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Week In Review – May 27, 2012

"The world is all gates, all opportunities, strings of tension waiting to be struck." - Ralph Waldo Emerson

Markets rose modestly last week, bouncing from deep oversold levels as buyers stepped in on hopes that new measures to counter the European financial crisis would be discussed following a European summit which, surprise surprise, yielded no results. Chatter is continuing to grow over a looming exit by Greece from the Euro, with likely the Greek vote set in June setting the tone. Undoubtedly plans are underway to limit damage from a worst case scenario and limit contagion, as money flees Greece and Spain and instead positions into the relative "safety" of German and U.S. bonds.

Regardless of all this, though, the "mini-correction" I believed we would be entering which I first wrote of after the first week of April has remained played out thus far, given that the S&P 500 is still decently positive for the year. As I noted recently on Bloomberg (around the 3 minute 55 second mark http://www.bloomberg.com/video/93394089-stocks-driven-by-greece-china-taking-stock-5-24.html), the concern that we've been expressing lately is that credit markets which sent a strong defensive message two weeks may be warning of a deeper stock market correction ahead. So far the "mini-correction" idea, consistent with the negative narrative and bear paradox concepts, has resulted in bonds doing very well while stocks in the U.S. still cling on to gains for 2012. If the bond market is right and fever does not break in credit, the mini-correction could turn into a deeper one (see my CNBC interview on Tuesday of last week further explaining this at http://video.cnbc.com/gallery/?video=3000092173&play=1).

This is not our base case scenario. All along we have been arguing that resiliency in stocks would only further the probability of the "Great Re-Allocation" and Spring Switch out of bonds and into stocks. The Spring is certainly not over yet, and a few weeks could result in a dramatic change of mood towards optimism (weeks seem to last a lifetime in markets nowadays). Having said that, market internals still do not point to all things being well just yet, as our ATAC (Accelerated Time And Capital) models we use for managing client accounts remains defensively positioned into bonds since we first re-allocated out of equities following the first week of April. More clarity may be needed from Europe to convince market participants that a buy and hold position in bonds yielding under 2% likely will not keep up with the pace of future inflation in the same way stocks could.

Key to any kind of feeling of comfort by investors likely will be the removal of the risk of country wide bank runs, which is something I alluded to on Bloomberg and which Ed Dempsey gives a nod to in his latest market commentary video available at www.youtube.com/pensionpartners. A Eurozone FDIC equivalent likely is needed to limit contagion effects from Greece leaving the Euro and causing country-wide bank runs. I very much maintain that this is not the "Black Swan" surprise event. The 40+% reflation theme, which could still very much play out if credit markets are wrong, may indeed still happen. Until market internals provide a more positive tone, however, we remain in "wait and see" mode.

One final note - make no mistake about it that it is possible that the post-European elections may have only delayed the Spring Switch from getting flipped. The thinking and analysis remains very real given low yields and central banks who will stop at nothing to prevent deflation from taking hold. There is a "Great Re-Allocation" out there…it just may take a bit longer to happen.

Thank you again for your interest in Pension Partners, LLC, and feel free to reach out to us any time with any questions you may have about our investment management services.

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: Headed for a Crash or Another Melt-Up - http://www.minyanville.com/business-news/markets/articles/utilities-health-care-sector-performance-lead/5/22/2012/id/41184

Forget Greece and Spain, Focus on Italy - http://www.minyanville.com/business-news/the-economy/articles/euro-crisis-greece-spain-italy-italy/5/23/2012/id/41209

Reflecting on Reflation and the Spring Switch - http://www.marketwatch.com/story/reflecting-on-reflation-and-the-spring-switch-2012-05-21

Why Crash Risk Remains Very Real - http://www.marketwatch.com/story/why-crash-risk-remains-very-real-2012-05-23

Crash Risk Could Turn Spring Switch to Ditch - http://www.marketwatch.com/story/crash-risk-could-turn-spring-switch-to-ditch-2012-05-25

Yen/Euro Relationship Nears Crucial Moment - http://realmoneypro.thestreet.com/articles/05/25/2012/yeneuro-relationship-nears-crucial-moment

A Critical Currency Moment - http://realmoneypro.thestreet.com/articles/05/23/2012/critical-currency-moment

Forget the Euro: Focus on the Real - http://realmoneypro.thestreet.com/articles/05/22/2012/forget-euro-focus-real

Big Upsets in Emerging Markets Leadership Favor India - http://realmoneypro.thestreet.com/articles/05/22/2012/forget-euro-focus-real

Deflation Fears Return - https://seekingalpha.com/article/603711-deflation-fears-return

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.