"Working hard to get my fill,
everybody wants a thrill
Payin' anything to roll the dice,
just one more time
Some will win, some will lose
Some were born to sing the blues
Oh, the movie never ends
It goes on and on and on and on
Don't stop believin'
Hold on to the feelin'
Streetlight people"
Don't Stop Believin' by Journey
As performed by Cast of Glee, congrats on the 19 Emmy nominations. Glee is a great show to watch with the kids, they now actually think some of Dad's music is "kinda like OK."
Dark Cross:
There has been a lot of talk lately about a so called "Dark Cross". A "dark cross" is a technical indicator that refers to the markets 50 day and 200 day moving averages. Without getting into a tremendous amount of detail the "dark cross" is triggered when the 50 day moving average crosses below the 200 day moving average, this is considered bearish. The opposite of a "dark cross" is a "golden cross," when the 50 day moving average crosses over the 200 day. The reason the media is talking about this technical indicator is that the S&P 500 has recently breached the dark cross. The last time that this happened was in February 2008 which turned out to be a great time to get out of stocks. This indicator is not always so prescient. Since 1929, the "dark cross" has appeared 45 times, over the next 12 months the market was actually up 28 times, and down only 17 times. The market was down 12 months later only 37% of the time! So why do people pay attention to an indicator that is only right 37% of the time? The reason people pay attention to this indicator is that it protects you during huge bear markets like 1929, 1937, 2000, and 2007-08 to name a few. While you might experience some missed opportunities if the market turns and rallies again (which has happened this week), at least you don't lose massive amounts of principal. While "everybody wants a thrill," most that I know would rather it not be to the downside.
Investment Considerations:
The indicators we follow for the US Equity market are still neutral, they have not crossed over to bearish territory, yet.
We did have a couple of other assets trigger trades this week. US REIT's moved from Bullish to Neutral causing us to sell, while Emerging Market Bonds moved from Neutral to Bullish causing us to buy.
The Fed vs The US Taxpayer/Saver:
On June 23 the Federal Reserve announced that they will yet again leave rates unchanged at the target rate of 0.00% to 0.25%. This marks the 15th consecutive meeting that rates have remained unchanged since December 16, 2008. The Fed's exact words, "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Translation: The Federal Reserve continues to believe that the best way to help the country is to help our banks earn easy money by borrowing at 0.00% and buying Treasuries at 2 - 3%. This also continues to allow our politicians to borrow with impunity since interest costs are a minor concern.
There are no free lunches though, while bankers and politicians prosper, someone has to pick up the tab. That someone is the taxpayer, saver, and investor. To some (present party included), it appears that the Fed has decided to reward the reckless at the expense of the prudent. According to the federal Bureau of Economic Analysis, the percentage of personal income accounted for by interest and dividends was 17.2% in 2000, but only 14.5% today. In the meantime, transfer payments like Social Security and Welfare rose to 18.2% from 12.8%.
This ZIRP (Zero Interest Rate Policy) is forcing some investors to take on significantly more risk than what would normally be deemed prudent. Underfunded pension plans are significantly increasing their levels of risk to try and meet actuarial assumptions that average near 8%. We are seeing these plans greatly increase their allocations towards alternative assets like hedge funds and private equity. While these assets may increase longer term returns, it is at a cost of less transparency, less liquidity, higher fees, and more uncertainty. Chasing returns rarely ends well.
The other primary victim of ZIRP is the saver/investor, especially the retired. These people are either saving for retirement or trying to live off of their investments during retirement, and again they are faced with meager return prospects. As a professional money manager it pains me when I see people stretching for returns that just can't prudently be attained. They fall prey to countless charlatans promising returns that just aren't there.
The Fed is almost entirely populated by Keynesians. Keynesians are economists that believe that the Government can spend it's way to prosperity. These Keynesians have been scratching their heads of late wondering why consumers aren't out there borrowing more and spending more, especially with their very generous ZIRP. The reason, which escapes them, is that not all investors and savers are stupid. They are not willing to significantly increase their levels of risk for the "potential" of higher returns. Faced with minimal returns on their investments, and significantly increasing taxes, they are choosing to save more. With less after-tax income coming in they are hunkering down and squirreling away as much as they can. ZIRP leads to ZIGP (Zero Income Growth Policy).
These taxpayers/savers/investors are also working harder and harder to elect a new crop of politicians that understand their plight. "Don't stop believin', hold onto that feelin'."
Unfortunately we can't elect our Fed governors so it will be some time before the Keynesians are replaced by Austrians (those that believe in living within your means). In the meantime; continue to hunker down, pay off your debt, save more, and please, please don't chase after returns.
Harrisburg Closer To Chapter 9 Bankruptcy Filing:
It appears likely that the first major municipal bankruptcy of the New Normal is quickly approaching, with none other than our own Harrisburg ready to close the gates. In an interview with restructuring site Debtwire, the City's controller Dan Miller said Harrisburg would be better off filing for Chapter 9 bankruptcy instead of trying to restructure under Act 47, the Financially Distressed Municipalities Act. He added that Act 47 never solved the problems of any municipality that entered the program (Just look at Pittsburgh which has been operating under ACT 47 since 2003, and has yet to address the problems of pension funding or health care costs). Of course Governor Rendell hopes the city "will sell assets or seek Act 47 before making a Chapter 9 filling." It never looks good to have your state capital declare bankruptcy while you are governor! "Some will win, some will lose."
Be careful out there,
Chris Wiles
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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