Peter Dag & Friends: May 2012

5/30/12

Profiting in Bull or Bear Markets

Headline - The benchmark U.S. Treasury yield fell to its lowest in at least 60 years on Wednesday as investors fled to safe-haven assets to ride out Europe's deepening financial crisis.

Whatever the reason, there is an almost inverse relationship between stocks and bond prices. It used to be also with commodities. The Fed killed that relationship - temporarily.

More details on The Peter Dag Portfolio.

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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 are your sole responsibility.

What to do if you expect a market decline

Another ugly day. The market is oversold, but financial risk indicators (proprietary indicators) remain high.

An oversold market can remain oversold for a long time. Investors need to have - as part of their process - the trigger that tells them when to buy.

It looks like today everything is going down. There is one exception - Treasury bonds. Too bad most investors do not understand this important, crucial, essential asset class. I have several videos on our website www.peterdag.com on bonds and lagging indicators.

The reason they are important is because they rise when the market declines. But the relation is much more subtle. This is what makes it profitable, I am preparing a video on the subject. Stay tuned.

5/29/12

Observations

Shannon is a sharp and willing-to-learn young lady. She has a very intuitive mind and is ready to take new assignments. Her interest is in the process of stock selection within strong sectors.

We decided to look at the consumer non-durables sector. These stocks become attractive when the growth of the money supply rises. This is the time when the foundations are being set for a stronger economy.

She read Chapter 7 of my new book and plunged with enthusiasm into the assignment. We met after one week and she presented the most attractive stock alternatives.

She did a good job. As she was talking, I thought about the process of becoming a portfolio manager. What skills will she have to develop?

She will have to have the personality, background, and response-time to withstand the pressure when the overall market goes against her.

Investors can have great stocks in their portfolio, but if they are not astute portfolio managers they will do poorly. Experienced portfolio managers are able to change their portfolio to weather any financial storm by taking into account the downside risk at all times.

It is important to have a stock-picking discipline. Try to improve it. Always. With no exceptions. Try to learn from mistakes. Use what you learn to improve how you select stocks.

The main objective, however, is performance with low volatility. It is no easy task. Only discipline and focus on your total portfolio performance matter. And be able to adopt the maxim of Taoism: “When in doubt, act!”

Picking stocks is the easy part. Applying a strategy to the whole portfolio is where the challenge lies. Listening to what the market is saying. Act, do not wait. It may be too late. It may be too costly. Not too fast. You may be caught off balance. This is what goes through my mind every day. You read the outcome of this process twice a month.

Shannon has a lot to learn. I know she has the talent to do well.

(This Observations appeared in the 5/10/04 issue of The Peter Dag Portfolio)

Strange?!?

The market is strong, but..

JNK is also strong ...no surprise here

Commodities are weak ...surprise because DBC is highly correlated with the market and should have been stronger.

Treasury bond prices are up ...surprise because when the market is strong bonds are weak.

Corporate bonds are also up (prices) ... why? Because the economy is weak?

The point is that the markets are not consistent. Is this good news or bad news?

5/27/12

Something to think about in these difficult times

5/25/12

Interesting ideas from Merkel

Today's Der Spiegel magazine says Merkel will present a six-point plan based on the East German blueprint - unification with West Germany - as a growth strategy for Mediterrenean countries. It includes measures such as privatisation, looser employment law and lower tax rates.

Should we follow the same approach?

From an article in the Washington Post

(via Carpe Diem)

From Marc Theissen writing in yesterday's Washington Post:

"Since taking office, Obama has invested billions of taxpayer dollars in private businesses, including as part of his stimulus spending bill. Many of those investments have turned out to be unmitigated disasters — leaving in their wake bankruptcies, layoffs, criminal investigations and taxpayers on the hook for billions. Consider just a few examples of Obama’s public equity failures:

● Raser Technologies. In 2010, the Obama administration gave Raser a $33 million taxpayer-funded grant to build a power plant in Beaver Creek, Utah. After burning through our tax dollars, the company filed for bankruptcy protection in 2012. The plant now has fewer than 10 employees, and Raser owes $1.5 million in back taxes.

● ECOtality. The Obama administration gave ECOtality $126.2 million in taxpayer money in 2009 for, among other things, the installation of 14,000 electric car chargers in five states. Obama even hosted the company’s president, Don Karner, in the first lady’s box during the 2010 State of the Union address as an example of a stimulus success story. The company has since incurred more than $45 million in losses and has told the federal government, “We may not achieve or sustain profitability on a quarterly or annual basis in the future.” Worse, the company is now under investigation for insider trading.

● Nevada Geothermal Power (NGP). The Obama administration gave NGP a $98.5 million taxpayer loan guarantee in 2010. The New York Times reported last October that the company is in “financial turmoil” and that “[a]fter a series of technical missteps that are draining Nevada Geothermal’s cash reserves, its own auditor concluded in a filing released last week that there was ‘significant doubt about the company’s ability to continue as a going concern.’ ”

● First Solar. The Obama administration provided First Solar with more than $3 billion in loan guarantees for power plants in Arizona and California. According to a Bloomberg Businessweek report last week, the company “fell to a record low in Nasdaq Stock Market trading May 4 after reporting $401 million in restructuring costs tied to firing 30 percent of its workforce.”

● Abound Solar, Inc. The Obama administration gave Abound Solar a $400 million loan guarantee to build photovoltaic panel factories. In February the company halted production and laid off 180 employees.

● Beacon Power. The Obama administration gave Beacon — a green-energy storage company — a $43 million loan guarantee. At the time of the loan, “Standard and Poor’s had confidentially given the project a dismal outlook of ‘CCC-plus.’ ” In the fall of 2011, Beacon received a delisting notice from Nasdaq and filed for bankruptcy.

● This is just the tip of the iceberg. A company called SunPower got a $1.2 billion loan guarantee from the Obama administration, and as of January, the company owed more than it was worth. Brightsource got a $1.6 billion loan guarantee and posted a string of net losses totaling $177 million.

● And, of course, let’s not forget Solyndra — the solar panel manufacturer that received $535 million in taxpayer-funded loan guarantees and went bankrupt, leaving taxpayers on the hook.

What caught my attention

Today, at the market close, high-yield bonds (JNK) were lower. This is bad news and confirmes the broad weakness of the market.

5/24/12

Thought of the day

The pattern is still the same between stocks, bonds, commodities, gold,....

One more thought. When the market goes down more often than not TLT goes up. Is this the basis for a great strategy in a bear market? How?

5/23/12

The unraveling of the European Union

THE GUARDIAN - A major rift has opened up between Germany and France for the first time in 30 months of euro crisis over how to restore confidence in the single currency. A special EU summit marking the debut of France's President François Hollande saw him challenge Germany's chancellor, Angela Merkel, on the euro, arguing that the pooling of eurozone debt liability – eurobonds – had to be retained as an option for saving the currency. Merkel has ruled out eurobonds as illegal under current EU law.

The historical differences between Germany and France are finally coming into focus. France will never accepts the leadership of Germany.

The other countries are followers. They never had any muscle in the running of the continent. The cultures are so different between Germany and the southern countries that their merger cannot and will not work.

The disagreement between Merkel and Hollande is the first act showing clearly to the world opinion why the Euro is a failed, tragic experiment I condemned since 2003.

An ugly day. An ugly picture.

Early morning.

The stock futures down sharply, close to 1%.

European markets down close to 2%.

Commodities sagging with oil down to $90.

Gold keeps sinking. What happens to this touted hedge? Are central banks aggressively selling it to raise needed cash?

Copper, a reliable gauge of economic strength, sharply lower - in a major downtrend.

High-yield bonds in a pronounced downtrend.

Inflation (CPI and PPI) slowing down in a major way.

The US economy growing slowly.

Financial risk (my subscribers know what I am talking about) not improving.

Europe is a mess, lead by incapable bureaucrats - incapable of making decisions.

The only asset classes going up are the dollar and US Treasury bond prices.

Are we close to capitulation? Or is it just the beginning? What to do?

5/22/12

Economic growth and profits

The WSJ - In this negative environment, businesses are less willing to invest in the future, and individuals are less willing to spend what they can. Meanwhile, savers and retirees have seen much of their income decline because of low interest rates. The massive costs of all the stimulus have been wasted because of the heavy counterweight put on the economy by the administration's antibusiness and pro-redistribution policies.

True. But the press fails to point out that we have slow growth because our productivity shows almost no growth in the past 12 months. And long-term economic growth equals productivity growth plus population growth. Population growth is about 1%. So, we have an economy that will grow about 1.0-1.5% - to be optimistic.

Low producitvity has an impact on profits and the stock market.

But this is too boring, I know, to be printed. But the problems of every country can be boiled down to how efficient they are.

Is anyone proposing how to improve our productivity? No. People do not want to tackle boring subjects.

Nothing new

Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932). The first episode occurred in the early days of that country's war of independence, and the last default was during the Great Depression in the early 1930s. The combined length of period under which Greece was in default during the modern era totaled 90 years, or approximately 50% of the total period that the country has been independent.

Read more: http://www.investopedia.com/financial-edge/0911/The-History-Of-Greek-Sovereign-Debt-Defaults.aspx#ixzz1vbhBkHV9

The reason I never believed in the Euro (I have a post here showing my comments written in 2003). The main reason is that there is such a cultural difference between the southern and northern European countries that it is difficult to appreciate. Unless you lived in both cultures - as I did. I lived the first 25 years of my life in Italy.

The south is outgoing, extroverse, does not recognize and accept discipline. You live to have fun, not to work. The northern European countries, north of the Alps, are exactly the opposite.

Italy could not merge the two personalities in more than 100 years. The European task of merging all these cutures is just impossible. Besides - why?

Why create an environemnt of depression, austerity, misery, poverty, despair. To keep Germany from dominating western Europe? They are dominating it anyway.

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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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 are your sole responsibility.

5/21/12

Confused

I just heard the President say that his job - the job of a President - is not to create profits.

I understand what he implied, especially as it relates of the experiences of Mr. Romney.

However, if the policies of an administration do not stimulate business activity/profits, tax revenues dwindle and there is less money to be used for assistance to those who need it.

Or am I missing something?

5/20/12

A history of European failures

In 1970 the European nations tried narrowing exchange-rate fluctuations. It was to be tried on an experimental basis without any commitment to the other stages. It took for granted fixed exchange rates against the dollar. When the USA effectively floated the dollar from August 1971, the ensuing wave of market instability put upward pressure on the Deutschmark and squashed hopes of tying the Community's currencies more closely together. And the experiment failed.

In March 1972, the Member States created the ‘snake in the tunnel’. This was a mechanism for managing fluctuations of their currencies (the snake) inside narrow limits against the dollar (the tunnel). Hit by oil crises, policy divergence and dollar weakness, within two years the snake had lost many of its component parts and was little more than a German-mark zone comprising Germany, Denmark and the Benelux countries. And the experiment failed.

The quick ‘death’ of the snake did not diminish interest in trying to create an area of currency stability. A new proposal for EMU was put forward in 1977 by the then president of the European Commission, Roy Jenkins. It was taken up in a more limited form and launched as the European Monetary System (EMS) in March 1979, with the participation of all Member States’ currencies except the British pound, which joined later in 1990 but only stayed for two years.

The European Monetary System was built on the concept of stable but adjustable exchange rates defined in relation to the newly created European Currency Unit (ECU) – a currency basket based on a weighted average of EMS currencies. Within the EMS, currency fluctuations were controlled through the Exchange Rate Mechanism (ERM) and kept within ±2.25% of the central rates, with the exception of the Italian lira, the Spanish peseta, the Portuguese escudo and the pound sterling, which were allowed to fluctuate by ±6%. In August 1993, these bands were widened to 15% in order to counter speculative pressures, but by 1996 all currencies had moved back to their original fluctuation margins. And the experiment failed.

Many years of managing large sums of exchange rates hedges and teaching the subject in universities and colleges taught me that large monetary unions, like that of the US, survive if the productivity between the member states is close, very close.

European foreign exchange experiments will continue to fail as long as productivity differentials between member states are so different.

The markets always win. Even in the US monetary union. Sates like Ohio, Michigan, and California are paying dearly because they have become uncompetitive (within the US monetary union) as Greece, Spain, Portugal, and Ireland (within the European monetary union).

5/19/12

Observations

Who is George Dagnino? What makes him tick? In the money management business you have to have unique ideas and a sense of why things happen the way they do. Eventually I have to tell you what are the most attractive investments.

The media are full of news. People continuously express their opinions. Administration officials tell us what they are planning to do and why. We are bombarded with events, data streams, opinions, ideas, and surprises.

I am a logician, because I need to tie everything together in a cause and effect relationship. If I am successful, I make the right forecasts.

I have to absorb the events and try to give a perspective to what is happening. Does it matter? Should we be concerned? Why should we? Why not.

I have to be open minded and creative. This is the reason why I read subjects such as philosophy, history, and religion. I stretch my mind by reading philosophers who have violently attacked my religion, such as Nietzsche, to understand why they think the way they do.

I read Bertrand Russell. He is an agnostic. He is one of the most brilliant and fertile minds of the last century. He refuted, as the great logician he was, the famous proofs given by St. Augustine that God exists.

In the last issue, I wanted to make the point that we tend to forget the real issues. I used the event of the day to convey this idea. The event of the day was not the message. The message was that, as a Nation, sometimes we get sidetracked and tend to minimize the huge problems facing us. To remain the world leaders we need to stay focused.

At times there may be misunderstandings in the way I express a concept. I hope my awkwardness does not obscure the value and the real objective of this service as an investment resource.

(This Observations appeared in the 3/29/04 of The Peter Dag Portfolio).

5/18/12

Commodities and the business cycle

Commodities have been plunging since March 2011 (click on the chart to enlarge it).

Yields have been declining since then. Commodity sensitive stocks have performed poorly since then. The dollar has strengthened since then. The economy (orders, industrial production, inventories) has grown more slowly since then. Some stocks, however, have performed very well since then. The pattern? This is the phase of the business cycle unfriendly to commodity sensitive stocks.

5/15/12

The real problem with Europe

The real problem, when all is said and done, is that most European countries (those with a large current account deficit) own a lot of money to Germany. Now Germany wants to be paid for the huge exports and loann to the easy-going countries.

And guess what - Germany has found out that they do not have the money. So she is trying to do everything possible to keep the European countries together.

Germany is the big loser. For more details try to understand the accounting of TARGET2 to convince yourself about this issue.

5/14/12

The pattern continues

The markets are moving. The messages is clear. It is not Greece or Europe. It is the economy. This is a classic pattern you find in a weakening economy.

Stocks sharply lower. Commodities sharply lower. Gold and oil sharply lower. Yields down, bond prices up.

It looks like the economy is not in good shape.

5/13/12

An important concept to understand today's markets

5/11/12

The business cycle is alive and well

These are the typical patterns I disucssed in my videos on www.peterdag.com.

The economy slows down. The Fed eases. Commodities - all of them - decline. Including gold and crude oil. Inflation declines. Yields decline. Bond prices rise.

This is exactly what is happening now. The latest PPI sagged 0.2%.

In our latest issue we have our watch list of stocks doing well in a weak economy. We have also a video on the subject - "Investing in a weak economy". It might be useful for you to peruse it.

5/10/12

Europe will fail...again

European Monetary System (EMS) was an arrangement established in 1979 under the Jenkins European Commission where most nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations relative to one another.

The basic elements of the arrangement were: 1.The ECU: A basket of currencies, preventing movements above 2.25% (6% for Italy) around parity in bilateral exchange rates with other member countries. 2.An Exchange Rate Mechanism (ERM) 3.An extension of European credit facilities. 4.The European Monetary Cooperation Fund: created in October 1972 and allocates ECUs to members' central banks in exchange for gold and US dollar deposits.

Periodic adjustments raised the values of strong currencies and lowered those of weaker ones, but after 1986 changes in national interest rates were used to keep the currencies within a narrow range. In the early 1990s the European Monetary System was strained by the differing economic policies and conditions of its members, especially the newly reunified Germany, and Britain (which had initially declined to join and only did so in 1990) permanently withdrew from the system in September 1992. Speculative attacks on the French Franc during the following year led to the so-called Brussels Compromise in August 1993 which established a new fluctuation band of +15%.

In 1998 Europe introduced the Euro. This is another way of fixing exchange rates between member countries.

The EMS failed and the Euro is failing. For exactly the same reasons. They are two sides of the same coin.

Why? Because you cannot have fixed exchange rates between countries having so much different productivity. Exchange rates are determined by productivity differentials among countries.

In order to have a stable currency union like the USA, the countries/states must have very similar productivity. I have been saying this since 2003.

The country with the lowest productivity will always have the largest current account deficit and the weakest currency. The productivity differentials are too wide relative to the Germans. The Germans have to leave the union. It is the only feasible solution.

5/9/12

The incredibla Farage does it again! You must review this video. He is saying in 3 minutes what I have been saying for more than 9 years in my broken English.

Farage pulls no punches but in three minutes provides a clear picture of just how concerned anyone who is not merely a head-in-the-sand status-quo muddle-through'er should be with regards Europe: "It is a European union of economic failure, of mass unemployment, and of low growth"

Gold

Gold is slumping together with all other commodities.

It looks like the markets are telling us gold is a commodity.

And if the economy keeps growing slowly it is likely commodities are going nowhere.

5/8/12

The pattern continues

The market pattern is staring at you. It is important to listen to its message.

Weak stocks. Weak commodities. Weak gold and crude oil, Weak agriculturals, Lower bond yields and higher bond prices.

Do you see the implications?

5/7/12

Sell in May and go away? A look at the markets' seasonality

Question: Which market is likely to be strong in the summer months?

5/6/12

Headlines

Greek Election Gridlock Raises Risk for Bailout, Euro Future

Sarkozy Becomes First French President in 30 Years to Be Ousted

François Hollande ousts Nicolas Sarkozy to become president

My point? Slowly and steadily the markets are asserting themselves and will force the European bureaucrats to face reality. The European experiment is a failure.

Thought of the day

The fallacy of utopias (example: the workers' paradise, everyone should own a house even if they cannot afford it,....) is that they are used to deceive people to believe the unfeasible programs justifying their attainments. But the ultimate goal is the achievement of power and wealth by the promoters of the utopia. The outcome is inevitable misery and chaos. See what is happening to Europe.

5/5/12

Observations

It is difficult to be yourself. One is always self-conscious about what the others might say of the true you. This is especially so when you are young. When I started this business, I hid myself behind a pen name such as “Dag” (short for Dagnino) because I was sensitive to the sound of my last name.

This column was the idea of a friend. “Be yourself. Write what goes through your mind. Your readers will appreciate your advice if they have a feeling for what makes your brain tick,” he told me once. I am a good skier. I have to be -- my wife is Swiss. She does not ski. She glides on the snow.

She is as natural on the snow as a Swiss should be. I learned to ski on the mountains east of Rome, about 2-3 hours from the city. After meeting my future wife, I started to go skiing also in summer, on the glaciers in the Alps. The instructors were members of the Italian national team. It was a treat.

In Ohio, I found little or no challenges. So, I became a ski patroller. My children are excellent skiers, enough to become ski instructors. Now my daughter is trying to teach my grandchildren about the exciting world of skiing. They are four and six years old. They are taking lessons and have a good sense of the sport. We decided to go skiing in New York state for two days, all five of us.

A publisher and managing editor of a magazine once told me: grandchildren are your ties to eternity. I could not fully grasp the meaning of it. When we were going down the slopes, they were following me closely, as I told them to do. They were making turns where I told them to make them. It was so thrilling to see them so serious, trying to negotiate bumps and rough spots. Yet, they were always there, behind me, perfectly executing the series of moves that would make them slow down and change direction.

As we were going down the hills, I realized the meaning of continuity. A concept I did not fully understand until I saw those two little, playful boys skiing behind me.

(This Observations appeared in the 2/9/04 issue of The Peter Dag Portfolio).

5/4/12

Thought of the day

The importan features of money management are knowing...

1. How much to buy or sell.
2. When to buy or sell.
3. What to buy or sell.

5/3/12

Do you see the pattern?

Stocks down. Yields down and bond prices up. Commodities down. Gold down. Oil down. Economy...some bad news.

If the economy keeps growing slowly, where would you invest your money> Some stocks remain strong. Check my video "Investing in a weak economy" on www.peterdag.com.

5/2/12

Thought of the day

When I talk to my friends they always know what to buy and why. Then, I ask them when will they sell the stocks they like? No answer.
The point is that when you decide to buy a stock it must be clear what are the conditions telling you to reduce/sell the stock you bought.

5/1/12

Thought of the day

If you want to time stocks, select low-volatility stocks. Why? Because if you make mistakes and they go down you do not lose much. And this is the main principle of risk/money management.