"In battle it is the cowards who run the most risk; bravery is a rampart of defense." -Sallust
Stocks fell worldwide last week as volatility increased on investor uncertainty over China's growth on the economic front, and Crimea's referendum on the political one. The German DAX (NYSEARCA:EWG) continued underperforming, with the index nearly down 10% in March. News of Chinese exports dropping 18.1% year over year suggests that global growth has indeed been much weaker than US stocks believe, while at the same time Treasury yields fell aggressively in a volatile few days.
Copper (NYSEARCA:JJC) has gotten much attention as of late, with a chart that looks like it's in a crash. It is often argued that the behavior of copper tends to be indicative of growth expectations. The severe collapse has made many question if something more nefarious is underway when it comes to China (NYSEARCA:FXI), but few seem to be considering the possibility that the decline may be an overreaction. The concern is that because copper is used as the collateral for some borrowers in China, margin calls on the ground are about to take place and can exacerbate the current economic slowdown. While this is valid, it does appear that China is taking proactive steps, most notably by widening the trading band the Yuan can move within. It appears that there is a desire to let the market devalue the Yuan, which in turn would increase China's competitiveness and could be bullish.
However, in the near-term, the market is largely treating everything going on in emerging markets and in commodities as negative. Our ATAC models used for managing our mutual fund and separate accounts are back in deflation pulse mode, which from an asset class perspective means long duration Treasuries. From a constant equity sector standpoint, periods like this tend to favor Utilities (NYSEARCA:XLU), Consumer Staples (NYSEARCA:XLP), and Healthcare (NYSEARCA:XLV) on the idea that less cyclical/more defensive names outperform. This in the near-term does appear to be the path the market is taking.
For the second time in 2014, our main strategy has rotated out of equities and into Treasuries. The first time occurred a week before the mini-correction of January began, allowing us to bypass the drawdown stocks experience. Whether a correction is about to begin now is unclear however. Yields could easily drop at the same time emerging markets rally and US stocks stagnate. So far in 2014, the US has been really in much more of a holding pattern, while many other areas of the investable landscape have been weak. Select areas of the equity market have been strong (India and Indonesia of the "Fragile Five" in particular), alongside Gold (terrible performer in 2013) and bonds (terrible performer in 2013). It is only a matter of time for the real terrible performer of 2013 (emerging markets) to make a comeback. Until then, though, conditions currently favor a more defensive stance.
On a side note, we heard some extremely good news last week. April is shaping up to be one of the biggest months in the history of Pension Partners. Several announcements will be made in the days ahead. Suffice it to say that in the spirit of underpromising and overdelivering, a tremendous amount of buzz and discussion will be generated over our approach to intermarket analysis. It will be abundantly clear just how important it is to watch relative relationships in the market, and how one can outperform the average by choosing the right average.
Alpha is beta rotation in disguise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.