"The greatest oak was once a little nut that held it's ground." - Anonymous
Last week was a powerful one for most major market averages, which rallied strongly on renewed optimism over Europe. Spain's stock market rallied strongly off of its lows, while monetary action from Australia and China helped spur overseas bullish sentiment. Interestingly, despite hope for further stimulus from the Fed which has proven thus far to be false, stocks continued to move higher following Bernanke's testimony. The mini-correction I began arguing was likely in early April appears to be over, as reflation re-asserts itself.
I co-hosted Bloomberg's Street Smart with Matt Miller and Trish Regan on Monday, and the timing could not have been better. Several weeks ago, I sounded the alarm on credit spreads which suddenly widened in a way suggesting a credit event was underway. I specifically argued at the time that markets internally were acting as if a Crash was underway (http://www.ritholtz.com/blog/2012/05/gayedare-markets-in-a-crash/), which would either get resolved very negatively for equities, or very positively for credit risk. The various intermarket relationships I track began reaching levels not seen since post-Lehman. Very specifically, I argued on Bloomberg thematically on Monday that markets have BEHAVED as if a Lehman-like event ALREADY occurred (for one example of this, check out one of my Bloomberg segments at http://www.bloomberg.com/video/94069685-making-the-bullish-case-for-stocks.html). Because behaviorally the negative narrative got to the point where buy and hold investors in the bond markets got confused between return of principal and return of purchasing power, I believe markets are suddenly realizing that the "end of the world" trade may not actually be the profitable one.
I began re-arguing my case for the Spring Switch and the reflation theme, with what could be another "melt-up" in the months to come similar to the "Fall Melt-Up" of last year. In many ways, the reasoning this time around is precisely like what happened post October 3rd low of last year. Market internals have gotten to a point of incredible pessimism, and yet the S&P 500 Total Return Index is up over 6% year to date. I've used the analogy of the stock market acting like Muhammad Ali with the bond market being George Foreman, which keeps swinging and swinging at markets to the point where the bear argument gets tired in the face of stocks that refuse to break down powerfully (rope-a-dope). Or, for those that prefer movie references, the stock market is very much like Rocky Balboa refusing to give up against the more powerful Clubber Lang in Rocky III.
The next few weeks are crucial for confirmation. Our own ATAC (Accelerated Time And Capital) models are transitioning into a more aggressive stance, with next week likely when we do a full allocation back into stocks after having performed well in bonds during the May correction. If reflation is real, then the next few months can be very exciting for us given how badly certain emerging markets have behaved during this period. The global cyclical growth story could come back with a vengeance as optimism over Europe returns, and investors re-price a comeback in inflation expectations.
We expect our results to be updated on our homepage some time next week, and I encourage you to read my writings on MarketWatch, Minyanville, EmergingMoney, etc. for the progression of the analysis over the last 10 days. Looking up my last name will bring up numerous video segments from my Monday segments on Bloomberg.com, and check our youtube channel at youtube.com/pensionpartners for further commentary by Ed Dempsey. We are actually very excited for what's to come. I have been more than consistent and transparent in my writings as far as how I believe 2012 can play out. I maintain the idea that a significant move for equities can occur.
Did you know that there have been 27 times since 1928 that the Dow Jones Industrial Average has risen by more than 30% over a rolling 7 month period? The countdown begins to see if my thinking about a significant move in stocks for 2012 plays out. Investing is always about understanding the conditions one is operating in, and if reflation is real, then I think most might be surprised at how risk assets behave.
On another note, I will be writing another piece for Marc Faber of the Gloom Boom and Doom Report to be published next month alongside his Monthly Commentary. I will be presenting why it is entirely possible that a generational low has been hit in terms of Treasury yields, using price ratio analysis and behavioral finance. I also will be announcing something very exciting…
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.
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: Is the Bear Fever Breaking? - http://www.minyanville.com/business-news/markets/articles/sector-performance-sector-analysis-health-care/6/5/2012/id/41513
Wal-Mart to Bears: You're Wrong - http://www.minyanville.com/business-news/editors-pick/articles/wal-mart-wal-mart-analysis-WMT/6/6/2012/id/41534
Why Another Stock Melt-Up is Likely - http://www.marketwatch.com/story/why-another-stock-melt-up-is-likely-2012-06-04
Lehman, Where Are You? - http://www.marketwatch.com/story/lehman-where-are-you-2012-06-05
Emerging Markets Signal Correction's End - http://www.marketwatch.com/story/emerging-markets-signal-corrections-end-2012-06-06
Collapse of Global Copper Miners: Capitulation or Sign of Worse to Come? - http://www.forexpros.com/analysis/collapse-of-global-copper-miners:-capitulation-or-sign-of-worse-to-come%20-125456
European Financial Sector Heading Toward a V Recovery? - http://www.forexpros.com/analysis/european-financial-sector-heading-toward-a-v-recovery%20-125978
Bear Fever is Breaking - http://www.marketwatch.com/story/bear-fever-is-breaking-2012-06-08
A Contrarian View of the Euro, Part II - http://realmoneypro.thestreet.com/articles/06/04/2012/contrarian-view-euro-part-ii
A Question of Reflation - http://realmoneypro.thestreet.com/articles/06/06/2012/question-reflation
The End of the Road for the Yen? - http://realmoneypro.thestreet.com/articles/06/07/2012/end-road-yen
Brazil Interest Rate Cuts are Good News for Large-Cap Stocks - http://emergingmoney.com/brazil/brazil-interest-rate-large-caps-bzf-brf-ewz-uup/
Are the BRICs Coming Back to Lead Emerging Markets - http://emergingmoney.com/bric/emerging-markets-brics-vwo-rsx-fxi-inp-ewz-eza/
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.