Peter Dag & Friends: 2010

12/31/10

Interesting patterns

It is a boring day. No doubt about it.

LQD and JNk, however, keep going up. Slowly and steadily. High-grade and low-grade bonds are firm.

The a-d line is also showing some muscle. Is this good news?

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

12/30/10

Headlines and thoughts

Companies have become good at doing more with less. The solution is to greatly improve our educational system.

Fed funds profited overseas banks. The financial sector is an important global power group. That we like it or not. Orwellian.

Kremlin foes face longer jail terms. Excessive concentration of power results in very slow economic growth. This is the lesson of history. That we like it or not.

China raised rates to 5.81%. Very few people understand what is going on in China. Very few people understand the reach of China.

European borrowing costs eclipse US. Europe is in deep trouble. The EU formula is wrong.

Investors should seek the least bad places. Agree. But how?

Swiss Frank at new peak against the Dollar. Small is beautiful. Yet, the "European dream" is following the idea that bigger is better. And failing.

Rally continues for equities and commodities. Do not fight the Fed.

Spike in foreclosures despite talk of recovery. The housing sector has serious problems. They are not going to go away for some time.

China helps defuse Korea crisis. Ridiculous situation.

Obama's moment of decision. We need his leadership.

Time for the Eurozone to come up with some answers. They will never find the right answers because they are against their parochial interests.

Beijing minimum wage to rise by 21%. China will have a tough time to grow richer. It took centuries for Europe and the USA. China may become dangerous like Russia. But it will take many decades to reach the GDP/capita of the industrialized world.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

If this is true we should pause and think about what's going on in Washington

By Rush Limbaugh:

I think the vast differences in compensation between victims of the September 11 casualty and those who die serving our country in Uniform are profound. No one is really talking about it either, because you just don't criticize anything having to do with September 11. Well, I can't let the numbers pass by

because it says something really disturbing about the entitlement mentality of

this country.

If you lost a family member in the September 11 attack, you're

going to get an average of $1,185,000. The range is a minimum guarantee of

$250,000, all the way up to $4.7 million..

If you are a surviving family member of an American soldier killed in action,

the first check you get is a $6,000 direct death benefit, half of which is taxable.

Next, you get $1,750 for burial costs. If you are the surviving spouse, you get

$833 a month until you remarry. And there's a payment of $211 per month for each child under 18. When the child hits 18, those payments come to a

screeching halt.

Keep in mind that some of the people who are getting an average of $1.185 million up to $4.7 million are complaining that it's not enough. Their deaths were tragic, but for most, they were simply in the wrong place at the wrong time. Soldiers put themselves in harms way FOR ALL OF US, and they and their families know the dangers.. (Actually, soldiers are put in harms way by politicians and commanding

officers.)

We also learned over the weekend that some of the victims from the Oklahoma City bombing have

started an organization asking for the same deal that the September 11 families

are getting. In addition to that, some of the families of those bombed in the

embassies are now asking for compensation as well.

You see where this is going, don't you? Folks, this is part and parcel of over 50 years of entitlement politics in this country. It's just really sad. Every time a pay raise comes up for the military, they usually receive next to nothing of a raise. Now the green machine is in combat in the Middle East while their families have to survive on food stamps and live in low-rent housing. Make sense?

However, our own US Congress voted themselves a raise. Many of you don't know that they only have to be in Congress one time to receive a pension that is more than $15,000 per month. And most are now equal to being millionaires plus. They do not receive Social Security on retirement because they didn't have to pay into the system. If some of the military people stay in for 20 years and get out as an

E-7, they may receive a pension of $1,000 per month, and the very people who

placed them in harm's way receives a pension of $15,000 per month.

I would like to see our elected officials pick up a weapon and join ranks before they start cutting out benefits and lowering pay for our sons and daughters who are now fighting.

12/29/10

Scary trend

I am trying to be optimistic, but this chart is really scary. How can the economy remain strong with 9.8% unemployment and gas prices trending steadily higher (click on the chart to enlarge it)?

This price pattern will continue until people cannot afford to buy gas anymore. Only an economic slowdown will force prices to stabilize as they did in 2009.

The problem is that with the economy gaining momentum, the odds favor higher gas prices. This is an important trend.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

The European crisis in numbers

Click here to view the graphs.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

Interesting development

Surveys show that many Germans are worried about the future of the euro, but the country's political parties are not taking their fears seriously. The number of grassroots initiatives against the common currency is increasing, and political observers say a Tea Party-style anti-euro movement could do well.

This is an interesting development. certainly not surprising. I have been negative about the Euro since the beginning of the experiment. The trend points to the final dissolution of the EU with Germany leaving.

The weak countries like Greece, Ireland,...joined because they liked the low level of interest rates designed to match Germany's economic strength. They took advantage of it.

Well, you know the conclusion. The markets always win.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

12/28/10

Thought of the day

Are we too pessimistic? Are we really aware of what is going on or are we prey of what the press is printing? Should we take a deep breath?

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

12/27/10

Technical patterns

The market was boring today. To be expected.

But two interesting patterns were very clear from the start. Corporate high and low-grade bonds were strong.

LQD and JNK rose quite strongly. Does this mean bond yields are close to a top? It may be an important pattern.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

12/26/10

Black swan

What if...just what if....

What if everybody is going to be wrong.
What if the economy is going to grow at 3.5+%.
What if bank earnings are going to soar.
What is banks will start lending more money to small businesses.
What if business is going to boom.
What if earnings are going to grow 10%-20%.
What if the market is going to keep rising because that's the only way to solve states' pension fund problems.
What if stocks are going to respond in a way no one is expecting by rising another 15%-25%.

What if...just what if. Should this scenario be part of your overall strategy?

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

Is it fair?

Cities across the nation are raising property taxes, largely citing rising pension and health-care costs for their employees and retirees.

In Pennsylvania, the township of Upper Moreland is bumping up property taxes for residents by 13.6% in 2011. Next door the city of Philadelphia this year increased the tax 9.9%. In New York, Saratoga Springs will collect 4.4% more in property taxes in 2011; Troy will increase taxes by 1.9%.

"The main driver is the irresponsibility of local public officials who for years and years have not been funding their pensions," said Henry Bayer, executive director of the American Federation of State, County and Municipal Employees Council 31 union, which represents 72,000 employees in Illinois. (Source: WSJ)

We are paying for irresponsible management and outrageous pensions, almost double those of non-union workers. Somehow it is always the little guy (us) who pays for the established power groups.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

12/25/10

Observations

Currencies. What drives their value? Can central bankers change their trend?

These thoughts are the result of my experience in managing a one billion dollar currency portfolio designed to hedge Goodyear's foreign exchange exposure. Teaching the subject for many years has also allowed me to focus on this topic.

Dealing for several years with foreign exchange markets convinced me that the most important factor driving currencies over the long-term is the inflation differential between two countries. A country with 8% inflation will see its currency depreciate about 6% over the long-term against a country with only 2% inflation.

Past currency crises (Mexico, Latin America, Asia and Russia) are caused by the superficial belief that currencies can be manipulated. Policy makers try to resist market forces. However, eventually the currency sags to reflect long-term trends in inflation differential between two countries.

Differentials in productivity growth have exactly the same impact on a currency as inflation. A high productivity country is more efficient and likely to have low inflation. Capital flows away from a low productivity country and seeks stability of returns in countries with higher productivity and low inflation. The outcome is that the currency of the low productivity/high inflation country is sold and declines. The currency of the high productivity/low inflation country is purchased and strengthens.

High real interest rates favorably impact a currency because they reflect a monetary policy leading to low inflation and higher productivity. For instance, the US had very low real interest rates in the 1970s. The dollar sagged as inflation soared and productivity declined sharply. After 1982 real interest rates jumped and the dollar has been much stronger in an environment of low inflation and high productivity.

The size of the trade deficit has a long-term impact on a currency. There are two schools of thought on the subject. The first one maintains that a trade deficit is just a sign of economic health because the country is importing goods to improve its competitive standing. And this has a positive impact on the currency.

The second school of thought is concerned about the large amount of dollars held by other countries when the trade deficit becomes too large. These dollars will eventually have to be sold, thus impacting adversely the currency.

The US has a very large trade deficit. The good news for the US is that current productivity growth is very strong. Capital flows into the US because of lack of a better alternative.

Growth differential between countries is very important when the inflation differential is low. Capital leaves slow growth countries to move to stronger growth countries. When growth in the US declines, you can rest assured dollars will be sold and will be moved to other countries seeking better returns.

Political climate is also crucial, especially in less industrialized countries. Strong socialist policies, such as in Russia and Europe, have a very negative impact on the currency. Why should capital flow to a socialist country and be confiscated by central planning policies? This is what is haunting the euro. Capital flowing to Europe is not welcome because local industries feel threatened and are very protective of their markets. For this reason capital is flowing from Europe to the US looking for profitable ventures with considerable freedom.

As you can see, there are many forces influencing a currency. It is ludicrous to believe that central bankers can impact a currency in a meaningful way. The recent attempt to revive the euro should be interpreted as an act of desperation. It points to very serious political and economic problems in Europe and enhances the dominance of the US economic system in the world.

(This Observations appeared in the 10/30/00 issue of The Peter Dag Portfolio).

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

12/23/10

Who is going to pay?

News. The dubious honor of being the first city in the nation to completely default on pension obligations goes to Prichard, Alabama. The city has sought bankruptcy protection twice and is flat broke. It faces a choice of paying to keep city services like police and garbage running or pay pensions. It selected the former.

It's only a matter of time before a major city decides to do what Prichard, Alabama, and Vallejo, California, did: declare bankruptcy to shed pension promises forced by state legislatures.

City employees were promised lavish pensions because the managers of the funds assumed rate of returns that were unrealistic. Now the pension funds are almost empty. This is a sign of poor management. Unfortunately people counted on that money. They believed in unrealistic promises.

The good news is that the markets eventually bring some sanity in our thinking. It is unfortunate. The markets always win.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

Could it be....?

News from FT. Thousands of students took to the streets across Italy on Wednesday, clashing with riot police in Palermo, occupying Naples’ main railway station and paralysing the outskirts of Rome

Police in Berlin destroyed a package containing “explosive materials” which had been delivered to Angela Merkel’s office, the federal chancellery, German officials told the Financial Times on Tuesday.

Two people were injured in separate explosions at the Swiss and Chilean embassies in Rome on Thursday, Italian authorities said.

Europe is facing turbulent times financially and, consequently, socially. As a follower of these posts, you know I believe that the big risk with the financial crises hitting the world is social unrest (as shown by the above news from FT).

Some may also suggest that these developments are the fertilizer of totalitarian governments as police becomes paranoid about just about everything we do, we wear, and we carry.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

Thought of the day

The VIX dropped sharply and is at low levels. Many commentators are saying this is a sign of complacency (bearish). It may be true.

History shows, however, that the VIX can stay low for a long time. In this case the VIX is not a measure of complacency, but a sign of confidence and strength in the market.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

Technical patterns

This is a great chart (click on the chart to enlarge it).

It shows a trend. And the trend is up. This is how bull markets look like. Forget about what you read about crises in Europe. Mortgage foreclosures. Double dips. Budget deficits.

The central banks of the world (including China -- Chinese Vice Premier Wang Qishan said the world’s second- largest economy has taken “action to help some EU members counter the sovereign-debt crisis.” Source: Bloomberg) want to rebuild our wallets to make us feel better. Enjoy. Until the trend is broken.

George Dagnino, PhD

Editor, The Peter Dag Portfolio. Since 1977

Ranked second best gold timer by Timer Digest

12/22/10

The outlook for the Euro

Interesting exchange of views on the fate of the Euro and the chances of Germany's withdrawal from the EU. The Germans are clearly thinking about this issue. Just click here.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

Complacency?

The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 6.3 percent to 15.45 as of 4:15 p.m. in New York. That’s below the prior 2010 closing low of 15.58 on April 12, and the lowest closing level since July 2007. The index measures the cost of using options as insurance against declines in the S&P 500, which rose 0.3 percent and moved in a 0.35 percentage-point range between today’s intraday high and low, less than half the 0.83 average over the past four weeks.

The problem with these kind of indicators (like investors' optimism) is that they can stay at extreme levels during major moves on the upside or the downside.

Sometime they work. Sometime they don't. It's all hindsight.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

Technical pattern

Is the market losing momentum? One of the first indicators I watch is the advance-decline line. And right now it is heading higher. No loss of momentum here.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

12/21/10

Interesting pattern

Market up. JNK up.LQD down The A-D line is going nowhere.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

I might be wrong, however ....

A new austerity drive has been sweeping across Europe, as governments struggle to trim huge budget deficits and the 16-nation eurozone races to reassure sceptical markets.

EU finance ministers have agreed rules that will automatically punish member states which break budgetary rules.(Source:BBC News)

By austerity programs the Europeans mean cutting government spending. Cutting what the countries cannot afford because of low productivity. That's fine. But I do not read anywhere that the politicians cut their benefits (to give an example to show that they are also making a sacrifice for the good of the nation) or that they are liberalizing the markets to improve the opportunity for people to find a job. It remains a close club with the people at the bottom of the scale paying the price.

12/20/10

Interesting comment from "zero hedge"

Ben Bernanke is a highly educated PhD from Princeton who has never worked a day in the real world since he graduated from college in 1975. His entire life has been spent in the ivory tower of academia surrounded by models and theories that work perfectly in the comfort of his office. After building his reputation as an “expert” on the Great Depression by studying it and reaching the wrong conclusions, he came down from his ivory tower in 2002 to join an organization that has systematically destroyed the value of the US currency, thereby undermining the well being of the once vibrant middle class...

They are smart. They are very smart. But somehow we keep having huge problems.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

Forecast

Based on past readings the Cleveland Fed says the current environment is consistent with 1% growth in real GDP:

“Projecting forward using past values of the [yield curve] spread and GDP growth suggests that real GDP will grow at about a 1.0 percent rate over the next year, the same projection as in October and September. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”

Can inflation be a problem in this environment?

Time to pay the piper?

We appear to have dodged a bullet in the form of maintaining a $1.3T deficit during this balance sheet recession (and through the coming calendar year), however, the risks at the state level remain largely unknown and difficult to quantify. If the shortfalls are as large as Whitney believes it’s likely that we won’t have the political will for more bailouts. Whitney believes the issues are potentially more frightening than the banking crisis.

We pay taxes to pay for government pensions. Can we afford it?

Do not forget. The markets always win. Always. That you like it or not!

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

12/19/10

Interesting numbers

Right now, the average retiree is getting about $14,000 a year from Social Security. To buy a similar income stream on the open market, a 66-year-old would have to pay about $250,000. Someone getting the maximum benefit, $28,000 a year, would need to pay about $500,000.

It's something to bear in mind as we debate cutting Social Security. Most Americans are already grossly underprepared for retirement and have saved far too little.

According to the most recent survey by the Employee Benefits Research Institute, a think tank specializing in the topic, fewer than half of workers have even saved $25,000, and only a third have saved as much as $50,000. Forty-four percent have saved less than $10,000, and a quarter have basically saved nothing at all.

To put these numbers in context: Someone with $25,000 can buy an annuity (with the 3% annual bump) paying maybe $1,400 a year. Someone with $50,000 can raise that up to $2,800 a year. That works out to an income of $54 a week. Good luck with that.

If we want to cut Social Security, even prosperous middle-class Americans need to save much, much more. Starting about 20 years ago. (Source: WSJ).

These are very interesting numbers. It is clear we are not saving enough. We grow up with the idea that we can borrow and keep going. Saving should be part of your budget. And if you are young, start saving now! Develop the discipline of saving for your future and your security when you are old. Yes, you are not immortal, even if you think so now.

12/18/10

Observations

Poverty. Poverty is one of the major challenges facing the globe. In 1998, 1.2 billion people were in dire poverty throughout the world. They are concentrated in Africa, Asia and ex-Soviet countries.

Poverty is a crucial issue for rich countries, and not only from a human viewpoint. It is an issue that impacts peace, because the poor are swarming rich countries and creating imbalances and strains.

Why is a country poorer than others? There are also issues of poverty within a country. Why is income inequality increasing between rich and poor?

I firmly believe the level of wealth in a country depends on the distribution of political and economic power between its groups. A large number of power groups (democracy) is typical of wealthier countries. It is in the interest of all the power groups to expand the economic pie so that all can share a bigger piece.

Countries with very few power groups (dictatorships) are poorer than average. In this instance there is no need to have a big economic pie because wealth has to be shared only by a few people. The problem with poor countries is that the power groups in control do not allow other power groups to become visible, to become politically active. It would imply a loss of wealth. This is one of the main reasons poor countries remain poor.

Then there is the issue of the growing gap between rich and poor within a country. Access to high quality knowledge is a major issue. Only the rich can afford it, thus perpetuating the gap. Social programs may help. But money alone does not solve the problem. Raising the civic standards of the poor and their educational level are major requirements to close the gap.

Others suggest poverty should be solved at the level where people are employed. Corporations should raise wages of the lower paid employee and try to reduce the gap between management and the rest of the employees. It sounds crazy. But it may not be.

The solutions are difficult to find. But something has to be done. Why? Social unrest and political instability are the price to pay for ignoring the problem. In the US we have seen groups attacking other groups based on the issue of rich and poor. Immigrants are flooding the rich countries, creating imbalances, unrest and increase in crime (see my commentary on the issues raised by immigrants into the rich European countries).

I am convinced the problem cannot be solved by throwing money at it. The real challenge is

• to allow an increase in the number of power groups in the poor countries,

• to raise the accessibility to high level education, and

• to raise the cultural standards of the poor.

The failure to solve this enormous and pervasive problem will lead to political and social unrest.

(This Observations appeared in the 8/28/2000 of The Peter Dag Portfolio).

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

12/17/10

Good news

The Conference Board's Index of Leading Economic Indicators (LEI) posted a solid 1.1% gain in November after a revised 0.4% increase in October. The LEI has risen at an annual rate of 8.7% in the three months ended November compared with a 0.4% gain during the previous three months (ending August). The accelerated increase of the LEI implies continued growth of the economy and at a stronger pace compared with the trend seen in recent months.

The economy is growing and the the latest data about the LEI suggest the economy will strengthen even further. This is good news for earnings. And stocks?

Is QE2 needed?

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.

The markets and Germany are shaping the new EU

German Chancellor Angela Merkel had been heavily criticized in the run-up to this week's European summit in Brussels. But on Thursday, she got what she wanted -- a change to the Lisbon Treaty allowing future measures to combat currency crises. But will it be enough?

Angela Merkel's plan has cleared the next hurdle. At the EU summit in Brussels, the European Council on Thursday agreed to anchor a permanent mechanism for potential future euro crises in the Lisbon Treaty. What had been derided in summer as a unilateral demand from Berlin has now become European consensus.

European leaders want to insert two sentences into Article 136 of the Lisbon Treaty: "The member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality."

The formulation would allow Europe to save heavily indebted member states from bankruptcy even after the temporary €750 billion ($1 trillion) backstop expires in 2013. A permanent mechanism, European leaders hope, will provide lasting stability for the euro. Merkel had insisted on the treaty amendment in part to avoid a scenario in which future bailouts could be challenged in German courts.

It looks like Germany is now running the show in Europe. The sense I am getting by reading the German press is that the Germans do not want to pay for the lack of budget discipline of the other EU members.

But how can you change the Italians, the Greeks, and ...... to be responsible? Good luck Europe!

12/16/10

Thought of the day

I am not sure, but my sense is that the market did not like the sharp rise in yields from 3.21% to 3.82% in the 10-year Treasury. Stocks seem tired. My guess is that they are waiting for yields to move lower.

12/15/10

Questions

Is a sharp rise in yields bearish for stocks?

Is a decline in yields bullish for stocks?

Are these signals, if true, coincident or lead/lag stocks?

These are the kind of questions we answer in The Peter Dag Portfolio.

Bad politics

Dec. 15 (Bloomberg) -- Greek unions grounded flights, kept ferries docked at ports and shut down public services today to protest wage cuts as the government sticks to conditions of an international bailout.

The government made them believe they earned all the social programs they enjoyed. This is what happens when you have poor leadership in government. It is easy to give, give, and give to buy easy votes (e.g. GM). There is a point, however, that the bondholders want to be paid. And if the nation does not generate the revenues to pay the interest, chaos and discontent arise. This is what real bad politics is all about.

12/14/10

About volatility

Volatility (VIX) is an interesting concept (click on the chart to enlarge it). The main idea is that when it is low, as now, it implies complacency. And this is bearish for stocks. Too much optimism is a negative. This is the conventional wisdom.

The problem is that in a prolonged long-term bull market, bullishness can last for months. Or, to put it in another way, VIX gives useful information when you look back. But no one can tell if it is going to rise -- now. It will -- eventually. But this idea has little investment value because between now and "eventually" the market could soar.