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06302015 June 30, 2015

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

I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 50%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 06/30/15

(S&P100 compared to exactly 3 weeks before***)

-13.64, 5.33, 2.13, -12.8

(Today from 3 Fridays ago, 2 Fri’s fm 4 Friday’s ago, 3 Fri’s fm 5 Friday’s ago, 4 Fri’s fm 6 Friday’s ago)

In the 1993 movie ‘Groundhog Day’, the character played by Bill Murray is a local TV newscaster who finds himself reliving the same day repeatedly, until he finds a way to make some improvements in his character.

Increasingly in the past three months, and for much of the past few years, the news finds itself rotating around the same two issues – (1) that which surrounds the probability of a Greek default and exit from the Eurozone/impact on the remaining Eurozone economies, and, (2) the prospect of the ‘lift-off’ from zero level interest rates by the Federal Reserve Board of Governors, and what impact that slight(!) rise in short-term rates might have on the psychology of the markets.  Both of these issues have created an ever increasing amount of lowered opportunity and higher risk for our TSP assets.  None of the categories in the TSP funds have created decent opportunities this year, without an abundance of risk to go along with any opportunity. There have been thousands of stories and articles on these two topics in the last few years.  These two topics will continue to dominate our news and market reactions, due to their broad reaching impacts and the fact that neither of these issues will be settled until many larger underlying issues are restructured, or, until the inescapable nature of world-wide debt obligations, and the impact of that debt on assets, is eventually resolved.

stats

(click to enlarge)

Equity markets around the world fell Monday on Greece’s apparent imminent default. Asian indices fell nearly -3% in a volatile day of trading, led by the Shanghai Composite. European indices fared no better; the DAX closed with a loss greater than -3.5% after hitting a low greater than -6% in intra-day action.  The Shanghai Composite is already in a heavily corrected mode, down as much as 20% from it’s June 11th high.

Our markets were not immune, with futures trading indicated an opening near -1% lower than last week’s closing prices and that did not moderate into the open. There was little data and few earnings reports to influence early morning action leaving the indices trading lower once the opening bell sounded. The early low was hit soon after the open, followed by a small bounce and then another intra-day low around 11:30. The morning low did not find support, selling continued throughout the day with the market hitting new lows more than once and leaving the indices at the lows at the end of the day.

After the -2.4% move on the NASDAQ, the S&P 500 made the next largest move and perhaps the one with the most notable visual impact. Monday’s action carried the index down -2.09% and created the largest one day drop for at least the last 12 months. Price action broke support levels at the short term moving average, 2090, 2080 and 2060 coming to rest just above 2050. Closing this week below 2060 could indicate a return to true bear market conditions. The indicators have rolled into a bearish territory and are pointing to lower prices so a test the 2050 level is likely. A break below this level, 2050, could carry the index down to the long term trend line near the 2000 level for a total correction near 7%. One thing hasn’t changed – ‘…stairs up….elevator down…’

SPX(click to enlarge)

From the last report in March, and into much of April, the S&P 500 had made no progress in a span of 70 days, in the area of 2090. For that first 70 days, the index closed at 2091.18, basically the exact same place it was on December 29, 2014. Since April, from 2090, the index has ranged from about 30 points higher, to about 30 points lower.  Today, it is at 2063. This is just the sixth time since the March 2009 bottom that Large Caps have stalled for a seventy-day period. Over the last 1,533 seventy-day periods, the average change was 4.35%.   In the chart below, it’s easy to see that the ranges from highs to lows is growing narrower over time, and has been for several years.

 

70-day

 

In the rotation index below, it can be seen that the trend favoring equities is getting weaker, for about a year, showing bursts of life for increasingly shorter periods.

 

Rotation

 

Below is the MSCI World index,  a stock market index of 1,631[1] ‘world’ stocks. It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is used as a common benchmark for ‘world’ or ‘global’ stock funds. It has the strongest parallels to the C and I funds.

MCSI4Mo

Below is the same world index over the past 24 months

 

 

 

 

 

MCSI2Yr

Here is a year-to-date performance of the major US indexes, as of Monday, June 29th close.

(click to enlarge)

 

YTD

Greece has, again, dominated the news and the world markets lately, particularly this week, as it will next week.

Effectively, a June 30th due date for  a payment of under $2 billion is not going to be met.  The Greek prime minister backed away from negotiations last week, saying that the conditions before him would place too many burdens on the Greek population.  Capital controls for banks were announced during the Sunday overnight hours and sparked another round of protests. The news, not unexpected, comes on the eve of an apparent to default (the $1.7B) to the IMF.  There is also an additional $8.3 billion due to the EU and the ECB in July and August.  If Greece can’t pay $1.7B now, there is no need in ignoring the $8.3B that they can’t pay in July and August. Controls will keep banks closed for the next few days, limit the amount of ATM withdrawals by Greek citizens to 60 euros, prevent the transfer of money out of the country and large transactions to electronic means only.

Early Monday afternoon S&P lowered Greece’s credit rating to CCC- with negative outlook. They say a Greek exit from the Euro stands at 50% and that without changes a default is inevitable, likely to occur within the next 6 months. Later in the day Fitch downgraded the Greek banks to restricted default. Greece, or PM Tsipras at an rate, continues to snub creditors and is urging the people to vote no on a referendum to accept terms.  Over the last five years the Greek debt has been restructured to where the IMF, EU and ECB own 90% of it. The equivalent of a Greek bankruptcy should be relatively contained and not impact the rest of Europe. Draghi will dump several hundred billion euros of QE into the market and the Greek impact will only be a blip on the chart.  Here are the likely paths over the next month, in a nutshell. (click to enlarge)

Greek

 

Puerto Rico added a little downdraft to Monday’s sell-off. The governor of the heavily indebted island territory announced today, of all day’s, that the debt load was unpayable. The island needs debt restructuring and reforms, long overdue, and is not expecting to receive aid from the federal government.

 

Bonds

Our F-fund has taken a minor whipping most of the year.  This has been for issues that are out of the ordinary.  The demand has fallen for our bonds, along with a heavy increase in demand for German bonds, ever since European Central Bank President Mario Draghi announced his intention, late last year, to commence U.S.-style quantitative easing, a debt-buying program aimed at keeping yields low and goosing the financial markets with liquidity.   Our bond prices have fallen, from sellers moving out of our 10-year bonds, and this reduces the prices of the F-fund (iShares Barclays Aggregate Bond Fund), as it also increases the interest rates of related U.S. debt instruments, like the 10-year treasury note.  The iShares have lost 3.6% since the high point of the year in early February.  I do not expect this condition to continue as the negative pressure continues to build in equities.  There has yet to be a ‘flight to safety’ into bonds, which benefits the F-fund, since the price pressures on equities/stocks has not yet reached a pressure point.  The additional pressure on bond yields in the Eurozone, tied to the Greek debt problems, has been an additional upward pressure on interest rates, in Europe and here in the U.S.  This will reach a tipping point and a quick reversal, as usual.

AGG

Even this ‘whipping’ has only amounted to about -3.6%.  This is why I don’t move in and out of bonds rapidly/frequently to avoid what are normally minor losses – losses that generally reverse within months under conditions of greater bond price stability/weakening fundamental economic conditions, conditions that never actually go away except over the very long term; we are in a chronically weak economic condition overall, with only brief glimmers of daylight.

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