Peter Dag & Friends: June 2009

6/28/09

Next week may be an interesting one

Meanwhile, let's enjoy this unique/different interpretation of the music of a great American composer. Enjoy!

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

Should you be bullish when ....

... the bank stocks are going nowhere (click on the chart to enlarge)?

Some analysts believe the market cannot rise without a strong financial sector. They may be right.

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

6/24/09

Are the bankers at fault?

News . ..... I’m rooting for the founder of Kuala-Lumpur-based AirAsia Bhd. This region needs more entrepreneurs like him if it’s going to thrive, and I want Fernandes to succeed.

So it was with a tinge of sadness that I read his recent comments about how difficult it still is to borrow money. His words explain, perhaps better than anything, why the global recession may have a long way to go. .....

My point. The thrust of the article is that the bankers are at fault. They are not lending. The history books are full of cases where the bankers were at fault. Were they?

The current crisis has been precipitated by decades of wrong government policies. Everyone had to own a house. Lending standards were lowered to achieve this purpose. People took advantage of it and forgot the meaning of prudence. The banks were there to benefit from the situation.

It is easy to say the banks are at fault because they are not lending. We are all at fault: the government that followed the wrong policies, the regulators who were asleep at the wheel, the bankers that were not following prudent lending practices, and finally us who took advantage of it.

The outcome is that we all lost. We all lost a sizeable portion of our wealth. Including the bankers.

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

6/23/09

What is this indicator saying now?

We follow many indicators like the one shown on the above chart (click on the chart to enlarge). We update them regularly and they are a dominant feature of our service completed by an in-depth analysis of the economy and of the trends of the most important asset classes such as stock sectors, commodities, interest rates, low-grade and high-grade bonds, ....

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 notice that .....

...asset classes have a distinct seasonality pattern?

Stocks go nowhere in summer.
Yields decline or go nowhere in summer
Bond prices rise or remain stable in summer.
Commodities are weak in summer.

These patterns, if they repeat, point to a specific investment strategy in the coming months. 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

Keep track of the volume

I wrote about trading volume several times in this blog.

A bearish near-term pattern is rising stocks with declining volume and declining stocks with rising volume.

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

6/22/09

The pattern keeps repeating

As I showed you in a previous post, and discussed in detail in my book Profiting in Bull or Bear Markets, the same pattern (or sequence of events) keeps repeating.

1. Bond yields rise.
2. Stock prices decline.
3. Commodities decline.
4. Bond yields decline and bond prices rise.
5. Stock prices 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

Two important charts

Two important charts to follow. The first one is the chart of bank stocks (click on the above chart to enlarge). The chart shows how this index telegraphed this correction. The bank stocks are an important leading sector of the market. Stocks cannot rise without bank stocks moving higher.

The above chart shows the transportation average (click on the chart to enlarge). The transportation average has to move above the current resistance level of 3400 to confirm the bull market. The Dow Theory 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
Editor, since 1977

Power groups and economic growth

What is happening in Iran?

Countries with few power groups in control of the political system underperform countries with many power groups.

Look at what happened to the USSR. More recently Russia, Iran and Islam in general. They are mired by slow economic growth and poverty. They do not care about how fast the pie grows. What they care about is that the pie is big enough for them to eat it.

This is the classic historical formula for self-destruction. 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

Why are they so poor?

News...June 22 (Bloomberg) -- The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

“Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,” the World Bank said.

My point. The poor countries always pay. How come they remain poor in spite of the consistent and generous help from the World Bank and IMF?

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

6/20/09

This music will fire up your veins

What a great piece of music! It just makes you jump, dance, and smile. Have a nice week-end.

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

6/19/09

More on social and economic engineering

News. Car shoppers could take advantage of government incentives worth up to $4,500 this summer to send their old gas guzzler to the scrap heap in favor of a more fuel-efficient new vehicle.

President Barack Obama is expected to sign into law the "cash for clunkers" program, which was approved by the Senate on Thursday. For owners of low-mileage models such as the 1994 Ford Bronco, 1998 Nissan Pathfinder or the 1995 Chevrolet Blazer, the plan could give them a reason to visit their local car dealer during an economic downturn.

Bottom line. After making a mess of the housing sector and destroying our wealth, the government is now working on completely effacing from the face of the earth the US auto industry.

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

An important point about the Fed printing press

The monetary base has been soaring, growing more than 100% y/y (click on its graph to enlarge). What are the implications? Is the Fed too easy?

The comments by Bob McTeer, a former governor of the Fed, are very instructive. Click here to read his article on the subject.

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

6/18/09

Two very informative articles

I found these two very well written and documented articles about what has happened in previous financial and economic conditions similar to the current one. They help to shed some light on what might happen next.

The first article explores the possibility of a recovery without credit expansion (click here to read it).

The second article by the same authors analyzes what happened during 122 recessions in 21 advanced countries. It looks at the duration and amplitude of the business cycle and equity market (click here to read it).

Enjoy!

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

6/17/09

How will we pay far all this?

I keep hearing about regulations, restructuring healthcare, bailing out the major banks, bailing out the unions (oops, I meant GM and Chrysler). The President is everywhere giving speeches telling us what a great future we will have.

One thing still bothers me. No one, and I mean no one, is talking about economic growth, where growth is going to come from, what are we going to do about it, and how we generate the wealth to pay for all this.

It is not taxes that will pay for all the presidential programs. It is going to be growth because without growth we will not have the money to pay taxes.

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

Are we facing inflation or deflation?

The cost of living in the U.S. rose less than forecast in May, culminating in the biggest 12-month drop in prices in almost 60 years.

The consumer price index increased 0.1 percent after no change a month earlier, the Labor Department said today in Washington. In the 12 months ended in May, consumer prices dropped 1.3 percent, the biggest decline since 1950.In the last 12 months producer prices declined 5.0%.

I do not understand why everybody seems obsessed by future inflation when the real danger seems to be deflation, as the latest data keep reminding 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, since 1977

6/16/09

Are you bullish or bearish?

Please do click here and here to read the thoughts of Martin Wolf, a great FT columnist, and of B. Eichengreen and K. H. O’Rourke. The evidence is intriguing, to say the least.

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

Food for thought

June 16 (Bloomberg) -- Goldman Sachs Group Inc. chief economist Jim O’Neill said financial markets could weaken in coming weeks amid concern about governments’ intentions on rolling backing stimulus packages.

“I wouldn’t be surprised if what started yesterday is the beginning of a correction that goes on a few weeks,” O’Neill said in an interview today in Monaco. “The markets have had a lot of juice thrown at them. You take away a bit of the juice, at first it’s going to be a bit trickier.”

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

6/15/09

Our future healthcare system

The US healthcare system is slowly evolving into a socialized system. What does it mean?

There will be two types of deliveries. One for the wealthy. These patients will enjoy the best care by the best specialists and will be charged fees most of us cannot afford. This system will not accept Medicare or insurance controlled pricing. There are already examples of this type of healthcare delivery.

The second system (for the rest of us) will be one based on prices controlled by the government and the insurance companies. The quality will suffer, of course. This is why it is so important to take good care of our body!

There is no escape.

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

Will they sell?

Now that the Dow is even for the year, will investors sell?

How will you know? Watch volume. As I said in previous posts, rising volume and a weak market is not a favorable combination.

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 rise of the BRIC countries

Russian Finance Minister Alexei Kudrin said the dollar is in “good shape,” further affirming that there’s no substitute for the world’s reserve currency.

Kudrin’s comments underscore the dependence of Brazil, China, Russia, and India on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market.

Leaders of the so-called BRICs nations -- Brazil, Russia, India and China (ETFs: EEB, EEM)-- may use their first summit this week to press the case that their 15 percent share of the world economy and 42 percent of global currency reserves should give them more influence over global financial policies.

Bottom line. These countries will increase pressure to make sure the world recognizes their increasing role in the global economy. It may be an important investment theme in the coming 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, since 1977

6/14/09

Dream and relax

Very few notes, divine music.

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

Dow Theory

The transport average (click on chart to enlarge) has to move decidedly above 3400 to confirm and validate the current bull move, according to the Dow Theory.

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

6/13/09

California is in trouble

Gov. Arnold Schwarzenegger vowed Wednesday to let California government come to a "grinding halt" rather than agree to a high-interest loan to keep the state afloat if he and the Legislature do not close the yawning budget gap in coming weeks.

Bottom line. You can promise. You can spend. You can borrow. But eventually you have to face the markets. Why? Because the markets always, and I mean 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

6/12/09

An interesting pattern

What is bothering me is that this rally is takng place with declining volume (click on chart to enlarge). In the past, this pattern was followed by rising volume and lower 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

The markets always win

Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, signaling the second-biggest foreign holder of the securities will keep buying them amid record sales.

China and Russia, the largest and third-largest single holders of the debt, have said they may switch some of their reserves out of Treasuries.

U.S. President Barack Obama, who is projected to quadruple the nation’s budget deficit to $1.85 trillion in the year ending Sept. 30, has tried to assuage investor concern by pledging to cut the shortfall in half by the end of his first term. Obama may borrow a record $3.25 trillion this fiscal year, almost four times last year’s amount, according to Goldman Sachs Group Inc.

Bottom line. We can have all the great dreams and plans we want, but if our major lenders stop trusting us, well, we are going to have 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
Editor, since 1977

6/6/09

Going sailing

I need to take a few days off. I have been working hard to publish The Peter Dag Portfolio and now I need to take my mind off the markets.

My boat is waiting in Annapolis -- a gorgeous (for me, of course) Sabre 38. I will be sailing for a few days with some friends, then back again to tackle the next challenges.

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

Health care spending and life expectancy

According to the Economist the total US spend on healthcare is 15.4% of GDP including both state and private . With that it gets 2.6 doctors per 1,000 people, 3.3 hospital beds and its people live to an average age of 78.2

UK - spends 8.1% of GDP, gets 2.3 doctors, 4.2 hospital beds and live to an average age of 79.4. So for roughly half the cost their citizens overall get about the same benefit in terms of longevity of life.

Canada - spends 9.8% of GDP on healthcare, gets 2.1 doctors, 3.6 hospital beds and live until they are 80.6 yrs

Now if we look at the more social model in Europe the results become even more surprising:

France - spends 10.5%, 3.4 docs, 7.5 beds and live until they are 80.6

Spain - spends 8.1% , 3.3 docs , 3.8 beds and live until they are 81

As a whole Europe spends 9.6% of GDP on healthcare, has 3.9 doctors per 1,000 people, 6.6 hospital beds and live until they are 81.15 years old.

What is the bottom line?. Unfortunately, the only answer is that Americans are not living an healthy life as do the people in the rest of the world. We have the best healthcare system in the world, the best doctors, the best surgeons, the best hospitals, the best response system but in order to live longer we have to have more discipline in how we treat our body.

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

6/5/09

Make no mistake about it......

The Administration can propose all the stimulus, taxes. bank bailouts, union bailouts, car bailouts, social programs, to nationalize all of us, but at the end of the day if profits of corporations do not rise, we all will be miserable!

In particular, the stock market is unlikely to have a multi-year move on the upside unless earnings per share rise as shown in the above graphs (click on chart to enlarge).

At some stage of the Presidents' whirlwind travelling around the world he has to sit down with his advisers and face the fact that our industries are going down the tube. The simple question they have to ask themselves is: What are we going to do about it? Please let us know Mr. President.

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

He is everywhere

President Barack Obama pledged to “seek a new beginning” for the U.S. and the Muslim world, calling on people in both societies to find common ground and end a “cycle of suspicion and discord.”

In a speech at Cairo University today, Obama touched on tension points from the wars in Iraq and Afghanistan to religious freedom to women’s rights, democracy and the threat of a nuclear-armed Iran. Some of his most direct language was used to address the Israeli-Palestinian conflict.

The point. Very few Presidents had the energy to travel so much and speak to the world about what should or should not be done. An English magazine, however, suggested that we cannot lead the world by giving nice speeches. What they do not realize is that being the new kid on the block he has to get acquainted with the world power structure.

The markets, meanwhile, seem to like his tenure as they produce steady gains.

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

6/4/09

Wrong policy

Bondholders have a new risk to contend with -- the Obama administration’s policy of “shared sacrifice.”

The government’s approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group (the unions).

Bottom line. This socialist policy will raise interest rates for corporations. Why? Because lenders will price in the risk of government intervention. This is not anymore a free market system.

If local governments follow the wrong policies will the bond holders have to share in the "sacrifice"? Lenders are bound to raise interest rates to include the "government intervention premium"? What happened to the rules of law?

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

6/2/09

.... and the bank stocks.....

Bank stocks are going nowhere (click on chart to enlarge) in spite of a very generous interest rates structure orchestrated by the Fed. Can the market go higher with bank stocks falling behind?

Are commodities going through another period of speculation? Is the economy strong enough to justify a rise in all commodities?

Is the price of crude oil and gasoline rising to levels in the past hindered economic growth?

The point I am trying to make is that the answers to these questions are crucial in setting up a sound 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

An ugly trend

The dollar is sinking...badly (click on graph to enlarge). This trend cannot be good news. The international community does not believe in our currency. This trend is an important one. Especially 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
Editor, since 1977

6/1/09

Observations

The wind is coming from the northwest close to 10 knots, enough to let you know that the sailing season cannot be too far. However, you still have to dress warm. It is a great day and I am sitting in the cockpit facing the sun. As I sip my coffee, I become conscious of what is around me. Definitely not like Akron or the rest of the world. This is my escape.

Another escape are the local bookstores such as Barnes & Noble where I keep abreast of the latest books. As I jot down some notes, I follow from behind my imaginary camera the interesting people walking by. Who are they? What do they do? My computer, meanwhile, connects me with the world and the financial events. It is a refreshing mix.

SNS and other friends go there too. We talk about many things, trying to solve the problems of the world. It is a stimulating environment, good for research and out of the box thinking. “All this will change. No more bookstores” SNS told me with gravity.

Too bad, because I really enjoy browsing through the new books. The other day a little book by Jim Rogers, “A Father’s lesson for life and investing” caught my attention. Many solid ideas and plenty of common sense such as do what you have a passion for and stay focused.

I was surprised when he recommended the study of philosophy. It teaches you how to think. Why? Ed and I finished reading all the major philosophers in the past several years. Even the “linguists”. These philosophers gave the framework to computer scientists to conceive computers and make artificial intelligence a reality. Mathematical linguistics is the base for “compilers”.

As I review the ideas of the major thinkers, I realize how we all benefited from their thinking because of the way they framed the problems of the times. This abstract thinking allowed us to mature and to understand our problems. This is an important way to identify issues and define their implications. Of course, Jim Rogers recognizes that this is the kind of thinking required by an investment strategist of his caliber.

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