Risk

Every time I start looking at the scope of the next publication, I make a list of the information I have to analyze.

I collect the data (yes, I still do it manually). I like to get a feeling for the numbers and the revisions. I get a better understanding of what is happening.

At the end of the process, I go through an incredible number of charts and graphs. As I look at them, I ask myself whether or not what I am looking at is relevant and if it helps conveying to you what I see.

If the chart fits a definite pattern, I use it as “evidence.” I realize that I have to present my case to you in a convincing way. I know you need hard evidence because you have to make tough decisions for you and/or your clients.

At the end of the process I found out this is the longest issue. Why? Because I need to convince myself about the trends I see so that I can explain them to you.

The most important concept is the idea of risk and how various asset classes reflect this risk. This is how I see it.

Moving from low risk to high risk these are the options: T. bills, CDs, 12 month Treasuries, 20+ year Treasuries, short-term high-grade corporate bonds, long-term high-grade corporate bonds, short-term low-grade corporate bonds, long-term low-grade corporate bonds, high-yield bonds.

Risk rises substantially when you move into the asset class “stocks” (see our financial risk indicator).

Investors have to allocate capital depending on risk, depending on the odds of making money. There is no question the economy is growing slowly. This is the reason commodities and interest rates are heading lower and will stay low.

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

Behind the camera

We went skiing with our grandchildren on Sunday and Monday. I was utterly dismayed. No ski lift lines on Sunday. The area, located in western NY, was empty. Usually it is packed on a Sunday. It was a sign of the times. People are scared.

Driving back to Akron I found myself thinking about my boat. The snow was melting. Friends saw 6 robins. Time to look forward to sailing on the Chesapeake.

The following day I was at The Normandie in Annapolis. Jean-Louis is the chef and owner. I felt at home as the waiters recognized me. Terry suggested I go in the kitchen and say hello to J-L. He greeted me with a great smile as he was negotiating pans and various sauces. “Let’s have a glass of wine later”, he said with a strong French accent. The restaurant was full.

Suzanne, J-L’s wife, came to say hello. I did not recognize her in tight jeans and a youthful short haircut. Are you J-L’s daughter? She loved it. We talked about her children, Nick and Melanie.

I quickly moved behind my imaginary camera and recorded in my brain what was happening. Often we search for the meaning of life and we forget what we have. What I was experiencing was warm friendship. Good laughs.

Later, J-L invited me to join them after I finished my dinner. They were eating a new mussel dish, a recipe J-L had improvised. I sat at their table and started talking about France, Italy. The wine was good. A Key lime tart with pear sorbet, expresso, and cognac. What a delightful evening. It takes so little.

My camera was still rolling. The financial crisis was way back in my mind. We shared our passions. Why was J-L successful while others were not? Passion. Passion for cooking. My work, his work. We have no time to travel. For this reason, it is so important to always bring with you your imaginary camera because you never know when the next great moment will happen. J-L has a passion for what he is doing. So do I. This is the main secret of life. You need to have passion for what you are doing. Then joy de vivre will make things easier.

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

2/19/09

Too much nonsense...time to relax

Pablo Casals, a sublime artist, plays Bach Suite #1.

Time to relax and forget all the nonsense and positioning of the politicians. They are trying to convince us that socialism is a good idea. I come from Italy where socialism is strangling the country, and I can tell you that it is a dangerous and ruinous concept.

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

The markets always win

The government intervention in foreclosures and mortgage modification regulations increases the risk for the lenders. In order to protect themselves against the added risk lenders will increase the premium in the interest rates they charge to homeowners.

What the administration should really do is to convince the population that housing should be bought only if one can afford it. Subsidizing housing through various nonsensical programs has pushed all of us in a financial abyss. It is the time to recognize the policy mistakes and start all over again.

Why? Because the markets eventually win. If it is a bad idea we will end up paying dearly, as we are now.

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

Food for thought

In a period when inflation is positive, say 3%, an investment return of 5% is equivalent to a 2% return after inflation.

However, when inflation is negative, say -3%, an investment return of 5% is equivalent to an 8% return in real terms.

We do keep this in mind when we develop our investment strategies.

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

2/18/09

How can you trust what is going on in Washington?

From the FOMC minutes of April 29-30, 2008

"Economic activity was anticipated to be weakest over the next few months, with many participants judging that real GDP was likely to contract slightly in the first half of 2008. GDP growth was expected to begin to recover in the second half of this year, supported by accommodative monetary policy and fiscal stimulus, and to increase further in 2009 and 2010."

These are the same people conducting monetary policy for the biggest economy in the world. In April 2008 (almost a year ago) they did not have a clue of what was going on. They were fearlessly forecasting stronger growth in the second half of 2008!!!!!!

We are in February 2009 in the midst of a serious recession, skirting a depression.

The same people are now trying to find solutions to problems they did not anticipate. How can we trust the solutions to problems they have clearly proven of not understanding?

The markets always win. The only way you can defend yourself is by understanding how they work.

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

A long time...but no solutions!

The bureaucrats are telling us the markets do not work. They are not telling us, however, that their emphasis on social engineering distorted the markets.

The outcome has been a collapse of the markets they distorted with easy lending and low interest rates: banking and housing.

The bank stocks (click on graph to enlarge) are still heading down after peaking two years ago. The trend of the this stock sector is clearly telling us that the bureaucrats have not made a dent in solving our credit problems.

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

Boring, but very important

Productivity, or output per man hour, is an important measure of profitability (click on graph to enlarge). But there is more to it.

When the economy is in a recession, productivity, which measures our efficiency in producing goods, rises. Why? Business strives to be more efficient to protect margins. This is an important condition for the economy to move out of a recession. See, for instance, what happened during the 2002 recession.

The problem with this business cycle is that productivity is declining, suggesting that profitability is still under downward pressure.

The economy will recover after steady improvement in productivity.

Question. Does the stimulus package improve our productivity?

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

2/17/09

An interesting trend

The transportation stocks are plunging (click on graph to enlarge). This is the bad news.

The good news is that when the transportation average is weak (because the economy is weakening) other asset classes strive. The business cycle works!

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

2/16/09

Question

President Barack Obama opted against naming a “car czar,” instead asking Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers to head a task force on revamping the US auto industry, according to people familiar with the decision.

What do Geithner and Summers, two economists and financial experts and college professors, know about the car industry? How can they fix it if they do not know absolutely anything about cars? If they did, they would run a car company. Is this where we are heading? Bureaucrats telling us how to run our business?

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

Something interesting is happening

More and more people, especially from the current administration and congress, are saying they have to do something because the free market does not work.

What is bothering me is that the general public does not recognize that the problems we are facing have been carefully engineered by the government to re-distribute wealth.

Karl Marx and Engels disagreed with the great achievements of the English Industrial Revolution. They devised a new way to create a just society -- communism. History shows that their ideas and implementation created poverty and the collapse of an empire.

My point is that we have to be careful before agreeing that the free markets do not work.

The free markets work if the rules of the game and their enforcement are spelled out clearly.

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

2/14/09

Another tough week....Time to relax

This great music makes you forget the vagaries of the markets. Take some time off and relax.

Meanwhile, the markets are acting as predicted by our indicators. You should consider subscribing to our The Peter Dag Portfolio. It will give you ideas on how to develop investment strategies to take advantage of the trends of the business cycle.

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

2/13/09

Stay focused...the business cycle and the markets work.

Government policies created the problems. Now the government says the markets do not work. First they bend the rules, then they say the rules (read: regulations) need to be updated. Their efforts are useless.

Why? The markets always win. The government is only confounding some players, but not the markets. The markets are closing the least efficient financial institutions (financial stocks keep sinking) in spite of all the efforts made in the past 2 years.

Things will unfold as they should. The business cycle works. If you understand this simple concept, you will find money making investments. Safely. Now. This is an invitation to read our publication. You will find practical answers to these issues.

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

2/12/09

Question

There is only one strategy that made you money in these turbulent times. Do you know which one? The answer is simple. Follow the business cycle. It tells you exactly which investments are likely to perform well.

The Peter Dag Portfolio explores this issue in great detail.

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

Does Obama have the experience...

....and the leadership to decide what to do? Or is he just the messenger?

This is what Martin Wolf, the renowned columnist of the Financial Times, notes.

"....it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome."

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

The business cycle works

Commodities, all commodity indexes, no matter how you measure them, are acting as they should (click on chart to enlarge). Commodities go nowhere when the economy grows at a below average pace.

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

2/11/09

The problematic nature of the current recession

These are the issues raised by Gross/El-Erian of Pimco. These are very important considerations and should dominate the investment strategy of every investor.

a. Traditionally, economic growth has been a delicate balance between finance and production, with the growth/recession cycle determined by monetary policy rates and inventories. However, the makings of the current recession included the additional long-term “trans-generational” element of leveraging in the housing and financial markets.

b. This recession is the result of typical imbalances–-an oversupply of houses–-but also of a global economy that was fueled by a leveraged financial complex and a level of debt that was unsustainable.

c. The increasing leverage in the U.S. economy goes as far back as the era of the Bretton Woods agreement in the mid-1940s, accelerated in the 1970s and 1980s with the advent of financial leverage, and topped out in recent years with the Shadow Banking System—which was not well recognized or regulated by policymakers—and U.S. housing bubble.

d. This is not a mild inventory correction; it’s a delevering, deflationary debt-liquidating cycle.

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

Watch the bank stocks ....

This is not the picture of a bull market (click on graph to enlarge). Stocks (and the economy) are doomed as long as financial stocks are heading down.

PS. The bank index peaked in January 2007, 7 months ahead of the market.

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

A terrible day, but....

The business cycle works.

Commodities weak. Bonds strong. This is exactly what you should expect when the economy is sinking.

Financials are weak responding to the timid response of the bureaucrats. Stick to the basics.

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

2/10/09

Business cycle and investment strategies

The business cycle can be subdivided in 4 phases.

1. Growth above average and rising
2. Growth above average and declining
3. Growth below average and declining
4. Growth below average and rising

I believe the way to manage an investment portfolio is to focus (the opposite of diversification) on the choice of asset classes that perform well in each of these phases.

When growth is above average, I select sectors that do well in a strong economy. This is the time when all commodities rise because of the robust demand from global business. Investors should focus on those stocks that are commodity driven: energy, energy exploration, energy drilling, metals, fertilizers, shipping, heavy machinery.

When growth is below average, completely different asset classes and stock sectors emerge as best investment choices. This is the time when commodities and interest rates decline. The strongest sectors are those benefiting from the lower cost of money: long-term Treasury and corporate bonds, high-yield bonds, regional banks, insurance, REITs, and defense.

The point is that stocks or asset classes that perform well in a strong economic environment are completely different from those doing well when the economy is growing slowly.

Diversification does not work for two reasons. The first one is that it makes your portfolio perform like the averages. Why not then buy the “average”, such as SPY (the ETF for the S&P 500). The second reason is that stocks that perform poorly because of the position of the business cycle drag down the performance of the whole portfolio.

The trend of business growth (rising or declining) should be used to guide your strategy by gradually investing your portfolio in sectors benefiting from the next phase of the business cycle.

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

2/6/09

About Friday's market

A good day. A broad based move. Financials strong. Commodities mixed. Dollar is acting poorly. A top? High-yield bonds performing as expected.

Our indicators are responding as discussed in today's issue. It is tempting to become emotional and start buying aggressively.

A good week. Time to relax and listen to Chopin's Polonaise played by one of the greatest pianist.

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

About Thursday's market

What I found encouraging was that the advance was broad based. All sectors were strong and there were no major surprises.

This is good news and may bode well for the market in the next several weeks. The financials must find support near current levels for the market to improve. As usual, however, we will follow closely our trusted timing indicators.

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

2/5/09

The outlook for GOLD

Oil was supposed to go well above $150. Some major players were predicting $200, up, up and away! Now it is standing at $40.

The same forecasting game is now played by those who benefit the most from rising gold prices. Sign of a top?

This graph of gold and inflation (click on graph to enlarge) shows inflation (CPI) and gold on an index basis so that you can compare the appreciation of gold relative to consumer prices.

In 1980, gold moved considerably higher than the inflation index and gold did not do much for 30 years from those levels.

In 1998-2000, gold fell well below the inflation index and gold soared above the 1980 levels (barely).

Now, gold prices jumped well above the price index. With so many people (I do not want to call them investors) forecasting much higher gold prices ($1200-$2000) and consumer prices declining, has gold reached a multi year top?

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

2/4/09

The markets will win...always

President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure.

"Obama announced the dramatic new government intervention into corporate America at the White House, with Treasury Secretary Timothy Geithner at his side. The president said the executive-pay limits are a first step, to be followed by the unveiling next week of a sweeping new framework for spending what remains of the $700 billion financial industry bailout that Congress created last year.

The flight of executives from companies receiving TARP money will confirm Obama's decision was not a good one. The best executives will leave. The below average ones will stay. Is this what we want? Is it just a PR move to show the government is in control?

I firmly believe the markets always win...always.

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

2/3/09

About today's market

Financials, the dollar, and energy were weak. Gold is overbought.

I find difficult to believe the market can rise without strength in the financials. Strength in the housing stocks, such REITs, would help. But there is little chance at this stage of the business cycle.

Furthermore, deflation is raising the real cost of money, discouraging investors and business to borrow. It may be one reason why the interest sensitive sectors are laggards in spite of historically low interest rates.

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

2/2/09

About the stimulus plans

No one really understands what is going on. The markets, meanwhile, are handling the problems the best they can.

The main positioning of the Washington power groups is to make sure they are not left out from the biggest orgy of giveaways in the history of this country.

The trough is big and deep. And the party is sponsored by us.

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

2/1/09

Relax... It has been a rough week and month...

This piece by Debussy (clair de lune) will make you dream and forget for just a few hours what is happening.

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