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Michael A. Gayed
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Michael A. Gayed, CFA, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages a mutual fund and separate accounts according to its ATAC (Accelerated Time and Capital) strategies focused on inflation rotation. Prior to this role,... More
My company:
Pension Partners, LLC
My book:
Intermarket Analysis and Investing: Integrating Economic, Fundamental, and Technical Trends
  • Week In Review - July 1, 2012: Certainty Illusion 12 comments
    Jul 1, 2012 2:16 PM | about stocks: IVV, DIA

    "I have realized that the past and future are real illusions, that they exist in the present, which is what there is and all there is." - Alan Watts

    Markets closed the week strongly after much news came out on the macro front sending investors piling into risk assets on the very last day of the 2nd quarter. News of Spain directly asking for bank aid, the Supreme Court's ruling on healthcare, and a "breakthrough" in Europe was certainly much to digest, but the key thing to take away last week was an increase in certainty illusion. It is becoming more and more clear that fears over a Eurozone breakup are actually bringing Europe closer together, as EU leaders agree to direct recapitalization of banks and a Eurozone-wide growth program. Germany appears to have blinked, allowing for some softening of its stance in how to deal with the crisis. This in turn continues to remind market participants that escalation of commitment means more and more protection against a 2008 repeat, which I have stressed since the very beginning is precisely what psychologically has been holding equities back from being up significantly more in the face of low yielding bonds.

    The illusion of certainty over the future is all markets need to rally strongly, and we may be entering a period where psyche shifts towards aggressive risk taking in what could be called the coming "if you can't beat 'em, join 'em market." The negative narrative has caused significant under allocation to equities, and despite every possible bear argument thrown against stocks, the S&P 500 is hovering near 10% year to date returns. Meanwhile, scared money may only now be realizing that the world is still spinning, and that we are not in a post-Lehman environment which justifies the fear trade being as certain about the future as it currently is. This is a main theme of mine in the latest writing which Marc Faber of the Gloom Boom and Doom Report just published this weekend alongside his Monthly Commentary. While the market fears uncertainty, it also must be uncertain about the fear trade as well.

    Our ATAC (Accelerated Time And Capital) models remain "risk-on in equities" and repositioned into more international exposure last week. It was looking more and more like market internals were sensing another period of volatility post Operation Twist extension, but Thursday and Friday dramatically reversed that. Across the board our strategies are strongly up for the year, with even our most conservative composite up as much as the S&P 500 with less volatility. We maintain the idea that stocks can continue to rally from these levels in the face of dividends and growth potential which literally can not be found in the bond market, in a bank account, or in any other area of the investable landscape. Many continue to believe it is impossible for markets to rally 30-40%, even though such occurrences are fairly common place in stock market history.

    Ed Dempsey's latest BNN interview nicely covers some of the ideas we have expressed throughout the year within the context of today's market (watch.bnn.ca/#clip710279). Should this move be real and the EU summit news act as a true catalyst, that means money can easily begin to chase stocks to new highs, as the Summer Surprise of persistent reflation and end to the end of the world trade occurs. For us and for our clients, this means there are a lot of opportunities our ATAC strategies can exploit, and fortunately from a position of strength given our returns thus far in 2012.

    One final note I am excited to share with you all. We are going to be launching our own mutual fund in the months ahead based on our ATAC models and approach to inflation rotation. Stay tuned…

    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: Healthcare Diverges - http://www.minyanville.com/business-news/markets/articles/xlk-xlv-xlp-xli-ipe-sector/6/27/2012/id/42036

    A Big Rally in Nuclear to Come? - www.minyanville.com/sectors/energy/artic...

    Dividendsanity and the Summer Surprise - http://www.marketwatch.com/story/dividendsanity-and-the-summer-surprise-2012-06-25

    Perseverance and the Big Picture - http://www.marketwatch.com/story/the-next-52-weeks-and-perseverance-2012-06-27

    Anticipating the Anticipation of Others - http://www.marketwatch.com/story/anticipating-the-anticipation-of-others-2012-06-29

    Busting the Pound/Euro Trade - http://realmoneypro.thestreet.com/articles/06/27/2012/busting-poundeuro-trade

    Real/Euro Still Likely to Fall - http://realmoneypro.thestreet.com/articles/06/28/2012/realeuro-still-likely-fall

    Indian Economy: A Temporary Breakdown or Something Else? - http://emergingmoney.com/currencies/indian-economy-ipn-vwo/

    Emerging Market Status: the BRICs Appear to be Bottoming - http://emergingmoney.com/bric/emerging-markets-vwo-fxi-ewz-ewy-ewt-eza-rsx-inp-eww-ewm-idx-2/

    Preferreds as the Income Transition Play - seekingalpha.com/article/681961-preferre...

    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.

    Themes: bull market, summer surprise Stocks: IVV, DIA
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Comments (12)
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  • >>Many continue to believe it is impossible for markets to rally 30-40%, even though such occurrences are fairly common place in stock market history.<

     

    Michael, can you quantify "fairly common"? 1 out 2, 1 out 3, 1 out 4 or something else?

     

    Thanks.
    1 Jul 2012, 04:10 PM Reply Like
  • Author’s reply » Sure - http://bit.ly/QPsLdf

     

    Also recommend reading this as well:
    http://on.mktw.net/N2yxqN

     

    I have a post coming out on Ritholtz's the Big Picture site next week further expanding on this. Far more common than most believe.
    1 Jul 2012, 04:58 PM Reply Like
  • Thanks, Michael. So 27 times in the last 80 years, basically 1 out of 3. But 15 out of the 27 instances took place in the 1930's, and it had only happened once in the last 25 years and it was right after the Asian financial crisis.

     

    Anything is possible in this market, but given the size of today's equity market, it will take a lot for the market to go up 30-40% in the next 7 months. One possibility is CBs around the world start printing massively to prevent a global deflation.

     

    Time will tell and thanks again for the data.
    1 Jul 2012, 06:07 PM Reply Like
  • Author’s reply » It happened more than once in the last 25 years, including in 2009. As to the Depression, bond yields globally have behaved as if we are in the 1930s, which to me furthers the argument even more about why such a move is very possible.
    1 Jul 2012, 07:49 PM Reply Like
  • I stand corrected. I missed the 2009 rally. Nevertheless, twice in the last 25 years, and both times were off significant corrections in the market.

     

    As for bond yields being comparable to the depression era, it is probably because the yield curves today are much more "influenced" by the Fed than they were right after the 1929 crash. Bernake is an expert of the Depression era, and he didn't wait to open the monetary spigot, unlike the Fed of 1929-33 which was far less accommodating.
    1 Jul 2012, 11:00 PM Reply Like
  • Author’s reply » This is a global phenomenon - bond yields in paces where the Fed is not buying bonds are at Depression lefels, meaning that the Fed alone can not explain this.
    2 Jul 2012, 06:09 AM Reply Like
  • Not in PIIGS, Brazil, Australia, India, Vietnam.....

     

    BOE and ECB have been very accommodating as well. And there is always Japan.

     

    I think we need to take the feedback-loop effect into consideration when comparing the 1930's market to today's.

     

    Time will tell.
    2 Jul 2012, 11:10 AM Reply Like
  • I would add: stock market rallies of 40% are ONLY possible when no one thinks they can happen. It is only at extremes of bearish sentiment that such a rally can begin.

     

    I still think this kind of rally is pretty unlikely, mostly because we aren't that far off the highs from Q1. If you mean a 40% rally from 1100 in October I can see that as being very possible by year's end. In fact, I would say the S&P ending the year at 1550 is much more likely than ending the year at 1150.

     

    In the absence of a bearish catalyst (eg US recession or Euro break up) the S&P will end 2012 above 1400 by default. In other words, you will probably make money in the market by year's end just if the worst doesn't happen.

     

    The odds of a recession by year's end are probably >10% and Europe is going to keep kicking the can. I like the odds here...
    1 Jul 2012, 09:24 PM Reply Like
  • Author’s reply » @brenoboyle - the bond market seems to think it is impossible. Intermarket analysis disagrees. Appreciate the counter perspective.
    1 Jul 2012, 10:14 PM Reply Like
  • Small caps are one third of the way to 40% in just the past four weeks!
    3 Jul 2012, 01:45 PM Reply Like
  • Yes that's part of the reason I still see a wall of worry.

     

    Also, strong bids for bonds tend to precede excellent stock market returns. Google Business Insider the real cult of equities. Bond Price divided by stock price is an excellent leading indicator of stock market returns. Just as excessive risk taking leads poor performance, excessive risk aversion leads good stock performance.

     

    I expect Energy, Tech and Cyclicals to dramatically outperform in the next quarter or two, particularly with rebounding oil. Buy some APA, APPL, CMI, CAT, CVX, SLB and RIO while they are still cheap.
    4 Jul 2012, 01:32 PM Reply Like
  • Very entertaining but I still worry about US more than others. Got a feeling that nonUSA equities night be better buys. Weakness in USA-- lower employment, Govt cutbacks, austerity. Seems the Germans are turning towards a more socially conscientious course. Japan maybe turning a corner too. Elections in USA are not necessarily positive with either party winning. Since you've pretty close to accurate in the two years I am balancing value longs with shorts on tippy top overvalueds.
    2 Jul 2012, 01:09 PM Reply Like
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