For Monday March 25, 2013, We Recommend Against Investing

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Investment Recommendations – Unchanged:

Continue to avoid US markets.  The updated money supply, banking reserves and our proprietary technical analysis are all pointing to a declining market in the future.  Price inflation hedges are a good alternative investment to stocks because the money supply is still expanding, just not as fast.  Avoid all bonds including TIPS because all bond prices will fall when price inflation accelerates thanks to the growing money supply.

Technical Comments:

The S&P 500 advanced 0.7% on Friday with volume lighter than Thursday and below the 30 day moving average volume.  Friday was a light-volume down-day and the overall daily data continues to suggest market weakness.  The beginning of a growth pattern has emerged, but it is only the beginning and not a fully developed pattern.  The index climb was sufficient to again reverse our stop loss trigger, so our automated forecast is back to a growth trend.  For the week US markets were down.  Our technical analysis shows a high degree of uncertainty remains regarding the future direction of US stocks.  Should the S&P 500 drop about 8 points on Monday (-0.5%) our forecast could change again to an uncertain trend.

Subjective Comments:

The past week saw the Fed announce no change in US monetary policy while the Eurozone and the world was and remains focused on Cyprus.  A few days ago we speculated Cyprus would implement capital controls, and that has indeed occurred.  It is highly anticipated depositors will attempt to withdraw as much of their money as possible when banks reopen in Cyprus.  The capital controls seek to prevent banks from collapsing when a bank run occurs.  Any bank that practices fractional reserve banking will collapse (go out of business) if all the depositors try to withdraw all their money.  It remains unclear if Cyprus will impose a tax on bank deposits.  What is very clear is depositors are going to lose money.  The implications for the rest of the Eurozone are worthy of concern.  Any issues in Eurozone financial markets and in the banking system could spook US investors.

The US money supply growth remains lower than it has been, but the current growth rate for the past 2 months is now 9% annualized.  If US M2 continues to grow at 9% from here it is likely US markets will not crash outright for a while.  9% is probably enough to create a plateau for US stocks.  M2 is going to have to be a little stronger to keep markets growing.  This is our best guess, and it becomes moot if the growth rate of the money supply changes.  Of mild interest is the combination of 9% M2 growth combined with the beginning of a potential growth pattern in our technical analysis.  It could indicate US banks are accelerating lending, or it could be noise in the data.  Time will tell.

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