For Tuesday March 19, 2013, We Recommend Against Investing

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Investment Recommendations:

We recommend against investing in US markets because of the uncertainty in our automated technical analysis combined with the drop in the US M2 money supply growth rate.  Research and invest part of your portfolio in price inflation hedges as an alternative to stocks.  Avoid all bonds including TIPS because all bond prices will fall when price inflation accelerates later this year.

Technical Comment:

The S&P 500 declined 0.55% on Monday with volume below Friday and lighter than the 30 day moving average.  Monday was a light-volume down-day.  In the development of patterns a light-volume down-day is typically neutral.  The overall pattern last week was mostly negative, so Monday does nothing to change the recent pattern.  A predictive pattern has not developed, so the direction of US markets remains unclear.  It has been over 3 weeks since our pattern detection algorithms identified the 50/50 pattern, predicting a 50% chance of market growth or decline.  Since then there has been no definitive development in the daily market data to resolve this technical uncertainty.  Monday’s decline was almost enough to trigger our stop loss algorithm.  Should the S&P 500 decline about 1 point (-0.05%) on Tuesday our automatic forecast is likely to change to an uncertain trend.

Subjective Comment:

The Eurozone debt crisis continues.  If you haven’t heard, this past Saturday morning the government of Cyprus announced a “tax” on bank deposits.  They waited until banks were closed for a 3-day holiday weekend to make this announcement.  Included in this nifty little “one-time” tax was the detail that money would be removed from bank accounts prior to reopening on Tuesday.  The tax was to be 6.7% on the first 100,000 euros and 9.9% on balances above 100,000.  There have been protests and major backlash from the public.  The government of Cyprus did not hatch this idea on their own.  Their Banks are broke and in need of a bailout.  The European Commission, the European Central Bank and the International Monetary Fund had been negotiating with Cyprus on the terms of the bailout, and these three parties demanded Cyprus effectively steal depositor’s money as part of the bailout funding.  Never mind the long legal precedent of the bankruptcy where equity holders take loses first, followed by unsecured and then secured debt holders in that order.  Depositors receive the lowest interest rate and are kept whole when a bank goes bankrupt.  In this case only the depositors were losing anything while the other groups were to be kept whole.

It appears the Cypriot national legislature will vote down the measure.  Debate has occurred on changing the “tax rates”, but this is just a discussion of how much to steal.  ATMs were drained of cash over the weekend in Cyprus and a “bank holiday” has been declared through Thursday (so far) to give the government more time to debate their plan.  The correct solution in the many European nations facing this debt crisis is to do what Iceland did.  Insolvent institutions need to go bankrupt.  Bailouts solve nothing, except transferring wealth from those who have it to the managers and owners of poorly run businesses that deserve no help.  This would also require the sovereign bonds to default, so the governments and banks are colluding to maintain the status quo for themselves by imposing austerity measures on their populations.  A private bailout is different, but that’s not what is being discussed.

It appears this turmoil had had only a minor effect on US markets.  The small decline on Monday was with light volume.  If we had to guess, we would say last Friday’s strong volume decline was from insiders who probably knew what was about to happen in Cyprus.  Monday was relatively quiet as most everyone is waiting to see what happens next.  The Federal Reserve meets this week and will announce their results Wednesday afternoon.  This is another reason US market volume could be light.  We have seen light volumes just prior to previous FOMC meetings.  If (when) bank runs begin in Cyprus after the bank holiday is lifted it is likely other European banks could experience withdraws from depositors nervous about similar actions in other Eurozone countries.  This could cause additional turmoil in US markets.  US investors are probably also curious what the Fed will say about price inflation since official government CPI has accelerated to 2%.  Remember that 2% is what the Fed has said is their target.  We think it is unlikely the Fed will slow the rate of Quantitative Easing, but some investors might be worried about that.

What will ultimately drive the US markets is the rate of money supply growth, and that will be determined by the net new lending from US banks and the printing by the Federal Reserve.  Keep your eyes on that and you’ll be prepared to invest appropriately.  Also, we humbly suggest getting your money out of European banks, pronto.

2 Responses to For Tuesday March 19, 2013, We Recommend Against Investing

  1. Paul says:

    Thanks for the detailed explanation on Cyprus. And the anticipated fallout in Europe. Will people simply keep their money under the bed, or send it overseas (Asia, emerging markets)? Likely we’ll have a pop into precious metals, yes? Are miners a good play?

    • People are always looking for opportunities to grow their wealth and preserve their principal. When bank deposits become risky assets with next to zero return, it is logical money will be moved elsewhere. Precious metals are a good option for hedging against price inflation. Real assets (like PMs) also offer a method of moving assets out of banks. The money printing is why price inflation hedges will do well. If you are interested in mining company stocks we encourage you to do your own research. Remember, all stocks tend to follow the overall market.