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Week in Review – December 4, 2011

“One cannot plan for the unexpected.” – Aaron Klug

I’d like to start off this writing by immediately addressing the move in equities that occurred last week. We missed it, and while it was difficult watching surging stock prices without having any exposure, in many ways we are relieved about the why. Our ATAC models WERE correct (as were my writings calling for a “December to Remember Breakdown”). The conditions had deteriorated so severely within the market that our models signaled it was time to take on a very defensive posture. The fact that global central banks acted in such a coordinated way clearly shows this. In other words, central banks surprised the markets because they themselves sensed the world was on the verge of a panic. With hindsight, a defensive position was justified because underlying conditions forced such a global coordinated action to occur.

Here is what we wrote last Sunday:


“Having said all that, last Friday our models positioned us full risk-off (into bonds) and out of all equity exposure as internals continued to deteriorate. A true feeling of deflation is taking hold, and no amount of Holiday spending can counter that. I have noted that Italy changed everything in terms of the continuation of the Fall Melt-Up, and it appears that my writings timed with ATAC were correct given that equities just had their worst Thanksgiving week since 1932. This occurred while 2 and 5-year Treasuries hit all time record low yields at recent auctions.”


Markets worldwide were on the verge of a significant decline, with Italy’s yields crossing 8% and equity markets falling at an unrelenting pace. Our ATAC models had been largely defensive all month (primarily into bonds with relatively minor equity exposure) before going out of all stocks the Friday before last. All worked very well until last week, when SuperBen and the League of Extraordinary Bankers intervened. Once news hit that global central banks were stepping in to relieve financial stress, worldwide equities surged in minutes. The result was equities having their best week since March 2009.


As to the idea of the “December to Remember Breakdown” I have been laying out in my writings in the last few weeks, it appears that monetary action short-circuited the Italy short-circuit which I argued on November 10th likely ended the “Fall Melt-Up” in equities. I, as well as Ed Dempsey, have noted numerous times that Italy’s bond yield spike was a big deal and that the “fever had to break” for equity prices to continue higher. Neither of us expected Doctor Ben to bring in as much medicine to the patient as he did. Following the central bank intervention, Italy and Spain’s yields dropped substantially enough to we believe break the fever that was running dangerously high before last week.


With all this said, our ATAC models flipped aggressively into equities as of Friday. We went from being full “risk-off” (bonds) to full “risk-on” (equities) as the underlying dynamics of the market violently flipped in favor of increased inflation expectations and an environment conducive toward equity risk-taking. Qualitatively, it appears that market participants are now expecting a series of global policy moves to remove any possibility of a 2008 repeat.


Back to the Fall Melt-Up scenario, when Italy’s yield spiked, it looked like that could have been a warning sign that a Lehman-like event was on the verge of happening, as markets sharply declined and credit spreads blew out. Last week’s entirely unexpected global central bank intervention seemed to be in response to what could have been an imminent Lehman-like event in Europe. With the message now being that global monetary authorities are willing to act faster than EU leaders to prevent another financial collapse, it appears as though the Fall Melt-Up is back.


It is perfectly okay to miss a big day or week in equities so long as it is based on something real, and the move higher continues. Unlike prior big up days/weeks which have been driven generally by rumors, this time around a true global action took place to avert a 2008-like repeat. Certainly nothing structural has changed in Europe, and the December 9th meeting of EU leaders is crucial for longer-term reform. However, with what appears to be the start of a global “shock and awe” campaign to prevent further deterioration, for now it appears to be the right kind of environment to feel comfortable in equities…at least for now.


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


Summary of Writings Published Last Week:

*Note: Most of the writings below were written before or on the day of central bank intervention. It is worth reviewing the thinking as in all writings I noted that a “few more days” were needed to see just how real the move up is. In my writings next week, I have one theme and one theme only to stress. The Fall Melt-Up Returns.


Junk Debt, Treasuries, and the December to Remember Breakdown -


Central Bank Desperation and the December to Remember Breakdown -


December to Remember: Sectors -


Financial ETFs Not Sending Encouraging Signals -


Nothing’s Changed: Italy and the December to Remember Breakdown -


Global Coordinated Desperation and the December to Remember Breakdown -


ATAC Backtested Model Results:

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.