Michael A. Gayed's  Instablog

"Hope is definitely not the same thing as optimism. It is not the conviction that something will turn out well, but the certainty that something makes sense, regardless of how it turns out." - Vaclav Havel

Stocks declined again last week as panic gripped investors fearing an imminent exit of Greece from the Euro, a bank run in Spain, and a "hard landing" in China which continues to release disappointing economic numbers. U.S. jobs growth came in considerably weaker than expected, and pending home sales declined. While most U.S. stock market indices have now gone round-trip and are flat to slightly down on a year to date basis (with the S&P 500 still up over 2% for 2012), the fear was most visibly expressed in the bond market. Treasury yields utterly collapsed with the 10-year rate at an all-time historic low, as 30 Year Treasuries hit levels not seen since post-Lehman in 2008 (more on this later). The concerns I expressed about markets potentially actually being in a Crash (http://www.ritholtz.com/blog/2012/05/gayedare-markets-in-a-crash/) based on the breakdown of credit spreads (http://www.cnbc.com/id/15840232/?video=3000092173&play=1 and http://www.cnbc.com/id/15840232/?video=3000092289&play=1) appear to be precisely how the U.S. Treasury bond market is perceiving the current landscape.

However, despite it feeling like a massive decline in stocks has already occurred, this still looks to me more like the "mini-correction" which I argued was likely to happen starting on April 6th (http://www.marketwatch.com/story/bad-jobs-numbers-a-correction-and-risk-off-2012-04-06). My entire premise back in April was that if stocks acted resiliently in the corrective period I expected, it would only further the case for reflation and the "Spring Switch" out of bonds and into stocks (which Europe has admittedly delayed from getting flipped).

Now, the whole world is trading as if an end of the world scenario has happened, and as if a Lehman-like credit seizure has ALREADY taken place. Various intermarket trends are behaving as if a Crash has ALREADY passed. Even though equities have not collapsed, the bond market has BEHAVED as is a collapse has happened. And yet, where is the event? Where is the negative catalyst which justifies the complete and utter spike in bond prices higher? In many ways, the bond market is acting as if something has happened, but nothing actually has despite on-going global concerns. There has been no event to cause such a move (yet).

I am reminded of the stock market right before the March 9th low of 2009, when the Dow Jones Industrial Average fell below 7,000. The message at the time was that an end of the world scenario was coming. Then came the March 9th low, and a massive rally in equities ensued. The EXACT same message is being sent now, but by the bond market this time around. If the bond market is right about the future, we're all in a lot of trouble because the implication is a significant period of financial stress and economic pain lies ahead. But what if the bond market is wrong? If you remove the event and market participants realize that the fear trade became too crowded too quickly, a significant rally in equities can occur (which I remain consistent in saying since I brought up the idea earlier this year).

As to the ATAC (Accelerated Time And Capital) models we use for managing client accounts, we remain defensively positioned awaiting for clearing conditions to emerge to rotate back into equities. We closed the month of May very strong, and think many will likely be surprised by the results of all of our Composites (with the most noticeable that of our Aggressive strategy). Intellectually, betting on an end of the world scenario is a tough trade because it comes only once. The crowded bond market seems to be convinced it is coming. We are not of that opinion, and our ATAC models are designed to buy and rotate as conditions change for the better or worse.

The crowd is rarely right at the extremes.

Thank you again for your interest in Pension Partners, LLC, and feel free to reach out to us any time with any questions you may have about our investment management services.

Sincerely,

Michael A. Gayed, CFA

Chief Investment Strategist

Pension Partners, LLC

www.pensionpartners.com

Twitter: @pensionpartners

YouTube: www.youtube.com/pensionpartners

Advantages of Pension Partners, LLC Managing Your Portfolio:

1) ATAC - strategy designed to buy and rotate, not buy and hold

2) Performance comparable to hedge funds without being one and with lower fees

3) Liquidity and transparency through the use of ETFs

4) Ease and security of using Fidelity

Summary of Writings Published Last Week:

The Lead-Lag Report: Still No Bullish Signs and a Challenge for Equities Near-Term - http://www.minyanville.com/business-news/markets/articles/XLV-XLY-IEF-XLK-XLB-VWO/5/29/2012/id/41298

Transports to Bears: You're Wrong - http://www.minyanville.com/business-news/markets/articles/michael-gayed-reflation-inflation-rally-stocks/5/30/2012/id/41363

Think Stocks Can't Rise 40% in 2012? Think Again - http://www.marketwatch.com/story/think-stocks-cant-rise-40-in-2012-think-again-2012-05-30

Pound Competition No Match for Dollar - http://realmoneypro.thestreet.com/articles/05/30/2012/pound-competition-no-match-dollar

A Contrarian View of the Euro - http://realmoneypro.thestreet.com/articles/05/31/2012/contrarian-view-euro

Real Support Means More Real Stimulus - http://realmoneypro.thestreet.com/articles/06/01/2012/real-support-means-more-real-stimulus

China About to Underperform…Spain? - http://emergingmoney.com/china/china-about-to-underperformspain/

Lack of Chinese Stimulus Dragging Down Emerging Markets - http://emergingmoney.com/bric/emerging-markets-vwo-fxi-ewz-ewy-ewt-eza-rsx-inp-eww-ewm-idx/

Energy Nears (Relative) Support - http://www.investorplace.com/2012/05/energy-nears-relative-support/

The Curious Reconnect Between Gold and Gold Miners - http://www.forexpros.com/analysis/the-curious-reconnect-between-gold-and-gold-miners-124516

Bond Strength Implications and the Spring Switch - http://seekingalpha.com/article/619981-bond-strength-implications-and-the-spring-switch

Alternative Energy Takes Massive Hits During May Correction - http://seekingalpha.com/article/620041-alternative-energy-takes-massive-hits-during-may-correction

What Homebuilders May Be Warning Of - http://seekingalpha.com/article/632701-what-homebuilders-may-be-warning-of

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.

"The world is all gates, all opportunities, strings of tension waiting to be struck." - Ralph Waldo Emerson

Markets rose modestly last week, bouncing from deep oversold levels as buyers stepped in on hopes that new measures to counter the European financial crisis would be discussed following a European summit which, surprise surprise, yielded no results. Chatter is continuing to grow over a looming exit by Greece from the Euro, with likely the Greek vote set in June setting the tone. Undoubtedly plans are underway to limit damage from a worst case scenario and limit contagion, as money flees Greece and Spain and instead positions into the relative "safety" of German and U.S. bonds.

Regardless of all this, though, the "mini-correction" I believed we would be entering which I first wrote of after the first week of April has remained played out thus far, given that the S&P 500 is still decently positive for the year. As I noted recently on Bloomberg (around the 3 minute 55 second mark http://www.bloomberg.com/video/93394089-stocks-driven-by-greece-china-taking-stock-5-24.html), the concern that we've been expressing lately is that credit markets which sent a strong defensive message two weeks may be warning of a deeper stock market correction ahead. So far the "mini-correction" idea, consistent with the negative narrative and bear paradox concepts, has resulted in bonds doing very well while stocks in the U.S. still cling on to gains for 2012. If the bond market is right and fever does not break in credit, the mini-correction could turn into a deeper one (see my CNBC interview on Tuesday of last week further explaining this at http://video.cnbc.com/gallery/?video=3000092173&play=1).

This is not our base case scenario. All along we have been arguing that resiliency in stocks would only further the probability of the "Great Re-Allocation" and Spring Switch out of bonds and into stocks. The Spring is certainly not over yet, and a few weeks could result in a dramatic change of mood towards optimism (weeks seem to last a lifetime in markets nowadays). Having said that, market internals still do not point to all things being well just yet, as our ATAC (Accelerated Time And Capital) models we use for managing client accounts remains defensively positioned into bonds since we first re-allocated out of equities following the first week of April. More clarity may be needed from Europe to convince market participants that a buy and hold position in bonds yielding under 2% likely will not keep up with the pace of future inflation in the same way stocks could.

Key to any kind of feeling of comfort by investors likely will be the removal of the risk of country wide bank runs, which is something I alluded to on Bloomberg and which Ed Dempsey gives a nod to in his latest market commentary video available at www.youtube.com/pensionpartners. A Eurozone FDIC equivalent likely is needed to limit contagion effects from Greece leaving the Euro and causing country-wide bank runs. I very much maintain that this is not the "Black Swan" surprise event. The 40+% reflation theme, which could still very much play out if credit markets are wrong, may indeed still happen. Until market internals provide a more positive tone, however, we remain in "wait and see" mode.

One final note - make no mistake about it that it is possible that the post-European elections may have only delayed the Spring Switch from getting flipped. The thinking and analysis remains very real given low yields and central banks who will stop at nothing to prevent deflation from taking hold. There is a "Great Re-Allocation" out there…it just may take a bit longer to happen.

Thank you again for your interest in Pension Partners, LLC, and feel free to reach out to us any time with any questions you may have about our investment management services.

Sincerely,

Michael A. Gayed, CFA

Chief Investment Strategist

Pension Partners, LLC

www.pensionpartners.com

Twitter: @pensionpartners

YouTube: www.youtube.com/pensionpartners

Advantages of Pension Partners, LLC Managing Your Portfolio:

1) ATAC - strategy designed to buy and rotate, not buy and hold

2) Performance comparable to hedge funds without being one and with lower fees

3) Liquidity and transparency through the use of ETFs

4) Ease and security of using Fidelity

Summary of Writings Published Last Week:

The Lead-Lag Report: Headed for a Crash or Another Melt-Up - http://www.minyanville.com/business-news/markets/articles/utilities-health-care-sector-performance-lead/5/22/2012/id/41184

Forget Greece and Spain, Focus on Italy - http://www.minyanville.com/business-news/the-economy/articles/euro-crisis-greece-spain-italy-italy/5/23/2012/id/41209

Reflecting on Reflation and the Spring Switch - http://www.marketwatch.com/story/reflecting-on-reflation-and-the-spring-switch-2012-05-21

Why Crash Risk Remains Very Real - http://www.marketwatch.com/story/why-crash-risk-remains-very-real-2012-05-23

Crash Risk Could Turn Spring Switch to Ditch - http://www.marketwatch.com/story/crash-risk-could-turn-spring-switch-to-ditch-2012-05-25

Yen/Euro Relationship Nears Crucial Moment - http://realmoneypro.thestreet.com/articles/05/25/2012/yeneuro-relationship-nears-crucial-moment

A Critical Currency Moment - http://realmoneypro.thestreet.com/articles/05/23/2012/critical-currency-moment

Forget the Euro: Focus on the Real - http://realmoneypro.thestreet.com/articles/05/22/2012/forget-euro-focus-real

Big Upsets in Emerging Markets Leadership Favor India - http://realmoneypro.thestreet.com/articles/05/22/2012/forget-euro-focus-real

Deflation Fears Return - http://seekingalpha.com/article/603711-deflation-fears-return

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.

"We are living in a world in which all wars are wars of defense." - George Wald

Equties worldwide dropped precipitously while bond yields fell deeper into panic mode as European markets broke through key technical levels, and as many emerging market indices crossed into negative year-to-date territory. It is rather remarkable how quickly the best 1st quarter for stocks in years has been reversed, as the "mini-correction" I addressed on April 6th turned deeper (http://www.marketwatch.com/story/bad-jobs-numbers-a-correction-and-risk-off-2012-04-06). There is no doubt that the tone of the markets dramatically changed as jobs data in the U.S. turned softer coinciding with European elections which have turned bulls into bears for fear of a repeat of the latter half of 2011.

Fortunately, our ATAC (Accelerated Time And Capital) models correctly positioned for this environment when the first warning signs flashed for stocks on April 5th, allowing us to largely rotate out of stocks and into bonds for our clients then, with full allocation into defense mode in the past few weeks. It turns out that the mini-correction environment of April decided to aggressively express itself this month. Of major concern is Spain, which continues to upwardly revise its budget deficit, with the IBEX stock market index continuing its sharp decline.

Needless to say, our ATAC models remain very cautious, as our clients have fared well in this period. And while I remain broadly very bullish on the stock market for 2012, the past week resulted in significant deterioration in credit markets which, if not reversed soon, could be a warning sign of much deeper losses to come. This is not my base case scenario, but given that the long-term is a rolling series of short-terms, it is important to recognize that crowd expectations are now favoring deflaton all over again, as market internals behave as if we are in the midst of a meaningful breakdown in equities. I addressed the sudden break in credit spreads on Bloomberg Friday (http://www.bloomberg.com/video/93006859/) and in an article I recommend reading which explains what we are faced with right now (http://www.marketwatch.com/story/forget-facebook-stocks-are-at-serious-risk-2012-05-18?link=MW_TD).

As always, we remain ever-ready to rotate back into stocks when conditions warrant. This may simply be the last flush for the year before stocks come back and the "Spring Switch" out of bonds and into stocks finally gets flipped. Furthermore, for those that are saying "Sell in May worked!" I recommend reading a piece just published today at http://seekingalpha.com/article/602911-revisiting-sell-in-may-and-the-spring-switch. The "Sell in May" strategy is not about selling for just one month, but actually about being out of stocks and in bonds until October. While the correction has happened just this month, we are still very early on in the Sell in May strategy period. If stocks were to rally 10-20% from here by October, then NOT adhering to Sell in May might actually with hindsight have worked.

Thank you again for your interest in Pension Partners, LLC, and feel free to reach out to us any time with any questions you may have about our investment management services.

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

Advantages of Pension Partners, LLC Managing Your Portfolio:

1) ATAC - strategy designed to buy and rotate, not buy and hold

2) Performance comparable to hedge funds without being one and with lower fees

3) Liquidity and transparency through the use of ETFs

4) Ease and security of using Fidelity

Summary of Writings Published Last Week:

Why Stocks Can Make New All-Time Highs - http://www.minyanville.com/business-news/markets/articles/stock-market-stock-advice-stock-market/5/14/2012/id/40987

The Lead-Lag Report: Deterioration Continues in Risk Assets - http://www.minyanville.com/business-news/markets/articles/jpmorgan-jpm-market-trends-technical-analysis/5/16/2012/id/41028

National Bank of Greece: It's Over - http://www.minyanville.com/business-news/politics-and-regulation/articles/national-bank-of-greece-greece-economy/5/16/2012/id/41055

Is Another 'Summer Crash' Coming? - http://www.marketwatch.com/story/is-another-summer-crash-coming-2012-05-14

The Most Important Question in the World - http://www.marketwatch.com/story/the-most-important-question-in-the-world-2012-05-16

Forget Facebook; Stocks are at Serious Risk - http://www.marketwatch.com/story/forget-facebook-stocks-are-at-serious-risk-2012-05-18

Lumber and the Spring Switch Redux - http://seekingalpha.com/article/585471-lumber-and-the-spring-switch-redux

Revisiting 'Sell in May' and the Spring Switch - http://seekingalpha.com/article/602911-revisiting-sell-in-may-and-the-spring-switch

How to Bet Against the Euro - http://realmoneypro.thestreet.com/articles/05/16/2012/how-bet-against-euro

How to Play China's Rate Cuts - http://emergingmoney.com/china/how-to-play-chinas-rate-cuts/

Asian Emerging Markets Rule the World this Week - http://emergingmoney.com/etfs/asian-emerging-markets-rule-the-world-this-week/

Utilities: From Hero to..Superhero? - http://www.investorplace.com/2012/05/utilities-from-hero-to-superhero/

Is Copper Broken or Just about to Turn? - http://www.forexpros.com/analysis/is-copper-broken-or-just-about-to-turn%20-123045

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.