5/25/14

Observations

We spent the evening in Oxford, MD. We anchored in a nice creek. A delightful place I have been going to for the past 25 years. We had dinner at the Robert Morris Inn, a business established in 1710. We went back to the boat and enjoyed a late evening drink looking at the green and red lights flashing to indicate the entrance of the channel.

We got up early the following morning because our plan was to sail to St. Michael – a long trip. The winds were from North-East. After motoring 30 minutes we decided to sail. That was the reason we were there.

As we reached the Bay we decided to keep sailing although the wind was coming from the North, against us. It was a pleasant sail. The wind was close to 10-12 kts, sunny, and the temperature was a cool 70 degrees.

Eventually we realized we could not go to St. Michael. We were sailing too slowly. It was time to find another destination – Annapolis.

After lunch we noticed some clouds north of the Bay Bridge. Not to worry said Richard. They are too far away. Ron agreed. I am a strategist. This is my mindset. I started looking for alternative destinations – just in case. We decided it was wise to think about going into a creek in the West River, one hour away. And we had to motor going south.

The wind was behind us and becoming stronger. The clouds were not far away and were biting our stern. Waves were becoming increasingly whiter, suggesting winds were picking up and were stronger than 20 kts. Our instruments confirmed it.

Eventually winds became 40-50 kts strong. The boat, a Sabre 38’, was handling it well. But to reach our destination (a protected cove) we had to go through a narrow channel in very shallow water.

Now the winds were gusting up to 73kts. I decided to go in. The winds were to port. The boat was healing with the starboard rail almost in the water. But I made it. Safely. The boat handled well. We anchored in 50 kt winds and waited for the storm to blow away drinking a Scotch. The rain stopped. All is well what ends well.

(This Observations appeared in the 6-25-2007 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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4/30/14

Smile

Smile though your heart is aching
Smile even though its breaking
When there are clouds in the sky, youll get by
If you smile through your fear and sorrow
Smile and maybe tomorrow
Youll see the sun come shining through for you

Light up your face with gladness
Hide every trace of sadness
Although a tear may be ever so near
Thats the time you must keep on trying
Smile, whats the use of crying?
Youll find that life is still worthwhile
If you just smile.
Thats the time you must keep on trying
Smile, whats the use of crying?
Youll find that life is still worthwhile
If you just smile.

4/26/14

Selling in May and go away: the historical record

Source: ZeroHedge (click on the chart to enlarge it)

Annual seasonality and second year presidential cycle

Source: ZeroHedge (Click to enlarge)

Observations

Jerry asked a good question at our latest “coffee group” session. We were looking at a chart showing the price pattern of some commodity-sensitive stocks and financial stocks. The message was obvious: commodity sensitive stocks have been outperforming the financial stocks. Questions: “What should we do now?” And SNS added: ”This is history”.

Charts, as in sailing, are an aid to navigation, part of the process of planning your trip, managing your money. Managing money is a process involving continuous decisions which have to be taken at the frequency suited to each investor. Every week, every month…you decide.

The first step is to determine the investment scenario and evaluate which asset classes are most likely to benefit. The outcome of this step is usually a multiple set of scenarios. Start with the one with the best odds. The lower probability ones will also be used.

The second step is selecting stocks for each scenario. If the main scenario reflects a strong economy, then a high percentage of your portfolio should be in commodity-sensitive companies. If one of the scenarios is a slower economy, then some money should be allocated to, for instance, financial stocks.

The third step is allocating money to each stock reflecting the odds of success assigned to each sector. A chart showing the graphs comparing the price of all the stocks is an invaluable aid. Capital should be allocated according to the relative strength and financial appeal of each stock as it compares to the S&P 500.

The fourth step, probably the most important, is to evaluate the performance of your portfolio by looking at the change in the balance of your portfolio and at the chart showing the relative performance of your stocks. You have to decide how often you want to do it.

Are you making money? Is most of your money in the strongest sectors and the strongest stocks? What are the scenarios you are considering? You need to change your portfolio according to this new evaluation.

The answer to Jerry and SNS is: The graphs of your stocks are part of the process. They give an idea of where you have been and where you are going.

(This Observations appeared in the 6-11-2007 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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Currencies, Inflation, and Foreign Investments

Inflation is the cancer of the economy. Rising inflation is a sign that the economy is operating less efficiently, it means that business is allowed to raise prices rather than improve productivity to improve its profitability. Rising inflation has a negative impact on productivity as business finds it easier to raise prices rather than investing to improve productivity in order to increase margins. Rising inflation means that people who rely on fixed income have their source of livelihood depleted by external forces and they are forced to live with smaller resources. ,p>Rising inflation creates discontent in the economy and in the population as people see their money worth less and less. The quality of goods purchased declines as business cuts cost to improve profitability and raises prices. The whole economic process becomes distorted.

The financial markets, as inflation rises, reflects this uncertain state of affairs and they act very poorly as they did in the 1970s. Rising inflation is really a cancer of the economy and that's why the Federal Reserve and the central banks around the world are committed, at least on paper, to keep inflation under control and achieve price stability. Price stability really means that with prices growing slowly, business is forced to improve margins by increasing productivity and this increased productivity creates a stable business cycle, sound growth and high real income as wages rise above the inflation rate.

Rising inflation also is usually associated with an overwhelming role of the government in the workings of the economic process. A definitive example is what happened in the 1970s in the United States. Inflation soared from 3% to 15% as the federal government aggressively expanded social programs and at the same time was fighting the war in Vietnam without raising taxes. Spending was funded by keeping very low interest rates relative to inflation, causing inflation to soar, thus indirectly raising tax revenues as income was artificially inflated by inflation. This influence forces the economy to operate at inefficient levels. It is not a coincidence that the Soviet Union, where the bureaucratic apparatus was 100% of the economy, collapsed because of the inefficient Soviet economic system. Other countries in Europe have shown that the more socialistic governments have been associated with an economy growing more slowly. This is the reason why Europe grew slowly in the 1990s. Japan itself was in a long recession in the 1990s due to the close control of government and cartels on the way their economy operates. The United States has proved that by maintaining some freedom in the marketplace, one can achieve solid economic growth and a low unemployment rate. As we have seen in chapter five, rising inflation is eventually associated with high unemployment rates as business cuts employment and recessions are usually the rule, not the exception.

Of course as inflation rises, interest rates also rise. Lenders ask for a higher return for their money being lent to keep into account the inflation risk. When inflation rises, everything seems to be going wrong. On the other hand, the 1960s and the period following the 1980s showed quite clearly low inflation is accompanied by stable economic growth. The currency of a country reflects this state of affairs and is a delicate mechanism measuring the imbalances of one country relative to the others. A strong dollar reflects the fact that the US economy is performing well, with stability and low inflation. A weak currency reflects a country that has economic problems, inflation problems, and productivity problems - a country that lacks stability and conviction to solve the issues.

Currencies, over the long term, reflect the inflation differential between two countries. It measures the relative efficiencies between two countries. A country with low inflation is more efficient and more stable than a country with higher inflation. Therefore, the country with a weak currency reflects a country that is relatively worse off than the country with lower inflation. This is an important fact to recognize because when investing in foreign stock markets or in foreign assets, one has to assess the impact that the currency has on the performance of the investment.

For instance, if one invests, let's say in Japan, and the Japanese market rises 20 percent, it provides the investor with a 20 percent capital gain. However, if the Japanese Yen declines 20 percent, the total gain for the US investor is zero. Although the investor has a 20 percent profit from stocks, it takes 10 percent more Yen to buy dollars to repatriate his investment, therefore, net net the gain is zero.

Foreign investments should be made in countries with a strong currency to avoid the currency risk because a currency loss takes away from the gain of the investment in that foreign country. Since the long term trend of a currency is determined by the trends of inflation in that country, before investing, one should do a cursory check of the level of real interest rates for that country. It will provide the investor with a very simple way to recognize what the currency risk involved is in that investment. Inflation in a country depends mostly on the level of real interest rates.

For instance, in 2000 South Korea had short-term interest rates of close to six percent and inflation of one percent. Clearly, South Korea monetary authorities were following a sound monetary policy. Short-term interest rates were low, close to the norm of 5-6%, real interest rates were high with short-term rates higher than inflation, and inflation was low by many standards. Clearly, all this information suggests that South Korea is a country that has a firm or strong currency.

However, let's say the United States has short-term rates of five percent and inflation of two percent, and for example Venezuela and Mexico have short-term interest rates close to 35 percent and inflation of 30 percent. In this example, the currencies of Venezuela and Mexico offer a currency risk. The first reason is because high short-term interest rates well above the five percent norm tell the investor that the country has serious structural problems. The second reason is that real interest rates are extremely low relative to the US. In this example, interest rates are more than two times inflation in the U.S. However, in Venezuela and Mexico real interest rates are only 1.2 times the inflation rate. This means that monetary policy in Venezuela and Mexico is conducive to a weak currency relative to the U.S. dollar since monetary policy in these two countries is likely to produce higher inflation than in the US. Therefore, these two countries offer a very high currency risk and should be avoided. By the way, these numbers are available on the Internet or any weekly edition of the Financial Times or The Economist.

(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.

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4/16/14

Observations

Richard was driving and talking to Jim. I was sitting in the back with all my reading material. Finally I had the time to catch up. Three articles caught my attention.

The first one was unfavorable to the ethanol craze going on right now in the US. This is an industry buoyed by 51 cents per gallon government subsidies to a few major companies such as ADM.

This market interference by the government is creating distortions as farmers and speculators take advantage of the bonanza. The ensuing misallocation of crops will increase the price of commodities not produced because of the emphasis on corn and soybeans. There will be a green effect because corn and soybean require large amounts of fertilizer, pesticides, and fuel.

The second article dealt with the new shape of the global balance of power. As other countries grow faster, their relative economic weight increases.

Asia (mainly China and India) is creating its own organizations and excluding the US. The US, on the other hand, is trying to bring all the countries in the existing global structure to keep control of what is happening. China, meanwhile, is opening aggressively to Africa. Russia is increasing its ties with China and Asia.

The power structure of the world is evolving and everybody is positioning to gain most control.

The third article dealt with the world demographics. People spend progressively more money until the age of 48, after which spending slowly decreases as they save more for retirement. You can tell what is happening to a country by looking at the number of new born 48 years ago!

The outcome is countries with the youngest population will grow faster such as India will assume power. Those with older population (Japan) will grow very slowly. Europe, Russia, and USA are “middle-age” countries and are entering the slower growth phase.

China, with its one child policy in 1979, had plunging births. It will grow rapidly until 2015. It looks like China will grow old before it grows rich!

(This Observations appeared in the 5-28-2007 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.
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Observations

Lee Kuan Lew, minister mentor of Singapore, created a prosperous city nation. He is recognized as a major statesman. I read excerpts of a speech on Foreign Affairs and he made interesting points. Given his standing as a global statesman, I thought to share with you some of his ideas. Very different from what you read in today’s press.

He compares Iraq to Vietnam, but not in the usual way. He noted that conventional wisdom in the 1970s saw the war in Vietnam as an unmitigated disaster. But that has been proven wrong. These are his words.

“The war had collateral benefits, buying the time and creating the conditions that enabled noncommunist East Asia to follow Japan’s path and develop into the four dragons (Hong Kong, Singapore, South Korea, and Taiwan) and, later, the four tigers (Indonesia, Malaysia, the Philippines, and Thailand).” [Ed. note: by stopping the spreading of communism]. ,p>The conventional wisdom now is that the war in Iraq is also an unmitigated disaster. However, he suggests, a stabilized, less repressive Iraq can be a liberating influence in the Middle East.

He concludes that this overall new order can only be achieved by bringing all of Iraq’s neighbors into the process of achieving this objective. The latest diplomatic efforts of Dr. Rice seem to follow this direction.

I would like to add another dimension. The awakening of China is engaging the world politically, economically, and diplomatically. Its power around the world is astounding through its financial commitments, which include a plant in South Carolina and Oklahoma and a $500 million loan to Pakistan. India is feeling the pressure and is mimicking the successful Chinese model of enterprise zones.

China is moving west. The Middle East and Islam will find themselves sandwiched between a successful Europe and burgeoning Asia. History will probably say that the war in Iraq was an unmitigated disaster. But Mr. Lee Kuan Lew may be right. Time will tell.

(This Observations appeared in the 4-30-2007 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.
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4/5/14

Observations

It was cold, but I decided to go to Annapolis to check if my boat was still floating. It was an excuse to leave my usual habitat and regain some perspective on how the world works. I brought along my laptop. It is my umbilical cord in case of an emergency -- my ultimate connection.

The marina has wireless internet and the temptation was too great. I needed to review what was happening. The connection worked and I was in business. Technology never fails to amaze me. It was exactly like in my office. But this time I was sitting at my nav table with the water sloshing against the hull. In my cocoon.

I called my uncle in New Zealand using Skype and I could see him because he used a web cam. And all this was free. Incredible. I also caught up with some of my reading. The first item was the low productivity of the European countries. I expected these issues to become a problem since the inception of the EU. See my previous observations.

Spain and Italy cannot compete with Germany. In a normal environment they would devalue their currency and/or lower interest rates. But this cannot be done in an economic area with one central bank and one currency.

The outcome is capital flowing from low productivity countries to higher productivity ones such as Germany. Life becomes very difficult for low productivity countries in large economic areas with one currency. Similar problems are being faced by Ohio, Michigan, and West Virginia here in the USA.

“China welcomes ideas on how to improve its economy” I read on the Xinhua web site. “The hard evidence is that China’s soft power policy is working”, a Financial Times columnist penned a few days ago.

It is interesting to compare the two approaches to diplomacy. We are the strong guys, bashing the world to understand that democracy is the way to go.

China’s leaders go around the world totally unnoticed. Africa, Asia, the Middle East, Russia, …. They are weaving a web of common business interests. Who is going to be right? Confucius or Calvin?

(This Observations appeared in the 3-12-2007 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.
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Observations

It is 10:00 am on Sunday. They are already there, sitting around a table sipping their cup of coffee. Talking about the news of the past week. Dr. R always greets me by singing a few lines of an Italian song. Sometimes I join him. People look at us, smiling. Buy EWL, he told me, immediately writing the symbol on a napkin. It is a strong ETF and is going to remain strong. Great, I answered.

SNS was not there. Cruising to Hawai. He finished his big project of renovating a plaza and leasing all the stores. A great personal and financial success.

Dr. H did not come. Probably he had the remnants of the cold he gave me the previous Sunday when I shook his hand. Oh well, it was too late when he told me.

I like EFA, Dr. M told us with a solemn tone. You should also look into EWG, EWO and EWS. They are strong, I added. Hillary, we concluded, cannot be trusted. Besides, she is too much to the left. Oh, well, what about Obama then? Silence. He is even further to the left.

Just do it. A long-time ago Dr. R recognized a new advanced procedure in surgery. He went to England to learn it. His career grew rapidly after that. Just do it. Do not waste time was his message. He likes art. Often he flew to London to buy pieces he liked. He is now selling them at a nice profit. When you like something … buy it. A good investment idea.

The art market is soft, he added. I am not surprised, I suggested. All prices have the same cyclical turning points from housing to copper to art.

The 1700s were a major turning point for the west. The English empiricists (Locke, Hume, Berkeley) and the continental rationalists (Voltaire, Rousseau). And Adam Smith and Turgot. They anticipated the French revolution, romanticism, and communism. But how do you make big money? Not through diversification. You are doomed to perform like the averages. You need to take big bets on a few trends.

Sunday, the time to exchange ideas. I look forward to it.

(This Observations appeared in the 2-26-2007 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.
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