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Markets fell again as Europe continued to scare investors out of stocks and into bonds (the opposite of the "Spring Switch" thesis). Spain's 10 year yield spiked to over 6% in a sign of bond market panic re-asserting itself in the Eurozone, coinciding with consumer confidence which is at the highest level since 2008. Chatter over Greece leaving the Euro is getting louder by the day and could happen at any time. I addressed this recently in what has been one of my best live interviews to date discussing Europe, bonds, stocks, the negative narrative, and the bear paradox (http://www.youtube.com/pensionpartners).
So far, U.S. stocks have behaved fairly resiliently off of the highs, with most European and emerging market equity averages down significantly more. Much of this I believe relates directly to the "Bear Paradox" idea which I have been bringing up more frequently in my various writings online. There is no doubt I thus far have been early in the "Spring Switch" call following the Summer Crash, Fall Melt-Up, and Winter Resolution. However, as I've noted in prior writings, our quantitative ATAC (Accelerated Time And Capital) models have kept us in defense mode, largely in bonds for our clients since the first week of April (http://www.marketwatch.com/story/bad-jobs-numbers-a-correction-and-risk-off-2012-04-06). I have been right so far about the idea that we would be entering a "mini-correction," and have argued all along that should U.S. markets behave resiliently, it likely means the reflation theme is still in place and that the 2003/2009-like move for risk assets remains a strong possibility.
Our models ended the week sensing a much stronger deflation scare, putting us effectively more defensive than weeks prior. The next few weeks will be important to pay attention to. News crossed over the weekend that the People's Bank of China has decided to lower reserve ratio rates, helping to inject more liquidity into China's economy to counter slowing growth. In numerous Bloomberg interviews I have talked about how easier monetary policy coming from the world's second largest economy could help bolster demand for commodities and investment in emerging markets. While not as effective in its transmission as Quantative Easing 2 by the Fed, monetary easing is still in its early phases on a global emerging market level.
For now we remain cautious, but I maintain my belief that every day that goes by brings us closer to the Spring Switch getting flipped. Companies are raising dividends, bond yields are at panic lows, and in many ways the stock market is now the only game left to play if you want to have a chance at keeping up with actual real inflation over a longer-term time frame. Of course, the crowd may not realize this reality for some time, but each day brings us closer to the "Great Re-Allocation" than the day before.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
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: Major Market Changes Are Coming - http://www.minyanville.com/business-news/markets/articles/michael-gayed-sectors-investing-consumer-discretionary/5/8/2012/id/40865
Rain in Spain or V to See? - http://www.marketwatch.com/story/rain-in-spain-or-v-to-see-2012-05-07
Catalyst for Higher Stocks is No Catalyst - http://www.marketwatch.com/story/catalyst-for-higher-stocks-is-no-catalyst-2012-05-09
When Risk-Free Turns Risky - http://www.marketwatch.com/story/when-risk-free-turns-risky-2012-05-11
Junk Bonds Sing the Siren Song - http://seekingalpha.com/article/581351-junk-bonds-sing-the-siren-song
Play Greek Votes with Brazil's Currency - http://realmoneypro.thestreet.com/articles/05/08/2012/play-greek-votes-brazils-currency
Don't Fear a Falling Euro - http://realmoneypro.thestreet.com/articles/05/10/2012/dont-fear-falling-euro
Could Be a Flash in the Pan - http://realmoneypro.thestreet.com/articles/05/10/2012/could-be-flash-pan
Core Emerging Markets Assert Leadership - http://emergingmoney.com/bric/core-emerging-markets-assert-leadership/
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.