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Week In Review - January 29, 2012

|Includes:iShares Russell 2000 ETF (IWM), SPY, VWO

"Quality means doing it right when no one is looking." - Henry For

Last week's broad stock market averages were little changed, with the Dow Jones Industrial Average closing down about 0.5%, and the S&P 500 up about 0.1%. Earnings continue to come out with some blockbuster results from Apple (NASDAQ:AAPL) and Caterpillar (NYSE:CAT) surprising most Wall Street analysts. What is encouraging is that earnings are on the whole not disappointing when one considers the operating environment of last year which was marked by massive uncertainty and volatility globally due to the European debt crisis. The resilience of corporations is impressive given the strong headwinds faced in the latter half 2011.

While major market averages on the whole did not perform in any meaningful way, the quality of this rally has been quite high. Small-cap stocks and international/emerging markets had a strong burst of outperformance. This continues to suggest that risk-sentiment is improving internally within the markets as inflation expectations return. Part of this certainly has to do with the very real and growing possibility that Greece will avoid default. However, more importantly it appears that the Fed is intent on creating a bull market for risk-assets.

As I have noted in prior writings, following the first week of January, our ATAC (Accelerated Time And Capital) models sensed a dramatic shift internally within markets in favor of reflation. We immediately positioned our clients aggressively into equities following that week and have benefited directly from the strongest January for stocks in decades. The reason for this has to do with the model's core purpose which is to 1) identify the direction of inflation expectations and go risk-on (stocks) or risk-off (bonds) accordingly, and to 2) identify which areas within those risk-on and risk-off allocations have the best potential to outperform. Being in equities is one thing, but being in the right equities is another. Last week was a particularly strong week for our clients because of the equity choices the ATAC models positioned our clients' investment portfolios for.

I have a piece coming out next week which Marc Faber of the Gloom Boom and Doom Report will be publishing in which I make the case that 2012 likely will be the year of reflation, with markets potentially setting themselves up for an environment similar to 2003 and 2009. I wrote this and sent it to Dr. Faber before the Fed's announcement last week to extend its low rate pledge from 2013 to 2014. But this is not what is most important in terms of Wednesday's FOMC decision. Rather, the most consequential announcement was the explicit targeting of 2% inflation the Fed wants to achieve.

The Fed is telling the investing community that it will do whatever it takes to make sure deflation expectations don't get entrenched into the system longer term through the 2% inflation target. This is quite important for risk-assets. In a recent segment of Bloomberg Rewind which Ed Dempsey and I co-hosted (viewable at http://mobile.bloomberg.com/share/video/EzYm9kMzp3rXMqhYxbTHiB54Z1u-2Pdd), we specifically laid out the bullish case for stocks this year within the context of Fed policy. Ed Dempsey further details the importance of the Fed to risk-taking in our latest YouTube video (viewable at http://www.youtube.com/watch?v=zslcX9YJdds&context=C30ab029ADOEgsToPDskJdhQY2T0Cxva26G9ad0xPF). In a writing to be published on MarketWatch.com this Monday, I clearly argue for why the Fed's paranoia about deflation expectations is bullish…at least for now.

We remain positive in the near-term on markets and will change as our ATAC models sense altering conditions. Performance-wise we believe there is a strong possibility for our clients to do well this year, and we have a number of new business initiatives to be launched in the near-term. For example, we have started a new relationship with InvestorPlace.com and Tim Seymour's EmergingMoney.com, writing about intermarket trends and implications on markets on both sites. As we grow, we look forward to interacting more with prospective investors interested in a new way of thinking about markets and our approach to portfolio management.

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: You Bet It's Bullish - http://www.minyanville.com/businessmarkets/articles/technical-analysis-lead-lag-report-michael/1/23/2012/id/38971

Have Stocks Gone Too Far Too Fast, or Not Far Enough? - http://www.minyanville.com/businessmarkets/articles/technical-analysis-stocks-stock-market-tip/1/25/2012/id/39024

Fed to Reignite Agflation in 2012? - http://www.minyanville.com/businessmarkets/articles/agflation-inflation-reflation-michael-gayed-dba/1/27/2012/id/39073

Are China Financials Signaling a Bull Market to Come? - http://emergingmoney.com/china/are-china-financials-signaling-a-bull-market-to-come-chix-fxi/

International Consumer Staples Signal Global Risk-On Move - http://emergingmoney.com/strategy-2/international-consumer-staples-signal-global-risk-on-move/

The Ultimate Contrarian Trade - http://www.marketwatch.com/story/the-ultimate-contrarian-trade-2012-01-23

Betting on Inflation? Don't Bet on Gold - http://www.marketwatch.com/story/betting-on-inflation-dont-bet-on-gold-2012-01-26

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: IWM, SPY, VWO