Peter Dag & Friends: May 2009

5/31/09

I might be wrong but.....

Is Obama bailing out GM or the union? Who did support Obama's election? Jack Welch had a great line recently....Tell me which American industry benefited by being unionized ... airlines, steel, auto...?

The problem is that we, and I mean all us, fail to be flexible at crucial times. This is what exacerbates crises! We rather sink with the ship than try to save it.

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

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, since 1977

The markets always win

News. Investors are challenging a president’s attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke’s efforts to cut borrowing costs for businesses and consumers.

The 1.4-percentage-point rise in 10-year Treasury yields this year pushed interest rates on 30-year fixed mortgages to above 5 percent for the first time since before Bernanke announced on March 18 that the central bank would start printing money to buy financial assets. Treasuries have lost 5.1 percent in their worst annual start since Merrill Lynch & Co. began its Treasury Master Index in 1977.

Bottom line. They can plan, talk, sell all the ideas they want. The markets will eventually have the last word. The markets always win.

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, since 1977

5/29/09

An interesting panel of smart people.

The attached news video deals with the current problems as debated by a group of smart people. I found it informative. Just click here.

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, since 1977

5/28/09

Crude oil and stock prices

The last time crude oil had a huge rally was in 2007. It almost tripled from $51 to $140+. The stock market, however, started sputtering in June 2007 when oil had risen 35+% from the bottom of $51 reached in January 2007.

Move forward a couple of years. Crude oil jumped from $35 in December 2008 to $65 (as of yesterday), a move of almost 86%. The stock market has been sputtering since the beginning of May.

Question. Is rising crude oil prices bad news for the stock market? Does the market peak after six months of rising crude oil prices? Time will tell.

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, since 1977

Did you know that ...

In the last 3 years,

1. Commodity base stocks consistently outperformed the S&P 500 except for the June-November 2008 period.

2. The bank index has consistently underperformed the S&P 500 except for the June-November 2008 period.

Bottom line. Do you see a useful pattern to use in your investment strategy?

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, since 1977

The markets always win

The Dow Jones industrial average fell almost 175 points Wednesday, erasing most of the previous day's rally as a jump in government bond yields fanned concerns that higher interest rates will sap strength from the economy.

A steep drop in the price of the benchmark 10-year Treasury note pushed its yield up to 3.75 percent from 3.55 percent late Tuesday and to the highest level since November. Bond investors were selling on concerns that the huge amount of debt the government is selling to fund its bailout programs will ultimately keep Treasury prices down.

Along with increasing borrowing costs for the government, rising yields on Treasury debt could hamper an economic recovery since they are used as benchmarks for home mortgages and other kinds of loans. Higher mortgage rates could delay a recovery in the battered housing market.

Bottom line. Since the beginning of the year, the yield on 10-year Treasury bonds soared from close to 2% to just under 4% (click on chart to enlarge). Washington cannot bail out the whole country and convince us we are headed for prosperity. We just cannot become a wealthy country by borrowing. We have to work for it.

Interest rates on government bonds are soaring. And we are just at the beginning of the borrowing process. The markets are letting us know the government interventionist ideas do not make economic sense. Watch interest rates on government bonds. The markets always win.

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, since 1977

5/23/09

Time to relax...

Time to relax and enjoy this great music by Boccherini. Have a nice Memorial Day weekend. We will have to face the markets next week fully rested. The uncertainties continue.

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, since 1977

5/22/09

Bond yields have been rising and ......

Treasury bond yields have soared from 2.50% to 3.35%. What are the implications for stocks?

The following patterns are useful in predicting the next turning point.

1. Rising stock prices are followed by rising bond yields.
2. Rising bond yields are followed by lower stock prices.
3. Lower stock prices are followed by by lower bond yields.
4. Lower bond yields are followed by higher stock prices.

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, since 1977

5/21/09

What if?

What is the message of the stock market if it remains weak for a protracted period of time?

According to the patterns of previous business cycles this is how the markets behave.

1. Stocks decline (this is the assumption).
2. Bond yields decline and bond prices rise.
3. The economy weakens.
4. Commodities decline.
5. Inflation declines.
6. The Fed eases aggressively.

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, since 1977

Watch the bank index for clues about the direction of the market

The bank index is important because banks caused the mess we are in and banks will lead us out of it.

Bank stocks have gone nowhere since early April (click on chart to enlarge). They hit the resistance level (blue line) and retreated. On 5/20 they sagged 2.39% while the S$P 500 declined only 0.51%. They have been weaker than the market for a while. They will tell us the direction of the overall market.

There is another idea that bothers me. Will all the major players sell ahead of the end of the quarter to lock in the profits to show the great gains they had in Q2?

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, since 1977

5/20/09

The markets always win

News. California voters rejected a package of budget-balancing measures that Governor Arnold Schwarzenegger said were needed to keep a $15 billion deficit from widening to $21 billion. A proposal to limit lawmaker pay passed.

Bottom line. The people ask. The government gives. Services/benefits increase beyond the means to provide them. It has happened in California as in private enterprises. See, for instance, the relationship between the unions and GM or Chrysler, or Alitalia in Italy. People rather sink with the ship than save it. A desperate fatalism seems to drive them.

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, since 1977

5/19/09

Watch the bank index for clues about the direction of the market

The S&P 500 Banks Index slumped 4.4 percent, the most among 24 industries, after the Moody’s report. U.S. commercial property prices are now down almost 23 percent from the October 2007 peak and transactions have dropped as much as 80 percent, according to Moody’s/REAL Indices issued today. Prices fell 1.7 percent in March from February.

“Moody’s expects continued weakness and possibly further declines in volume in the coming months,” the ratings company said in a statement.

Watch the bank index (click on chart to enlarge). It stands at a major resistance level. This index is important because it may lead the market.

Note how it has gone nowhere since mid-April.

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, since 1977

Dear Neil, I love your show Cavuto on Business. You are incisive, witty. Full of common sense and relaxed when you try to challenge your guests. You are inquisitive and to the point. I like the way you manage your interviews. You make your guests feel at ease with your charm.

I confess, however, I was deeply disappointed about your 4/30 show. You were talking about Chrysler’s vicissitudes and its sad demise and failure to produce the type of world-class products needed to survive.

Then, you started talking about Fiat. You showed a little 500. I drove exactly the same car in Rome to go to the university. The plate of the car was several decades old.

You started kidding about Fiat cars how small they are and were surprised how a company producing such cars could come to the rescue of an American icon. Why did I resent your you-must-be-kidding kind of smile?

Last December I drove a small Fiat from Rome to Genoa at 90+ mph. The car had superb stability, great road handling, low noise level, no vibrations, and six gears plus reverse. I could not fail to compare its performance to my Lexus SC 430.

Neil, we need to be more open minded if we want to beat the competition, if we want to survive in the global market. The attitude that everything foreign is ridiculed using old fashioned clichés is destroying this country.

The reason GM and Chrysler are going out of business is because they failed to keep up with modern manufacturing processes. Friends of mine visiting from Europe called our cars “sofas on wheels”.

You should have noted that a major industry has been wiped out. An industry using complex technologies, a complex supply chain, complex intellectual content, complex management issues. And we failed miserably.

Neil, do you recognize the magnitude of this event? Do you recognize what this event is saying about our industrial base and its implications on our position in the global economy?

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, since 1977

5/17/09

...and now relax before the markets open next week....

Take time to sit down, close your eyes and try not to think. This is great music. It will get your batteries charged. You will need them next week.

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, since 1977

5/15/09

Watch the bank index

The bank stocks average (click on chart to enlarge) has been volatile, but at the end of the day it is close to the levels of March. It is under performing the rest of the market. Is this sector trying to tell us something?

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, since 1977

5/14/09

Volume patterns

This chart (click on chart to enlarge) of SH (short the S&P 500) shows an interesting volume pattern. In October, November, and March SH peaked as trading volume was soaring well above average.

The pattern has changed lately. SH has declined from $93 to $66 with below average volume. Recently, however, volume has soared and SH stopped declining, showing a small advance. SH may be moving higher if trading volume remains high. Time will tell.

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, since 1977

These ideas keep bothering me

Too many people are expecting a correction.

Too many people think this is a healthy correction in a bull market.

Too many people are saying "I told you so".

Too many people are saying the economy has turned the corner.

Too many people are saying commodities is the way to play this bull market.

Too many people are bearish on bonds.

Too many people do not have a clue on what is going on because of government meddling in the economy.

Too many people are saying the housing sector is close to turning the corner.

Too many people are expecting soaring inflation.

My point? The markets have a way to fool "too many people".

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, since 1977

5/13/09

The dangers of deflation

The highest inflation-adjusted borrowing costs since the 1980s are hindering U.S. companies’ ability to build their businesses.

Deflation hurts businesses in two ways. First, it suppresses sales. When prices are falling, buyers have reason to delay purchases and wait for a better deal.

The second way deflation hurts is by increasing real interest rates, making borrowing more expensive. A $100,000 loan at a 5 percent rate with 2 percent deflation translates into a real yield of 7 percent. When prices are going up, the opposite happens. If inflation is 2 percent, the real rate on that loan is 3 percent.

The outcome is that rising real yields may deter companies from borrowing to invest in new products or factories because deflation will erode cash flow and make it harder to service debt. The economy is bound to grow slowly under these times.

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, since 1977

5/12/09

This is how the government wants to solve our problems

News. Mortgage giant Freddie Mac is looking for $6.1 billion in additional government aid as the cost to taxpayers from the housing market bust keeps growing.

The McLean, Virginia-based company, seized by federal regulators in September, on Tuesday posted a loss of $9.9 billion, or $3.14 per share, for the quarter ending March 31. That compared with a loss of $149 million, or 66 cents a share, in the year-ago period.

The results were driven by $8.8 billion in credit losses due to soaring delinquency rates and falling home prices, and $7.1 billion in writedowns of the value of its mortgage-backed securities. More than $63 billion of Freddie Mac's loans were either 90 days overdue or in foreclosure at the end of March, nearly triple year-ago levels.

This is one of the many ideas sponsored by the government so that we could all own a house. The government seems to have even bigger ideas like the green car. The outcome? You guessed it.

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, since 1977

Trading volume and the stock market

There are two volume patterns that intrigue me.

The first one is strong trading volume following a decline. It implies accumulation. The bottom is reliable if volume is particularly strong/above average.

The second pattern is when volume is strong following a sharp rally. The meaning is distribution. As the crowd jumps in the strong hands sell to the newcomers. A top or a period of consolidation (at best) is near.

These two patterns are shown in the above chart (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, since 1977

I do not agree

I read the following investment suggestions in a well known monthly magazine.

Stocks outperform bonds. Not necessarily. High-yield bond funds have outperformed the S&P 500 on a total return basis in the past 1, 3, 5, and 10 years (as I have documented several times in my publication).

Stocks are stable over the long period. I am not sure who gave him/her this idea. Where was the writer in the last 10 years?

A diversified portfolio provides extra stability. If you diversify you are wasting time and money and you are bound to perform like the averages. If you feel you have to diversify then buy an index fund such as SPY.

You have a chance to outperform the averages if you focus your investment and you concentrate on which sector will be strong given business cycle forces.

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, since 1977

5/10/09

The trend of the dollar is not a pretty picture

The trend of the dollar (see graph) has an enormous significance. It reflects the view of the international community about us and our future. We might not care. However, a weak dollar spells problems. The dollar declined from 2004 to 2007. And you know what happened after 2007.

Bottom line. Keep an eye on the trend of the greenback. It might spell trouble if it keeps declining.

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, since 1977

5/8/09

Stock prices and bond yields

Yields on 10-year Treasury bonds soared from 2.08% in mid December to a recent 3.29% -- a jump of 58%. What is the implication for the stock market? The following relationships should be useful in the current financial climate.

1. A decline in stocks is followed by a decline in bond yields.
2. A decline in bond yields is followed by a rise in stocks.
3. A rise in stocks is followed by a rise in bond yields.
4. A rise in bond yields is followed by a decline in stocks.
5. Go to item 1.

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, since 1977

The business cycle and profits

Bottom line. Labor costs have to come down for profits to rise.

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, since 1977

5/7/09

Food for thought

A major industry is being wiped out...the auto industry. What are we doing about it? We are busy talking about bankruptcy. Should not we talk about why we are losing such complex industry? Instead we like to talk about clean coal technology. Incredible! How can we re-build such complex technologies and production processes? Why did they fail? What can we do so that this incredible event does not repeat?

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, since 1977

5/6/09

Seasonality of asset classes

There is a strong seasonality (northern hemisphere) of the price of asset classes. This is what I have experienced.

1. Commodities. Strong in winter. Weak in the summer months.
2. Yields. Up in winter. Down in the summer months.
3. Equities. Strong in winter. Weak in the summer months.

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, since 1977

5/4/09

The consensus is usually wrong

On 5/1 (see post below) I noted the consensus was expecting a market correction. The market kept soaring.

The lesson? Beware of the consensus. The majority cannot be right. It would be too easy to make money. On the other hand, you should also beware of the euphoria the current rally is likely to generate.

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, since 1977

5/3/09

What are commodities telling us?

The trend of commodities (click on chart to enlarge) is very interesting and it may signal an important change in the investment environment.

Commodities seem to have reached a bottom. The rising trend is obvious. Let's assume this is the case. What are the implications from a business cycle point of view?

1. The global economy is strengthening.
2. Inflationary pressures are on the way up.
3. Bond yields are bound to rise with the increase of the inflation premium.
4. Commodity driven stocks will perform well and are likely to outperform.

What is bothering me is that a month ago the markets were concerned about depression. Now we are looking to such a strong expansion to drive commodities higher.

Time to pause.

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, since 1977

5/2/09

Pain and the mind

I need to leave the office for a few days after publishing The Peter Dag Portfolio. At the end of the process, I find myself thinking “sailboat”, my ultimate escape.

Even in winter, if there is no snow on the road, I go to Annapolis, MD. The excuse is that the boat batteries need to be charged. In February, the boat needed some repair. The kill switch of the engine was not working. The mechanic, to access the engine, took off the second to the last step going down to the cabin.

When I went down the stairs I did not see the open step because it was way down. My left foot found support on the engine, blocking my leg. I freed my right leg and fell pivoting 90 degrees on the left knee.

As I fell, I held on to the sink, which was at least 2 feet below me. I succeeded in freeing the left leg. I never endured such excruciating pain in my life.

Back in Akron, I found out that my strong legs saved me. I damaged the left knee and the doctor recommended physical therapy. The PT exercises focused on building the muscles of the leg and improving the flexibility of the knee. A lot of stretching, weight lifting, ultra-sound and electrical currents through the damaged part of the knee.

After 3 weeks I felt I needed a break. I sensed my body was not accepting the approach. The reason is that I am accustomed to a different way of looking at pain. We think that building a healthy body is synonymous with how much muscle we have around the bones.

I like to think, as the Taoists do, that health reflects the energy balance in your body. Your mind controls this balance as slow movements maintain the flexibility of the body. Doctors recommend meditation when in pain. Why? It is the subconscious way to let your mind regain control of what is wrong in your body. The healing of my knee is a challenge and gives me an escape. Pain is a positive concept if you let your mind penetrate, explore, and understand your body. Peacefully. In tranquility.

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, since 1977

5/1/09

A dangerous populist comment

News. President Barack Obama thanked everyone from unions to executives for working to keep Chrysler LLC alive while blaming “a small group of speculators” for forcing the automaker into bankruptcy.

In the land of capitalism, lenders are now considered speculators? A dangerous turn in our thinking of the capital markets.

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, since 1977

The consensus

Too many people expect a correction and are skeptical of this rally. Two things have to happen to make them wrong.

One. The correction will be more severe than expected, showing that the bear market is still in full force.

Two. The market will keep rising, confounding all those waiting for a pause.The strength of low-grade bonds due to the Fed plans may very well suggest this is the most likely alternative.

Stay tuned.

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, since 1977