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Michael A. Gayed, CFA
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Michael A. Gayed, CFA, winner of the 2014 Dow Award and 3rd Place Wagner, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies.... More
My company:
Pension Partners, LLC
My blog:
Pension Partners Blog
My book:
Intermarket Analysis and Investing: Integrating Economic, Fundamental, and Technical Trends
  • Week In Review - July 15, 2012: Can 10 Year Hit 1%? 1 comment
    Jul 15, 2012 4:07 PM | about stocks: IVV, DIA, IEF

    "A great deal of intelligence can be invested in ignorance when the need for illusion is deep." - Saul Bellow

    Markets were mixed last week, on the verge of closing quite negatively before the spike up in equity prices on Friday following JP Morgan earnings. Bond yields collapsed further despite some improvement in Spanish and Italian bonds, once again sending market internals back into post-Lehman mode without an actual Lehman event having taken place. It appears that market internals began deteriorating following the July 4th holiday as momentum and strength returned to the bear trade. Negativity internally remains high despite the S&P 500 being up nearly 10% year to date. Somehow, despite 2012 actually so far being a very strong year for the stock market, it is the bond market that gets all the love.

    Many are now calling for the 10 year Treasury yield to hit 1%, which is a rather curious thing as the same people who are ultra bullish on Treasuries now were largely ultra bearish in early 2011 before the Summer Crash took place. The irrationality of the bond market is nothing short of spectacular. I addressed this at length in an article Marc Faber of the Gloom Boom and Doom Report published of mine just two weeks ago. A buy and hold strategy of 10 Year Treasuries means an investor in "safe" paper gets his or her principal back, but not the same purchasing power back.

    In behavioral finance, money illusion refers to the idea that investors tend to think in nominal terms, and not in real terms. With inflation running above most bond yields, while it may seem as if an investment fixed income generates returns, it does not compensate for the rising cost of goods around us. Money is favoring a guaranteed loss in bonds in terms of purchasing power from a buy and hold perspective, instead of being willing to take a chance with stocks which have better balance sheets than most governments, and also yield more than Treasuries.

    Having said that, can the 10 year Treasury yield hit 1%? Absolutely, because the crowd has a funny way of being massively irrational at extremes. Our ATAC (Accelerated Time And Capital) models flipped back into defensive mode on Friday, selling equities into the advance and positioning into certain fixed income investments. I suspect this may with hindsight be a "false signal" which occasionally occurs in quantitative strategies. Fortunately we have strong gains and a buffer against what could be some volatility to come in stocks and bonds, and the strategy remains within a hair-trigger of switching back into an aggressive equity allocation. With the U.K., U.S., ECB, South Korea, China, and Brazil all easing monetary policy in the last few weeks, it will become harder and harder for money to resist taking more aggressive and sustainable risk.

    We remain ever-vigilant and respectful of price, and maintain our overall bullish thesis for the remainder of the year. Ed Dempsey and I will be appearing on Bloomberg Rewind this Tuesday at 8 PM EST discussing this further, as well as officially announce for the first-time on-air that we are launching our mutual fund as an additional offering alongside our separate accounts we currently manage. It is an exciting time for us as we revamp our website and prepare for what's to come.

    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: Conditions Get Challenging - www.minyanville.com/business-news/market...

    Transports to Bears: You're Still Wrong - www.minyanville.com/sectors/transportati...

    China: Hard Landing or Hard Rally? - www.marketwatch.com/story/china-hard-lan...

    In Defense of the Bears and Deflation - www.marketwatch.com/story/in-defense-of-...

    Mini-Correction Sequel and the Bear Paradox - www.marketwatch.com/story/mini-correctio...

    The Pound/Euro Trade Defies Gravity - realmoneypro.thestreet.com/articles/07/1...

    For EM Currencies, It Could Be Time to Buy - realmoneypro.thestreet.com/articles/07/1...

    Euro Could Yet Surprise the Skeptics - realmoneypro.thestreet.com/articles/07/1...

    China Spooks Emerging Market Investors, But Reversal is Still in the Cards - emergingmoney.com/emerging-markets-marke.../

    Are Emerging Markets Heading for Significant Strength? - seekingalpha.com/article/720501-are-emer...

    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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  • datadave
    , contributor
    Comments (685) | Send Message
     
    Great to hear from you after a hiatus. I do wonder if the Lehman crash analogy is overplayed. the weakness of government's ledgers is a far more serious matter and not to be dismissed. It was Govt that bailed out Wall Street. But who is going to bail out the Govt!
    TLT has a nice thriving options market, who'd guess that? As an defensive ETF moving upward, it's mimicking last year's summer downturn, one you predicted. Political tensions are again high with one party wishing for a market crash to make a regime change so that similarity to last year is startling. XLU ultily sector also showing robust defensive growth. Again, treasury buying is an interesting phenom and I'd like to know who's buying them on a percentage basis, (is it the Fed mostly, Govts?) and note that a crowded trade is often a very profitable trade. Interesting that Vanguard's bondsman is saying a three to four year timeline is set before yields rise again, so going with the crowd on a short term basis is hardly irrational. Propping up Govt is a far nobler task than investing in loser IPOs, fat burritos, overpriced yoga togs, and other irrelevant products.
    17 Jul 2012, 06:51 AM Reply Like
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