"Doubt must be no more than vigilance, otherwise it can become dangerous." - Georg C. Lichtenberg
Markets rose modestly last week as investors breathed a sigh of relief on successful Spanish bond auctions and strong business confidence in Germany. Brazil and India both eased their monetary stance cutting rates in an effort to stimulate growth as inflation in both countries moderates due to slower export growth and demand overseas. I have noted numerous times that this environment is very much a test for the "Spring Switch" idea out of bonds and into stocks, such that any kind of equity resiliency likely would force money back into risk in earnest. Despite much fear over a deep correction, Dow 13,000 seems to be acting like a magnet as bulls hold onto the reflation theme I've been stressing in my writings for some time now.
Our ATAC models remain largely risk-off with some changes in terms of positioning as the deflation pulse continues to beat in the near-term. As a reminder, our ATAC models sensed that equities would have a tough time outperforming bonds as early as April 5th which is when the major allocation shift occurred. It does not appear that the mini-correction environment is over just yet given big uncertainty over French elections and the overall state of Europe's credit markets as a result of new leadership which could backtrack on austerity measures. As such, our models continue to suggest caution remains warranted.
The dilemma for longer-term investors of course is what to do right here and right now. Our strategies are run on a weekly basis, allowing us to tactically and dynamically rotate among bond and stock funds as conditions alter. That means our allocation to bonds now is not a long-term position, but is simply a position for right now. Ed Dempsey, Chief Investment Officer of Pension Partners, appeared on Taking Stock with Pimm Fox on Bloomberg last week and articulated well the idea that investors can't get comfortable with bond yields under 2% when stocks in many cases are yielding more, and with the Fed explicitly saying they want to achieve a 2% inflation rate (http://www.bloomberg.com/video/91053293/). Buy and hold it would appear is not a viable approach should the Fed be able to get what it wants through money printing.
Having said all this, we remain very bullish on equities for 2012 past this period which, although volatile, is not exhibiting the same internal characteristics of a collapse similar to the lead-up of the Summer Crash last year. Corrections are normal and healthy environment within bull markets as it "shakes out" weak hands and allows those with firepower the ability to position back into risk at lower prices. We remain in a global easing cycle, with emerging economies now leading the way through various interest rate cuts. Stocks themselves remain a key part of the global reflation story, as rising collateral prices ease financial stress and create a better environment for growth. For now though, listen closely to the message of the markets, which is saying to stay vigilant in your portfolio.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
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Summary of Writings Published Last Week:
The Lead-Lag Report: Correction Already Over? - http://www.minyanville.com/business-news/markets/articles/market-price-ratio-lead-lag-report/4/17/2012/id/40460
Clean Energy May Have Finally Bottomed, Putting it on the Verge of Outperformance - http://www.minyanville.com/sectors/energy/articles/alternative-energy-alternative-energy-stocks-PowerShares/4/18/2012/id/40483
Is Wal-Mart Signaling a Deflation Pulse? - http://www.marketwatch.com/story/is-wal-mart-signaling-a-deflation-pulse-2012-04-16
Forget the Fed, Stocks ARE QE3 - http://www.marketwatch.com/story/forget-the-fed-stocks-are-qe3-2012-04-18
Another Reason Correction Could Be Shallow? China - https://seekingalpha.com/article/499001-another-reason-correction-could-be-shallow-china
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.