Getting Your Head Into Investing

 | Feb 28, 2012 | 4:30 PM EST
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The most important part of investing is knowing where you are. If you don't know that, and can't figure it out, it is impossible to get where you want to go (short of having ruby slippers and clicking your heels together).

But most investors aren't aware when this is the case.   

The first part of this process is making sure you have an understanding of the basic mechanics of the capital markets and that you get in the habit of checking them periodically and in a structured organized way. 

There is a standard procedure I follow every morning to get my mind set for the day and to organize the world and my orientation to everything unfolding in the continuum of events.

But before checking capital markets we must organize the world geographically and by level of importance economically.

The global capital markets are divided into three main geographic areas and each of these areas is subdivided into three areas.

The main division is the Americas, Europe and Asia.

The first tier in the Americas is the U.S. The second tier is Canada and Mexico and the third comprises the countries of Latin and South America.

In Europe, the first tier is Germany, the second France and Italy and the third all of the others, both east and west of the first three countries.

In Asia the first tier is still Japan, the second is China and South Korea and the third is all of the other Asian countries.

It is important to understand the level of capital markets in each of the first-tier countries first and then their relationship to the other first-tier countries before checking the second- and third-tier countries.

There are five basic capital markets to follow: bonds, stocks, commodities, currencies and real estate. Each of these also has several categories.

The first thing I do in the morning is check the US Treasury market, specifically the yield on the 2- and 10-year Treasuries, as well as the spread between them. 

The 2-year US Treasury is the most widely traded security in the world and movements in its price and yield provide an immediate indication of global capital market sentiment. Rising yields typically means money is moving out of the US and falling the opposite. I then check the 10-year Treasury yield. The 10-year is used as a peg for mortgage loan rates. Rising yields mean mortgage rates are rising and vice versa. This is important because housing is correlated to movements in mortgage rates and housing is the most important indicator of consumer sentiment and near-future economic viability.

Then, I check the same sovereign yields in Europe and Japan and compare their levels, movements and spreads over the past 24 hours to those of the US. Once you are doing this regularly and it becomes habit. 

I do this for each asset class across each country in each tier in succession. This process provides the first broad stroke of the what the global capital markets look like and provides an orientation to consider other issues. Note as well that I have not looked at any news, headlines, economic reports or e-mails yet.

The next step is to check news headlines and the economic calendar. Most important on the calendar is what is being released before the markets open. 

Today, for example, the durable goods report was released during the premarket.  The report was terrible by the way. Equity futures immediately fell with the Dow Jones Industrial Average moving from up 40 to up 16 and the other indices performed similarly. All else aside, this indicates that traders are still watching and sensitive to macroeconomic indicators, which is not always the case.

Also in the premarket I will check esoteric indicators and the columnists conversation at Real Money. This morning I made note that spot electricity prices on the West coast had jumped about 20% since last Friday and sent a query to Glenn Williams about it. He informed me that a nuclear reactor at a facility on the border of California and Nevada was offine, but it was nothing worry about. 

Once these issues and others are addressed I check news, e-mail, etc. The entire process takes about an hour.


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