Thursday, October 30, 2008

Dollar makes the world go round

The two charts above show what has happened to the value of the dollar when compared to the Pound(top) and the Euro(bottom) over the last 30 days. Just about anywhere in Europe or the British Isles, everything has gotten 20% less expensive over the last 30 days for Americans with dollars. It appears that everybody wants to own dollars at the expense of selling just about everything else they own.

Just imagine that you owned German stocks at the beginning of September and most of your investments outside of Germany were in Euro based investments. As long as your money stayed in Germany, you were fine. However, if you had money invested outside of Germany in Euro’s, you would be down the market fall plus an additional 20% on the currency loss.

The dollar has appreciated a great deal in a short period. I expect that we will get some correction in the dollar in the next month or so. I do believe that the dollar will reassert itself when the European Central Bank and the Bank of England have to lower interest rates considerably to try to stave off recession. I think we could see a dollar value for the EURO at $1.00 and at least $1.25 for one pound perhaps even more, depending on how theses economies fare over the next 12 months.

With increasing demand for dollar dominated investments, American investments are the quickest way for a foreign investor to play the strength of the dollar. They will sell their stocks and bonds and move their money to the United States. These foreign investors have already been big buyers of American Treasuries and they will move into stocks as the EURO and The Pound fall.

Look for the US Markets to outperform the other major markets in the world over the next 12 to 24 months, reversing the most recent 5-year pattern. The rest of the world is finally beginning to understand there is only one currency in the world, THE US DOLLAR.

Dan Perkins

Friday, October 24, 2008

You Thought September Was Bad.

By now, most people have received their September investment statement. The first question is “Did you open it?” Well if you did open it and thought it was shocking in the amount of money you had lost in account value wait until you see your October statement. As of today, the S&P 500 was off just about 24% for the month. If your accounts performed in line with the market for the month of October then $100,000 in account value at the end of September should be worth $76,000 at the end of October. We still have another week to go before the end of the month and we could see some recovery, but only time will tell.

Why is it that some people who have the same investments that they had at the end of September will not be off near as much as the market by the end of the month? There are two basic answers to that question. First, they have a much higher percentage of their assets investing in preferred stocks that pay a high dividend. The second reason is that most of the preferred stocks were in the financial services sector.

When the Federal Government said that the banks were "money good" guaranteeing the banks debt, then the market rallied almost 1,000 points. The big winners then and continue to be the financial sector especially the preferred. I wrote recently about preferred stocks and I pointed out that they are senior to common stocks and therefore should be more stable in price. The government did not bail out other companies so the strength in the preferred stocks of financial companies has regained favor. As the markets finally figure out where the bottom is, the financial stocks will lead the rally.

The fear of recession will cause the Federal Reserve to move their bias towards cutting interest rates as it will state that inflation is no longer an issue in its meeting "statement "next week. It is possible that the Fed may cut 25 basis points and it will, I believe the Fed will take one full percent out of the Fed Funds interest rate before it is done cutting interest rates. As order returns to the markets the financial services preferred stocks could have quite a run.

Here is a test question for you. If your account is off 40% like the markets, how much will the market have to go up for you to recover what you have lost?

A 40%
B 50%
C 65%

Dan Perkins

Answer C

Wednesday, October 22, 2008

I was taken to dinner by clients that had a decline in their accounts and they paid.

I had dinner with clients this weekend and they picked up the tab--perhaps they felt sorry for me. They had two questions that they wanted me to try and answer for them. The first question was, when will all of this turmoil be over and the second question was when would they see the values of our accounts start going up? On the surface, these seem like straightforward questions, but in reality, these are two questions that nobody has answers to now.

I told the clients that I do not have an exact answer because I am not sure that we have enough information to come up with an answer that can be supported by facts. I said that I felt that the greatest risk now is the unknown. It is what we do not know that could have the greatest impact on the eventual outcome of the challenges we are facing today.

There is no doubt that people just went crazy with some of the investment structures that are causing the problems we are dealing with today. I wanted to make my answers as simple as possible so that they could have a foundation of concepts. After you have built a foundation of information then you can begin to answer the questions. I do believe that one word sums up the extent of the problems, that word is transparency.

Clear glass in a window lets in more light than a stained glass window. If try to look through a stained glass window you cannot tell for sure what is on the other side. With a clear glass window, you can see everything. Many of the investment structures we have today have little or no transparency. By example: if you knew that the Reserve Fund had $750 million in Lehman Brothers commercial paper on the Friday before it closed, would you have deposited your money in the fund, probably not.

Under the structure of a mutual fund, you get detailed information every 90 days. What happens to the investments during the ensuring 90 days is not know to you until the next reporting period 90 days later. This is an example of a lack of transparency that exists today. I could give you many other examples, but time and space do not allow. Your understanding of the concept of transparency is most important. If you own a diversified portfolio of stocks then when you get your monthly statement you can see what you own and access the risk of what you own. You have total transparency.

Back to the two questions that need to be answered. I said in my last Blog to watch the movement of one month and three month LIBOR interest rates. (Go to for an excellent explanation of LIBOR.) If one and three month LIBOR interest rates start falling, the banks are beginning to lend money to each other. Since my last posting, three month LIBOR has fallen by about 1.5%. Currently one month and three month LIBOR are 3.28% and 3.54% respectively.
We need three month LIBOR to be within one quarter of one percent of 90-day T-bills. Right now, the difference is two-hundred and fifty basis points (250) or about 10 times higher that it should be normally. As the spread continues to narrow, we will see further rallies in the global stock markets. How long will it take to get the spread to return to a normal rage? My best guess is late this year, but more likely into first quarter 2009.

As a result, I think we are in for volatile time for the balance of the year and into first quarter 2009. Over time, the market swings will be dampened as more stability is added to the markets. As to the second question of recovering account values, my clients have already seen a significant recovery in their account values. The account values are not back to summer values, but have moved closer to the September month end values. As I indicated the things that will lead the market higher would be the assets classes that were the most beaten down in the bear markets.

Take a hard look at what you own and make decisions as to what you want to keep and what has to go. Set a realistic target for selling the ones that have to go and then sell them if they get to the target. If what you want to sell does not move up when the market rallies then sell out at the best price you can get.

The problems we are facing today have their origins way back to the Carter Administration and will take a long-time to rebuild. Return expectations are going to have to be reduced for many years to come. I think we may well see some recovery in account values in the second half of 2009 depending on what happens in the economy.

Dan Perkins

Wednesday, October 15, 2008

And You Thought All the Problems Were Solved.

So, you thought that the market goes up 1,000 points and the worst is over and it is onward and up from here. We Americans want everything solved over night and we get very impatient when we do not get what we want when we want it. I warned you on Monday night that we had a 20% gain form the low on Friday and that it was possible to add another 5% or about 450 points, but then I felt we had to correct. We started Tuesday with a 450 point gain only to close down for the day. Here we are two days later and we have already given back over 450 points of the 1,450 point gain.

I suggested that we might have to prove that the bottom of last Friday was the true bottom in this cycle. I am not convinced that we will test the bottom this time around. I think as I pointed out that I would expect to see selling pressure by people who did not sell on the recent decline, but would take advantage of any rallies to sell and raise cash.

This selling will, at some point in time, exhaust itself and then I think the market will move sharply higher after all the selling is done. Once we have another sharp advance that will be the time to build additional cash. It is after the next sharp rally that I expect the market test the previous low around 7,800 on the Dow.

Let me make one thing clear, these are guesstimates on my part and may or may not happen. I am trying to give my readers some guidelines as to what I think could happen and what action you should be taking if what I think will happen does happen.

On Monday, I suggested that you follow both the one and three month LIBOR interest rates to get a feeling for what is happening in the credit markets. A falling LIBOR interest rate would indicate that money is beginning to flow. As of this morning, the one and three LIBOR interest rates were 4.36% and 4.55% respectively. These LIBOR interest rates are more than 25 basis points lower than they were on Monday. I will post the LIBOR interest rates at the Blog site so you can see what is happening.

I do want to point out something that is important that is going on in the credit markets. All of the trouble we have had revolves around the problems in the mortgage market. As the government issues more debt to deal with the liquidity problems 10 and 30-year interest rates on Treasuries are rising rapidly. It will be difficult to refi mortgages with even higher interest rates. If people cannot afford their current mortgage interest rate, they clearly will not be able to refi at a higher interest rate. This divergence in interest rates tells me that the Federal Reserve Open Market Committee will either cut rates at their meeting at the end of the month or change their bias to cutting rates in the future.

Make sure you are strapped in because it will be a bumpy ride for a while.

Dan Perkins

Monday, October 13, 2008

Columbus discovered, " the market was over sold."

It is surprising what a few trillion dollars can do for the stock markets. We had a big rally today that took us back to the level the market was last Wednesday afternoon. While 1,000 points, just over an 11% increase, was impressive, the credit problems have not been solved. We could go another 5% higher perhaps a little more from this level, but then I think we have to retest the previous low to see if it was a true bottom in the market.

I said last week that I would use the rally to raise some additional cash. I will and you should be looking at positions that do not pay a reasonable dividend as possible sell candidates. Look at stocks that have not shown any movement in today’s market as additional candidates to sell. Keep in mind, as I said last week, the sectors that were the most beaten down would lead the recovery. In todays market rebound the biggest gainers were energy and financial services.

These laggards will probably continue to lead until the rally runs out of gas. The leaders in the rally may be the stocks that sell off to test the previous low. The one thing that has to be taken into the mix is what happened last Friday with the opening sell off and then the spectacular recovery. Last Friday we hit a low in the Dow Jones of 7,782. Today we closed at 9,387 or a 20% move off the bottom in two trading days. As I said, the Market could go another 5% higher from this level.

As I said in Friday’s Blog, watch the one month and three month LIBOR interest rates to give you an indication of the direction of the market. While the US credit markets were closed today, the LIBOR rates issued this morning were off just slightly from Friday’s level. If we were to see LIBOR rates decline by more than 25 basis points tomorrow morning then I would expect the rally to continue. If they do not fall by one quarter of one percent in the morning, I would expect the stock markets to sell off.
We are not out of the wood yet and I think it will take more time than people are willing to wait to bring back confidence in the markets. I expect the volatility of the markets to be event driven; meaning that if a large company announces it is in trouble, the announcement could spook the markets. It is important not be swayed by the hype that now is the best time in your lifetime to buy stocks. Take the rallies as they come to raise cash. Make a stock shopping list with price levels at which you want to buy. When the stock hits the level you have set, commit one third of the amount you want to invest and then wait two weeks and invest the next third and after a final two week invest the remaining third. At each buy point look at what is happening and make a new decision if you see the price lower than your first purchase.

If it is true that this is the chance of a lifetime to make money buying stocks, just remember, “Buyer beware.”

Dan Perkins

Thursday, October 9, 2008

When will the waves of selling stop?

Every day people on Wall Street come into their offices and the market gives them hope and then it just pounds on them to the point that they begin to question if is it really the beginning of the next Great Depression. The whipsaw effect is devastating and makes it hard to keep there head above water.They look back and start playing the “What If” game. What if only I had done this or that, would we be better off than we are at this moment? Brokers start thinking about whether the markets could go to zero. Could the government run out of money? We will get a new president in less than a month, is either of the candidates capable of dealing with a crisis of this magnitude? For that, matter is anybody capable of solving the problem?

These are the questions professionals are asking myself included. even more dire questions about what Americans are askingwill happened to not only their investments but their lives. Do not throw stones at me if I ask “could all of this be signs of a bottom of the market?” People have moved away from thinking they will sell half of their position and build some cash and then buy more at a lower price later. Now they are selling everything thinking they cannot deal with this market situation anymore. The loss of any rational process is also a sign of a bottom. I was a new broker in 1973 and that Bear market felt a lot like this Bear Market today with one very significant difference; if we move away from the financial stocks, we find that the rest of American business has in excess of $1 trillion in cash and cash equivalents on their balance sheets.

I want to make it clear that we have serious problems that need to be solved. We will not solve them overnight, even though Americans historically want quick fixes to their problems, there is no quick fix to this liquidity problem.

I do not think that in the last 30 days we have found a cure for AIDS, yet the company that is the leader in developing AIDS drugs is off 30% in market value. Another example is a company that manages $60 billion dollars of US Government guaranteed bonds which is off 30% in the same period.This is an investment that the timely payment of principal and interest is guaranteed by the US Government and it was off 16% just today. Why? People are selling everything at any price out of fear and panic.

Based on my life experience, for whatever that is worth, we may well be close to a bottom. I am not saying this is or is not the bottom for we will not know for sure until we get a rally and then come back and retest the level. How close are we to a bottom? The worst Bear Market was down about 40%. We are close to that level now. I want to give you something to watch that will be an indicator of the turn in the market. Watch the 30 and 90-day LIBOR interest rate.

As of today, the 90-day LIBOR rate was 4.75% compared to 1.55% for the Fed Funds rate. If we see the spread begin to narrow that will be a sign the money is starting to flow. If money flows, the stock market will begin to rally. You can follow LIBOR at Look for the markets header and go to Rates and Bonds then look left to see Key Rates. Click on Key Rates and you will find 3 month LIBOR.

Dan Perkins

Tuesday, October 7, 2008

If I sell, where do I invest my money?

The question in the above headline is very important and because it is so important, I need to spend some time on the answer. The question that has to be asked is why did you invest your money in the first place? Did you invest because you needed income or did you invest for long-term growth or some of both?

Let us separate the two and look at each individually. You have a need for income as an objective. If you sold an income producing investment, what would you do with the money? Suppose you owned a preferred stock paying 7.5% yield. If you sold it today, you will loose the 7.5% cash flow. If you wanted to be safe, you could invest in ten year Treasury Bonds at 3.4%. If you had $50,000 in the 7.50% preferred you would be receiving $3,750 a year in income. On the other hand, if you sold the preferred and bought a 10-year T-Bond you would get 3.4% income or about $1,700 per year. If you needed the $3,750 per year for living expenses, switching to $1,700 means, you will be short $2,050 in income.

There are only two ways to make up the shortfall in income; reduce your expenses by $2,050 a year or start spending your principal. If you start spending your principal your income will also fall as you liquidate principal. As difficult as it may be to deal with, your need for income is more import than the price changes of the investment. You would not sell the preferred if its price went up because you need the income and you should not sell if the price is down,

If you are investing for long-term growth then the recent declines in the stock market present a buying opportunity through dollar cost averaging. The process of dollar cost averaging is investing the same amount of money in an investment regardless of the current price. By investing, the same amount each time sometimes you will buy more of the investment and sometimes you will buy less. The point is to invest on a regular basis. For readers who are dollar cost averaging now may be the best time in your lifetime to invest.

I know that it is hard to see these markets decline the way they have and in many respects, it is very scary for me, too. In the 35 years, I have been investing in the markets I have never seen such a time as I have seen in the last 30 days.

Things will not turn around over night and it will take time to rebuild the markets. I want to remind you of one very important event that is taking place in all of this turmoil. The United States dollar is skyrocketing against many of the major currencies in the world. When people get scared, there is one place they all want to get their money to, the good old USA. It is a good place for you to have your money invested, too.

Dan Perkins

Monday, October 6, 2008

It is the Darkest Before the Dawn

The world sold off today and there was no place to hide. The baby, the bath water, the tub and all the plumbing in the house were thrown out today in every country of the world that had a stock market. People don’t know what to do so they just sell everything with out any thought of what needs to be done. If you have a stock paying an annual dividend of 8% would you sell it, take a loss and then buy a T-Bill for .46%? If the company looks like it has a chance to continue to pay the dividend, then keep it. If on the other hand if you are not being paid a dividend you really have to look at the prospects of the company if you want to keep the stock.

People are flat out scared about what is happening and trying to figure out what could happen next. Many people wonder what they should do with whatever amount of money they have left. I did get a response from one of my readers to my blog last night, who said, “I liked your comment, IT WILL PASS. That has always been my attitude, but I just hope I do not PASS first.” My reader is over 90, has been investing for many decades and has seen all the bull and bear markets.

I think we can learn a lot from what she is saying. Markets do go up and they most certainly go down. What gets scary is when some of the emerging markets like Russia drop 20% in one day. I was encouraged, yes, I said encouraged, today with the fact that the US markets, which at one point were off over 800 points, finished the day down about 360.

I know that 360 points is a significantly scary drop, but it is a hell of a lot better than the 800 points we were down earlier in the day. The markets on a global basis are trying to deal with the problem of liquidity, they will sort things out, and this will pass. If I knew how long it would take to sort things out I would control a great deal more money than I do today. As I have said many times before, get paid for the risk you are taking.

Over the next few weeks, you will be receiving your 401k, IRA, brokerage or mutual fund statements. Be prepared to be shocked at what has happened through the end of September. I believe that many millions of Americans have no idea how much their accounts have declined in value.

The statements they will be receiving will understate the decline that has already taken place in the first 6 days of October. The panic will increase as people see their statements and they will want to sell, probably selling too late. Ask yourself how much time you have until you will need this money. If you have time then continue to add money and take advantage of dollar cost averaging. If your time horizon is shorter then think about selling some of your positions on any rallies.

I do have one concern that I need to discuss with you. It is your choice as to what you want to do about my suggestion. Perhaps you have read in the papers about the inability of some companies to get cash to pay bills. As I said yesterday, an HMO in Florida had to shut down because it could not get at its money. I think it might be a good idea to have some cash around the house. I can not tell you how much to have on hand but it might be a good idea to have enough to buy two or three weeks worth of food and fuel. After things settle down and you do not need the money, put it back. I hope I do not have to use emergency cash, but I will feel much better if I need cash and have it in hand.

Dan Perkins

Sunday, October 5, 2008

Now that The Congress Passed the “Bail Out,”,What Next?

The “Bail Out” bill was passed by the House of Representatives on Friday and many people, me included, are wondering “What next?” The point of this new legislation was not to drive the stock market higher; clearly it did not on Friday when it was passed. The liquidity problem is in the credit, (bond), markets much more so than in the stock markets. It is true that companies were experiencing liquidity problems because of the credit market lock up.

I read last week that an HMO in Florida had to close because they could not get at its cash in a frozen money market account to pay claims, bills or payroll. In order for our economy to work, companies and people need access to money. If money is hard to get then the economy stops or at least slows down until it can get the necessary money to keep running.

With the new legislation, money should start flowing again; slowly at first, but over time I expect to see the volume of money available to expand our economy increase. We know that the stock markets are off about 25% over the last 12 months and the quarter end statements will be scary. I think there are two questions many people will be asking after they get over the shock of the statements.

The first question is, “Will my account recover?,” and second, “Do I own the right things to recover?” Both of these are excellent questions and I think deserve answers. If we look at the investments that had the biggest decline, they were financial services stocks, preferred, and bonds. These investments all declined because of a lack of liquidity in the credit markets. As money increases in circulation along with new valuation standards I expect the stocks that were the most beaten down will lead the reversal.
As the economy continues to slowdown there will be more pressure on the Federal Reserve to lower interest rates to try to help spur the economy out of recession. I would also expect to see Euroland and The Bank of England lower interest rates to try to preserve their economies. As a result, the level of interest rates around the world will begin to decline. As interest rates decline investments that pay an above market return should out perform other investments.

I want to make it very clear that while we have had a very difficult and scary year because of all the problems in the financial services industry, I expect that the problems in the rest of the world are very far behind the United States in recognizing and dealing with their problems. If, in fact, the rest of the world has yet to deal with their problems as we have in the United States the demand for dollar denominated assets will drive significant demand for US investments including fixed income investment.

Do not look for the US markets to recover quickly. I believe it will take time to rebuild the confidence in the markets. The beauty of what we own is that we are being paid while we are waiting for the assets to recover.

Dan Perkins