October 7, 1998
Fully fueled and ramming the intake with
whatever liquidity needed, the world may be about to leave the smoke
behind. Sure the US dollar could continue the slide for many months now
that the trend has become noticeable to anyone who can see, but this could
be good because it forces investors around the world to keep their cash at
home and invest in their own economies. We should do fine here too,
because our products should become more competitive as the dollar declines
and our market share should increase abroad. Also, earnings may improve,
now that the foreign pressure on our prices may weaken thereby allowing us
to finally raise them and increase the profit margins, which may be
another reason for the precious metals are showing some life again as a
world currency shield.
The US stock market may be supported more
by US citizens rather than foreign investors due to the currency risks
presented with a declining dollar. Investing in other countries may be
more favorable to the US citizen now because not only could you have a
profit from the price of the investment appreciating, but the added yield
that could be captured by the change in the currency relationships. The
great repair of the world's financial well-being seems to be at hand.
The T-bond rally may be over as any
excessive, short covering, over chased and over owned investment would be.
This may be bad if you were fooled into accepting 4 3/4% for the next
thirty years. What can happen now is to have the long bond start to move
higher in yield and the short term paper fall to very low levels which can
be a source of cheap capital whereby the spread between rates can be used
to help recapitalize ailing financial institutions and world governments.
This is how the US banking institutions were brought back from disaster in
the early 90's when they looked like they were going to follow the course
of the Savings and Loan crisis. What may happen if short term interest
rates were at 3% and the T-bond was near 5%?
August 11
Pushing On A String
The Federal Reserve could find themselves
pushing on a string again as they did back in the early 90's when they
were trying to get the banks to start lending. That process took almost
three years to have the full effect. Now both the IMF and the Fed are
trying to handle the global wreckage of financial markets. The good news
may be that short term interest rates could fall if our stock market major
averages went to 1997 or 1996 prices again quickly, but that kind of
action only helped a country like Japan stabilize after having their stock
market fall from 39,000 to 15,000. Very high risk level currently even for
such a bullish story as Apple or Compaq Computer.
July 21
Clear signs of economic slowing are
emerging for the remainder of the year and possibly well into next year.
The general averages should drift into a sideways channel that could be
very similar to what happened last August into January. The fastest risers
may fall the hardest with sixty per cent hits in value while the blue
chips form ten or fifteen per cent trading bands.
Very few winners may emerge with very
rapid revenue growth and earnings to be the star performers for the next
twelve months. They will need to have competitively priced products that
hopefully have proprietary technology that would improve the productivity
of the end user. Companies such as Apple, Compaq, Metricom, Qualcomm,
Irvine Sensors, Sony and Qlogic are a few of the ones I have focused on
and hold in the portfolios from time to time. Many other companies may
have problems with profit margins falling because of increased
competition.
Currently much of the selling is being met
with equal buying, but what would happen if the buyers vanished? Even a
few sellers could cause bid prices to back down which could bring on even
more sellers until a level is reached that buyers feel is a deal and come
back in. I have most positions ready for this kind of trading action.
General Electric and IBM are fully shielded and I let half of the IBM
position get called away last Saturday. My most bullish positions are
shielded with covered call options for all or a percentage of the
position. Today I plan to review the
Buy / Shield and will post any changes that will show more of a
neutral view for the rest of the year because most stocks seem priced out.
Wireless communications could have the best chance for growth and the best
suited portable hardware could also.
June 16
The Day Before Intervention
Repatriation
If the trend of the US dollar changes
direction, it may be good for all the citizens of other countries to keep
their currency and stop coming to our shores for safety. It could be the
classic buy low and sell high contrary investing strategy.
Yesterday the Nasdaq hit support and maybe
the Dow Industrials might not need to do the same. If we have another
stock rally from here, I also think the Federal Reserve will not do
anything for a while. A weaker dollar may be good for everyone at this
time to set up a greater future for the world's population.
May 10
Relatives
The return on an investment relative to
the risk should be the main focus when analyzing possible candidates for
your cash. There is a risk that interest rates could rise after you buy a
6% bond that would cause you to lose as much as 10% of the face value of
the bond for every one per cent increase in rates. In 1994, a bond
portfolio had as much as a thirty per cent slide in value that also sent
the stock averages into a dive and did not rally until the elections.
Rates had to go high enough to cause pain such as Orange County becoming
insolvent and for investors to feel that the reward for their investment
dollars was sufficient to compensate for the risk they would take before
stepping in.
Since then we have had a wonderful rally
in these financial assets in part as a reaction to the hope that the
government would cut the deficit spending and then reacting to the reality
that the US Treasury was moving into a surplus situation much earlier than
most could have believed until now. Paying down the national debt, which
Chairman Greenspan wishes, and relative stability existing in the current
stature of our currency markets including Asia helping delay any
inflationary pressures, could help us continue our way to greater
prosperity.
It seems two things are happening that may
be showing early signs of trouble though. Further reports of strength in
the housing market that could bring a late 1970's real estate inflationary
cycle and the Federal Reserve continuing to consistently drain reserves
from the banking system as they did through most of last week. Already the
charts of financial sector stocks such as some of the banks, brokerages,
insurance and utilities show trends flattening or turning lower. There
seems to be a greater focus on the housing sector and a larger reaction in
the bond pit to surprises of stronger than expected housing sales and new
construction. This is the heart of the inflation argument because housing
costs affects all of us directly unlike financial asset appreciation.
Inflation showing up only in the housing sector can be easily remedied by
discontinuing the tax subsidy of the mortgage interest deduction. This
action could dampen some of the employment pressures, increase tax
revenues, improve the national debt situation, and slow the economy down
without the Federal Reserve doing anything thereby keeping the financial
markets appreciating.
April 27
So High..Most High..So High
Once the Fed starts the process of
tightening, there could be an initial reaction of less money going into
the stock market and flowing into real assets such as real estate or just
buying things. This would feed the problem more, causing the Fed to
tighten again. Buying bonds has been another choice for investment if you
think the economy would slow eventually to the point that the Fed would
loosen again, but what could happen is another year in the debt market
similar to 1994. Hence, perhaps the best place may be in cash such as
money markets and t-bills.
Consider the massive amount of wealth that
could be shifting to safety. If cash is your choice, then you need to
consider the global currency situation that could cause you to lose wealth
even if you have more dollars. This is one of the arguments for the
precious metals and may be why the central banks around the world, having
experienced the Asian currency swings, have changed their reserve policy
relationship to gold.
If the Fed does nothing and the bond
market does the work, moving rates to an attractive rate to bring in the
investment dollars rather than going into stocks, you may see the Dow at
least back to the classic moving average of support which is near 8,000.
But markets usually go to extremes and if this sell-off continues to an
equal and opposite extreme, then 6400 could be the area where risk reward
values balance out. After all, inflation can be good for the earnings of
some companies.
February 25
Turning Green
There was something that Federal Reserve
Chairman said today about our debt situation. The current account deficit
may be his greatest concern. He asked where is the equilibrium for net
debt and how does it affect our dollar posture as a high demand currency.
The Chairman spends a significant amount of time trying to spot any
material erosion of demand for US dollars. This comment brings caution for
both stock and bond markets by lessening the chance of a reduction of
interest rates any further.
January 5
If a Trillion dollars of wealth vanishes,
I could call that deflation, too. When personal computer prices fall by
10% or more at the start of the new year, that can be called deflationary.
But, if your currency falls by 5% while you sleep, what is that and how
can you defend your interests? Having plenty of US dollars in your
reserves seems to be the solution for now.
Interest rates in the states could go a
lot lower with our dollar being so strong currently. What that level for
rates may be, probably will be determined when the US dollar looses it's
value to say, the Mark if Germany does have to raise interest rates to
defend the final adjustments for the Euro dollar in the face of an already
slow economy. It seems that to raise interest rates while an economy is
weak could force even more deflation, this time in the stock markets.
There seems to be a good chance that our
stock market may be dead in the water for a while due to lower earnings
offset by lower interest rates, thereby making the buy write strategy, buy
the stock and sell a covered call option against it, even more appropriate
especially now when the volatility factor is high causing a very wide
spread in price that helps you try to capture an attractive return. This
volatility influence will deflate if the stock trends sideways or starts a
slow trend higher for a long period of time, thereby giving you a
competitive rate of return relative to other investments.
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