Covestor

Do you feel weary of the alternating roller coaster rides that the market has recently given us from late April with the bullish market having the most number of up days without even a 5% correction and many economic data trending upwards, to the bearish get out of all stocks if you can – while you can with the unprecedented 1,000 Dow point drop in early May?  Classic mass schizophrenia in action – but to a macro investor like me, this is just the absolute stark reality of the markets.  Okay, I admit it.  It's frightfully exhilarating!

On the other hand, I do shake my head disdainfully.  When I said in my earlier report in April 2010 that I expected the carnivores to have their day with the market consolidating and building a base for the tertiary bull market phase next year which is the third year in the Presidential cycle – an extremely bullish year, I had no idea how sharp and furious the carnivores would be in devouring their prey.  The reports that noted the top investment banks had net profitable trading days – every day - for three months this year was unprecedented – ever!  The statistically impossible is now, truly, possible!  So, you know who the carnivores are in the stock market - and their absolute killing potency.  Next time, when the media states how investors have been frightened by market volatility and sold stocks en masse, you know that "phantom non-investors" are by definition buying on the other side!  You should note though that it is not a coincidence that the U.S. Treasury has to continue to sell, literally, tons of treasury bonds to the world, and the Fed has to try to keep the crimp on advancing long rates to stabilize and increase retail lending.  That is why market crashes and down waves are extremely helpful to ensure enough U.S. bonds are sold at wonderfully low prices to eager, and some desperate, investors, and interest rates get clamped down – from time to time.  But, markets have to recover quickly so that consumers and – now, generally, poorer investors - do not lose confidence permanently. 

Many investors, over the next three months - as the market approaches intermediate highs again - will discover they have again sold-out prematurely…. That's okay – why don’t you buy back-in – at higher – and safer - prices?

Such is the life of the regular investor….

As subscribers know, I had market-neutral-hedged the category 4 and category 5 models (but left the Category 1 model untouched) fairly successfully throughout the roller coaster ride and maneuvered to smooth out portfolio volatility and attempt to maintain some winnings through the massive wave down.   I am pleased to state that as of end of day, May 28, 2010, all three models remained above water i.e. they performed better than the benchmark.   Feel free to juxtapose the time weighted performance of our models on the benchmark, or on other models.

Beginning May 17, we are "all-in" – with chips all over the table – with some new numbers in play.

Here's the reality as I see it.  There will not likely be a double-dip recession in the global economy because recessions only happen when governments and central banks use constrictive high interest rates to squelch hyper-inflation risks.  Where there is still risk of serious deflation now – with the recognized sovereign debt and bank debt of European countries – AND still deteriorating mortgage investments with unrecognized accounting losses in U.S. banks – all countries in the world are in monetary expansion mode.  Global recessions do not take place when virtually every country in the world is expanding monetary policy – ignore what some so-called "experts" say.  Some people will argue that China has tightened its policies – and there will be continued negative knock-on effects on global assets that feed-off China indicators.  In my opinion, China has just slowed down momentum and stipulated distinct policies against rampant real estate speculation – but it has not reduced expansion momentum to below zero.  It's on schedule to grow GDP at 9+ %!  China's interest rates - as in every country in the world - are at historically LOW, LOW, LOW levels.  Whenever China's stock markets fall to certain pre-defined levels, senior government officials make positive announcements – and all appears to be fine again.  Very much like in the U.S., isn’t it?

The fact that many investors - professional ones as well – still get frightened by the Lehman specter and the double-dip bogeyman tells you why investing is a dreadfully difficult game for many, while it is "slightly" easier for some – but ONLY if you know something else that most other people don’t know or don’t understand.  

In investing, contrary to what everybody has told you, for every winner, there will always be a loser – minus the commissions and margin costs!

A few short words on "impending war" in the Korean peninsula.  North Korea has been in dire financial straits for the last few years.  The alleged sinking of the South Korean Cheonan destroyer is in effect a desperate North Korean ploy to cause a crisis to again attempt to "convince" its neighbors and the U.S. to negotiate positively, and more importantly, to provide a rallying point to unify its increasingly dissatisfied citizens.  Does this look like a "global crisis" to you?  Or, is it another solveable crisis where the wise ones would just say, Let us wait for North Korea to come to the table.  We can afford to wait a generation.  North Korea cannot.  It will compromise by its own accord – or starve, or implode domestically.  I hope the wise ones prevail in their thinking….  So much can be accomplished in some problems by doing absolutely nothing.

Meanwhile, the President and Democrats are focused on keeping incumbent seats in this year's mid-term elections as they prepare for the next presidential election as one would expect that the economy will recover in the third and fourth years in the presidential cycle – as is customary.  Also, the infrastructure stimulus packages announced much earlier will begin to kick in even more in the next few months – as they have been designed that way – to engender a better economic environment that greatly assists the re-election of the party in power!   When you forget the details of those bothersome trees – and just look at the big forest, it's a bull market heading out to at least the next two years.

Many financial experts and bloggers who are livid at frightful increases of U.S. debt monetization would disagree with me.  But what one thinks, is not as relevant as what the market ultimately thinks – and would likely do.  It will do what it does – even as many sit on the sidelines and feverishly jeer.

We have had the opportunity to see very clearly how our models have performed (…squiggly lines) with the market's own:  at start–down–down–up–down-up-0% – up–up-up–up-up-up-it can only go up- oh, my god–down– Crash– Deliverance-down–down-up and more down – until now.   In the next intermediate cycle, as a fore-note to subscribers, there will be a slight change in strategy.  This will result in our harvesting of stocks at an opportune moment to realize modest profits as we proceed with a market neutral or significantly lower long exposure, and then re-establish long bias as soon as it is warranted.   ((This cryptic phrase means, We will sell-out most of our largely profitable positions to harvest profits at the next probable high, and keep more cash in reserve, and then buy big at the next probable bottom, but somehow, that just sounds too pretentious – and almost comical in the investing world! So, we'll leave this comment in double parentheses and go with the cryptic stuff)). 

Again, in the markets, talk is truly cheap….  We are working hard to keep our models working hard for subscribers. 

Indeed, we are ready for the next wave.

A serious note, though.  Should global war be a real probability, and just so you know in advance -if we were given the opportunity to react, we will "null" all stock positions as world wars have a seriously negative effect on global stock markets at outsets and interim phases.  But again there is great potential for profits at the later stages of war and recovery...! We would optimistically hope to survive and be "all in" again – at an opportune moment. 

We'd have to invest on both the winning and losing sides - with my preferred deep undervalued bias on the losing side!  The Second World War resulted in 90+% crashes in the German and Japanese stock markets.  Those who bought widely diversified portfolios in post-war German and Japanese stock markets -when they began trading again- made very, very, very good returns – and even better than in the U.S. stock market that corrected with post-war economic constriction!  

Think differently.  That's the only way to get an edge in markets.