Remember the lessons of past if your do not want to repeat the same errors.
What goes up fast, will come down fast!
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Weekly hours worked has been declining (click on graph to enlarge). This is what happens during a recession.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Money is going to pour on the world problems! Get ready for the next bubble.
Asian and European leaders said Saturday they have reached a broad consensus on ways to deal with the global financial meltdown and will present their views at a crisis summit next month in Washington.
"I'm pleased to confirm a shared determination and commitment of Europe and Asia to work together," EU Commission President Jose Barroso said at a closing news conference.
Meanwhile in our USA ......
First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.
Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.
But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.
Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.
There is a big party going on in Whashington. Enjoy! Money is dropping from the sky. I mean .... our pockets.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
I like to learn from my investment experiences. I asked myself: What did I do right and, above all, where did I fail? What happened in the past 17 months offers thought provoking lessons. Listening to my friends is a privilege. Their ideas and plans are eye-openers. Each one follows different approaches. These experiences can be condensed as follows.
1. Have a short list of stocks. A short list of stocks in your portfolio makes the management task easier. 15 stocks or 5 ETFs should be enough. Refrain from adding positions just because a friend gives you a special insight. Every time you feel like you have to buy a stock, check it against your existing portfolio. Which one should you sell if you decide to buy the latest suggestion?
2. Diversification is bad. Too many stocks across many sectors will make your portfolio perform like the averages. If you feel you have to diversify, make your life simple. Just buy the S&P 500 (SPY). However, if you want to outperform the market, follow a selective strategy. Use only 2-3 investment themes. This approach will keep your list of stocks from becoming unmanageable.
3. Long-term investing is grossly misunderstood. In October 2008, the market is at the same levels as May 2002 and February 1998. In 1982 the market was almost at the same levels as in 1969. Long-term investing is great only when you look at history, but it does not exist. If you enter one of those long periods of market stagnation, you are bound to have a portfolio showing little or no returns. You have to believe an important tenet: things do not last forever. John Maynard Keynes once said: In the long term, we are all dead.
4. You need a timing model. Market timing models are imperfect, but they provide a sense of risk. They are important and there is no excuse for not using them. The main issue is that market risk changes and your portfolio has to reflect changes in risk.
5. The business cycle works. The global business cycle is perfectly synchronized. All foreign stock markets have the same turning points at major tops or bottoms. A corollary is that when you buy emerging foreign markets you buy volatility. When you buy foreign illiquid markets, the performance of your portfolio becomes highly unpredictable because of its volatility.
6. Choose your investment wisely. You cannot ignore the crucial relationship existing between asset classes and business cycle. Commodity driven stocks (materials, energy, agriculturals, infrastructure, transportation) strive in a strengthening economy, not in a slowing business cycle. Interest sensitive sectors perform well when the economy weakens and grows below par. Your portfolio needs to reflect business cycle developments. In other words, your portfolio has to reflect changes in risk and changes in the business cycle.
7. Momentum works. The odds favor a strong sector to remain strong and a weak sector to remain weak as long as economic conditions do not change. Changes in business cycle conditions change the momentum of stocks. Choose stocks in strong sectors. Rising water lifts all boats and minimizes the odds of being wrong.
8. Do not try to catch a falling knife. Do not even think to buy a stock on a free fall. It is financial suicide. Buy stocks that go up, not down.
9. Hedging your portfolio. The introduction of “short” ETFs such as SH, PSQ, or DOG allow you to hedge your portfolio and make it less volatile. Avoid the “ultra” short. They are too volatile. Leave them to the gamblers.
10. Investment strategy. Act slowly, but act. Inaction will produce losses and profound pain in a down market.
11. Does it sound too complicated? If all these thoughts sound complicated, you should buy TIPS (inflation-protected bonds) from the Treasury by accessing their website www.treasurydirect.gov. You will avoid frustrating and time-consuming work and will gain peace of mind.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Amazing markets. This is what happened today.
*** The growth of the monetary base is absolutely unbelievable (click on graph to enlarge). It is soaring. It is the Fed's recognition that they have been too tight for too long. This is one of the main reasons we have a recession. Now they are flooding the banking system without sterilizing the injection of liquidity. This is excellent news for the economy (in due time) and for the markets.
*** The US dollar Libor rate declined sharply. This is excellent news and may signal that the aggressive increase of liquidity is unclogging the credit pipelines.
*** The dollar is soaring. This is also great news. It is a vote of confidence of international investors for our actions.
*** Gold jumped, but is still 26.5% below the March highs.
*** Commodities and crude oil were down, following closely the price of gold. This is quite typical.
*** Yields on Treasury bonds declined. Due to flight to safety or lower inflation?
*** Yields on low-grade bonds moved higher. Bad news!
*** Stocks declined.
Bottom line. Slowly and steadily the stars are aligning.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The chart of the S&P 500 is ugly this morning at 10:26 am (click on graph to enlarge).
I like to watch trading volume and the blue line above the price movement.
Volume is positive because it has surged as the market declined. But the blue line spells caution. It is declining too rapidly. What I would like to see it moving sideways and the S&P 500 rise above it.
The fundamental picture also spells caution. I am watching closely bond spreads and yields to give me a clue of the trend.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
There are two patterns in trading volume. Rising volume in a rising market and rising volume in a declining market.
The favorable pattern that has been taking place since the end of September is rising volume in a declining market. Let me explain.
Investors sell as the market declines. Selling increases with the severity of the correction. Stocks, meanwhile, move from weak hands to strong hands. Eventually sales dry up and the bottom takes place.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Incredible!
1. The dollar is very strong. The world is scared and is buying dollars. This is good news for us.
2. The global economy is sliding.
3. Financial risk is rising.
4. Commodities (including gold and crude oil) are declining because of weaker global demand.
5. Inflation is declining.
6. Interest rates of high-grade borrowers are stable to lower.
7. Equities are sinking.
8. Equities have gone nowhere since 1998.
9. Fear has reached extreme levels.
10. The world is not ending (I am pretty sure about this).
Bottom line. The markets work. Social engineering created the housing bubble by convincing us that everyone should own a home. Lending standards had to be relaxed to make it possible. Regulators looked the other way. It could not work. And it did not.
Now the markets are forcing the government to become the landlord of last resort and our banker and our retirement financier and our medical insurer. There is a huge transfer of power and wealth taking place from us to Washington.
This is a major historic change for our country. We are creating a new class of citizens -- the bureaucrats who will be empowered to regulate, regulate, and then regulate. Countries going this route have shown much lower growth rates in business activity. Is it going to happen to us too? Are the markets discounting this shift of power?
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The problem with the market is that financial risk is still rising in spite of the aggressive easing of the Fed and Treasury. There is little or no hope for the market to rise as long as financial risk keeps moving higher (click on graph to enlarge).
Furthermore, some surveys show there is too much optimism that we have hit bottom. Well known market technicians pontificate on TV we had capitulation. I hope they are right.
Rising financial risk, however, is not the ideal background for equities.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Wow! Is this the long awaited market rally?
--- The dollar was strong. This is the most impressive feature.
--- Commodities surged. All of them. Very impressive. Is inflation in the cards? When?
--- Gold and crude oil were up. Unusual since the dollar was strong.
--- Small banks were shining.
--- Long bonds remain under downward pressure.
--- Credit markets thawing.
All asset classes were strong. The strong commodities do not fit the deflationary scenario. Or, there is so much money on the sidelines that investors just bought, bought, and then bought. It will be interesting to see what happens in the next few days.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
