Weekly Recap & Outlook – 12.23.11 – special PIMCO edition

Tower Private Advisors

  •  ’Ever hear of a bond ladder?
  • Economic strong patch

Capital Markets

 

Top Stories

The period beginning with today’s close and through next Friday’s trading marks the period known for the Santa Claus Rally. According to Mark Hulbert, since 1896, this week has been positive “78% of the time. That compares to a gain rate of 54% for all other weeks of the year.” On average, the gain is 1.07%. Of course, the phenomenon has a saying to go along with it:  “If Santa Claus Should Fail to Call, Bears May Come to Broad and Wall.”

Pacific Investment Management Company, aka PIMCO, made the Bloomberg top stories four out five days this week. Here are the headlines:

  • PIMCO Predicts “Risk Off” in First Part of 2012. That’s in keeping with one of our best service’s historically-based composite performance for the S & P 500 index. Rough sailing through July, followed by a second-half rally. Evoking images of The Karate Kid, the Risk-on/Risk-off phenomenon refers to the tendency of all risk assets (cyclical stocks, corporate bonds, commodities) to move as one. When the risk switch is turned to the ON setting, they all go up; when OFF, they all go down.
  • PIMCO’s El-Erian Sees Risk Europe May Spark Lehman-Like Crisis. This one of the PIMCO wise men sees a 1-in-3 chance that “the Euro Zone will break apart and trigger a financial crisis akin to the one that devastated the global economy in 2008.”
  • Gross’s Reversal Too Late as Total Return Headed for Redemptions. Well, this is so ridiculous and typical. You might recall Bill took to his soapbox in the late Spring to share what he thought of U.S. Treasury debt and how his Total Return Bond Fund was positioned accordingly. (I think he went to far as to say he was short some Treasuries, betting they’d go down.) I mean, do you think getting 3.5% from the U.S. government for ten years is a sound investment? We are Greece, folks. And, to boot, the latest Consumer Price Index reading was 3.5%. Of course, everyone piled on the man widely known as the Bond King for being such a fool. His fund is back to +3.5% on the year, and the lemmings are still leaving.
  • PIMCO Forecasts U.S. May Stagnate Amid Data Showing Growth. PIMCO sees this occuring as a result of the European crisis and a slowdown in China.

Chew on the implications of this headline for a while:  BP Deems Solar Unprofitable, Exiting Business After 40 Years. Wouldn’t the money-grubbing, capitalist, 1% scum of BP have been able to make a dime off solar if anyone could?

Do you think this might be a problem?

If you have trouble interpreting the graph, it’s saying that 20% of Italy’s debt has to be refunded next year. Do you think investors will want to give the country 20 years to pay it back? Mightn’t they try to be compensated for the risks by demanding a higher interest rate?

Here’s the same chart again, but with a different isuer. Could be almost the same chart–and Bill Gross catches flak for wanting to avoid its debt. Do you think investors will want to give the country 20 years to pay it back? Mightn’t they try to be compensated for the risks by demanding a higher interest rate?

 

What is it with these countries? Here is Spain.

At least twice this week I have heard that 2012 promises to be 2011, all over again. I take that to mean high correlations, high volatility, and many nail-biting moments.

This Week

We seem to have entered what one firm we follow, has termed a U.S. strong patch. This week, we saw good housing, jobs, and consumer confidence reports. All is not rosy, naturally, that won’t happen until the economy gets out of first gear. Still, it’s better than the alternative.

On the housing front, the National Association of Homebuilders Housing Market Index saw, virtually, its best level since late 2007, save for a one-month better reading in mid 2010. This index essentially tracks the mood of homebuilders. The biggest drivers of the improvement were Present and Future Sales, along with Traffic. The best-looking region for new home sales is in the South, according to this index.

Housing Starts and Building Permits were both almost 10% higher than expected and well over October figures. Viewed from 2009 and these indexes look pretty healthy.

 

Viewed in a longer-term context–I’m sure you know where this is going–the picture isn’t quite so healthy. Still, I’m sure there’s some Chinese philosopher somewhere who said something like, “every long journey begins with a single step.”

Initial Jobless Claims fell to their lowest level since early 2008. A four-week moving average is commonly used to smooth out the week-to-week volatility of the series, and it continues to point down, also reaching the same relative low. That helps confirm the firing side of the picture is improving, but hiring has yet to pick up, of course.

Lastly, but not leastly, University of Michigan Consumer Confidence index rebounded smartly from November’s 64.1 reading, to 69.9, and that’s a cool 25.4% above the Congressional-ineptitude-induced low from August. Here’s a look at what a 15th-century mathematician might think of the rebound in the index. Leonardo Fibonacci discovered a series of patterns (ratios of proportion) occuring in nature (broccoli and nautilus shells) and in other places (Egyptian pyramids, Last Supper painting). We can apply the same ratios, namely, 38.2%, 50%, 61.8%, which are the biggies of the sequence, to security price fluctuations and, why not, economic series, like University of Michigan Consumer Confidence. Absurd! you say, and I’ll grant you that, but it’s a slow news day, so check this out.

The index peaked in early 2007 at 96.8, fell all the way to 55.4 in late 2008. The critical levels of the move–and what we’re really after, the retracement, or the rebound–are highlighted in orange below. Notice, that, on four occasions, the index has been rejected at the key 38.2% and 50% levels. As–probably better make that when–the economy improves, the 61.8% level (81 in the index) will prove to be difficult to surpass.

Next Week

Quite a few meaty reports considering it’s a holiday-shortened week.

Key indicators to watch

  • Conference Board Consumer Confidence (Tuesday)  – December
  • Initial Jobless Claims (Thursday) – weekly

Regional activity indicators

  • Richmond Fed Manufacturing Index (Tuesday) – December
  • Dallas Fed Manufacturing Activity (Tuesday) – December
  • Chicago Purchasing Manager Index (Thursday) – December
  • Milwaukee Purchasing Manager Index (Friday) – December

Housing indicators

  • CaseShiller Home Price Index (Tuesday) – October
  • Pending Home Sales (Thursday) – November

 Here’s wishing you a Merry Christmas!

Graig Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

 

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