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Week in Review – November 13, 2011

“I wanted a perfect ending. Now I've learned, the hard way, that some poems don't rhyme, and some stories don't have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what's going to happen next.” – Gilda Radner
Something significant happened Wednesday of last week. No, it has nothing to do with the U.S., and nothing to do with Greece. The interest rate on 10-year Italian government bonds spiked to over 7%. To put this into context, several economists have basically said that any borrowing costs above 6% are unsustainable given Italy’s growth potential and continued government spending. While Greece’s own interest rates are significantly higher than that of Italy’s, Greece is relatively inconsequential when compared to Italy, which is both the third largest Eurozone economy and third largest government bond market in the world.
Certainly Italy has been a concern for some time now – this is not the issue. The central problem is the speed at which Italy’s bond yields spiked Wednesday. The move was significant enough for me to begin writing about the possibility that the “Fall Melt-Up” may be short-circuited:
Did Italy Just Short-Circuit the Fall Melt-Up?
Italy Changed Everything: Implications on the Fall Melt-Up
Italy and the Fall Melt-Up Dilemma
While rates ended the week below 7%, they still remain above the critical 6% level. Now, with Berlusconi gone and new austerity measures approved, next week will be a crucial one. Italy’s upcoming 5-year bond auction will provide markets worldwide a clear signal of whether the spike above 6% was a fluke or justified. This in turn will likely set the tone for risk-taking into the end of the year. If bond yields drop under 6%, the world will cheer and the odds of a continuation of the Fall Melt-Up jump.  If they do not, I worry that markets could be very vulnerable to a repeat of August/September.
I noted in the last Week in Review that our ATAC (Accelerated Time And Capital) models positioned us mostly out of equities and back into bonds.  Our positions remain largely unchanged – market internals still remain unconvinced.  At the core of the problem is that defensive sectors (Utilities, Consumer Staples, Healthcare) have all shown a tick up in strength.  High beta stocks are also not performing as well as they should, particularly given positive seasonality as we sprint towards the end of the year.  Next week should provide just enough clarity for what happens next. 
On another note, Edward Dempsey will appear on Breakout next week to discuss his thoughts on markets and Europe. In addition, last week we launched our YouTube channel which can be viewed at  We will provide video updates there to complement my writings and bring more attention to our firm and investment management services. We expect the quality of these video updates will improve over time.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
Twitter: @pensionpartners
ATAC - Conservative Model Backtested Results:
ATAC - Moderate Model Backtested Results:
ATAC - Aggressive Model Backtested Results:
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.