Thursday Outlook: No Inflation? Who Knew?!

Oh boy! Who knew? There’s no inflation. All you need do is read the headlines in the financial media and listen to the talking heads and you’ve got the story. The trick here of course is, and has been, to drink the Kool Aid of government manipulated inflation data.

This month the featured statistical “look left, run right” was the “seasonal” energy price adjustment which argues that energy demands will be higher at this time of year and that means we need to heavily discount the headline number. Did you ask your gas station attendant for a discount at the pump? If you didn’t get your adjustment just drop a note at the Bureau of Labor Statistics and ask for one. Good luck.

In my absence from posting, I’ve been visiting ETF providers in the Chicago area. What fun! Have I learned anything out in the western suburbs? Not much new frankly.

Stocks have been rising erratically over the past four trading days as bulls still command the tape and are able to cherry-pick the news that suits their purpose. Let’s face it, bulls have a lot of cash, trigger fingers and are beset with performance anxiety. It’s understandable.

Bears on the other hand have been repeatedly squeezed so much they dare not think of shorting.

Bulls are just playing the game with each other as volume and breadth haven’t been impressive.










































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Comments

[sorgmot:]

Great graphs. Its all there. Well maybe not quite all, how about commodities and foreign currencies?

Our estimate is that USA interest rates are in long term upward trends begun in 2003 and capping in 2050.

The USA interest rate run up will do the same damage to USA asset prices (bonds, stocks, real estate, and USA dollar exchange rates and commodity buying power) as did the period from 1933 to 1980. For bonds, stocks, and real estate, the price to earnings ratios will fall. For commodities and foreign currencies, their prices will rise in term of USA dollars.

For the rest of 2008, we expect the trends that your charts show to stay in force. Stocks down from May 19th to September 2008. And, in that period USA interest rates up, USA bonds and real estate dollar prices go down. Also, commodities and foreign currencies to go up in USA dollars, now to September 2008.

These are guesses based on our readings of Elliott waves in extended versions of graphs like those you show. With USA business cycle periodicity also considered.

These expectations can all be changed in an instant by one or more exogenous events. Always diversity and alway see you financial adviser to design a portfolio appropriate to your particular financial circumstances and needs.

2008 May 15 11:46 AM

[whidbey:]

The consequences of a generally rising bond rate are not pleasant to contemplate for a growing retired US/Global population. But I agree the trend is up, and for retired folks it means loss of principal in fixed income funds, probably not offset by interest income which may not keep up with inflation in any case. Moreover, any income will be taxed except for Roth owners (maybe). Shift to Roth and pay the tax now? Is that a fair definition of the choices open to the retired? Further, such choices will not be mitigated by "diversification to taste" as the writer above suggests.

It will prove cheaper to the governments involved to lower tax rates on the retired. Of course that will require a cut in federal expenditures. The earth must move and it appears that few, if any, of the politicians have noticed the coming upheaval involved in a repricing of risk.

2008 May 15 12:27 PM

[OJO Zafado:]

Alot of charts. No sign of the charts for SDS or PST. Of course PST just started trading. The mutual fund of the same strategy has been doing quite nicely the last few weeks. It seems to have made a confirmed turn up. Does anyone really believe now that as oil and precious metals have become currencies via ETFs in their own right, the US 10 year Treasury bond can stand up going forward. There is certainly more The Republic of Check rebate economic policy comming. States and local are already feeling the pinch as COLA costs are driving up wages and benefits while at the same time the States are no longer recieving the Federal Medicaid mony. The FEd last week incresed the TAF to $75 billion and the TRCA to a whopping $100 billion. A good thing too as there were three more European banks writing down another combined +10 billion on Monday morning. The real kicker was after cooking the inflation #s this week the Treasury decided they had best come clean and reported the TIC for March to be a minus $47 billion. This is not so bad untill compared to the average monthly TIC which has been generally positive and last months ~$65 billion plus TIC. So you have an actual reverse "Corporal Parmenter" effect totalling $100billion. Who can blame the Chinese for not renewing their expiring treasury notes as they have their own Strat petroleum reserve to fill. They have also previously announced that they intended to Quad their Central bank holdings in Gold. Maybe as the worlds largest miner producer they can make half of that increase from in house production. Meanwhile McCain is arguing with Hillary as to who can give away more tax money and cut taxes more while dealing responsibly with the severe Near year" shortfalls in the the bommers Social security funds. Not much chance that the generation that has paid in the most money to date into the system will not execise their right to a fair return and Colas at the ballot box. I thank the author for his concise conclusion "For the rest of 2008...." Did anyone notice the pesky Loonie AKA "Petrel" went back above par again today? I agree with his sentiments and would strongly recommend GDX,GLD,SLV, PMY,DBA,MOO,ENY,USO, UHN, as well as the still grossly undervalued huge dividend paying EVDVF/EIN/TSX. Just own them all, with the RJI! Do not over lok the true bargain basement ETFs NLR& CUT. 2 asset classes that have yet to participate in this great commodities boom! Hey who isn't going to need toilet paper? in the comming US economic collapse and bad years? Imagine the TRCA $100 billion... a few key strokes and hit enter! There goes a $100 billion off to the ECB and SNB! Think of all the money, electronic money is saving the taxpayers by not having to pay for printing that much cash. Anyone know when the ATM's will start kicking out the $50s?

2008 May 15 12:52 PM

[OJO Zafado:]

Widbey~`` I do not follow your logic on the bond market. Only those locked into bond funds and long term bonds will see significant deterioration. J M Keynes once observed, "When the situation changes, I change my mind. What do you do?" I am 80% in bonds and use my excess income over my distributions to invest in the equities. Once a year I take a harvest of 2-3% of my equity portfolio and drop it back into bonds. I am doing quite nicely here at the S&P-1400 having not lost any money in my portfolio since 1/2007. I am up by less than 1% but I have taken distributions at 4.6% so I am ahead by over $60K in distributions. The thing to do is to have a bond ladder that you keep short to less than 6 years. You minimize the amount you bar bell out to the long term for higher yield to less than 15%. In this fashion you have constant maturities. I am significantly improving my yield in this envirionment. As more than half of my bonds in this year's rung have matured and rates have been ridiculously low on "safe" issuances, I have temporarily switched into Subordinated debt securities. The BAC '12 bonds yield less than 4%. The BAC-PRE pays out 5.4% not much of a premium except it is adjustable and sells substantialy below par and it's default coupon. The FBF-PrN (BAC) also way below par yields 6.8%. combined you get a great yield with inflation protection of sorts. The same for the FNM-PrP at 6.3% adjustable and UBS-PrD . With some severly discounted HJJ (Goldman Sachs) you add on some more +7% yield. The PYI, MSJ, USB-PrE, C-PrF and WB-PrS are all up there in the 7.25% to 8% yield. Of course these are long instruments but their quality is superb. Many have short term call dates. I continue to build my hedge in DXKSX to hedge their valuations. I have indeed changed from the < than 6 year bond ladder model but the situation is changing. The premium in yield is just too compelling in these subordinated high quality debt issuances. This is good news for income investors as many of these like the PYI, FBF-PrN and HJJ have short call dates and if called will reap a windfall, in gain for the investor. I am also holding fully funded ladder rungs through 2011. As soon as the ten year bond rate gets up above 5.5% I will start filling my '12 and '13 ladder rungs again. This is of course very bad news for the common shareholders of these great companies as some newbie investors jump in line in front of them causing them to havce their dividends and future dividend increases substantially reduced. A good deal for one investor almost always means some other investor is being diadvantaged!

2008 May 15 01:41 PM

[User 141585:]

David Fry:
Enjoy your posts but wonder about the value of tracking the QQQQ based on David Jackson's analysis of it excerpted below:

"the NASDAQ 100 is a slightly unusual index that makes its popularity baffling. It’s dominated by large capitalization technology stocks, but it’s not a pure technology index. In fact, it excludes some of the largest US technology stocks, such as IBM and HPQ, which are traded on the New York Stock Exchange. As a result, if you want to make a concentrated sector investment in technology stocks you’re better off buying the Technology Sector ETF, ticker (XLK).

Moreover, many NASDAQ 100 stocks also appear in the S&P 500, so if you hold both QQQQ and IVV (or SPY) you have significant overlap in your portfolio.

And finally, a more conceptual point: there seem to be many suitable criteria for inclusion in a stock index (such as market cap, industry sector, or growth/value), but which exchange the stock is traded on doesn’t seem to me to be one of them. QQQQ, which tracks 100 stocks traded on the NASDAQ exchange, is thus a weird beast."
(seekingalpha.com/artic...)

2008 May 15 04:27 PM

[David Fry:]

User141585

Actually I like IGM best when long of the major tech indexes. But, for most, going with and where the volume is may work best.

2008 May 20 06:24 PM