3/30/13

The Euro. A failed experiement.

Der Spiegel - As the euro crisis wears on, the tough austerity measures implemented in ailing member states are resulting in serious health issues, a study revealed on Wednesday. Mental illness, suicide rates and epidemics are on the rise, while access to care has dwindled.

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 analyhttp://www.blogger.com/blogger.g?blogID=4393121024152614189#allpostssis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/28/13

LONG-TERM ECONOMIC AND INVESTMENT TRENDS: REAL SHORT-TERM INTEREST RATES

In order to recognize the overwhelming changes in the investment climate since the 1950s, it is crucial to appreciate the impact of real short-term interest rates on the economy and inflation. They play a major role in the way the U.S. economy, and for that matter any economy, performs. Their level has a close relationship with the performance of the financial markets and price of hard assets. They can also be used to assess strengths and weaknesses of foreign economies, and as a result, to evaluate the attractiveness of foreign investments. This will be discussed in more detail later in this chapter.

Short-term interest rates represent the price of money when it's borrowed and repaid in a period of less than one year. In our discussion, we will use the rate on 13-week Treasury bills, which represents the interest paid by the U.S. government when it borrows money over 13 weeks. The reason for using this rate is that it moves quickly when market conditions change. It also has the property of moving ahead of Federal Reserve announcements. We will devote a whole chapter on how the Federal Reserve performs the function of managing short-term interest rates. For the time being, let's accept the fact that the Fed has a major role in impacting the trend and the level of short-term interest rates, and in particular the rate of 13-week Treasury bills.

The difference between the level of short-term interest rates and inflation is called real short-term interest rates. Inflation is measured as the change over 12 months in the consumer price index or in the core consumer price index (over the long-term, these numbers are the same). These data are readily available from the Bureau of Labor Statistics. The Fed, since it can manage the level of short-term interest rates, also impacts the level of real short-term interest rates. The level of real short-term interest rates has an impact on the level of real long-term interest rates, that is the price of money when investors and business borrow over the long term. The evidence shows that the 1970s, a period of low real short-term interest rates, was also accompanied by low real long-term interest rates, well below the average of the last century. On the other hand, the 1950s and the years following 1982 were periods when real short-term and real long-term interest rates were well above their long-term average.

Real short-term interest rates oscillated around the value of 1.4 throughout most of the last century. The historical evidence strongly shows that the 1.4 value is an important number to follow when developing long-term investment strategies. The history of the last century since 1955 shows that as long as real short-term interest rates stayed close to 1.4 or higher, inflation remained under control.

Real short-term interest rates were close to this value from the early 1950s to 1967, and inflation oscillated between zero and 3% most of the time. However, real short-term interest rates began to decline quite sharply after 1968 and fell from 1.4 to as low as –7. That meant that interest rates were kept below the level of inflation through most of the 1970s. For this reason, in that decade people used to say that it pays to borrow - that inflation was going to bail you out. The cost of money was lower than inflation.

In 1980-81 real interest rates rose dramatically and moved well above the level of 1.4, hovering close to 5 in the 1980s. In other words, short-term interest rates were kept five percentage points above the level of inflation. The outcome was very expensive money and this was a major determinant for inflation to decline from roughly 15% to 2-2-1/2%. Since the early 1980s, real short-term interest rates have been above the important 1.4 level, except for a short experience in 1992-93, when the price of money was kept artificially low to re-liquefy the banking system because of a severe real estate crisis.

But after 1994 real short-term interest rates moved up again above 1.4 and inflation moved close to 2-3%. The main lesson of the last century has been that in the 1970s inflation moved dramatically higher from close to 3% to 15%, as real short-term interest rates were kept by the Fed well below the 1.4 level. The other times prior to 1968 and following 1982, when real short-term interest rates were close to or above 1.4, inflation hovered close to 2-3%.

Real long-term interest rates behaved very much like real short-term interest rates during most of this century. Real long-term interest rates, computed as the yield on ten-year bonds less inflation, hovered around the 2.75 level through most of the last century. Since 1955, as it happened for short-term interest rates, one can distinguish three main periods when real long-term interest rates behaved like real short-term interest rates.

From 1955 to 1966-67, real bond yields were very close to 2.75 as the yield on 10-year bonds stayed close to 4%. From 1965 to 1982 real bond yields declined sharply below the 2.75 level to drop as low as –4. During this time, when yields on long-term bonds were below the level of inflation, inflation soared. The outcome, which will be discussed in more detail in later chapters, is that bond yields jumped from 5% to 15% during the 1970s.

However, beginning in 1982, as it has happened for real short-term interest rates, real bond yields soared to well above the 2.75 level, moving close to seven percentage points above the level of inflation. Since 1982 the level of real bond yields was constantly above the 2.75 level as bond yields declined from 15% to close to 6 - 7%.

There are various theories on how real short-term and real long-term interest rates relate to the level of inflation and the level of productivity. What we want to show, however, is their strong relationship with inflation trends in the last century. What is important to recognize is that in this century there have been three important periods:
• Prior to 1967
• From 1967 to 1982
• Following 1982

The experience of the 1970s shows that sharply rising inflation and sharply rising bond yields were accompanied by very low real interest rates. The other two periods were similar in many respects. But their main feature was low or declining inflation and high real long-term and short-term interest rates. The experience of foreign countries confirms this relationship. Countries with low real interest rates are usually countries that have much higher inflation than the countries with high real interest rates.

Real long-term interest rates are also related to the growth of the economy and growth in productivity of the country. Trends in long-term interest rates and their role in your portfolio will be discussed in a later chapter.

When we speak about real short-term interest rates, we assume the Fed has an important role in determining their level. From our perspective, the issue is not why real interest rates are high or low. Our objective is to relate their level to economic and inflationary conditions.

Why do real interest rates have such an impact on the economy? The answer is quite simple. The level of real short-term interest rates determines whether the price of money is cheap or expensive. When the price of money is high relative to inflation, money is expensive. And this makes consumers, business, and investors more cautious about the use of their funds. On the other hand, when real short-term interest rates are low, money is inexpensive and it is easy to borrow and spend.

Why are low real interest rates inflationary? Let’s consider an example. When real interest rates are low, as in the 1970s, the price of money is close or below the level of inflation. Since the price of real estate grows roughly as inflation, consumers and investors borrowed heavily to buy real estate. There was little to lose. The price increase in the asset was enough to repay the borrowed money. There was no risk. More and more people thought that this was an easy way to protect their capital. As a result, the real estate sector boomed and prices rose sharply with it. In more general terms, low real short-term interest rates stimulated inflation through excess demand for goods due to inexpensive money.

Real interest rates also impact business and their decisions to invest and the type of investments they choose. For instance, high real long-term interest rates force business to invest in projects with a high rate of return. However, investments with a high rate of return require large financial commitments and have a high technological content. Let’s assume that a manufacturing company has the need for more manufacturing capacity and they plan to have a plant expansion. The project has to pay for itself to be implemented. That is, the savings that a project will provide or the return of the project, has to be greater than the cost of the money that is needed to implement that particular project. Let’s assume that long-term interest rates are 8% and inflation is 7%. The project can be implemented only if its return is greater than 8%, which is the cost of borrowing the money. But since inflation is 7%, that means that the company can increase prices by 7% a year; offsetting 7% of the cost of the money. As a result, the project only has to return at least 1% to make it viable. Clearly, a project with only 1% improvement is not difficult to achieve. Any small adjustment to existing machinery can provide a 1% return, thus making the project profitable.

However, let’s assume now that long-term interest rates are 8% but inflation is 2%. The project can be implemented only if its return is greater than 8%, which is the cost of money. The company can increase prices a rate of 2% a year, which only takes care of 2% of the cost of borrowing. The overall project, therefore, has to return at least 6% to make it profitable after inflation. Clearly, the effort of this kind of project has to be much more involved than the previous one, because now the project has to return at least 6%. In order to achieve this goal, the company has to allocate specialists to study productivity improvements of at least 6%, and they are likely to be achieved only if there is heavy usage of computers, programming efforts, and other technical innovations.

The point of these two simple examples is to show that the level of real interest rates has an impact on the type of projects that can be implemented. The higher the real cost of money, the higher the level of sophistication of the project, because the project has to provide a higher return. The high productivity of the project is a major reason why inflation during times of high real interest rates is kept under control.

We have discussed an example of one company, but high real interest rates affect all the companies in the country. When all the companies are trying to achieve the same goal, that is, to implement projects with a high rate of return because of the high real cost of money, the whole country becomes more productive. This is the reason why as inflation declines, the productivity of the country increases. The reason is that declining inflation does not allow business to raise prices at will, thus squeezing margins. On the other hand, high real interest rates force corporations to implement high rate of return, high productivity projects. The outcome is that the whole country has a productivity boom as experienced by the U.S. after the 1980s.

The opposite happens when real short-term interest rates are low and real long-term interest rates are also low. Business does not have to invest in high rate of return projects because the money is cheap and any project is easy to justify from a financial viewpoint. This leads necessarily to low productivity and higher inflation. As discussed above, low real interest rates do not stimulate innovation because any slight improvement in efficiencies will make the project viable. Since low real interest rates are accompanied by rising inflation, the company finds it easier to improve margins by raising prices rather than going through involved technological projects. Again, what the 1970s have shown in the United States and Europe is that high levels of inflation are associated with ever decreasing levels of productivity, growth, and low real interest rates.

High real short-term interest rates, in the U.S. or any country in the world is a sign the Federal Reserve and a particular central bank are committed to keeping money expensive. This situation forces consumers and investors to use money more carefully thus keeping inflation under control and forcing productivity to rise.

Productivity rises when inflation declines is because business cannot raise prices. As a result, the only way to improve margins and profitability is to improve productivity. This is the reason why technology stocks boom in periods of very low inflation. In fact, the technology boom that we had since the 1980s did not occur in the 1970s because in the 1970s there was no need for technology because margins were improved by raising prices. There is no doubt that as inflation declines, business pricing power decreases, and as a result, it cannot raise prices to improve margins. The only way to increase margins is by improving productivity to absorb and cut costs. It’s no coincidence that as inflation declined in the 1980s and 1990s, productivity growth soared in the United States, both in the overall economic level and in the manufacturing level. One can also say that low inflation is good not only for overall corporate America, but especially for the technology sector because of the strong reliance on technology to improve productivity and improve profitability.

Low real short-term interest rates suggest money is cheap, and therefore, consumers and business do not have the self-discipline to spend it carefully and thus create inflation and a low productivity environment. Let's see now how these concepts may help in explaining the huge changes in the economy and asset prices we experienced since 1955.

(From Chapter 5 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/25/13

What happened in Cyprus

In plain English.

1. No more public (taxpayers') money to rescue banks.
2. Investors and large depositors will have to accept the risk of investing in a given bank.
3. Overextended banks will close.
4. Germany is in control of what happens next. France is out of the picture with the disastrous Hollande's policies.

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 analyhttp://www.blogger.com/blogger.g?blogID=4393121024152614189#allpostssis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use somple hedging strategies to minimize the volatiltiy of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/24/13

Question

It took about 10 years for West Germany to absorb East Germany.

How many decades will it take for Germany to absorb the rest of Europe?

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 analyhttp://www.blogger.com/blogger.g?blogID=4393121024152614189#allpostssis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use somple hedging strategies to minimize the volatiltiy of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/23/13

Thought of the day

The more I read, study, research history and look carefully and honestly at my personal experience I am forced to reach an unquestionable and hard-to-believe conclusion.

No one can forecast. No one has a much better than 50% chance of being correct. This is the hard reality. I will discuss in more detail this issue in one of my next Observations.

The challenge is then .... what to do? What should investors do to develop an investment strategy to manage risk if you do not know what is going to happen?

The answer: Decision making under uncertainty is a well developed body of knowledge and games theory is part of that body.

More, much more details in The Peter Dag Portfolio - Strategy and Management.

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 analyhttp://www.blogger.com/blogger.g?blogID=4393121024152614189#allpostssis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use somple hedging strategies to minimize the volatiltiy of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/22/13

Strange day Friday

The market was very strong Friday. The Dow was up .63%. The S&P rose sharply, up .72%.

You would expect JNK also to be strong and LQD weak. Instead the opposite happened. JNK was down and LQD up.

What does it mean? It means the bond market did not believe the strength of the market. The bond market could very well be right. Time will tell, of course.

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 analyhttp://www.blogger.com/blogger.g?blogID=4393121024152614189#allpostssis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use somple hedging strategies to minimize the volatiltiy of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/18/13

Thought of the day

When will the European leaders recognize the European continent is a big mess? Why the European people are enduring what is happening to them? Do they have an option when the European leaders have not been elected by the people?

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use somple hedging strategies to minimize the volatiltiy of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/17/13

Observations

The last issue of the year. One more year under the belt. Trying to understand what is happening. Looking at the data over and over again, attempting to recognize trends, opportunities, and risks.

After a while, it should become quite boring. Unless you are fascinated by the logic with which events intertwine. Cause and effect relationships. Some old. Some new. Staying ahead of the crowd.

The big lesson I learned is that the investment process requires several outlooks for the economy and the financial markets. Each outlook is given a probability that it will become reality.

As new data become available, these scenarios are updated and new probabilities are assigned. The job of the portfolio manager is to select investments (asset classes, stock sectors, and stocks within those sectors) to take advantage of the most likely outlook.

At the beginning of the year I was mostly in commodity based stocks because of low real short-term interest rates. As the economy continued to downshift in the first half I became more cautious about hard assets. The surprising strength in business activity after the hurricanes surprised me. I was looking for continued weakness. I responded by keeping a substantial allocation to hard assets and commodity based stocks.

I continued to diversify, as it was clear that the market was heading higher and redeployed the cash I raised as the market corrected in August-September.

It is essential, in my view, to respond quickly when new trends emerge and adjust the portfolio accordingly. By following this approach, our typical equity account (up 8-9% year-to-date) keeps outperforming the market.

(This Observations appeared in the 12-29-2005 issue of 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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/15/13

Interesting and important

In the last 3 years Treasury bond yields declined when the stock market declined. They rose when equities rose. Do you recognize why this relationship is important to hedge (reduce the volatility of) your 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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/14/13

What amazes me is....

What is amazing in the current environment is the range of outlooks for the market and the economy. I closely follow the views of all what are believed to be the smartest people.

One set of strategist points to stronger growth of the economy and profits for the rest of the year with the equity market climbing until the end of the year.

The other set of strategists predicts doom and gloom based on the incapacity of the global system to get out of its dismal predicament.

What to do? Forecasts are unreliable by definition. Otherwise they would not be forecast. I look at the relationships between the economy and the markets. What happens now is what really matters. I also keep in place a strategy to protect my capital on the downside. The worst thing that can happen to you is to work hard to recover your losses.

I let my indicators tell me what to do and the degree of risk. I base my strategy on what they are telling me. Right now they are telling me to enjoy my profits and be careful and be ready to use my defensive strategy.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/13/13

The real issue

Bloomberg - The last time U.S. factory workers put in longer weeks than they averaged in February, Rosie the Riveter was on the assembly line and American GIs were fighting Nazis in Europe. All those extra hours helped to drive five straight months of manufacturing growth in the U.S., racking up 52,000 new factory jobs, according to Labor Department data. That includes 14,000 positions in February alone.

The real issue is not how much or how long we work. The real issue is how much we produce per hour. Our productivity has declined. In other words, we are not building wealth. We are destroying it. This is the reason - I think - the US economy cannot grow more that 1.5%-2.0%. This outlook drives our investment strategy.

Let's hope I am wrong.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

Do they know the unintended consequences?

"Clearly, the USDA has made up its mind that Big Sugar is going to trump the American consumer," is how industry exec perceives the news that the government is considerng buying 400,000 tons of sugar, as WSJ reports, to stave off a wave of defaults by sugar processors that borrowed $862 million under a government price-support program. Since these 'loans' were given nine-months ago, sugar prices have plunged 18% - and could leave the government's price-support program with an embarrassing $80 million loss given the additional sugar-to-ethanol purchase losses.(ZeroHedgr)

Housing, student loans, banking sector, auto induatry, ethanol, solar industry. And now sugar. And then we wonder why the economy is not working as it could.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/11/13

What am I watching?

Market strong. Bonds weak.

It fits the pattern. What next?

Bonds stop declinng. Stocks strong.
Bond prices rise. Stocks go nowhere.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/9/13

Unintended consequences

IBD - Gallup's survey found that the percentage of part-time workers as a share of the overall labor force surged to 20.6%, the highest level in data going back to the start of 2010 — just as the employment recovery began.

Why so many temps?

Barron's - ....the pervasive incentives resulting from Ombamacare, which requires that employers with at least 50 workers on their payroll buy health insurance for those who work 30 hours or more. ... there is therefore an incentive to keep workers on part-time status, even if they want full time-work.

The markets always win. A bad idea eventually has bad consequences.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

LONG-TERM ECONOMIC AND INVESTMENT TRENDS: LEARNING FROM HISTORY

There is a lot to learn from history and of course it would be beyond the scope of this book to analyze the historical events that took place in the last century. We will look at economic and financial data and try to extract the most relevant information that directly impacts the investors’ assessment of the financial markets. What we will learn from history are some basic trends useful to identify basic strategic choices of assets and the long-term risks of certain economic developments.

In order to do so, we have subdivided the history of the past decades in three basic periods. The first period goes from the 1950s to 1968, the second is from 1968 to 1982, and the third is the years following 1982 to the end of the 20th century. These three groups offer great lessons for the investor and provide important guidelines on what kind of parameters investors should follow to assess the major economic and financial trends that will impact their investment performance. It will provide a useful guide to what kind of assets were the most attractive, and which were the least, during these periods and why.

The main distinction between the three periods is the rate of inflation. In the 1950s up to 1968, inflation was well under control. From 1968 to 1982, inflation in the United States and overseas soared and reached unprecedented levels. From 1982 inflation started to decline. We will examine the reasons for this transition and obtain some useful guidelines as they apply to investing.

The policymakers have the levers that control these huge movements in prices from the 1950s to the 1970s and following the 1980s. These levers are very powerful and effective. Ultimately though, it is the opinion of the author that it is we, the people, who have great influence in driving the actions of the policymakers.

In the 1950s, following World War II and the Korean War, the United States was the economic leader and the most powerful nation in the world. We realized our power and our dominance of world events. The peace that followed created a sense of optimism and wealth, also shared by Europe. As the world and the population of the industrialized world recognized the great wellbeing that they derived, they tried to seek more of it. Towards the end of the 1960s and the 1970s, the population of both the United States and Europe became more sensitive to the suggestion that government could provide even more wealth than what they had already attained.

As the population extended the demand on the government to provide and share more wealth, the governments in the industrialized world became bigger and bigger. It is not to pass judgment, but it is a fact of human life that the more and the bigger an organization becomes, it eventually becomes inefficient, especially because of the size of the bureaucratic apparatus. This inefficiency of the governments and the increasing expenditures created inflationary pressures that were beyond control. Eventually, towards the end of the 1980s, the people realized that large governments were not the answer that they expected. Instead of more wellbeing, they were getting less and less wealth as inflation soared.

The people demanded that inflation be brought under control, which is what happened in the 1980s. The experiment which lasted the whole decade of the 1970s, which was based on providing the country with social programs and regulations that went beyond what the country could afford, created serious problems. Government bureaucracy increased, inflation steadily rose, and the country soon realized that the price that had to be paid for all the social programs and the multitudes of regulations that were instituted was higher inflation. Of course, rising inflation was a major price to pay because it had the immediate effect of reducing income. As a result, toward the end of the 1970s the country elected leaders who promised in a credible way to bring inflation under control and bring back solid economic times.

This same experiment of the 1970s also took place in Europe. The same inflationary pressures that were experienced in the U.S. were also a major issue in Europe. European inflation had a more structural problem. Many laws were passed in Europe providing protection for the workers on the surface. This created a rigidity that the U.S. economic system did not have. In fact, even when inflation began its long-term decline in early 1980s, Europe did not enjoy the kind of vitality the U.S. economy had, because of the rigidities in labor laws that were designed more to protect the people who worked than those who were seeking new jobs.

Since 1982, lower inflation created other strains but also created great wealth. Countries that had extremely large governments had difficulty in managing themselves and they strove to survive. The collapse of the Soviet Union is ultimate proof that very large bureaucratic systems cannot survive. They have within themselves the seed of collapse and high inflation. As the population asked for lower inflation, government shrunk, inflation came down and new opportunities arose. The leaders elected by the country were successful in the U.S. in bringing down inflation and initiating a very positive process. Of course, as inflation came down, it forced people to become more efficient. Inefficiencies could not be tolerated as the country was committed to keeping inflation under control. It’s no coincidence that governments were forced to become leaner and reflect the mood of the country.

As the environment in the last century moved from one of low inflation to one of high inflation and back to low inflation again, the population had a major impact in initiating these changes. Great wealth was created in the 1950s and the 1960s, destroyed in the 1970s, and great wealth was attained again in the 1980s. The savvy investor would have recognized these trends and taken advantage of them.

How could an investor have detected these huge changes from the available data? We will try to identify the main parameters that would have shown the astute observer that the policymakers were following policies that would have a major impact for many decades.

(From Chapter 5 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

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.

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3/8/13

Thought of the day

The hardest thing for a bear is to become bullish on the market. And for a bull to become a bear.

It takes mental flexibility and be prompt to act before the market goes away from you - up or down. This is the reason I like to move in small steps and follow my indicators.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

Technical patterns

Weak bonds. Strong market. Strong commodities.

The weakness in bonds and the strength in commodities suggests this may be a profitable rally. It is important to watch these three asset classes and how they perform relative to each other.

Time will tell, of course.

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.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/4/13

Observations

Springtime. The slip next to our boat was empty. “Tom finally left to sail around the world with his wife,” I thought. A weathered Tayana 37 arrived during the night. The owner had a sun burned face. I introduced myself. In the next few days we talked often. His wife died recently. He needed to talk.

He retired from the “agency.” With some of the buyout money he bought the boat. His plan was to go south. Because of too many repairs, he was forced to turn back. Besides, the rigging was such he could not sail her by himself. There was sadness in his voice as he recognized his retirement dream could not be fulfilled.

Many years ago he was told he was selected by the agency for a mission. He had no choice. He had to go. He went to England where he and a few other guys trained to kill. From the way he described them with his hands, they were giants. They spent their free time cleaning their pistols and long knives (about 12 inches). One day they were dressed in eastern European clothes and boarded an old German sub captured by the British during WWII. Destination: USSR. The mission was to steal the design of radar installations.

They were by themselves. If captured, their identity would not be recognized. They knew exactly where they had to go. They had to kill to steal the information. Bodies were brought back to England. In this way the Soviets thought the missing Russians were deserters.

He was captured. “George, I was tortured, beaten, raped, my bones were broken, my neck still hurts after so many years,” he told me. He showed me his S shaped wrist as he was talking.

When he left the agency his military records had a blank for that year. He went to England where he trained. No one knew of such a project. He did not exist for 12 months. I felt mesmerized. Was I dreaming? “You should write a book about your adventure,” I suggested. “Yes, and I know the title,” he added. “The Gates to Hell,” he ended with a bitter voice. Wow!

(This Observations appeared in the 12-5-2005 issue of 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.

IS THE MARKET TOO HIGH?
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3/2/13

Europe and the Italian elections

The Economist makes fun of the Italian election by stating..."Send in the clowns", referring to the election of Berlusconi and Grillo with about 55% of the votes.

You know how I feel about the European experiment. Over and over again I have been writing that is a disaster and it is a disgrace to punish, humiliate, and morally rape the European citizens.

This is an article that I wish I have written But I man not so gifted. So, I am reporting it in its entirety. Read it carefully. Because Europe is being directed by "anointed gods".

Authored by Charles Gave of GKResearch,

Italian electors’ rejection of Brussels-imposed economic diktat is an extraordinarily important moment in the history of modern Europe - perhaps the best political news since the fall of the Berlin Wall. Given the power of unelected technocrats, it is easy to forget that sovereignty in Europe still resides with the nation state as expressed through elections. The problem for those unelected officials who conspired to capture the political system - think Jacques Delors, Jean Claude Trichet or Mario Monti - is the obvious failure of their great project. For the first time a majority of electors has decisively voted against the euro and rejected policies imposed by technocrats.

As usual, the proponents of technocracy claim that the Italian vote changes nothing substantively and soon it will be business as usual. This is the standard response whenever European electors express disagreement (think of referendums in Ireland, France, and Holland..) and upset this freedom-killing project. Since more than half of Italian voters chose parties with an overt anti-euro stance, I would beg to differ.

The euro project is a financial Frankenstein which could not and has not worked; this Italian vote may mark the beginning of the system’s ultimate demise. Italy is different from other European problem economies since it runs a primary budget surplus, a current account surplus and finances most of its debt internally. Hence, Italy can leave the euro tomorrow and be much better off. Italians have led the way and soon the Spaniards, French and the Portuguese will reject this slavery in order to achieve "reforms" whose only purpose is to make a dysfunctional system work.

But let us stop and consider what these technocratic elites mean by “reform”—an end which is apparently worth so much suffering. To translate their bureaucratese into a commonly understood language let’s first define the different groups which compete for resources and influence in the modern European context:

1.The fellows who want to take care of themselves and be left alone - i.e., the entrepreneurs and those working in the private sector. These guys and only these guys create economic growth.
2.Those who want someone else to look after them. These fellows tend to work in the public sector or be retired and can be called the “new rentiers.” These guys want to lead a stable and uneventful life.
3.The fellows who want to lead their inferiors to a better future because they are smarter and know what is best. Borrowing from Thomas Sowell, I will call them the "anointed" since they very often have a very special relationship with their God, a kind of idol which they call by a strange name: the State. These guys have one and only one objective: the growth of their own political power.

Europe’s anointed decided a long time ago that we had too many little gods in Europe (The French State, the Italian State, the German State, etc.) and we needed to move to monotheism, thereby creating a European State or an altar where everybody could properly worship. Previously, each little individual god had its own "money,” with the peseta, drachma, French franc, etc., used by the local citizens to pay their dues to the local god. But as the French free market economist Jacques Rueff said, "a currency is a sewer in which unearned income is collected." In other words, if compensation is awarded even when nothing of value is produced, such “unearned income” will in time drag down the value of the currency. ,p>The stuff that gets distributed through the sewage system varies greatly from one country to the next. Take the example of Italy, a strange country (which I love dearly) if there ever was one. The north has a large community of entrepreneurs, and the south a majority of “new rentiers”. Up until 2000, Italy had a simple way of solving this problem. Massive transfers were made from the north to the south in the local currency, while the fellows in the north were effectively paid in deutschmarks. From time to time, the lira was devalued which guaranteed that the fellows in the north remained competitive against their German competitors. Similarly, the "new rentiers" received their retirement income in the local currency, which minimized transfers taking place between generations.

Balance was maintained since private sector salaries tended to be indexed (with a lag) to the DM, while retirement benefits and public sector salaries were paid in lira. The same thing happened in France, where an abnormally large part of the population (much higher than in Germany) wanted to be "rentiers” i.e. civil servants.

Because the French and Italian currency sewage systems had more waste to recycle than their German equivalent, the exchange rates adjusted accordingly and harmoniously downwards. As 19th century philosopher Ernest Renan noted a nation is defined by "a willingness to live together" - and every nation in Europe, for most of the post WW2 period, found a way to uphold its local social contract.

To cut a long story short, it is the constitutional right of every country to be badly managed if the survival of the social contract binding the population is at stake. Finding a way to live together is much more important than being well managed.

Unfortunately, this common sense formulation was never understood by the European zealots, who were intent on destroying the old gods to replace them with their new and unique god - a new Roman Empire. In this sense, the similarity with the USSR project is striking (see our discussion of a Christian Europe vs the new Roman Empire in Was The Demise Of The Soviet Union A Negative Event?).

The euro was created as a first step towards a new Roman Empire and the result was that Italians had to effectively transfer deutschmarks to the south. France was also forced to pay its innumerable civil servants in DM. Retirement benefits across the eurozone were effectively set in DM, which savaged the younger generations. The result was that local entrepreneurs lost competitiveness and peripheral eurozone economies started to go bankrupt. The euro has thus caused the probability of recurrent devaluations to be replaced by the certainty of national bankruptcy. This fate can only be avoided by a total surrender of national sovereignty to so called creditor nations, which is a remarkable achievement.

It is against this dreadful backdrop that the Italians have just voted.

However, the fact that the euro is a disaster has absolutely no impact on our "anointed." They are not interested in the well being of the local citizens, but are in fact missionaries for a faith. Since they are appointed from upon high, they are able to preach to the sinners and demand their repentance, i.e., that they should "reform". Monti, for example, was very big on preaching the "reform" sermon.

By “reform”, our proselytizing elite mean the dismantlement of "national contracts” which had managed to unify each European polity. In their place, we have been granted a new social contract whereby the Germans pay for the Sicilian and French civil servants (read a “Federal Europe”).

The Germans are not exactly keen on this idea, so in order to placate their own virtuous fellows, Berlin has offered to organize a world of ever falling salaries in southern Europe—to teach the sinners a lesson. For the lapsed southern Europeans, such collapses in their standard of living is the only way to stay competitive so long as the fixed exchange rate stricture remains. Compliance also implies dismantlement of all the social protections that the rentiers of southern Europe have over many years managed to secure.

As a Frenchman, as a European, I want a diverse Europe in which each nation is managed by its own elected people. If the nation chooses to be poorly managed—so be it, this is what democracy is all about. I am not interested in a Europe where the standard of living falls precipitously for a large part of the population, nor am I interested in humiliating what were once proud countries in the hope that they desert their old deities and accept a new god.

And neither do I want to be administered by unelected technocrats delegated by the northern Europeans on the flimsy pretext that my own politicians are useless; they may be hopeless, but I am entitled to have them that way.

What the eurocrats offer under the banner of "reform" is nothing of the sort but just an increase in their power and the destruction of the incredible diversity which made Europe an endlessly fascinating place.

It is time to return to market prices and democracy and to accept that technocracy cannot work. I love Italy more and more. Indeed, for the first time in years, I can envisage a situation in which I feel bullish on Europe.

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.

IS THE MARKET TOO HIGH?
With over 30 year experience, The Peter Dag Portfolio will show you if this is the time to become aggressive in the market or to become more defensive. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

3/1/13

Technical patterns

I like to watch charts of stock prices with their trading volume. Trading volume has considerable information on the outlook of the stocks.

Example. I was reviewing the chart of IYT (the transportation ETF) since last September. I noticed two well defined patterns. Strong volume when IYT was around $90. The other strong volume days took place toward the end of January. This is a very important pattern.

Why? Because you see above average trading volume at bottoms and after a strong rally as IYT had in the past few months.

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.

IS THE MARKET TOO HIGH?
With over 30 year experience, The Peter Dag Portfolio will show you if this is the time to become aggressive in the market or to become more defensive. You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.