Saturday, December 31, 2011

How Did Those Dogs (of the Dow) Do in 2011? Lineup for 2012

The Dogs of the Dow is one of the easiest screens to run. Simply find the 10 highest yielding stocks in the DJIA and viola, you have the Dogs.

So far in 2011, the Dogs have returned a whopping 17% on average. Not bad considering all of the things that went wrong this year. Let’s take a look at the names from the most recent litter.

As it stands now, the list for 2012 has only a few new names that have changed. Chevron (CHV) is out and Proctor & Gamble is in. McDonald’s (MCD) is also out and will be replaced by General Electric (GE).

It is a simple strategy that is rotated/rebalanced once a year and has done a decent job of beating the DJIA over time.

For more, check out

George Soros Sees Gold as the “Ultimate Asset Bubble”

Gold is set to finish its 11th consecutive year of gains, the longest winning streak in at ninety years, and is on the brink of a bear market, says George Soros. The billionaire who called it the “ultimate asset bubble” two years ago, reduced his gold and gold related by 99 percent in the first quarter of 2011, according to the Securities and Exchange Commission data.

Betty Liu reports on Bloomberg Television’s “In the Loop.”

Gold Bubble Seen by Soros on Brink of Bear Market

Source: Dec. 29 (Bloomberg)~~~

See also

George Soros Says Markets Are `Always Fallible’

Billionaire investor George Soros talks about global financial markets and his philanthropy. He speaks with Francine Lacqua on Bloomberg Television’s “Eye To Eye.” (Source: Bloomberg)Oct. 10 (Bloomberg)

Avoid The Generation Debt Trap

There is a worldwide generation that is marked by young, highly educated individuals who are often mired in unmanageable debt. In the United States it is called "Generation Debt," a phrase coined by author Anya Kamenetz. In Europe, it is called the "1,000 Euro Generation," a moniker credited to an internet novel published in Italy. How can young people all over the globe avoid this trap? Read on to find out.

Unmanageable Debt
Unmanageable debt is debt that can't be serviced without significant hardship to the borrower. More technically, it refers to non-housing related debt in excess of 8% of a person's gross income. The figure often comes into play when calculating eligibility for loans, particularly housing.

When it comes to housing loans, your front-end ratio , which consists of the four components of your mortgage: payment principal, interest, taxes and insurance (often collectively referred to as PITI), should not exceed 28% of your gross income. Your back-end ratio, also known as the debt-to-income ratio, should not exceed 36% of your gross income. The difference between the two is where the 8% figure comes from.

To calculate your maximum monthly debt based on these numbers, multiply your gross income by 0.36 and divide by 12. For example, if you earn $35,000 per year, your maximum monthly debt expenses should not exceed $1,050, of which not more than $816.60 should be dedicated to housing. That gives you about $233 a month to cover your car payment, school loans, credit cards and all other forms of debt. For those just starting out in the working world and earning a small salary, this really doesn't provide much room to service debts.

How Does it Happen?
There are many factors that lead to unmanageable debt. For one, there is the high cost of a college education, which cites as $28,500 for one year at a f our-year private institution and $8,244 for one year at four-year public school, during the 20011-2012 school year. Students pay the price in the hope of securing high-paying jobs.

Some students are lucky enough to have their parents' help or scholarships to cover the cost, but many students are not this fortunate. According the, two-thirds of students graduate with some debt; the average undergraduate student loan debt is nearly $23,186, while graduate students, depending on the degree, end up owing an average of between $42,898 and $118,500.

If students accumulate credit card debt or lines of credit during school to pay for rent, food, car leases and other living expenses, their total debt upon graduation can really add up. As a result, many students start their careers with a considerable debt burden.

Housing: Buy, Rent or Move Back Home?
After crunching the numbers to address the question of where to live once they graduate, many young people realize that they can't afford to pay a mortgage on top of servicing their existing debt. Others decide to buy and end up house poor, and more than a few move back in with mom and dad, ending up as boomerangs.

Unrealistic Expectations
In addition to the costs of education and housing, a pervasive culture of consumerism encourages additional consumption, turning luxury items into necessities. Travel, cell phones and computers are among the possessions everyone seems to have. Everyone wants to live "the good life," but because not everyone can afford these items, particularly young people who are already carrying significant student debt loads, credit cards and borrowing often fill the gap.

Few people remember that things weren't always this way. In the not-so-distant past, people worked a lifetime to achieve their financial goals, and their goals were often modest. A house in the suburbs (not a McMansion ) was a huge achievement; in 1950, that home was about 983 square feet, but by 2011 the average size had ballooned to 1,800 square feet, according to the National Association of Home Builders. Similarly, baby boomers may recall that their parents' vacations were infrequent and often involved domestic travel. Other luxury items such as high-end cars and designer clothes have also become more common; in fact, marketers frequently refer to the "under-40 luxury consumer" as a key demographic.

Today, the affordability of travel, easy access to credit and heavy marketing efforts have changed the dynamic. Young people grow up seeing the lifestyles that their parents enjoy, and they want to live that way too, but without working for decades to achieve it. The end result is often unmanageable debt.

The Bottom Line
In our fast-paced consumer culture, the truth is that slow and steady still wins the race. Simple decisions, such as not spending more than you earn and learning to delay purchases until you can pay for them in cash, go a long way toward getting your financial house in order. In most cases, the biggest challenge you face isn't financial, but the need to curb your desire to spend.

While the lure of spending can be hard to resist, take your grandmother's advice and appreciate what you have instead of complaining about the things you lack.

2011: A Year in Review (video)

The Economist - 31 December 2011

The Economist - 31 December 2011
English | PDF | 76 Pages | 67.6 Mb

read it here

Closing Out 2011 — Six Graphs

Source: Decline of the Empire

As we enter the final weekend of 2011, it seems appropriate to look at some data which sums up our position. Believe it or not, this was a pretty good year. Count your lucky stars. There was a small oil price shock, but not a really big one. According to the official data, we did not have a recession. We didn't have another financial crisis. This has been called muddling through.

Nonetheless, there is no reason to feel good about our prospects, as the next six graphs demonstrate.

Click to enlarge. From Doug Short's The Divergence Between Gasoline And Oil Prices Can't Last For Long. The "official" CPI, which is almost certainly understated, is on the left. Look at the items circled in red. Energy costs have increased 114%, medical care has gone up 58%, and college tuitions have risen 112%. By various measurements, like median household income, incomes for all but the top-tier earners have declined since 2000.

From Gregor MacDonald's Under the Surface of Non-OPEC Supply. You can see that oil production outside of OPEC is flat. Gregor says "In 2002 Non-OPEC oil production contributed 60.75% of the world’s total oil supply... So far in 2011, Non-OPEC oil production now accounts for 57.12% of global supply, with nearly 1/4 of that now coming from Russia... Technology, competition, and access to capital ... have not been able to overcome the limits of geology. Global giants such as Royal Dutch Shell and Exxon Mobil have essentially abandoned the effort to meaningfully expand their oil reserves. Instead, they are now shifting course in favor of a strong, natural gas emphasis."

From Zillow's U.S. Homes Expected to Lose Nearly $700 Billion in Value in 2011. "Homes in the United States are expected to lose more than $681 billion in value during 2011... While homeowners suffered through another year of steep losses, the good news is that homes are losing value at a substantially slower pace as the market works its way towards the bottom ... Compared to last year when we saw sharp declines following the expiration of the homebuyer tax credits, this year we saw some organic improvement in home values, in terms of a slowed depreciation rate, which resulted in a smaller total value loss for the year. Zillow’s analysis shows less value was lost in the latter half of the year due to increased stabilization of home values." Now look at the next graph.

Click to enlarge. From Barry Ritholtz's Case Shiller 100 Year Chart (2011 Update). Do you see that dotted red line? If home values revert to their historical level (since the early 1950s), we can expect home prices to follow that red line. In so far as the value of one's home is the largest factor by far in household net worth, we can expect large wealth declines over the next several years.

Click to enlarge. Household debt levels as of 2011Q3 from Calculated Risk as presented in my post Household Debt Mountain Grows, Nobody Cares. Total debt, including the revised student loan balance, is now $11.66 trillion. Total student loan debt probably surpassed 1 trillion dollars this year. Total household debt is not as high as it was in 2008, but student loan debt is growing by leaps and bounds. See college tuition inflation in the 1st graph above.

If there was any good news, I would report it. For example, some have been encouraged by the recent downward trend in jobless claims. We'll see if that continues. I am waiting for to see what happens when holiday workers are fired in January and February. All such trends must be seen in context. Here's the 6th and final graph.

Nonfarm_jobs_nov_2011From Mish's Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force (December 2, 2011). There are fewer nonfarm payroll jobs now than there were prior to the 2001 recession.

Muddling through must eventually end. Many think 2012 will be the year it does. That's what I think too. See my DOTE Predictions For 2012.

How The U.S. Government Formulates Monetary Policy

A monetary policy is the means by which a central bank (also known as the "bank's bank" or the "bank of last resort") influences the demand, supply and, hence, price of money and credit, in order to direct a nation's economic objectives. Following the Federal Reserve Act of 1913, the Federal Reserve (the U.S. central bank) was given the authority to formulate U.S. monetary policy. To do this, the Federal Reserve uses three tools: open market operations, the discount rate and reserve requirements.

Within the Federal Reserve, the Federal Open Market Committee (FOMC) is responsible for implementing open market operations, while the Board of Governors looks after the discount rate and reserve requirements.

The Federal Fund Rate
The three instruments we mentioned above are used together to determine the demand and supply of the money balances that depository institutions, such as commercial banks, hold at Federal Reserve banks. The dollar amount placed with the Federal Reserve in turn changes the federal fund rate. This is the interest rate at which banks and other depository institutions lend their Federal Bank deposits to other depository institutions; banks will often borrow money from each other to cover their customers' demands from one day to the next. So, the federal fund rate is essentially the interest rate that one bank charges another for borrowing money overnight. The money loaned out has been deposited into the Federal Reserve based on the country's monetary policy.

The federal fund rate is what establishes other short-term and long-term interest rates and foreign currency exchange rates. It also influences other economic phenomena, such as inflation. To determine any adjustments that may be made to monetary policy and the federal fund rate, the FOMC meets eight times a year to review the nation's economic situation in relation to economic goals and the global financial situation. (To learn about the relationship between inflation and bonds read Understanding Interest Rates, Inflation And The Bond Market.)

Open Market Operations
Open market operations are essentially the buying and selling of government-issued securities (such as U.S. T-bills) by the Federal Reserve. It is the primary method by which monetary policy is formulated. The short-term purpose of these operations is to obtain a preferred amount of reserves held by the central bank and/or to alter the price of money through the federal fund rate.

When the Federal Reserve decides to buy T-bills from the market, its aim is to increase liquidity in the market, or the supply of money, which decreases the cost of borrowing, or the interest rate.

On the other hand, a decision to sell T-bills to the market is a signal that the interest rate will be increased. This is because the action will take money out of the market (too much liquidity can result in inflation), therefore increasing the demand for money and its cost of borrowing. (To learn more read How The Federal Reserve Manages Money Supply.)

The Discount Rate
The discount rate is essentially the interest rate that banks and other depository institutions are charged to borrow from the Federal Reserve. Under the federal program, qualified depository institutions can receive credit under three different facilities: primary credit, secondary credit and seasonal credit. Each form of credit has its own interest rate, but the primary rate is generally referred to as the discount rate.

The primary rate is used for short-term loans, which are basically extended overnight to banking and depository facilities with a solid financial reputation. This rate is usually put above the short-term market-rate levels. The secondary credit rate is slightly higher than the primary rate and is extended to facilities that have liquidity problems or severe financial crises. Finally, seasonal credit is for institutions that need extra support on a seasonal basis, such as a farmer's bank. Seasonal credit rates are established from an average of chosen market rates. (For more read Internal Rate of Return: An Inside Look.)

Reserve Requirements
The reserve requirement is the amount of money that a depository institution is obligated to keep in Federal Reserve vaults, in order to cover its liabilities against customer deposits. The Board of Governors decides the ratio of reserves that must be held against liabilities that fall under reserve regulations. Thus, the actual dollar amount of reserves held in the vault depends on the amount of the depository institution's liabilities.

Liabilities that must have reserves against them include net transactions accounts, non-personal time deposits and euro-currency liabilities; however, as of Dec. 1990, the latter two have had reserve ratio requirements of zero (meaning no reserves have to be held for these types of accounts).

The Bottom Line
By influencing the supply, demand and cost of money, the central bank's monetary policy affects the state of a country's economic affairs. By using any of its three methods - open market operations, discount rate or reserve requirements - the Federal Reserve becomes directly responsible for prevailing interest rates and other related economic situations that affect almost every financial aspect of our daily lives. (Want more information on how the Fed influences the economy? Read The Fed's New Tools For Manipulating The Economy.)

Summarizing 2011 In Nine Easy Charts

If one had to summarize 2011 in one sentence, it probably would be: "a year in which the market ended unchanged, in which the world got within seconds of global coordinated bankruptcy, and in which central planning finally took over everything." Simple. On the other hand, conveying a comparably concise message full of hope and despair at the same time, using charts would actually be slightly more problematic. But not for the Economist, which has managed to do just that, however not in one but nine discrete charts. Here is what they did.

From the Economist:

IN 2008 banks were saved by governments. The question that dominated 2011 was how to save governments. The euro-area sovereign-debt crisis metastasised from a problem affecting small, peripheral states to one that threatens the single currency itself. The rise in Italian bond yields in particular marked a dangerous new stage in the saga (chart 1). European banks, stuffed full of government bonds, have suffered a severe funding squeeze since the summer (chart 2). The euro was oddly resilient against the dollar, but Switzerland and Japan intervened to hold down their currencies as investors sought shelter (chart 3).

Faced with skittish creditors, countries in Europe tried to instil confidence by cutting spending (chart 4). Austerity and growth do not mix, however. Euro-area GDP remains below its pre-crisis level. American output did at least regain that mark in 2011 (chart 5) but US unemployment remained very high.

The emerging economies again outshone their rich-world counterparts in terms of growth and jobs. But fears about inflation (chart 6) slowly gave way to fears about growth as the year went on and Europe’s problems worsened. Emerging-market stocks dropped sharply in the summer as investors put their money into less risky assets (chart 7). Gold also benefited from another year of fear. The metal was set to post its 11th consecutive annual gain in 2011 (chart 8). Google searches for “gold price” rose whenever measures of market uncertainty did (chart 9). If governments aren’t safe, after all, what is?

Chart 1

Chart 2

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Martin Armstrong: 2011 Year End Outlook

2011 Year End Outlook

The Immediate Outlook

click here to read PDF

Bollinger Bands 22 Basic Rules

Bollinger Bands were created by John Bollinger, CFA, CMT and published in 1983. They were developed in an effort to create fully-adaptive trading bands. The following rules covering the use of Bollinger Bands were gleaned from the questions users have asked most often and our experience over 25 years with Bollinger Bands.

A note from John Bollinger:
One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. These rules covering the use of Bollinger Bands were assembled in response to questions often asked by users and our experience over 25 years of using the bands. While there are many ways to use Bollinger Bands, these rules should serve as a good beginning point.

Jim Rogers: Why He’s Shorting Stocks and Favouring Commodities

Jim Rogers discusses his outlook for the economy, stocks, and commodities.

Call Notes:

Jim Rogers: I’m not optimistic about 2012, and maybe even not 2013.”

Favouring agricultural commodities – huge shortages developing of just about everything, and even, particularly, a shortage of farmers. Agriculture’s going to be a great place the next 10-20 years.

Shorting emerging markets stocks, American technology, European stocks;

JR: “I don’t see much reason to own stocks, when one can own commodities. If the world gets better, i’m going to make a lot of money in commodities because of the shortages, and if the world doesn’t get better, governments will print money. Whenever governments have printed money, the only way to protect one’s self is to own real assets.”

China: Hard or Soft Landing?

JR: “Some parts of the Chinese economy will have a very hard landing; the Chinese government has been trying to kill the real estate boom for 2 1/2 years. They’ve raised interest rates 6 times, raised reserve requirements a dozen times; they’re gonna pop the real estate bubble, but that’s not the whole China story. There’s gonna be parts of the Chinese economy that are gonna boom no matter what happens to real estate in Shanghai and Beijing.”

How about beaten down stocks like Potash and Mosaic?

JR: “I’m not familiar enough to give you a good comment; I just remember in the 70s, stocks went down and did nothing, and economies did nothing, and yet commodities themselves went through the roof. Some commodities stocks did well in the 70s; A recent Yale study showed that you would have made 300% more investing in commodities themselves rather than commodities stocks, unless you were a very good stock picker. So I’m sticking with the real commodities.”

Comment: Jim Rogers travels everywhere in the world with his family, and he eats his own cooking.

What about the other BRIC nations? What about Brazil and its dependency on China? Would you short Brazil?

JR: “I’m short India, I’m short Russia. Brazil is a huge natural resource based economy, and in commodity bull markets they do well. Fortunately, I’m not long, I don’t have any positions – Unfortunately, the new Brazilian government is starting to do some pretty foolish things which I think will not make them participate as much as they could.”

Jim Rogers is long gold, long silver, expects correction to continue down to the $1300/oz. level.

JR: “I’m a terrible market timer, I’m a terrible trader. It would not surprise me if gold went down to $1,300-$1,200. If it goes that low, I’m going to buy a lot more. I’m not selling any ofo my gold or silver, but I’m not a good market timer. I’m just saying that gold has been up 11 years in a row, it deserves a substantial correction. Substantial corrections are not unusual in bull markets. If it goes that low, I’ll buy a lot more.”