Archives for June 2012

Summer Rally, Pre-Election Sell-Off

The stock market will experience a summer rally, followed by a sell-off in the fall right before the election, Paul Schatz, chief investment officer of Heritage Capital LLC, told Yahoo.

Schatz said the first half of the year had a few unique twists, but it has been fairly typical for election-year market indices.

“It’s been an interesting first half,” he said. “We were vertical for a while and then we gave almost all of it back and now we’re kind of treading water in no-man’s land.”

Schatz predicted we already had a springtime low.

“The early June lows are going to be the lows for a while,” he told Yahoo.

“We will rally and peak some time at the end of July to the end of August. Then we’ll have the traditional sell-off before the election, postconventions.

“Stocks already had the summer declines we saw in 2011 and 2010,” he stated. “It’s rare when you see it three years in a row. … I don’t think it’s anything near what we saw last year.”

After the election, Schatz expects a year-end rally.

“So many of the bogeys for the market are known, everyone is worried about the same thing — the fiscal cliff, the euro, Greece, Spain, Italy — they’re all on the table now,” he added.

Schatz predicts that the problems in Europe will loom for the next several years.

“They’re going to get their act together this decade. It may take three, five or seven years to get their act together, because the alternative is nonexistence,” Schatz noted. “I mean Europe won’t exist. I’m not talking about the euro, I mean the continent.”

Europe will take its “sweet time,” but will be fine in five to 10 years.

“We’ve been underweight Europe forever and will stay underweight,” he added.

Regarding the fiscal cliff, Schatz said, “When push comes to shove, the lame duck Congress comes in, they make the middle-class tax cuts permanent, they extend the upper-class tax cuts for another six, 12, 18 months and let the next group worry about it.

“But I don’t think they’re going to solve that now,” he added. “There’s no impetus, there’s no catalyst for it.”

By the end of the year, Schatz predicts that the S&P 500 will be “1,400ish” and says he will keep an overweight position in biotechs.

Meanwhile, the so-called “fiscal cliff” looming at the start of 2013 with planned tax increases and spending cuts may begin to push the U.S. into a recession as early as the second half of this year, Bank of America’s top U.S. economist Ethan Harris tells Fortune.

Last month, the Congressional Budget Office warned the fiscal cliff could cause GDP to shrink by 1.3 percent in the first half of 2013, even as many economists are betting the politicians in Washington will cut a deal to avert the worst effects of the measures.

Harris says the fiscal cliff will begin to make itself felt long before it actually takes effect. Corporate earnings will slow in the second half and job growth may drop to nothing by October, pushing the United States towards the brink of another recession.

Read more on Heritage Capital CIO Expects Summer Rally, Pre-Election Sell-Off
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It’s All about Greece

Here is the clip from my segment on CNBC’s Closing Bell on June 15.  As is usually the case, my view is definitely the contrarian view and Bill certainly challenged me!

Take a look…

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What would Thomas Jefferson Say to the Architects?

The latest Street$marts is out, “What would Thomas Jefferson Say to the Architects?”$marts20120625.pdf

Topics in this issue include a little known, but important economic indicator, the latest pullback in stocks and where gold is headed.

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Fed Day is Here

Today is Fed day with split announcements.  At 12:30pm, the official announcment and statement come out and then Ben Bernanke will hold his press conference at 2:15pm.

The Fed is not going to move rates.  They will likely downgrade their view of the economy.

So far in 2012, every single Fed statement day has been a big day for the bulls. 

The market is anticipating some extension of stimulus or outright quantitative easing (creating money to buy securities, likely in the bond market).  If the Fed obliges, I look for stocks to extend the week’s gains.  If not, we should see a quick downdraft and then another rally attempt.

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CNBC’s Closing Bell at 3:10pm June 15

I am going to be on CNBC’s Closing Bell with Maria and Bill at 3:10pm today discussing Sunday’s election in Greece and the potential for a major market reaction next week.

Here are some quick, off the cuff thoughts:

1 – Markets seem very comfortable rallying into the event, which makes me a bit uncomfortable. I would much prefer to see weakness and worry ahead of a geopolitical event to wash out the weak handed holders and then reverse after a day or so.

2 – The reliance on the Fed and other central banks is getting to an extreme mode, not that I would want to fight against the guys who own the printing presses.  The world is already awash in liquidity and absence outright money printing by the Fed and ECB, which I have a hard time believing based on a political outcome of a nation with the economic output of Indiana, might investors be disappointed after a day or so?

3 – It almost seems like whatever the outcome, stocks must rally.  That seems like dangerous thinking.

4 – Markets are coiled like a spring or snake for a sharp, fast move. If the move is lower next week, I think it sets up a decent buying opportunity.  If stocks break out to the upside, I think we could see 13,000 on the Dow and then a quick u-turn to the downside.

5 – Since QE1 was announced almost 4 years ago, I said and continue to believe we will see QEII, 3, 4 and 5 with the Fed’s balance sheet approaching $5 trillion.  I hope I wasn’t conservative!

I will be back next week with a full Street$marts issue.

Have a great weekend and Happy Father’s Day to all the dads!

Looking forward to an awesome US Open at Olympic.


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Who Do You Trust?

The latest Street$marts has just been posted!$marts20120605.pdf


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The Week Ahead

With earnings season over and the monthly jobs report behind us, markets will likely focus on Europe and the outcome of ObamaCare before the Supreme Court which is due out this month on a Monday.  Heading in to this week, the bulls have the upper hand after putting in at least a trading low last Monday.  You can read the details in Street$marts, which is also posted$marts20120605.pdf

With the Dow at 12,550, we could see 12,750 – 13,000 this month and into July before the next bout of weakness hits.  I would give the upside the benefit of the doubt until 12,300 is seen again.  Unsexy sectors like telecom, healthcare, consumer staples and utilities all behave well and should offer decent risk/reward.  The problem is that these are defensive in nature and not what you want to see lead the way in very healthy bull market, but we’ll see what kind of quality we get during this rally before turning negative again.

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Can You Trust the Experts?

One story related by Peter L. Bernstein in “Against the Gods: the remarkable story of risk” was the experience of Kenneth Joseph Arrow, an American economist and joint winner of the 1972 Nobel Memorial Prize in Economics.

Some officers had been assigned the task of forecasting weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”1

Philip Tetlock, a psychologist at the University of California, Berkeley, has literally spent a lifetime looking at how well experts in their field do with respect to their professions. Over a period of 20 years he collected the predictions of 284 people who made their living “commenting or offering advice on political and economic trends,” including journalists, foreign policy specialists, economists and intelligence analysts. By the end of the study, Mr. Tetlock had quantified 82,361 predictions. How did the experts do? The vast majority of the predictions were worse than random chance. Post graduate degrees offered no advantage. Famous experts tended to do the worst.

Where did these individuals go wrong? According to Mr. Tetlock the main reason was overconfidence. Convinced that they were right, the experts ignored evidence suggesting they might be wrong. Another important bias is that most experts find it very difficult to make a negative prediction. Fear of “crying wolf” may be part of the reason, but there is also a desire to please the audience and be re-elected, or asked to speak again. Another important cognitive bias, Mr. Tetlock points out, is that most of us find it very difficult to change our minds.

Overconfidence and “confirmation bias,” where experts ignore evidence suggesting they are wrong, are of particular concern to investment advisers. With the financial security of our clients at risk, we can’t afford to become “prisoners of our preconceptions,” as Mr. Tetlock puts it. This is one reason why active management relies heavily on non-emotional, technical and quantitative analysis and mathematical relationships within the financial markets. Our goal is objectivity and discipline, checking our ego and emotions at the door.  The most important information for an active manager is not where the market has been or where we believe it is going, but where it is today.

By setting very specific investment rules as to when an asset will be purchased or sold, or when it is safe to be invested in equities or bonds or a specific sector, or when a defensive posture is better, our goal is to avoid letting our biases and emotions influence our decisions. I may be right in my belief that the market will recover from its current malaise, but to base a client’s portfolio on that belief ignores the consequences of being wrong. What if I am right on the market’s direction but completely wrong on the duration of the problem?

Active management is risk management. As with all tools to limit risk, it can also result in lost opportunities if conditions change quickly. But without risk management, without basing investment decisions on where the market is today, the risk of a major drawdown impacting the client’s future increases.

1 Against the Gods, Peter J. Bernstein, page 203.

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Shareholder Suit Plagues Facebook IPO

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Stocks Hit with the Ugly Stick

Stocks got hit with the ugly stick on Friday after continued worries in Europe led to overnight weakness and then the market got thumped by the horrid jobs report.  Gold and treasury bonds were the only bright spots.  Did gold just see “THE” low or “a” low?  We will tackle this in an upcoming Street$marts.

Stocks should be in the early stages of the bottoming process.  It’s too soon to offer how long it lasts, days or weeks.  But the market is now stretched to the downside, calls of the end of the bull market are making their way around and investors are becoming overly pessimistic.

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