1/30/14

Observations

I left a few things to do on the boat. It is a great excuse for me to go there and escape. Annapolis is a great place with a myriad of good restaurants.

Akron is not the place it was several years ago when the city was the “tire capital of the world”. The four major tire companies were in town and they added some excitement (and $). Now the major employers are healthcare and government. This is what happens when lack of state leadership fails to attract new businesses and scares them away with high taxes. Oh, well, higher taxes are needed to give people what they want. The consequences are grim

Last time I went back to the boat to install the de-icer. This is a propeller you put close to the bottom of the bay and it pushes the warm water to the surface, thus avoiding ice formation around the boat. Ed decided to come with me. With Ed we are studying the history of philosophy. An interesting project. We are now studying Schopenhauer.

Ed tried to find out what is my forecast for 2008. Is it important? After digging deep into my brain I was surprised by the answer.

The forecast is not the most important step in an investment program. The investment process is what makes the difference between success and failure.

The first and crucial step in the process is to measure the portfolio performance. You are trying to maximize returns. The keystone of the process has to be the reduction of the poorly performing positions and increasing your investment in the strongest ones.

The forecast fits in the process, but should be taken as an assumption. It helps guiding your decisions. However, a forecast is always wrong, by definition. The performance of the portfolio tells you if your assumptions were correct. Right now my main “assumption” is that the economy is going to slow down. This trend will drive all asset classes. We will focus on the strongest ones.

(This Observations appeared in the 1-7-08 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.

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Observations

First of all, before anything else, I would like to wish you happy and joyous holidays. I would like to say “I appreciate your business”, but I do not like the way it sounds. I simply want to tell you: thank you for following and using my ideas. Thank you! Many times subscribers ask me how I prepare each issue. This is it.

On Friday I start concentrating on the next issue, on what has happened, what is really relevant, and taking the “noise” out of the news.

On Saturday I make a list of the data released since the previous issue. Then I start to collect the data, focusing on the revisions and what they mean. On Saturday afternoon I enter the data.

Sunday is the most creative part of the process. I analyze hundreds of charts and relationships. They provide me with clues on what is happening. I make notes as ideas go through my mind.

On Monday I review my notes and start writing the content which starts on page 5. This is when I let my mind go and I nail the major trends. I define the relationships between leading, coincident, and lagging indicators and their impact on the financial markets.

On Tuesday I finish writing the first four pages and most of the issue, making sure my ideas flow correctly and always keeping an eye on recent market developments.

Wednesday is devoted to the stock sector analysis and the review of the many graphs I have developed. This is a very intense day because I study the many investment ideas I collected in the previous days.

Thursday is the day when all comes together. I make sure I have the right recommendations, strategies, and market timing conclusions. I constantly review my market indicators and finalize the timing.

Friday and Saturday are devoted to preparing the final format to be posted on the website. At the end of this process my brain feels completely empty. But I love what I am doing, knowing very well next Friday I have to start all over again.

(This Observations appeared in the 12-26-06 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. 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.

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Observations

Our world has not changed in 500 years. All this time and our basic human, political, and religious issues are unchanged. In 1500 the Spanish were the first to move to South America. They did not want to colonize. They wanted to ransack the region because they heard they could find gold, silver, and spices. They destroyed and killed to amass wealth.

The Spanish king did not care. He wanted the gold. The human sacrifice was ignored. For him South America was a gold mine. No more. No less. All the efforts spent by the conquistadores were measured in the weight of gold they were bringing back to Madrid. Spain was obsessed with becoming a military power. Fewer and fewer people were left to work. This was especially true after the Jews and moriscos were forced to leave because of the Inquisition.

The same Spanish feudal system with the nobility at the top and servants/slaves at the bottom was kept in the lands conquered by Spain where the laws were dictated by Madrid. The Church followed the conquistadores and established the secular (by supporting the Spanish rulers) and spiritual power it had in Europe.

The development of North America was quite different. The Puritans (Calvinists) were the first to arrive. They wanted to build a new world. Those who followed had the same spirit and courage. Success came at the expense of very hard work.

A spirit of solidarity and brotherhood kept them together. Freedom (political and religious) was an important issue because they all left as a result of persecutions and the tight feudal and monolithic European system. It was not gold. It was freedom.

After 500 years we still have the same major regional differences in the world. a. Where Spain and theocracy reigned (Latin America, Mediterranean countries, Middle East); b. North America, northern Europe, Australia and New Zealand (Protestants); and, c. Asia.

500 years and nothing has changed. We still think and act as then. What has happened, and why, is obvious. And yet, we refuse to change after 500 painful years!!!

(This Observations appeared in the 12-4-06 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. 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.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

1/13/14

Observations

Kathi, my Swiss wife, and I were having lunch. She prepared a typical Swiss dish – bread slices, smeared with mustard, topped with Gruyere, grilled in the oven, and dusted with pepper. A glass of Shiraz-Cabernet. Sun coming through the windows. The setting was relaxing.

We talked about a “Travel” channel documentary showing Zurich, a wonderful city, full of great stores (expensive and very elegant), tea-rooms with delightful patisserie, private banks without names on their doors, exquisite and cozy restaurants, and an attractive lake framed by awesome mountains.

Yet, nothing is perfect in paradise, where a well educated population has made a mark in the world economy with their productivity and innovation.

In the 1960s Italian workers from the south migrated to Switzerland. Because of the shortage of labor they would work nine months and then go back to Italy to their families to rest and enjoy their earnings.

The Italians were followed by the Spanish. The conditions were harsh, but the pay (in Swiss Francs) went a long way in their country. Workers were well organized by the local authorities. Medical assistance and schooling was provided and encouraged. Swiss discipline in the behavior of the guests was expected.

The Swiss are always prompt in helping countries around the world where there is need of financial and medical assistance. It was natural to open their well guarded frontiers to the refugees of the Hungarian revolution in 1956.

However, things have changed. Immigrants from Eastern Europe and Asia are flooding Europe. Switzerland and Europe do not have the infrastructures to absorb all these poor people. Besides, work is difficult to find for so many persons. Even the tranquil and bucolic Switzerland (and other European countries) is experiencing crime and violence because survival demands it.

These people are desperate. We have to deal with them. We cannot brush them aside. We have to find solutions. The alternative is horrible crime and civil wars. Wars and hate will not do it. What are we doing about it?

(This Observations appeared in the 11-20-06 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. 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.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

1/2/14

Inflation and your investments: Wages and Inflation

The growth in wages is closely related to the behavior of the business cycle. As the economy strengthens, the growth in wages tends to increase as unemployment declines. As unemployment declines, confirming a strong economy, the tighter the labor market becomes, the more pressure there is on wages to rise. A slowdown in the economy close to or below the long-term average of 2-1/2 to 3 percent, creates an increase in the unemployment rate; and with more availability of workers, growth in wages is likely to stabilize or decline.

The growth in wages has the same turning points as inflation as inflation because its behavior is that of a lagging indicator. The outcome is that turning points in wages follow turning points in coincident indicators both at troughs and at peaks of the business cycle.

The process can also be visualized as follows:
• A peak in the growth of the money supply is followed by
• A peak in the growth of the economy and employment, which is followed by
• A peak in the growth of wages, which is followed by
• A trough in the growth of the money supply, which is followed by
• A trough in the growth of the economy and employment, which is followed by
• A trough in the growth in wages, which is followed by
• A peak in the growth of the money supply
And the cycle starts over again.

Because of the cyclical relationship between wages and inflation, it is generally believed that a tight labor market, a strong economy, and rising wages are inflationary. There is not necessarily a relationship between wages and inflation. In other words, growth in wages may not be inflationary.

In the 1960s and the 1980s the US economy experienced strong growth in wages but very low inflation. In fact, in the 1990s wages were growing at three to four percent, while inflation was close to two percent. In spite of this evidence, policymakers, including some members of the Federal Reserves systems, believed in the Phillips Curve. The Phillips Curve relates the simple fact that a higher unemployment rate is associated with lower inflation and a lower unemployment rate is associated with higher inflation. The policymakers' conclusion is - let's not let the unemployment rate fall too far down, otherwise that could be a signal that inflation will start rising due to higher wages. Again, this is a fallacy because the facts have shown quite clearly that wages in the 1960s and the 1990s were rising faster than inflation and inflation remained under control. The only thing that the Phillips Curve shows is the obvious truth that as employment growth declines, wages accelerate. However, the experience of the 1960s and the 1990s shows quite clearly that an increase in the growth in wages is not necessarily inflationary.

So how is this dilemma solved? The dilemma is solved by looking again at real short-term interest rates. High real short-term interest rates increase the cost of borrowing and business is forced to invest in higher rate of return projects. Consumers on the other hand are also discouraged from overspending due to the higher cost of borrowing.

Let's look at it from a business viewpoint. The higher cost of borrowing forces businessmen to invest in projects that have a higher rate of return. But higher rate of return projects are usually projects with a high technology content, higher rates of return, and higher productivity. This is what is the missing link - productivity growth. High real short-term interest rates force businesses to be efficient and therefore increase their productivity. As productivity increases, the higher growth of productivity allows business to absorb the higher increase in wages. For instance, if wages are increasing at four percent, and productivity is also increasing at four percent, the unit labor cost to business is zero.

Wages are not the elements that create inflation. The element that creates inflation is low productivity growth. However, with high real short-term interest rates, by keeping prices down, by keeping the inflationary process low, it forces business to improve productivity. Since business cannot raise prices in a period of low inflation, they have to improve productivity to improve efficiency and improve margins. Wages are not inflationary unless productivity slows down dramatically. But this can only happen in an environment of very easy monetary policy with very low real short-term interest rates at or below the inflation rate. For instance, although in 1999 workers compensation was rising at a very strong 5.2% pace because of a very strong manufacturing sector, unit labor costs, that is labor cost-adjusted for productivity, were actually down 1.7% because of strong productivity growth of 6.9% in the manufacturing sector.

Investors should look at the trend of unit labor cost which is a quarterly release by the Bureau of Labor Statistics that ties productivity to workers compensation and also shows the unit labor cost index. Unit labor costs are also lagging indicators. Unit labor costs typically tend to rise after the economy is growing very rapidly, is in the upswing and slows down following a slow down in the economy. However, if - and this is a very important point - real short-term interest rates remain high, one should not expect a strong rise in unit labor costs - if any at all. The main reason is that high real short-term interest rates keep inflation low. As a result, business cannot raise prices. In order to improve profitability, corporations have to increase productivity, which keeps labor costs down. We will see later how this information regarding trends in commodities, trends in unit labor costs, and trends in inflationary pressures impact decisions concerning investment in bonds.

(From Chapter 7 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.
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.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.