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It's Tough Out There

Daily State of the Markets
Wednesday, June 6, 2012

Good morning. There is no denying the fact that the stock market has not exactly been a friendly place to invest since April 1st. Of course, prior to April Fool's Day the stock market had been uncharacteristically warm and cozy as the S&P had set some sort of record for the most consecutive days without experiencing a decline of 1% or more. And after the nightmare that was seen from summer through late fall of 2011, the one-way market advance was a welcome change.

However, since the bull-market high on 4/1 (which, in hindsight was a fairly cruel April fool's joke on any and all residing in the bull camp) it's been tough out there. Right on cue, the European Debt Crisis reprised its performance of the last two summers, making May once again the perfect time to work on the garden or your short game. And this time around, we've even got a global economic slowdown to add to the summer fun.

So, are you hating this market? Have your recent trades caused you to consider tossing the nearest heavy object (I prefer the stapler, myself) through one of your screens? Are you close to giving up on any and all investment strategies? And has the idea of putting your 401(k) in the IEI and giving up on the SPY forever crossed your mind? If so, I want you to know that you are not alone.

You see, while every guest that appears on the T.V. shows gives the appearance that they are infallible, that they are ALWAYS in the right place at the right time, and that they have nailed every move in the market, the returns from the hedge fund indices would argue otherwise.

According to Hedge Fund Research, based in Chicago, May was a tough month for Hedge funds in general. The firm's Global Hedge Fund Index, which is "designed to be representative of the overall composition of the hedge fund universe" fell -1.69% in May. To be sure, this was better than the S&P's return of -6.27%. However, on a year-to-date basis, the index is up only +1.52%, which is a far cry from where the S&P stood as of May 31st (+4.19%).

What's surprising here is this index is designed to give you a feel for a cross section of hedge fund categories. Given that hedge fund managers are supposed to be able to invest in just about anything including equity, debt and commodity markets via stocks, bonds, options, and futures, and that they can use leverage in order to enhance returns, I was surprised to see the rather skimpy numbers.

In fact, of the 17 major HFR categories published each month, only two produced green numbers in May. And the index that is close to my heart - HFRX Market Directional Index (think market timing) - lost -4.51% in May and was down -1.13% for the year. As such, I might have expected a manager or two to tell Maria Bartiromo that things are tough out there instead of all the smiling and nodding for the cameras that I witnessed last month.

So, how do those in the real world deal with this market environment? First and foremost, you've got to have a strategy that you can depend on. You can't just buy Apple (NASDAQ:AAPL), Monster (NASDAQ:MNST) and Wal-Mart (NYSE:WMT) these days and hope (and remember, hope is not a strategy). No, you should know what to expect from the investing approach you are taking. And you should go into each position with the confidence that over time, the system will likely prevail. (Oh and getting to know the symbols SH, VXZ, and EUM might be helpful at times right now.) It is for this reason that I'm able to sleep soundly at night when things appear to be coming apart at the seams.

To be sure, it is indeed tough out there right now and it may stay that way until the situation in Europe is resolved (again). But if you have a plan and you are able to stick to the plan, you ought to be just fine by the time New Year's Eve rolls around each year. Remember, if this game was easy, everyone would be wealthy beyond their wildest dreams. But from where I sit, that doesn't seem to be the case. So, when things are tough out there - no, make that especially when things are tough out there - it is important to stick to your plan/strategy/system. And if you don't have a defined plan, strategy, or system, now might be the time to get one, because as I've mentioned a time or two this morning, it's tough out there.

Turning to this morning... The "hope trade" appears to be in full swing this morning as a WSJ article by Fed Watcher Jon Hilsenrath suggested that the Fed is ready to do more. In addition, more talk of "bank fixing" in Europe has the futures pointing to a strong open on Wall Street.

On the Economic front... The government reported U.S. Nonfarm Productivity in the first quarter of 2012 fell by -0.9%, which was below the first reading of -0.5% and below Q4's +0.7%. On the inflation front, Unit Labor Costs rose by +1.3% versus the preliminary read of +2.0% and Q4's +1.2%

We will also get the Fed's Beige Book report this afternoon.

Thought for the day... He is richest who is content with the least --Socrates

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: +0.30%
    • Shanghai: -0.10%
    • Hong Kong: +1.43%
    • Japan: +1.81%
    • France: +2.14%
    • Germany: +1.55%
    • Italy: +2.10%
    • Spain: +2.30%
    • London: +1.47%
  • Crude Oil Futures: +$0.94 to $85.23
  • Gold: +$18.70 to $1635.60
  • Dollar: lower against the yen , euro and pound
  • 10-Year Bond Yield: Currently trading at 1.589%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +8.80
    • Dow Jones Industrial Average: +78
    • NASDAQ Composite: +22.0

Positions in stocks mentioned: SPY, MNST

For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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Disclosure: I am long SPY, MNST.