Michael A. Gayed's  Instablog

"My nature just changes." - Jimi Hendrix

Before I begin, let me just quickly say that our ATAC models we use for managing client accounts positioned us largely risk-off into bonds on Thursday, dramatically altering our equity allocations before the poor jobs numbers were released on Friday.

Markets fell last week as money initially thought one thing, and ended the week thinking another. At the beginning of the week, Fed minutes from its March meeting dampened expectations for further large-scale asset purchases (i.e. "QE3") while the European Central Bank took on a more hawkish tone given Eurozone inflation concerns in the face of still on-going debt problems in the region. The initial reaction to the possibility of QE3 NOT happening (a position I've maintained since the beginning of the year) sent yields higher and equities lower. Interestingly though, bond prices soon recovered as the shortened week came to a close.

While stock markets were closed on Friday, the bond market was open and equity futures trading took place in the morning following jobs data which disappointed. It seems that the bond market may have been anticipating poor hiring, which was less than even the most pessimistic of economic forecasts. Stock market futures nosedived and bond yields cratered as fear dramatically came back in. I immediately wrote a piece on MarketWatch following the news titled "Bad Jobs Number, a Correction, and Risk-Off" (http://www.marketwatch.com/story/bad-jobs-numbers-a-correction-and-risk-off-2012-04-06?link=MW_TD) addressing what happens now and what this potential period of volatility means for the Spring Switch idea I've been addressing.

Fortunately, our ATAC (Accelerated Time And Capital) models which are run on a weekly basis did pick-up on weakness expressing itself internally within the market. I sent out a Tweet and a Buzz (Minyanville's premium intraday service) that despite my bullish stance on equities rallying substantially more in 2012, the odds of a correction were at their highest level so far this year based on some significant weakness I began noticing. On Thursday, our models pushed us into a largely "risk-off" position, with a minor allocation to equities and significant overweight to Treasuries. It appears based on the initial reaction from Friday that this move may work quite well for our clients' portfolios.

Note that ATAC has kept us in equities since the first week of January, and that there has been a significant flip now of the switch in terms of a potential correction at hand. It seems now that there is a legitimate combination of reasons for why stocks could falter a bit given growing concern of Spain's rising bond yields, the potential for no more stimulus by the Fed and European Central Bank, and renewed concern over the state of U.S. hiring. Having said that, I do not believe any of this changes the 2012 reflation thesis, nor the Spring Switch idea. If anything, it may further strengthen the argument.

Consider that bond yields are now back at panic lows again, which in turn does what QE is intended to do (keep rates low to stimulate the economy). If equity markets undergo a mini-correction as I suspect they will, then the next leg higher will likely be the one that makes bond investors believe in risk-taking again (the Spring Switch), sending stocks to new all-time highs. I state that this is likely a mini-correction because emerging markets seem to be firming, which means some kind of comeback may be in store for overseas equities coinciding with weakness in ours. In many ways, this is the test for the entire Spring Switch thesis to begin with. If in the face of a sudden feeling of negativity equity averages hold up and act resilient, it will result in money getting comfortable with the idea that it can begin to put money to work aggressively in risk assets.

The next few weeks will be important to watch. Our ATAC models are built to be dynamic and we believe over time have the potential to significantly perform better than a buy and hold strategy of any one single asset class. I suspect we will rotate back into full risk-on mode at some point in the very near future, but for now it looks like it is time to play defense.

On another note, I am now a contributor of currency-related articles to Real Money Pro, a service provided by theStreet.com. Focusing on currencies will be important for investors given what appears to be a structural shift in the correlation of the U.S. dollar to equities. Intermarket analysis dictates paying attention to currencies as well as all other asset classes.

Sincerely,
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
www.pensionpartners.com
Twitter: @pensionpartners
YouTube: youtube.com/pensionpartners

Advantages of Pension Partners, LLC Managing Your Portfolio:

1) ATAC - strategy designed to buy and rotate, not buy and hold

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Summary of Writings Published Last Week:
The Lead-Lag Report: Emerging Markets to Push Markets Higher? - http://www.minyanville.com/sectors/emerging-markets/articles/XLF-JNK-TIP-XLB-VWO-TLT/4/2/2012/id/40199

Gold Likely to Cede Leadership in 2012? - http://www.minyanville.com/sectors/precious-metals/articles/michael-gayed-s2526p500-sp500-summer-crash/4/4/2012/id/40231

Fed Paranoia and the Spring Switch - http://www.marketwatch.com/story/fed-paranoia-and-the-spring-switch-2012-04-02

Is there a "V" move in Spain's Future? - http://www.marketwatch.com/story/is-there-a-v-move-in-spains-future-2012-04-03

Bad Jobs Numbers, a Correction, and Risk-Off - http://www.marketwatch.com/story/bad-jobs-numbers-a-correction-and-risk-off-2012-04-06

Financials to Lead Stocks to Over 40% Gains in 2012? - seekingalpha.com/article/471931-financia...

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.