Friday, March 16, 2012

Scared Money Gets Even More Scared?

Michael A. Gayed, chief investment strategist at Pension Partners, LLC. writes for MarketWatch, Scared money gets even more scared:

"Courage is doing what you are afraid to do. There can be no courage unless you are scared." - Eddie Rickenbacker

This has been wild week for investors given the definitive breakthrough of Dow 13,000 , NASDAQ 3,000 , Nikkei 10,000 , etc. Financials spiked higher on Tuesday's stress test results, and the sudden possibility of rising dividends and share repurchases by big banks is sending the message that the financial crisis is likely over (for now).

For those who have been tracking my work following the deflation pulse, Summer Crash, Fall Melt-Up, and Winter Resolution writings, you know I continually hammer this idea that intermarket trends are signaling that 2012 is likely a year of reflation, similar to 2003 and 2009. Such an environment is highly conducive toward risk assets, and can result in a moonshot higher for stocks.

This week now furthers this idea even more, as scared money gets scared. My colleage Ed Dempsey was on Bloomberg's Taking Stock with Pimm Fox Thursday and continually stressed this idea in his interview, which can be seen here (also embedded below).

It appears that this was a pivotal week for Treasuries as investors in the fixed-income landscape are finally believing the reflation story, and the possibility that the stock market is right after all about the prospects for future growth. I specifically asked the question, "What if the stock market is right?" in a writing Marc Faber of the Gloom Boom and Doom Report published of mine in early February.

Take a look at the price ratio of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) relative to the SPDR Dow Jones Industrial Average ETF (DIA) . As a reminder, a rising price ratio means the numerator/TLT is outperforming (up more/down less) the denominator/DIA. For a larger chart, click here.

I've annotated the chart to show where the Summer Crash, Fall Melt-Up, and Winter Resolution calls occurred, with the substantial selloff in the ratio that happened over the past few days (again, coinciding with the bank stress test news).

Here is the main point: the ratio is no where near where it should be given that most risk assets have in absolute terms returned to pre-Summer Crash levels. The relative ratio of bonds to stocks has much more room to fall. This trend lower likely continues through a combination of rising yields and rising stocks. So while the stock market has run up and bulls may be scared of a pullback, scared money in Treasuries may be even more scared.

And so the reflation theme I began writing about following the first week of January continues.

I completely agree Michael Gayed, too many investors are underestimating this rally and will be shocked to see it continue. There are way too many skeptics reading this rally all wrong, believing it's a fakeout, not a breakout (watch below).

But I've been warning my readers for months to keep buying the dips and to prepare for better than expected economic news coming out of the US. Importantly, the biggest tail risk in this market is a liquidity melt-up unlike anything you've ever seen before.

I was talking to a friend of mine earlier today and told him to read my latest comment on the 800-pound hedge fund gorilla. I also told him to prepare for better economic news coming out of the housing market next week, which will certainly send banks much higher.

I told him: "Remember how last year everyone was scared of flash crashes and oversold stocks became outrageously oversold. This year, the algos will work in reverse, you're going to see a bunch of flash melt-ups with over-bought stocks becoming outrageously overbought."

Edward Dempsey, chief investment officer at Pension Partners LLC, Douglas Borthwick, managing director at Faros Trading, and Mark Kopinski, chief investment officer for global and non-U.S. equity at American Century Investments, talk about the outlook for U.S. economy and stock market. They speak with Pimm Fox on Bloomberg Television's "Taking Stocks." Bloomberg economist Joseph Busuelas also speaks.

Robert Doll, chief equity strategist at BlackRock Inc., talks about his investment strategy. He speaks on Bloomberg Television's "Street Smart." Doll sees the S&P 500 reaching 1550 by year-end as fear dissipates, the crisis and risk premium comes out, which means "interest rates move up, spreads narrow and equity valuations move up."

Also, Todd Schoenberger, managing director at LandColt Trading, discusses on Yahoo Breakout why he sees this as as a fakeout rally. In my opinion, he's wrong and way too focused on earnings and (old) news out of Europe without understanding how powerful this liquidity rally is going to turn out.

Finally, PBS Newshour's economics correspondent Paul Solman speaks with author Robert Harris whose fictional take on Wall Street, "The Fear Index," stresses the dangers of algorithm-driven, high-frequency trading. This is an absolutely fascinating discussion which explains the 'flash crash'. It will also explain the 'flash melt-up' we will experience. Investors beware, forget the flash crash and get used to the flash dash.

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