Archive for August, 2009

Historical Look at the Dollar

Sunday, August 16th, 2009

long-term-dollar-2009-08-161

Yesterday at the Downtown Champaign Art Fair, I had someone ask me about my posts on the dollar. They asked how come I felt so strongly that the dollar would weaken simply because of the debt our country is amassing.

I told them that even though history does not necessarily repeat itself, it certainly can act in a fashion that allows us to forecast things. So, I told them I’d post something on the blog that might help them to visualize what has happened in the past and how the dollar has reacted.

The chart above is a daily look at the dollar from Ronald Reagan to present. I’ve annotated the chart so that the dominant political and economic influences are shown. Please note that none of the annotations are qualitative statements about any particular President but rather just notes detailing what happened during those years.

Also, there may be a tendency to say that the deficits grew because taxes were lowered by President Reagan and have been kept low by all succeeding Presidents. However, the chart below shows that government revenues have been growing steadily since 1960. The deficits and national debt are due to spending more than the revenues collected, they are not due to a shrinking revenue base as some people say.

govt-revenues

You can agree or disagree with each era’s spending priorities and fiscal policies, but as far as the dollar goes, responsible policies like those in the Clinton-Gingrich Era are certainly more conducive to a stronger dollar.

This is how I come to the conclusion that as long as the projections for record budget deficits and national debt come to be a reality, the dollar will be weak. It can rally significantly within the downward trend, and may in fact be doing that as we speak (see the short term chart of the dollar below and note how we bounced off support – the teal line – the other day and rallied up to the downward sloping pint trend line).

short-term-dollar-2009-08-16

So, for now, I am sticking with my negative view of the dollar but I anticipate that a rally is likely which will negatively impact all of the commodity stocks. But, I would not want to get in the way of the major downtrend for core portfolio positions.

Mark

Wall Street Rumor Mill

Thursday, August 13th, 2009

I’m hearing lots of talk among the Wall Street crowd about an international disturbance of some sort surrounding the Ramadan holiday starting next weekend.

Art Cashen was on CNBC this morning and even talked about it. Go watch it for yourself at CNBC.com. That was the first official word on it I’ve heard in the media – not sure yet what to make of it or if it will have an impact on investment activities.

The stuff we have to monitor just to make a buck…

Mark

Change in Character for S&P?

Wednesday, August 12th, 2009

sp-bear-mkt-view

I like the visual aspect of looking at graphs to give me a feel for what is really happening in the markets. There are two aspects to stock market prices: earnings and psychology. Earnings are fundamental to a company and its stock price – all else being equal, a stock price goes up as its earnings increase.

But we all know, all else is never equal. And the thing that makes it so is investor psychology. If investors are feeling positive about the future, psychology is positive and they are willing to pay more for growing earnings (this results in a growing P/E ratio). However, if they are feeling negative about the future, they are willing to less for growing earnings (this results in a contracting P/E ratio).

During a bear market, investors are decisively negative and they are not willing to pay for earnings. They use any opportunity to sell rallies, P/E ratios contract, and prices go down. Volume tends to decline on rallies until prices get to the point where investors decide to sell, then volume increases as selling dominates the landscape.

However, there comes a point where the psychology starts to turn and investors are willing to put their money to work in spite of prices increasing. When this happens, you start to see volume increasing on rallies and buyers willing to buy stocks in a market with rising prices. This change in psychology is important and can lead to very strong counter-trend bear market rallies, and even new bull markets.

In looking at the graph above, you can see that I’ve drawn in some diagonal red and green trend lines near market rallies with their associated volume levels below. This graph traces the course of the bear market from late 2007 to present and you can see the downward path with periodic rallies, the bottom made this past March, and the rally to today.

What is interesting to note and may give us a clue to investor psychology is the trend lines. You can see the the red lines show declining volume during every rally we’ve had during the bear market until the current one. The current rally actually shows investors moving money into the market and volume increasing as prices go up.

This is a pretty key change in psychology and could mean that we are due for a move higher. Only time will tell whether this market will in fact move higher since the newest entrants to the market will be the most skittish and be the first to sell – they missed the early part of the move and will not be patient with any bumps in the road. However, if the trend in volume continues increasing as prices rise, then investor psychology has changed we can expect prices to rise up to our next target for the S&P 500 index, 1050.

I’ll keep you informed as this market continues to move.

Mark

US Dollar Rally Won’t Last

Monday, August 10th, 2009

This from blogger Kaimu:

“Right off August 6, 2009 US TREASURY DAILY STATEMENT for FY 2009 … remember we have about another one and a half months left for FY 2009.

Total outlays = $10.3 TRILLION
Total US Debt issued = $7.8 TRILLION
Total US tax revenues = $1.7 TRILLION

(This is) $7.8 TRILLION of Bills, Notes and Bonds (issued by the treasury to fund our government’s spending over the last 10.5 months). That…does (not) include the $38 TRILLION of IOUs that (the government used to) the Trust Funds (e.g., Social Security, Medicare, etc) over the past 10 months.

Look at the measly tax revenues of $1.7 TRILLION. Our tax revenues need to be 460% higher to just cover the US Treasuries our government has issued.”

For those of you who want to check this out, here is the link directly from the government: http://www.fms.treas.gov/webservices/show/?ciURL=/dts/09080600.txt

Anyone that believes the dollar has any chance of resuming its predominance in the world, they just need to look at these numbers. The Chinese do, that is why they are making noises about wanting the world to transact its business in a basket of currencies instead of dollars. They are smart enough to know that in the history of the world, anytime a government has amassed so much debt compared to its ability to service that debt, they simply turn on the printing presses to devalue the currency so they pay back the debt in money that is worth less ( or is that worthless? ).

Don’t jump on the strong dollar bandwagon. Government spending is out of control – the Treasury’s financial statement makes that clear.

Portfolios need to be structured with core holdings that can withstand the coming devaluation – I truly expect it to accelerate at some point. Maybe not tomorrow or the next day, but this baby is going down.

Mark

Using Inflation to Fight Deflation

Monday, August 10th, 2009

Scary story below from Reuters (thanks to Bill Cara for pointing it out) relative to England’s debt situation….England’s issues are a microcosm of the US’s problems…the printing presses are roaring ahead in London to create Pounds Sterling (and inflation) to battle the prospect of deflation…watch for something similar to happen here

BoE to warn that UK risks slump into deflation-paper
Sun Aug 9, 2009 6:33pm EDT

LONDON, Aug 9 (Reuters) – The Bank of England will downgrade its growth forecasts and issue a warning this week that the UK economy risks slumping into a debt deflation trap, the Telegraph reported on Monday.

The newspaper said BoE Governor Mervyn King will use the Bank’s Inflation Report on Wednesday to say the risk of such a slump was one of the main reasons behind the bank’s surprise decision last week to extend its quantitative easing programme.

The paper also cited former BoE monetary policy committee (MPC) member Sushil Wadhwani — now a hedge fund manager — as saying the current apparent upturn in the UK economy may be wiped out by another downturn next year.

Wadhwani told the Telegraph he saw growing evidence the UK was tracking a similar path to that of the Japanese economy in 1990s, which apparently recovered from its initial economic crisis only to fall into stagnation for decades.

“The recession is over, in the sense that you will probably now get three to four quarters of a decent bounce — just as Japan did in the early 1990s,” Wadhwani told the paper. “People think things will then return to normal — but these bounces are driven by temporary factors.”

“The second half of 2010 could be more difficult for the UK than 2009,” he added. “There will be a big fiscal tightening, the VAT (value added tax) cut will have gone; and the world as a whole will be slowing at that point. You will have several things coming together which will dampen the economy.”

The BoE stunned markets on Thursday with a 50 billion pound increase in its quantitative easing (QE) programme to 175 billion pounds ($293 billion).

The Bank’s policymakers said weak economic conditions and tight credit warranted a large expansion to keep inflation on track to meet their 2 percent target, suggesting their new growth and inflation forecasts next week will be gloomy.

The Telegraph said Wadhwani’s warning was likely to be echoed by King, who will say that although the worst of the recession is now passed, the knock-on effects on lending to companies and individuals mean the recovery will feel almost as painful as the downturn.

It said King would refuse to rule out extending the QE scheme beyond the 175 billion pound level set by the MPC this week. (Reporting by Kate Kelland; Editing by Bernard Orr)

Interesting Times in the Broad Market

Sunday, August 9th, 2009

Its been a heck of a run in the market since the March 8th low. Just look at the price chart in the middle – we’ve run up from 666 at the low to 1010 at Friday’s close.

sp

There are a number of indicators I watch to give me a feel for the direction of the broad market. This graph includes several of them.

Look at the RSI(7) at the top. This is an indicator that, given its position above 70, says the market has gotten ahead of itself. When coupled with the Stochastics reading above 80, we sure have a market that needs to pull back a bit and consolidate the gains we’ve seen. Based upon the other indicators discussed below, though, any pullback will likely be short-lived and seen as a buying opportunity.

In the volume box, you can see that when the market hit a peak in early June and corrected into July, the correction happened on decreasing volume. However, since that correction bottomed out and we’ve rallied to a new recovery high, volume has been increasing. This is a very strong sign that the trend we are in is getting stronger. If you couple that with the Accumulation/Distribution indicator which is in strong uptrend, the market internals are very strong.

The basic premise behind volume indicators, including the Accumulation/Distribution Line, is that volume precedes price. Volume reflects the amount of shares traded in a particular stock, and is a direct reflection of the money flowing into and out of a stock. Many times before a stock advances, there will be period of increased volume just prior to the move. Most volume or money flow indicators are designed to identify early increases in positive or negative volume flow to gain an edge before the price moves.

Two additional price/volume indicators, the Money Flow and On Balance Volume at the bottom of the chart both show that money is flowing into the stock market in a very big way. As long as investors are pouring money into the stock market, any pullback will be muted.

The other two indicators on the chart, the MACD and the ADX are two indicators that direction and strength of the market’s trend. Both are showing us that the trend for the market is decisively up.

If you look at the price graph, you will see a series of horizontal bars. This Price By Volume indicator shows the total volume at various price levels. In general, the larger bars act as support and resistance to price movements. If you look at where the current price is relative to the bars, it is in an area with very little resistance until around 1250 and it shows significant levels of support at 950. You can infer that any downward move in the stock market ought to be contained to the 950 level and there should be a lot of selling pressure ahead until the market gets to the 1250 level.

So, looking at things as objectively as possible, we likely are due for a few percentage point pullback in the broader market as it has moved up too far too fast, but it will be a buying opportunity on the way to 1050, our next target level and 1250 after that (see my older blog posts for how those targets were calculated).

The general uptrend is likely to continue until something fundamental changes the investment landscape. Right now we have excess liquidity that is flowing into the broader stock market. This is pushing up prices as investors are enthused by the positive earnings surprises we’ve seen this quarter. However, there are still significant headwinds that could derail the trend, whether they be further problems in the commercial real estate market, a crisis of confidence in the US Dollar, fears of inflation, a fall back into recession, or something unexpected.

So for now, the trend is your friend. At some point the trend will change, but for now, all indications are that things continue to look up. Any pullback will be viewed as a chance to put cash on hand to work in the investment themes that profit most in the early stages of an economic recovery. If that fundamental change comes about, I’ll let you know here on the blog.

Mark

US Dollar Weakness Has a Major Impact on Investment Landscape

Wednesday, August 5th, 2009

The following is the Investment Commentary that I wrote and included with our clients month-end statements. We like to keep our clients informed about our investment activities and the things that are happening to impact their portfolios.

If your investment manager does not provide this sort of information as a value added service, we would love to help you with your investment management. Just email me at ballard@bankchampaign.com or call me at (217) 351-2870 to discuss.

On the graph at the end of this Investment Commentary, you can see that the US Dollar is in a sustained bear market. It broke to new 2009 lows last week and continues to weaken. This weakening has major implications for the stock and bond markets, so I thought a discussion here would be prudent.

Many of you received our periodic “Investment Strategies” newsletter last week. In it, I discussed where we see the stock market headed in the short and intermediate terms. Since the newsletter was published, the breakdown in the dollar occured and is having a major impact on certain investment themes we are following. If you did not receive our newsletter, please call Melodie Davis at (217) 351-2870 to request one be sent to you and to be added to the mailing list for future issues.

There are many theories being floated as to why the dollar has taken such a tumble. I believe it is because the investment community realizes that this country has adopted a loose monetary policy in an effort to first save our financial system from collapse after the Lehman Brother’s bankruptcy in September, 2008, and subsequently to bring our economy out of the current recession.

What the investment community sees is a Federal Reserve that has doubled the size of its balance sheet, lowered interest rates to near zero percent, and is now printing money to buy treasury bonds. Historically, these actions have always preceeded rising inflation. Additionally, our government is projecting a $1 trillion deficit for this year and many into the future. The investment community understands that the only way to fund that deficit is to issue treasury bonds, and they project that our Federal Reserve will almost certainly end up buying a portion of that debt with the resulting printing of additional dollars. Rising inflation devalues the purchasing power of the dollar, decreases its value compared to foreign currencies, and impacts investment decisions in a major way.

So, what investment types are the beneficiary of a falling dollar? As the value of the dollar goes down, the investment community moves its collective wealth into other stores of value. Assets like oil and precious metals are beneficiaries of the falling dollar as buying demand for them increases and their prices increase as a result. The other big beneficiary of a falling dollar is the group of domestic corporations that have significant foreign sales (e.g., McDonalds and 3M). Because they are earning a significant portion of their revenues in currencies that are increasing in value, when they are translated back into dollars for earnings reports they have the benefit of foreign currency gains in addition to rising sales.

As far as bonds go, expectations for rising inflation generally are bad for bonds. Bonds lose value as the investment community anticipates interest rates rising. We have started to add to client accounts Treasury Inflation Protected Securites, which actually gain value as expectations for interest rates rise. We are also maintaining our use of laddered certificates of deposit that do not lose market value as interest rates change.

These actions in stock and bond portfolios are designed to protect our clients from the resulting negative impact of a falling dollar and to take advantage of the positive impact in certain investment classes.

This is obviously a simplified explanation of a very complex phenomenon. However, I wanted you to understand that in our investment strategy, we will likely be stressing the investments that fit the theme of a falling dollar. We are watching this situation very closely, and if we see a confirmation that the move to the downside is gaining momentum, we will update you in our blog: http://investmentblog.bankchampaign.com/

Thank you for your continued business, and if you have ever any questions or if you have additional funds that you would like for us to manage according to our strategy, please do not hesitate to contact us.

dollar-vs-gold-oil-2009-08-05

Note the break of support (the pink line) by the dollar (the red line). See how the price of gold (the gold line) and oil (the black line) move up as the dollar moves down. The teal line represents the primary trend of the dollar and you can see that it is decisively down.

Investment Strategies Newsletter

Wednesday, August 5th, 2009

My periodic Investment Strategies newsletter has been published and mailed to clients and other interested parties.

If you are not on the mailing list and would like a copy, please email Melodie Davis ( davis@bankchampaign.com ); she can send you a copy and add you to the mailing list.

Mark