For Wednesday June 12, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US stock markets right now.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 declined 1% on Tuesday with volume above Monday but just below the 30 day moving average.  Tuesday was a strong-volume down-day which is generally associated with market weakness.  There have still not been enough strong-volume down-days is close enough proximity to one another to create a pattern that would predict a market decline.  If the S&P 500 were to decline another 4 points on Wednesday (-0.2%) our stop loss algorithm would likely trigger a change of our automated forecast to an uncertain trend.

Subjective Comments:

Bond prices have been going down, which is the same thing as bond yields going up.  According to the typical financial commentary, when people think stocks will go up they move out of bonds and vice versa.  This generally occurs, so it is common to see bond prices fall as stocks move up, or bond prices go up when stocks fall.  However, what’s been happening for the past few weeks is both bond prices and stocks have been falling.  How about that!  Under the current extraordinary circumstances brought about by years of money printing (Quantitative Easing) by the Federal Reserve, it is actually understandable to see both assets falling in price now that the US money supply has essentially stopped growing.  We have been warning for months to avoid bonds as they would eventually have to fall in price.  The logic is simple.  Bond prices will fall when the Fed slows or stops buying bonds.  Alternatively, bond prices will fall when bond investors start demanding higher yields to compensate for higher price inflation.  Price inflation is a direct (if somewhat delayed) result of the Fed’s money printing.  The Fed has hinted they might slow the purchases of bonds in the future.  This has probably put downward pressure on bonds.  The slowing growth of the money supply has been caused by a general lack of bank lending, so the Fed’s $85 Billion a month of printing is just increasing excess reserves and is not growing the M2 money supply.  US banks could accelerate lending anytime they choose, but they are not doing so.  They probably have their reasons.  Possibly they could be facing losses such as this article suggests for Citigroup.  Another possibility is they are holding assets on their books they expect will eventually have to be written off.  If that is true, then holding the excess reserves gives them a cushion for when this happens.  Bond prices will continue to fall for the reasons discussed previously.  Stock prices are going to fall if the money supply continues to not grow.  Continue to hold and accumulate cash positions.  Hold your price inflation hedges for the long term and avoid US markets and all bonds for now.

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