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12092011 December 10, 2011

Posted by easterntiger in economic history, economy, financial, markets, oil, stocks.
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Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) – exit G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 12/09

-29.43, -39.7, -5.93 +20.38

(3wks ago/2wks ago/1 wk ago/this week)

This is how I began the previous post – “…At today’s close, markets are back to where they were 7-8 weeks ago…”

So, other than lots of ‘rallies’ and ‘selloffs’, what’s changed in 5 weeks?

11/1/2011 12/8/2011 Percent Change
S&P500 – C Fund Proxy 1218 1234 1.31% Moderate Risk
S&P100 547 559 2.19% Moderate Risk
Dow Industrials 11657 11997 2.92% Moderate Risk
Nasdaq 2606 2596 -0.38% Moderate Risk
EFA – I Fund Proxy 50.74 49.8 -1.85% High Risk
AGG F Fund Proxy 109.68 109.45 -0.21% Low Risk

As the table shows, the net result of this hyper-sensitivity to market-related news is essentially minimal over periods of weeks, or months, and, due to high volatility, subject to quick changes in positive or negative posture without notice.

Reliable views of how the markets are performing cannot be gained by simply witnessing price action. For example, in spite of the appearance of relatively active but flat markets this week, so-called money flow indicators show that there was more selling than buying on 4 out of 5 days this week.

On the one hand, news and headlines trumpeted October as producing the best October gains since 1987.  Never mind the fact that it began from one year lows and was fueled by optimism and speculation since found to be falsely justified.  In contrast, November ended with the worst Thanksgiving week performance in 79 years.  The normal ‘Thanksgiving week rally’ failed to show for only the 2nd time in ten years.

November began with the remnants of optimism for minimizing the impacts or reverberations from a potential Greek default (more later on this very near potential event).  Later in November, increased pessimism from two primary areas emerged – the decision to place another round of ‘stress’ tests on major banks between now and January 9th, more extreme than tests of 1 and 2 years ago (this time, to simulate high unemployment and high rates of loan failure, called ‘global market shock’) and, one week later, failure of  the Congressional Super Committee to trim our own future debt.  And, so, with these events behind us, December begins with the larger realization that adding the day-to-day posture of Italian and French interest rates to Greek sovereign debt concerns, good news on the fundamental front was mostly ignored.

Essentially, the normal bags of fundamental data, employment expectations, moderating inflation, manufacturing base data, decent retail sales, etc., have all taken a back seat.  Even good news in any of these areas is quickly pushed aside, in favor of the next announcement, rumor, rumor denial or next plan from Europe.

And, it’s not that all of the fundamental data has been good.

For one example, even though the recent unemployment rate fell, it was mostly due to hundreds of thousands leaving the rolls of those being counted, due to failed expectations and tight job markets, therefore, no longer reflecting them in the numbers; this is a key fallacy of the employment data, since it only counts those ‘actively seeking work’.  Also, even with the growth of 1.8 million jobs in the past 20 months, or about 90,000 jobs per month, this is less than 1/4 the rate that is necessary to account for needs through immigration and work force growth, just to get us back to ‘full employment’ and lower unemployment levels, over the next EIGHT or so years.

Our markets are held hostage to the movements of the dollar and the euro.  Euro strength has indicated stability, from optimistic scenarios, while euro weakness has shown up with each pessimistic scenario.  There is little incentive to take risks in positions, with the uncertainty of the next day always looming large.

Two terms have emerged that help to understand the day-to-day nature of what is seen and heard in the press.

The first term, ‘risk-on‘ follows the ‘optimistic’ or ‘hopeful’ side of news and the market reaction.  If you hear of a 100, 200, 300, or even 400 point rise in the Dow Jones, due to some positive news event perception, that means ‘risk-on’, at least for the time being.

In addition to optimistic news, upside/risk-on appears to be mostly related to desires for financial professionals to improve their year-end results, to buy or position themselves for gains.  With each new European story pointing to optimism, risk-on takes the stage.

The opposite term, ‘risk-off‘, reverses the optimism to ‘fear’, as in, fear of failure, fear of higher interest rates, fear of defaults, fear of collapse, fear of a crash, fear of new debt, fear of not knowing what to do next.  One dominant risk-off posture has been the threats to/about/against/from Iran, resulting in constantly boosting oil prices to near $100/barrel, from the low 80’s just a few months ago.

So, the markets have oscillated between these two terms, every few days, for all of the past 4 months.

And speaking of risk-off, a triple dose of Euro phobia arrives, starting next week, with the revealing of whether or not Greece can (1) pay 1.172 billion euros on a 3-year bond due Monday, Dec.19, (2) 978 million euros on a zero-coupon bond due Dec. 22, and, finally, (3) 714 million euros for one-year paper maturing Dec. 30.

Rocky and jittery markets are with us for the remainder of the year, thanks to Greece.

Through all of this, some of us have expressed impatience or fear of not making money in this environment.  You’re not alone.

The average of the top 20 hedge funds is +14.69% year to date.  The average of the bottom 20 hedge funds is -28.09%.  This is not normal.  In recent years, the top 20 funds have performed significantly better at the same time that the bottom 20 funds weren’t performing as badly as this year.

One thing is certain.  The current environment, as before, presents more risk than reward, not just for us, but, for everyone.

Bond interest rates normally rise in early December, reflecting optimism and risk-on.  This year has started out differently with rates continuing to weaken since before Thanksgiving, based upon the need for safety, as part of the risk-off trade, or the safety trade.  This does not bode well for the prospects of a Christmas season rally, though it’s still possible for a short duration.  With end-of-year numbers fulfilled, the 1st quarter will quickly return to ‘risk-off’.

Also, probabilities of a ‘crash’ scenario have not been totally eliminated, in light of the fuzziness of details from this week’s debt summit in Europe (the 14th such summit), and the divisions between the countries involved. IF we could remove European debt issues from the picture, we could significantly reduce the probabilities of world financial stress.  But, that’s not an option, and this threat is not diminishing anytime soon.

Rather than yearning for growth in your portfolios, it is still best to focus on limiting exposure to large potential losses from these recent 3-year highs, and simply wait patiently, and safely, for less treacherous circumstances.

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