"Uncertainty will always be part of the taking charge process." - Harold S. Geneen

Markets rose in the first full week of the 4th quarter as risk sentiment improved on the global front (or so it would appear). The continued theme of global monetary easing continued as Australia cut its interest rates further to spur domestic demand. U.S. economic data continues to show robust improvement, as vehicle sales accelerate to levels not seen since early 2008, and as the unemployment rate dropped to 7.8%. On the Europe front, Spain's bond yields fell and a surge in Greek stocks is signaling that money is getting comfortable with the Eurozone.

And yet, as I have been noting in my most recent series of writings and on Twitter (@pensionpartners), intermarket trends are warning of uncertainty here. As followers of our firm know, we have been highly bullish on stocks all year, even throughout the April-May "mini-correction" when we positioned into bonds to avoid the decline that happened then in equities. Forced reflation remains the most likely course of action, and in our latest seasonal call (the Fall Catalyst of 2012) we argue that markets will make new all-time highs in the next three months.

However, as I stated on CNBC (http://video.cnbc.com/gallery/?video=3000120361&play=1), we have to caution our followers in the very near-term. Market internals do not look that enticing here, as defensive sectors show strength. The odds of a minor correction which could send the Dow back to 13,000 are rising in the here and now, all within the context of new all time highs to come. Our ATAC models used for managing our mutual fund and separate accounts is sensing this, and has kept us considerably more defensive than we were two weeks ago.

Could intermarket trends reverse and improve, causing stocks to push higher in an unabated way? Absolutely. Our ATAC strategies are weekly oriented, and could easily position aggressively back into stocks should things improve meaningfully enough to warrant that next week. But because we live in a world of probabilities and never certainties, we respect that the odds in the here and now for a decline are rising. It would appear that next week will be an important one to see just how real a pullback could be. However, anecdotally I can tell you that the type of pushback from bulls on Twitter in terms of my short-term bearishness is reminiscent of the type of pushback I got on June 4th by bears when I argued in my writings for another stock melt-up to occur. There appears to be a strange feeling by the crowd that a correction simply cannot happen because of "unlimited" money printing. I find this to be a dangerous idea to believe in. As Ed Dempsey told me last week, now might be the time for market to "refresh the fear."

Finally, it is worth noting that year to date the S&P 500 on a total return basis is up over 18%, making 2012 one of the best years in the past decade next to 2003 and 2009. One of my more ambitious calls back in January was that 2012 could play out like 2003/2009 in terms of being a year of reflation, and which in turn could result in stocks rising somewhere in the range of 30-40% for the year. Many believed the call to be absurd, and yet we are only 10% away from that happening. Yes - it is entirely possible in the next three months markets stage one more big push, resulting in that idea coming true.

Time will tell of course. Our ATAC models are flexible enough to go into or out of stock and bond ETFs as conditions warrant. In the near-term, we are tactically defensively positioned away from stocks, but fully expect that an end of year surge can shock people back into chasing equities.

Looks like it will be an interesting Fall.

Sincerely,
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
www.pensionpartners.com
Twitter: @pensionpartners
YouTube: youtube.com/pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: October Correction Warning - http://www.minyanville.com/business-news/markets/articles/October-Correction-Warning-Market-internals-bear/10/2/2012/id/44597

Copper Pause Signaling October Correct? - http://www.minyanville.com/trading-and-investing/commodities/articles/jjc-ivv-copper-IWM-iPath-Dow/10/3/2012/id/44656

From Hesitation to Correction? - http://www.marketwatch.com/story/from-hesitation-to-correction-2012-10-01

Wal-Mart Indicator to Bulls: Be Careful - http://www.marketwatch.com/story/wal-mart-indicator-to-bulls-be-careful-2012-10-04

No -It's NOT the Romney Rally - http://www.marketwatch.com/story/no-its-not-the-romney-rally-2012-10-05

Spain Weakness Returns - http://www.forexpros.com/analysis/spain-weakness-returns-138414

Are EM Currencies Sending Risk-Off Warnings - http://realmoneypro.thestreet.com/articles/10/03/2012/are-em-currencies-sending-risk-warning

The Extreme Movers Message - http://www.thestreet.com/story/11725919/1/the-extreme-movers-message.html

Homebuilders Tired Post QE3 - http://seekingalpha.com/article/896951-homebuilders-tired-post-qe3

Need vs.Want Trade Warning of a Correction - http://seekingalpha.com/article/905241-need-vs-want-trade-warning-of-correction

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.

Last week, I unveiled my next major seasonal call for markets. Following my series of writings on the Summer Crash of 2011, Fall Melt-Up, Winter Resolution of 2012, Spring Switch, and Summer Surprise, I began making the case for the "Fall Catalyst of 2012, or the Great Cognitive Dissonance." My premise for the next three months is that an acceleration into equities will occur as worldwide headlines read "Dow Hits New All-Time Highs" coinciding with a weakening U.S. dollar, and led by emerging markets. For more on this idea, check out one of my CNBC segments discussing the idea at http://video.cnbc.com/gallery/?video=3000118616&play=1.

Note that I specifically am addressing the idea that stocks make these new highs at some point during the Fall. Within my various writings last week and on Twitter, however, I have been sounding the alarm that market internals were deteriorating in a very sudden way. The bear trade of high dividend/low beta sectors began showing leadership once again as bonds continued their rally, essentially undoing the breakdown that followed in the aftermath of the Fed's QE3. Spain's IBEX stock market index fell over 6% on the week, and yields began rising on its debt once again. For whatever reason, the initial euphoria over QE-unlimited suddenly starting showing signs of reversal as markets "hesitate" in the very near-term.

It is unclear if this means another "mini-correction" similar to what happened in May happens again in October. Our ATAC (Accelerated Time And Capital) strategies used for managing our mutual fund and separate accounts positioned us fully out of equities on Friday, rotating into bonds as defensiveness gets favored. Given the possibility that this could be a false signal based on end of 3rd quarter rebalancing noise, next week should provide more clarity on just how severe any further intermarket deterioration will be.

Independent of this short-term period, however, forced reflation seems more likely than not to continue to push equities higher into the end of the year. With earnings soon to be announced, the reaction by price will be important to see just which way sentiment is likely to go. Keep in mind that by all metrics the S&P 500 Total Return has already had a huge year, gaining more than 15% in the face of tremendous skepticism. With the Presidential election coming up, it may make sense for equities to take a bit of a breather here and consolidate. For purposes of ATAC, it may with hindsight be a good quick trade to position out of stocks until more clarity in price movement appears.

We remain broadly optimistic into the end of the year on the reflation trade. However, to be ultra clear here we are not believers in buy and hold investing. Our entire approach is based on a buy and rotate disciplined methodology based on identifying the conditions under which stocks or bonds perform well. There has been much concern over what could happen in 2013, and on our end we have no idea what the probabilities favor just yet. The short-term is considerably more predictable than the long-term, and our approach is designed to exploit that as best as possible in a world of continuous booms and busts, interventions by fiscal and monetary authorities, and in an environment dictated by the "madness of the crowds" which push prices up and down.

As always, thank you for tracking our analysis and work. Feel free to sign up to our YouTube channel at www.youtube.com/pensionpartners. Ed Dempsey and former CNBC/CNN anchor Carrie Lee are upping the quality of our video presentations on a weekly basis, and we would greatly appreciate comments/feedback so that we can continue to improve. Feel free to tweet questions Ed can address to me on my Twitter handle @pensionpartners.

Sincerely,
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
www.pensionpartners.com
Twitter: @pensionpartners
YouTube: www.youtube.com/pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: Market Hesitation - http://www.minyanville.com/business-news/markets/articles/xlf-sly-tip-xlk-xlu-ief/9/25/2012/id/44360

Market Hesitation, Dividends, and the Fall Catalyst - http://www.minyanville.com/business-news/markets/articles/michael-gayed-fall-catalyst-equities-correction/9/26/2012/id/44444

Corrective Hesitation and the Fall Catalyst - http://www.marketwatch.com/story/corrective-hesitation-and-the-fall-catalyst-2012-09-26

Fall Catalyst to Keep Boosting Miners - http://www.marketwatch.com/story/fall-catalyst-to-keep-boosting-gold-miners-2012-09-28

Preferred Better than Treasuries Post QE3 - http://www.forexpros.com/analysis/preferreds-better-than-treasuries-post-qe3-137488

Decision Time for the Yen/Euro Trade - http://realmoneypro.thestreet.com/articles/09/25/2012/decision-time-yeneuro-trade

The Fall Catalyst of 2012, or the Great Cognitive Dissonance - http://seekingalpha.com/article/891961-the-fall-catalyst-of-2012-or-the-great-cognitive-dissonance

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.

Stocks declined marginally last week ending a strong string of gains as investors digested the latest minutes from the Federal Reserve indicating that new stimulus may be pushed through. Some volatility has crept in, however, given uncertainty over near-term policy action in the face of economic data which is improving. On Wednesday, I was asked on CNBC (http://video.cnbc.com/gallery/?video=3000110151&play=1) if the Fed really had room to act on another round of Quantitative Easing in the face of an economy which is not contracting. My response was simple - the Fed has a long history of overreacting to weak growth, which in turns creates booms but inevitable busts afterwards. Given paranoia over not reaching escape velocity in the economy with the fiscal cliff looming, it would make sense for the Fed to want to act sooner rather than later to help counteract future headwinds.

Having said that, make no mistake that even though the media continually refers to "QE3," the reality is that Quantitative Easing already happened. Ed Dempsey and I have long argued that the fear trade and negative narrative caused QE3 to be you and me, pushing rates to all-time historic lows. Here we are with the S&P 500 near record highs, and a recovery underway in housing, both of which are more stimulative to the economy than central bank action. More so than that, however, consider that there could be a 4th quarter surprise in economic activity as a lagged response to historic low interest rates on the long-end of the curve. People tend to forget that low rates act with a lag on the economy. What this means is that 30 Year Treasuries hitting historic lows has not yet filtered through into the economy just yet.

I suspect the Fed is less important now than most think. The world is ultimately waiting on the European Central Bank to explicitly announce its own form of quantitative easing through targeting and capping government yields. Those that have been following my media appearances are aware that I brought up this idea a few months ago as the most likely course of outcome for Europe. By putting a ceiling on Spanish and Italian bond yields, the ECB can keep the pressure on governments to continue austerity, but not to the point where contagion and a 2008 repeat happens. Prevent the event (or at least the perception of it through a bond ceiling), and rally on.

Indeed European equities have markedly improved, which is bullish for global markets given the benefits of rising collateral values on easing economic strain. Should the People's Bank of China also begin to act, then Chinese stocks which are at March 2009 levels could also begin to rally meaningfully and increase animal spirits. As Ed Dempsey stated in our latest "Inflation Rotation Watch" video (http://www.youtube.com/watch?v=ZJhiSLu6dR8&feature=plcp), ATAC has been flirting with emerging markets which we expect will be the next leader within the global equity landscape in the very near future. We remains fully allocated to equities as inflation expectations continue to increase.

One final note on markets I think is worth addressing. The Summer Surprise and "end to the end of the world trade" which I wrote about on June 20th (http://www.marketwatch.com/story/the-end-to-the-end-of-the-world-trade-2012-06-20) has indeed taken place, and intermarket trends suggest this move is not over yet. I have seen many pundits argue that the entire rally is driven by central bank hope and action. I find this to be rather curious since factually the U.S. stock market has been strong all year with the exception of the May "mini-correction" in the absence of aggressive Fed or ECB policy action. That aside, even if you were to argue the market is rallying on hope, doesn't it always? The future is always unknown, which means by definition any kind of uptrend is ultimately driven by hope - the hope that our vision of it plays out the way we think. If the environment is indeed characterized by central bank policy action, does that mean one should not take advantage of it? We remain highly positive on stocks, and believe that the potential for a chase into risk-assets is high by money which has badly lagged the S&P 500 this year.

On the business front, we are nearing the final stages of our upcoming mutual fund to be launched in September and which will be offered alongside our separate accounts. We are also going to be bringing on some new faces to the firm, one of whom may actually be familiar to long-term viewers of CNBC and CNN. Finally, please feel free to email comments as it relates to our website (newly re-designed) and this e-newsletter, which as I mentioned is now being handled by a new company.

As always, thank you for your interest in Pension Partners, and feel free to reach out to us any time.

Sincerely,
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
pensionpartners.com
Twitter: @pensionpartners
YouTube: youtube.com/pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: The Bull Rebellion Strengthens - http://www.minyanville.com/business-news/markets/articles/gayed-michael-gayed-energy-xle-oil/8/21/2012/id/43357

Gold to Bears: Pay Attention - http://www.minyanville.com/sectors/precious-metals/articles/gold-stocks-ben-bernanke-interest-rates/8/23/2012/id/43453

Are the Melt-Up and Summer Surprise Over? - http://www.marketwatch.com/story/are-the-melt-up-and-summer-surprise-over-2012-08-22

Silver Looking Brighter than Gold - http://www.forexpros.com/analysis/silver-looking-brighter-than-gold-133569

Whispers of a Gold Resurgence - http://realmoneypro.thestreet.com/articles/08/26/2012/whispers-gold-resurgence?cm_ven_int=homepage-featured

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.

Rather remarkable how bad it feels out there, with the S&P 500 having an incredibly strong year of performance, isn't it?

Stocks continue their Summer Surprise, nearing the year's all-time highs as bonds begin to crack amidst what I believed would be the coming "end to the end of the world trade" I wrote of as my seasonal call in late June (http://www.marketwatch.com/story/the-end-to-the-end-of-the-world-trade-2012-06-20). Many have been arguing that the rally is finished, but I wholeheartedly disagree given that various intermarket trends are still very early in their bullish infancy. I have argued since the low of June 4th that another stock melt-up was likely, and I maintain the reasoning behind it (http://www.marketwatch.com/story/the-end-to-the-end-of-the-world-trade-2012-06-20). With so few having participated in the rally to begin with due to the strength of the negative narrative, the potential for money to chase rising stocks is increasing by the day.

What is most telling about the most recent price action in markets is the behavior of the cyclical trade, which as I have noted for the last two weeks is signaling a melt-up may be upon us (http://www.minyanville.com/business-news/markets/articles/michael-gayed-lead-lag-report-energy/8/1/2012/id/42858). Across the board it appears that those areas most sensitive to global growth expectations are beginning to lead, as Materials, Energy, Industrials, and Emerging Markets show signs of life again. This, combined with small-cap stocks which began to dramatically strengthen shortly after my article pointing out that they reached a "pre melt-up extreme" (http://www.marketwatch.com/story/small-caps-reach-pre-melt-up-extreme-2012-08-06?link=MW_latest_news), is all how a meaningful rally begins.

While the world now waits for definitive action by the European Central Bank, I think the more interesting story will be what policy actions are taken by China. With year over year inflation in the world's second largest economy having its slowest rate of gain since January 2010, it makes sense that the monetary and fiscal side have an excuse to stimulate. This may ultimately be why metals are showing interesting price behavior in the last week, alongside strength in China's ADRs themselves. Our ATAC (Accelerated Time And Capital) models are sensing this, and remain fully exposed to equities.

Despite the negative narrative, the bullish call we have been expressing has factually been the right one all year, and we are excited for the next wave higher. It appears that the timing for our mutual fund launch in September to be offered alongside our separate account composites could very well be ideal for us as a firm as we work towards providing a true buy and rotate investment approach which has never been done before in the way we are doing it.

And that's exciting.

Sincerely,

Michael A. Gayed, CFA

Chief Investment Strategist

Pension Partners, LLC

www.pensionpartners.com

Twitter: @pensionpartners

YouTube: www.youtube.com/pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: Melt-Up Redux - http://www.minyanville.com/business-news/markets/articles/xle-xli-tip-ief-xlu-utitlies/8/7/2012/id/42994

Europe to Bears: You're Wrong - http://www.minyanville.com/business-news/markets/articles/VGK-IVV-s2526p-gayed-vgkivv-technical/8/9/2012/id/43072

Small-Caps Reach Pre-'Melt-Up' Extreme - http://www.marketwatch.com/story/small-caps-reach-pre-melt-up-extreme-2012-08-06

Copper Melt-Up Coming as Miners Reflate - http://www.marketwatch.com/story/copper-melt-up-coming-as-miners-reflate-2012-08-08

Metals Surprise on Inflation's Return - http://www.marketwatch.com/story/metals-surprise-on-inflations-return-2012-08-10

Spain V Takes Shake and It's Bullish - http://www.forexpros.com/analysis/spain-'v'-takes-shape-and-it's-bullish-132130

The Aussie Dollar/China Market Connection - http://realmoneypro.thestreet.com/articles/08/07/2012/aussie-dollarchina-market-connection

The Bond Message Gets Louder - http://seekingalpha.com/article/794411-the-bond-message-gets-louder

Time for a Coalback? - http://seekingalpha.com/article/800891-time-for-a-coalback

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.

Markets were highly volatile last week as the world waited for monetary policy announcements from the U.S. Federal Reserve and European Central Bank, both of which "disappointed" by not enacting any new policy measures. Yet, despite more continued rhetoric without action, stocks actually closed the week positive, holding on to gains made the week prior. I noted on Twitter (@pensionpartners) that market internals all week kept on improving in the face of doom and gloom coming from the media, as defensive sectors all began breaking down and bond yields began to rise.

On Monday I co-hosted Bloomberg reiterating the bullish case for stocks (http://www.bloomberg.com/video/reflation-coming-buy-stocks-says-gayed-ZxI9ikrXQRapfaH3KbGE9w.html) as well as the "Summer Surprise" (http://www.bloomberg.com/video/bonds-to-stocks-summer-surprise-in-august-jaMmAXN4SmiknEwyER0k6Q.html). On Thursday as stocks were faltering, I noted on CNBC that internals were "deceptively bullish" (http://www.cnbc.com/id/15840232/?video=3000106914&play=1) despite worldwide panic over Draghi's speech. Friday, markets undid the entire decline generated from Monday-Thursday.

Why did markets behave in such a volatile way? First, as much as media pundits argue that it was a major negative that no new policy action was taken, I take a completely different approach to this. The European Central Bank is doing PRECISELY what it needs to do, which is to remind investors that in their paranoia over a 2008 repeat, they will do whatever it takes to preserve the Euro. How can this be done in the face of Spanish bond yields which are near a tipping point? I believe the likely course of action will ultimately be an implied cap on interest rates, such that the ECB buys bonds of Spanish and Italian debt when a certain ceiling is hit. This keeps the pressure on those governments to continue austerity, but also takes off the risk of contagion through a complete buyer strike and the effects of that. This is why the VIX (a volatility gauge which tends to do well when fears over an event are rising) sold off on Thursday and Friday in an aggressive way.

I expanded on this idea Thursday morning in a lengthy interview as the news crossed in a segment which can be seen at http://www.youtube.com/watch?v=EOLcshzr3lw&feature=plcp. Prevent the event, and the perception of a 2008 repeat, and the re-allocation from bonds to stocks likely takes place as money begins to take risk again. Inflation expectations based on various intermarket trends are unquestionably beginning to show signs of life again, which is a bullish environment for equities. Our ATAC (Accelerated Time And Capital) models remain fully allocated to stocks, and have only turned more bullish following last week's market action. Few are fully prepared for what could be a runaway move in stocks given the strength of the negative narrative, which as I argued in a bull/bear debate is too priced in to be right (http://www.bloomberg.com/video/uber-bull-vs-uber-bear-where-is-the-market-going-1kHY5BBZQSG~g~jpnQnKZA.html).

We remain bullish as a repeat of the Fall Melt-Up of 2011 appears likely in the near-term. I have argued since June 4th that another such move was likely, and maintain the idea that stocks can experience an "inverse Summer Crash." With sell-side analysts the most bearish on stocks since the 1980s, AAII sentiment surveys showing continued pessimism, and absolutely no belief in equities despite them being up over 11% year to date, this seems like the contrarian investors dream environment to make a bet where no one else is betting: equities.

We continue to push forward at Pension Partners, preparing for the launch of our mutual fund in September to be offered alongside our separate accounts. The countdown is on, and we are excited to provide investors with a strategy that has never been done before in the way we are doing it.

Until then, we'll simply keep the pressure and stand by our message or what the market is saying.

Sincerely,

Michael A. Gayed, CFA

Chief Investment Strategist

Pension Partners, LLC

www.pensionpartners.com

Twitter: @pensionpartners

YouTube: www.youtube.com/pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: Cyclical Melt-Up Coming? - http://www.minyanville.com/business-news/markets/articles/michael-gayed-lead-lag-report-energy/8/1/2012/id/42858

Energy to Deflationists: Pay Attention - http://www.minyanville.com/business-news/markets/articles/reflation-trade-energy-sector-energy-stocks/8/1/2012/id/42885

Inverse Summer Crash Takes Place - http://www.marketwatch.com/story/inverse-summer-crash-takes-shape-2012-07-30

Silver Set to Rally Amid Forced Reflation - http://www.marketwatch.com/story/silver-set-to-rally-ahead-on-forced-reflation-2012-08-01

The Most Important Charts in the World - http://www.marketwatch.com/story/the-most-important-charts-in-the-world-2012-08-03

Silver Miners to Love Reflation - http://www.forexpros.com/analysis/silver-miners-to-love-reflation%20-131706

Despite It All, VXX at New Lows - http://www.forexpros.com/analysis/despite-it-all,-vxx-at-new-lows-131955

Emerging Market Currencies Continue Risk-On Trade - http://realmoneypro.thestreet.com/articles/07/31/2012/emerging-market-currencies-continue-risk-trade

Euro Bounce in the Cards - http://realmoneypro.thestreet.com/articles/08/05/2012/euro-bounce-cards

Did Draghi Flip the Spring Switch? - http://seekingalpha.com/article/759621-did-draghi-flip-the-spring-switch

Junk Debt/S&P 500 Switcheroo - http://seekingalpha.com/article/781441-junk-debt-s-p-500-switcheroo

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.

Stock markets closed up nicely last week with the bulk of gains directly attributable to strong rhetoric coming out of the Mario Draghi of the European Central Bank re-assuring the world that the central bank would do whatever it takes to preserve the Euro. As we've seen with many prior times in terms of market reaction, central bank paranoia is bullish for risk assets as it reminds the world that monetary authorities will try to front-run the possibility of a Lehman-like event and 2008 repeat. Rumors circulated around a potential bond buying program similar to what the Federal Reserve has done in its Quantitative Easing program, but it is unclear if this is the ultimate course of action the ECB will take.

Regardless, it is becoming more clear that preserving the Euro means preserving the European Central Bank. If Spain goes, the Euro goes, and the ECB goes. To simply keep his job, Draghi likely has to do something aggressive to counter Spain's rising debt yields. I made a big point about this on various CNBC segments I did last week, available by searching my last name on www.CNBC.com and on www.youtube.com/pensionpartners. Remove the perception of the event risk, and rally on. One way to do this would be to do a partial bond buying program that would cap how high Spanish bond yields go such that the pressure is still on the government to cut spending, but also not send the entire financial system into a tailspin.

Our ATAC (Accelerated Time And Capital) models used for managing client accounts re-positioned into stocks as market internals improved. As I have stated before, it is unclear if this is a false positive or not, but it makes sense to assume that markets can now strongly move to new highs on the year. The S&P 500 is up over 11.5%, and the Dow Jones Industrial Average has retaken the 13,000 level. Bond yields are still far below rates of inflation, and dividend yields for nearly all sectors of the stock market makes stocks a better income play than bonds. If this move is real, then the next rotation likely occurs into emerging markets and those areas more sensitive to a return to growth expectations.

If reflation does not happen organically, then it is clear that central bank paranoia will try to force it upon us. As an interpreter of market conditions and inflation rotation manager, everything I focus on is not about whether such measures are "right" or "wrong" - this is the environment we live in. To generate returns, it is crucial to anticipate the anticipation of others. If the market now begins to believe that more monetary action is coming to remove tail risk, then it will begin to act that way independent of whether actual policy is taken or not in the very near-term. I have long said that rising risk assets are now more stimulative than central bank action, and maintain that view. Where Draghi and crew can help is to remove the perception of event risk. That alone can cause markets to rally hard.

And so we enter August when last year's Summer Crash started, it is worth noting that the negative narrative is more mainstream now than it ever was before. The bear paradox has prevent a significant decline in stocks in the U.S., AAII sentiment surveys are showing significant bearishness, and bonds keep getting all the love. For all we know, August may be the money when central banks flip the delayed Spring Switch out of bonds and into stocks. If it is, a significant move higher in stocks may yet be waiting to appear among the line of white swans of negativity.

We continue to push forward, and are exciting for our upcoming mutual fund launch in September which will be offered alongside our separately managed accounts. August will be a busy month for us at Pension Partners, as we launch a new version of our website, and launch various other business initiatives. Finally, tune in to Bloomberg live at Bloomberg.com/tv between 3-5 PM EST when I will be co-hosting as I did on June 4th making the case for another melt-up in what happened to be the day of the low for stocks. Should be a good time as always.

Sincerely,

Michael A. Gayed, CFA

Chief Investment Strategist

Pension Partners, LLC

www.pensionpartners.com

Twitter: @pensionpartners

YouTube: www.youtube.com/pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: Reflation and Melt-Up Returns? - http://www.minyanville.com/business-news/markets/articles/xlb-xle-tip-xlp-xly-iwm/7/24/2012/id/42679

When to Fear an Oil Spike - http://www.minyanville.com/business-news/markets/articles/energy-stocks-xle-oil-crude-oil/7/26/2012/id/42750

Apple Competes with Treasury 'fearPad' - http://www.marketwatch.com/story/apple-competes-with-treasury-fearpad-2012-07-23

Did Apple Break the Market? - http://www.marketwatch.com/story/did-apple-break-the-market-2012-07-25

Central Bank Paranoia Returns - http://www.marketwatch.com/story/central-bank-paranoia-returns-2012-07-27

Fear Not the Euro - http://realmoneypro.thestreet.com/articles/07/25/2012/fear-not-euro

Draghi Could Break the Yen - http://realmoneypro.thestreet.com/articles/07/29/2012/draghi-could-break-yen

China Bull Market Returns? - http://seekingalpha.com/article/752071-china-bull-market-returns

Did Draghi Flip the Spring Switch - http://seekingalpha.com/article/759621-did-draghi-flip-the-spring-switch

Agriculture Strength Not Confirmed by Stocks - http://www.forexpros.com/analysis/agriculture-strength-not-confirmed-by-stocks-130842

Need Bears Want, and What it Means for Stocks - http://www.forexpros.com/analysis/need-beats-want,-and-what-it-means-for-stocks-130917

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.