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Week In Review - June 3, 2012

Jun. 03, 2012 2:50 PM ET6 Comments
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"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 - https://seekingalpha.com/article/619981-bond-strength-implications-and-the-spring-switch

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

What Homebuilders May Be Warning Of - https://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.

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