For Monday, July 9, 2012, We Recommend Against Investing

We recommend selling your equity positions or hedging for a risk-neutral position.

Technical Comment:

The S&P 500 declined 0.9% on Friday with volume lighter than Thursday and below the 30-day moving average volume.  On Monday the S&P 500 would have to decline about 28 points (-2.1%) to cause our automated forecast to change from the current growth-trend to an uncertain-trend.

Subjective Comment:

The light volume on Friday does not give the market decline much significance regarding pattern formations and consequently is of no help in developing technical predictions.  The most recent technical pattern is now weeks old and it was a 50% chance of growth or decline.  Since then the daily patterns have been consistent with market weakness.  There is no indication in the daily S&P 500 market data to conclude the market will grow.  Instead there are more indications the market will stagnate or decline.

We discussed the most recent US money supply situation in our prior post, and the zero percent growth continues.  The odds of a serious US market decline are growing every day the money supply growth rate remains where it is.  On principal we support a static money supply that does not grow or shrink.  Since US banks and the Federal Reserve do not share this principal, we use Austrian Business Cycle Theory to interpret the economic and market implications as the US money supply changes.  The bubble-boom that started a year ago is over.  Economic indicators are going to get worse from here and we are expecting US markets to decline.

On Friday the economic data released showed slower job growth with headline unemployment at 8.2%.  U-6 unemployment is near 15%, and if unemployment were still reported by the “official” methodology in use pre-1994, unemployment is near 23%.  Price inflation has been slowing recently, which is consistent with the slowing in the money supply and resulting economic impacts.  However, price inflation remains high and could accelerate if US banks resume aggressive lending.  We expect price inflation to continue to abate a bit or remain steady as long as the money supply remains at 0% growth.  This is why we are advising holding price inflation hedges and not accumulating more right now.

We have also been advising for quite some time against investing in US money market funds due to exposure to European sovereign default risk.  This past Thursday the European Central Bank lowered the deposit rate to 0%.  This means European banks now can pay NOTHING to depositors.  As a result several US money market funds have stopped accepting deposits.  This shows again that many US money market funds are invested in European banks, and consequently invested in European bonds.  These funds have a lot of risk and are paying next to no interest.  We continue to advise holding cash outside of money market funds for this reason.  The Eurozone debt crisis has not been fixed, and now border controls are making a comeback across Europe.  As European and Chinese finances and markets deteriorate they will have a spillover impact on US markets.

Our best guess is that US markets will stagnate for a few more days or weeks, followed by a decline before November.  This guess assumes a continued zero growth for the US money supply and it is a guess.  We do not recommend investing based on this opinion.  We recommend holding and accumulating cash, and doing so outside of money market funds.  Hold your price inflation hedges and stay away from all bonds.  For the time being, we also advise against investing in US markets.  As much as we would like to invest for growth, now is the time to position your portfolio to preserve your wealth.

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