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01152012 January 15, 2012

Posted by easterntiger in economy, financial, markets, stocks, Uncategorized.
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Current Positions  (Changes)

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 40%

G(money market) – remainder

=======================================================

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 1/13

+12.17, +2.68, +27.25, -10.61

(4 wks ago/3 wks ago/2 wks ago/last week)

=======================================================

For a broad view of the financial markets, I want to start with several facts.  First, the markets are bouncing off of half-year highs.  Second, these highs are LOWER than 3 bounces off of 2011 highs. Third, 2011 highs were LOWER than the highs of 2007.  Therefore, unless you KNOW that you are buying at lows, this is NOT the time to fall for the ‘stocks always come back’ mantra, because you can lose for years before they finally do return you to profit.

You would think that with all of the encouraging news over job growth and other positive year-end highlights, that stocks could do better for 2011 than just barely finishing below or just above zero, depending on the index.  Well, many factors were at play, and, other markets world-wide performed much worse.

Here are some sample results from 2011.

Dow Industrials +5.33%/S&P500 -0.04%/Nasdaq -1.80%/Russell 2000 -5.45%/Banking Index -25%/Biotech Index -15.89%/Broker Index -31.7%/Health Care Index +10.20%/Crude Oil +8.38%/Silver -10.57%/Gold +10.2%

Ireland +0.6%/New Zealand -1%/ Mexico -3%/ UK -6%/ Korea -11%/ Australia -15%/ Germany -15%/ France -17%/ Singapore -17%/ Japan Nikkei -17%/ Brazil -18%/ Hong Kong -20%/ Shanghai -22%/Russia -22%/ Italy -25%/ Greece -52%

As you can see here from other world market performance, there is one thing that can I can repeat, as I have many times before – IT IS BETTER TO BE CONCERNED WITH YOUR STABLE AND RISING BALANCE, ALBEIT A SLOW RISE, THAN TO LOSE MONEY THAT YOU MUST RECOVER LATER FROM OVER-REACHING YOUR RISK LEVEL  during these very risky times.

Here are the changes to TSP levels and major indexes since last report, first from 12/9 to year end. (negligible changes). The 2nd table compares current performance year-to-date.

(Last End Of
Report) Year 12/9 to

12/9/11

12/30/11

12/30 Change
C Fund

15.48

15.53

0.32%

S Fund

20.63

20.53

-0.48%

I Fund

17.94

17.64

-1.67%

F Fund

15.23

15.35

0.79%

S&P500

1255.19

1257.6

0.19%

S&P100

568.17

570.69

0.44%

Nasdaq

2646.85

2605.15

-1.58%

FTSE(UK)

5529.21

5572.28

0.78%

CAC(FR)

3172.35

3159.81

-0.40%

DAX(GE)

5986.71

5898.35

-1.48%

 Average     -0.31%
A majority of the total changes over the past month have
occurred on just two days, after European markets reacted
positively to more plans for resolving their debt crisis.
Gains this small over such long periods of time are, of course,
high risk, subject to loss within hours or days under the current
conditions and should be ‘chased’ with extreme caution.
12/9 to 12/30 to
12/30 Change

1/13/12

1/13 Change
C Fund

0.32%

15.93

2.91%

S Fund

-0.48%

21.28

3.15%

I Fund

-1.67%

17.68

-1.45%

F Fund

0.79%

15.41

1.18%

S&P500

0.19%

1289.09

2.70%

S&P100

0.44%

584.28

2.84%

Nasdaq

1.58%

2710.67

2.41%

FTSE(UK)

0.78%

5636.64

1.94%

CAC(FR)

-0.40%

3196.49

0.76%

DAX(GE)

-1.48%

6143.08

2.61%

 Average  -0.31%       1.91%

(Note – for the benefit of those long-time list readers who might wonder about my lengthy reports, and, for those relatively new readers, seeking an introduction, I include much detail whenever possible for this very simple reason – TSP management is not a simple process, and it is EXTREMELY important to all of us, as it represents a critical asset!!!  These additional details are included just to attempt to provide you with the causes of many of the events that AFFECT our funds, some directly, most indirectly.  My goal is to ‘jump the headline’.  It’s usually too late by the time news reaches the wires.  We have to know what’s probably ‘going’ to happen, not what’s already happened. If you’d like to know more about some of my numerous sources, both free and paid, just contact me.)

If the markets do not get past this current set of issues in some positively efficient fashion, which is unlikely, we could see the start of another dramatic turn downward in prices within the next few weeks, no later than April.  This next downward trend would likely continue through much of 2014-15 (next bottom), and could shave another 40-50% off of market price levels by then.

Last month, I identified three upcoming December debt obligations for Greece.  All three obligations were met without apparent difficulty, or so it appeared.  BUT – within a matter of days after the 3rd payment on December 31st, Greece officially announced that they would need a 2nd bailout prior to meeting any future obligations!

If that is the case, aren’t they, technically, re-borrowing some of the 2.864 billion Euros as an offset to what they paid in December? Some would insist that they were already in default as soon as the ‘package’ to relieve them in October was delivered (some are already calling it a ‘soft default’), since it erased 50% off of all of their existing obligations; and whose surrounding false optimism fueled much of the one-month, world-wide stock market rally. Interestingly, the yield on the 1-year Greek bond was 50% in August.  It is now over 400%!! Sounds like a great deal, until you ponder that they AREN’T PAYING the note holders all they’re promising already. Greece is a Ponzi scheme!

You can count this as the first major threat to the 2012 financial market.   As such, it didn’t take long for the Standard & Poor’s rating agency very long to recognize the impact on another Greek bailout by following through late Friday on earlier warnings to downgrade the credit quality of a number of Eurozone and other nations., including full downgrades by two levels for Portugal, Italy, and Spain, and a downgrade of one level of France and Austria.  (A downgrade of Japan is also being discussed today.) They all must cut costs, be prepared for higher risks in further lending & borrowing, will be hurt worse by recessions, and, will suffer competitively with other countries who are in better financial condition.  With these downgrades, Greece’s ability to gain an upper hand on their current requests, so, their ‘official’ default (beyond the ‘rearrangement’ of last month that was already, technically’, a default,) is virtually assured to occur in a matter of weeks.  This would be ‘hard’ default.  This will ripple into the rest of Europe and to us in some very measurable ways within a very short time.

Here are some additional, key issues concerning the European debt crisis that cannot be ignored.

* European bank borrowing from the European Central Bank has more than tripled since the summer

* GDP growth for Portugal & Greece is negative, or, recession levels; Spain is under 2%.

* Unemployment is over 15% in Spain and Greece.

* Bank of Portugal says GDP to shrink more than forecast in 2012 and forecasts GDP contraction of 3.1% in 2012; risks to their forecasts are clearly focused on downside risks.

* Italy must sell more than 10 times the debt in the next two years than they sold in 2011.

But, what does all of this have to do with us?

CAPACITY!

Obviously, financial resources aren’t infinite.  Therefore, whenever resources are committed to those who are over-obligated, those resources used for their relief are now unavailable to be used elsewhere.  You won’t here this admitted to by our people in charge here, but, we are already allowing foreign banks temporary use of available short-term funds, many of which are bank-to-bank, overnight loans.  Since this debt crisis, these relatively normal overnight loans have increased in both amount and frequency.  This is assistance that can only be in one place at once, so, if our own banks need assistance, they can’t get it.  As they say, the squeaky wheel gets the grease.

There is also inadequate protection in the US banking system against the kinds of negative impacts that these issues can have on the European banking system.  They all are connected, unfortunately, through the web of international commerce.

One of the biggest fears at this point is the concern that consumers will react to any signs of trouble with a flood of withdrawals, otherwise known as a ‘bank run’, such as what has occurred frequently in the past during other financial panics, including the Asian crisis of 1998. Several U. S. banks closed in 2008 following bank runs, including the IndyMacBank, a mortgage lender.  Later in 2008, Washington Mutual failed to survive a bank run and was forcefully acquired by Chase.  It took 10 days for customers to withdraw over $16 billion dollars.

The two biggest threats for European bank runs are (1) the natural reduction in fair value of financial liabilities, such as, the equity that has been destroyed by 50% write-offs, referred to as ‘haircuts’, recently handed to Greek liability holders, or (2) failure in responding to retail banking customers to their requests for withdrawals of their funds on deposit, such as, overdrawing the TEN PERCENT of the total balances, which is all that banks are required to keep on deposit to cover all of the depositor accounts. In fairness, (2) is unlikely to happen suddenly, however, this is also a bank run threat if customer demands occur over a period of weeks or months.

Our funds – through all of this, as you can see above, the equity indexes have only managed to squeeze a small degree upward, on much more than two days action over the past 30 or so days.  This is small gain/high risk.

We hear stories about how our economic picture is improving, so this should bring us confidence, right?

Let’s take a look at one example I just saw of our ‘strength’ that reads like this.

‘Las Vegas had record home sales in 2011’. Hidden in the details???  Over 74% of these homes were sold under distressed conditions, including short-sales and purchases from bank real-estate-owned (REO) categories.  Face it.  Money was lost by many previous buyers, current sellers and in-between lien holders or guarantors in order to create these ‘record sales’.

Therefore, watch out when someone gives you ‘good’ economic news.  Ask to what they’re comparing it. Even ‘better than expected’ news can actually mean ‘was expected to be much worse, so, the next one just might be worse’.

Meanwhile, our bond fund, the F, should have reacted with weakness, with falling bond prices, IF the suggestions heard in the media of our improving economic picture was to be believed. However, these bond prices have NOT weakened.   I am believing that bond prices, and the F fund, will head higher when the next round of stock declines kicks in within a few weeks.  Scared money will run for the relative security of the ‘warm spot’, and that spot has been bond prices through each of our recent ‘scared into safety’ runs. Continued record low interest rates will also be the result here in the U. S., in spite of rising rates in indebted Eurozone economies.

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