Sell in May?

“Sell in May and go away (buy back on St. Leger’s day)”

 

All in all, the market headlines look pretty good.  Payrolls are up, China's looking good (PMI), and there is merger and acquisitons (M&A) activity. 

 

Cam Hui, a noted investment manager, sounds an interesting note, based on the trite saying above that leads off this entry. 

 

Hui notes that major equity indices are approaching important resistance levels.  Let me give one example, that of the $SPX S&P 500 Large Cap Index. 

 

 

As you can see there is a retesting of the previous high and that previous high is called resistance.  Question is will the markets butt heads with resistance and break through, or will they fall back a little bloodied by the unbroken resistance.

 

I could put up several other charts that are showing various sector and secondary indicators are starting to roll over.  There is a distinct possibility that the Fed will stop its quantitative easing (QE2), some of the commodity prices are rolling over, the chip sector seeing support breakdown, and financials are rolling over on a relative basis.

 

For financial stability, one must look at the entire financial and economic scenario that is presented in which to work.  It may be time to take profits and begin to hedge for inflation. The worrisome divergences call for attention.  Do I think the markets will tank?  Probably not, precluding other natural and man-made disasters which no one can forecast.  However, caution is called for and if the markets do not consolidate, go away in May.  Limit equity exposure, hedge for inflation, have a nice summer!

Gold--Another leg up?

I'm not a gold bug.  Never have been.  However, I'm taking a new look at participating in gold (along with silver and other precious metals).  From the indicators I am seeing, there may be another breakout of gold on the horizon.  There are plenty of reasons, beginning with the fact that new supply is shrinking while demand is growing due to currency weakness around the globe, growing civil unrest in the Middle East and North Africa, and shriveling confidence in Western financial institutions.

Gold is going to continue to benefit as foreigners look beyond loading up with more dollars (some have a growing concern that the dollar soon will cease to be the currency of standard).  China, India, and Russia are interested in significantly increasing their gold reserves. India recently bought several hundred tons from the IMF, and Russia and China are talking about increasing their gold holdings by more than 1,000 tons each. Foreign demand of this magnitude will act as a floor on gold and limit the downside.

Most pressing in gold’s future is the future of the bond market. Retail investors dumped stocks at the lows in 2008 and bought bonds. For a while, they were rewarded, but there is evidence pointing to the beginning of a new secular bear market in bonds. The guy on the street is going to get slammed again; and as bonds pull back, he will once more jump into the strongest market at the time. That may well be gold. Once the crowd jumps out of bonds and into gold, the velocity/bubble stage will begin.

Remember, gold is real money.

Why is Oil Down?

Why is oil down today?

The simplistic yet realistic answer is that oil should be down!  OPEC is pumping a bit more, but basically the fundamentals and metrics have not changed and it is always about unknown risks.  Now that there is a better understanding of the situations, one would expect the price to move southward.

One tends to think that oil most always over-reacts to circumstantial change.  The differential between Brent and crude prices going to Europe over the last couple of weeks was between $2 and $5 per barrell.  With the futures market being driven by heart and the spot market driven by mind, oil above $105 is too rich and must come back under current scenarios.

According to WTI in Cushing, OK, the U.S. has more than enough supply and is predicting a softer driving season this summer (down 5-7%).  It looks like oil could come back to around $90 a barrell.

Bernanke on 60 Minutes --

I was glad to hear that Mr. Bernanke noted in his 60 Minutes interview this past Sunday that the central bank is NOT printing money.  Most video stories would be showing the government printing presses running full bore when commenting on Bernanke and the "Fed".   John Q. Public is made to believe that this is what has happened currently.  In this instance, there appears to be no additional printing of money. 

While there is no doubt the government printing presses stay in action overtime, this action is different.  When the Fed buys treasuries and thereby creates new bank reserves, it increases the size of its balance sheet on both sides.  The banks that are counterparties to those transactions exchange a risk free asset with a moderate term and some interest for a risk free asset payable immediately with an even smaller interest amount -- a federal reserve bank deposit.

The fact is that the Fed is buying tangible Treasury securities with something they print on a press.  While this may not have been a big deal in the past, there is great concern by the public today.  However, the idea behind the distinction Bernanke makes when he said the Fed is NOT printing money is this.  Central Bank guys view money as currency in circulation that is far removed from the multi-billions of dollars of "bank reserves" they are creating.  As long as there is separation and the newly created "bank reserves" stay put, there will not be inflation.  The danger is if it gets out into the economy.

Bernanke's fear is deflation.  With regard to inflation, Ben says the Fed can act in 15 minutes and is confident at a 100% level.   I hope he is right!

So, in seeking financial stability today, where, according to Bernanke, our greatest concern is deflation, what are the stable investment themes we should be looking for:

• In deflation, debt is the enemy.
• Risk is to be avoided.
• Cash is raised.
• Treasuries are sought out as a safe haven.
• Gold, acting as money does well.
• Select equity shorts or PUTs are a standout.
• Currency plays

Consumer Confidence vs Stability

Well, today the Conference Board said its Consumer Confidence Index now stands at 54.1, up from a revised 49.9 in October. Analysts were expecting 52.0. November's reading marks the highest point since June's 54.3. 

As you probably know, economists watch confidence closely because consumer spending accounts for about 70 percent of U.S. economic activity and is critical to a strong rebound. It takes a reading of 90 to indicate a healthy economy.

You have to wonder at times to whom the Conference Board is talking and why this type of survey.  I understand the value of sentiment.  Sentiment was probably fairly high on Black Friday as shoppers were ripping through stores, excited at some good buys.  But what about next week, next month, etc.  Sentiment rises and falls.  Now, to be sure, collectively America has been "down" in regard to the economy, jobs (or lack thereof), rising taxes, and the usual threats of world chaos.  Wikileaks and pyramid-building and all the other fodder for stress do not encourage optimism. 

My brief point is this:  In planning for financial stability, find out what is working as far as your investments are concerned.  There is always a sector or two that are thriving.  Do your due diligence or get some help.  Stay away from fads and theories.  Broadley diversify.  Build strongly on good financial foundations and the winds of opinion and sentiment won't blow your financial house down. 

What do you think? 

First Day Jitters

Right down the street from my office in La Mesa is a little hole in the wall coffee/snack shop.  They have really good breakfast plates and sandwiches.  However, as you can already surmise, they serve a really good cup of java.  Strong, it will give you the jitters if you are caffeine averse.

I wouldn't say I am experiencing the symptoms of caffeine jitters, but I am  excited about doing a blog.  I'm not sure of what to expect but am hopeful and optimistic.  Wow, what if people do read and respond?  How terrific would that be?

One of the basic things about financial stability is diversity.  It is so important to be financially diversified.  As an advisor, I strongly recommend a minimum of seven basic classes of assets.  Financial stability comes from the ability to grow in multiple areas while being "defended" by other classes. 

What are your thoughts on asset allocation and diversity?