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Week In Review - July 22, 2012: Self-Preservation By ECB?

"Waiting is painful. Forgetting is painful. But not knowing which to do is the worst kind of suffering." - Paulo Coelho

Markets rose modestly last week as equities experienced big swings both up and down. Stocks in the U.S. are still holding up nicely from their June low rally, while many European averages are revisiting those levels. Spain continues to be a source of tremendous angst, with its 10 year debt now solidly above 7%. Bond market fear sent U.S. Treasury yields back to all time record lows on a worldwide safety trade over what happens next to the Eurozone, which seems to continually get worse.

Stepping back for a moment, one would think given the pervasiveness of the negative narrative that stocks would be down in the double digits by now, yet here we are with the S&P 500 hovering around the 10% level on the year, essentially holding on to gains made during the first quarter. On a real return basis (after inflation) by all metrics this has so far been a very good year for equities, yet it is the bond market which continues to get all the love. With many companies yielding more than the 10 year Treasury, stocks have now become a better income play than fixed income. It is only a matter of time until market participants begin to act on this - a delayed "great re-allocation"/Spring Switch which did not happen in the Spring, but is ever more likely the closer bonds get to yielding nothing.

Clearly it is continued fears over Europe and a Lehman repeat which is holding back that Switch from getting flipped. There is no question that Spain is a massive wildcard in the reflation theme. On one hand, continued increases in Spanish bond yields could scare markets into full blown belief of a deflationary shock to come. On the other hand, the more Spanish bond yields rise, the more likely the European Central Bank is to directly purchase those bonds in a form of Fed quantitative easing to bring bond yields down. This latter option becomes likely logically since a collapse in Spain likely means a collapse of the entire Eurozone. Thus, in an effort for pure self-preservation, the European Central Bank would have to act. This alone might explain why equities in the U.S. have not collapsed, as our markets decouple more and more from Europe.

While it looked like our ATAC (Accelerated Time And Capital) models were nearing a full blown move back into equities, instead a minor amount of stock allocation was added to our Moderate and Conservative Composites. ATAC remains biased towards being defensively positioned in bonds given market internals which, as I have noted in my most recent series of writings, deteriorated following July 5th. Still, we remain within a hair trigger of repositioning fully back into stocks. I remain unconvinced of a deeper correction or mini-correction sequel as the bear paradox remains alive and well. Stocks may simply be in a holding pattern, waiting for the next "fix" to Europe's seemingly never ending crisis.

On the business front, we remain very excited for the upcoming launch of our mutual fund to be offered in additional to our separately managed accounts. You may have noticed our logo has changed (top left of this email). We are revamping our website as well and are looking forward to rolling out our various initiatives in the next two months.

Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
Twitter: @pensionpartners

Summary of Writings Published Last Week:

Oil to Bears: You're Wrong -

Wal-Mart Indicator Goes Vertical -

Bond-to-Stock Switch Still Can Flip -

Dividendsanity Reaches a Decision Point -

Yen Could Be Trapped in the Bear Paradox -

Gold Waits for the Rupee -

Homebuilders Leadership Nearing End?

Germany, the U.S., and the Summer Surprise of 2012 -

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.