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May 25 2013 Weekend Market Comment

May 25 2013 - Do you recall the high school sweat-heart that ripped your heart out with the words . . .
Oh it is not you, its me, perhaps we should just cool thing a little bit, just for a little while, I need some time to get centred.” Ya you got centred, in the back seat of the captain of the football teams car. Oops sorry I digress.  

Well Wednesday they did not take away the punch bowl exactly but clearly they are threatening to use more fruit punch and less booze. Fed Chairman Ben has been pressured to end his ongoing $85 billion a month buy back program. But Ben is an expert in the 1929 depression and he is going to be very gentle when he breaks the news. You could not be more gentle than his 5 little words. . .  “In the next few meetings.”  Here is the quote:

“If we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings, we could take a step down in our pace of purchases. Again, if we do that, it would not mean that we are automatically aiming toward — toward a complete wind-down. Rather, we would be looking to beyond that to see how the economy evolves, and we could either raise or lower our pace of purchases going forward.”

Oh Ben say it is not so . . . I did not even know you watched football.

Lets face it the market is in a flat out bull despite modest corporate earnings, high unemployment and a flaccid international growth outlook. European markets are up 25% but they have 12% unemployment with a staggering 56% of 18 – 27 year olds in Spain out of work.  Europe remains the major risk, as the implicit guarantee that Germany and Mario Draghi’s ECB will finance the south will face increasing pressure from social instability and high youth unemployment.  With Japan and the U.K. in the doldrums, emerging markets have also hit a growth barrier.  Excluding China, they are growing at about 3%, and they will have to work on productivity and investment to push that number back up again.  China is only doing well if you read the official communist party propaganda.   But the reality is the chinese are getting a bad case of road rash from their suspended economic reality economy.  Japanese whose market this week fell 7% in one session after Ben’s comments, is clearly jittery. 
The U.S. economy is doing better than its industrialized peers, with a basic growth trend of around 2%. but the markets are racing up. Bottom line here is that this U.S. bull market is clearly not based on a projected 2% growth rate, and poor global demand, so with no other good news, in must be based on buying bonds forever. So any message otherwise will spook the markets.
Well it was not just Japan, interest sensitive stock like utilities, consumer discretionary and RIETS got the brunt of the pull back. The most obvious was Abercrombie and Finch ticker ANF and their good buddy Areopostal ARO

Even rate sensitive but stable utilities suck this week . . .

I had warned that DXJ was the trade everyone was in and that crowded trades are dangerous, here is why I say dangerous:

Even market darlings like CREE (the maker of new age LED light bulbs) is looking weak this week. 

When a winner like that flattens, it looks very toppy like a pull back probably will come in the next 4 weeks. 

Is there any place to hide? 
What does continue to work is my call on TBT -- as bonds wind-down and stocks look over extended.

DVY was off a little with the market pull back but notice how it was not a huge sell off because the holdings in DVY are big stable companies and at market tops you want to play it safe. Plus if the rally does continue you are still long.

The Canadian Market, much to my surprise is rebounding. I still have no faith in Canada as an investment. A bunch of Gold Mines, Oil and Gas firms and some Banks. Those Banks have over investments in the USA with little understanding of how competitive the USA is, bundled with over valued Canadian mortgages. 

Here is a lesson on picking a stock based 100% on dividend yield. Canadian dividend diva, Automodular hit the skids when they lost their biggest client the Ford motor company. I sold weeks ago when I put my bear suit on . . .thank goodness.

Bad news continues to pile up for Gold miners, Bloomberg noted that  ETFs in 2013 sold 467 metric tons of gold value: $20.9 billion. Also this week Barrick Gold was fined $16M for environmental problems Pascua Lama project in Chile.

Indicators Weaker
The key indicators are off slightly but it is still a bull market. This not the time to run and it is not the time to be aggressive. NYSE Stocks above the 50 day moving average is still over 70% but if it keeps falling it could signal a summer pull back.

Same story on the YP Primary Sell - still up

Sum It Up 
It is a US bull market, but don't be a hero here, no margin, no high flyers and stay away from crowded trades in utilities and the DXJ. It is still not the time for global markets and avoid commodities. This is a nice time to be in: short bonds with TBT, broad market ETFs, financial stocks and stable dividend players that have not run too far. Expect a mild summer pull back in the next 5 weeks.

Political Witchhunt
Senator Levin took a shot at Apple this week for innovating in America and then hiding from taxes in Ireland. Careful what you wish for senator they could build an R and D center in Ireland too . . .

Not all lawmakers supported summoning Apple executives to the hearing. Senator Rand Paul, a Kentucky Republican, said Apple was dealing with an “awful” tax code. “I’m offended by the spectacle of dragging in executives from a company that is not doing anything illegal,” Paul said. “I frankly think the committee should apologize to Apple.”

Modern nations have boarders, modern companies don't. The truth is taxing companies that are global is a tricky thing. Especially since what is sold is increasingly ethereal, like a song on iTunes or advice on elance. That is why the world is moving away from customs duties, stamp tax, corporate income tax and moving to sales tax like the European VAT. 

Mitt Romney paid an effective tax rate of 14.1 percent in 2011, a relatively low tax rate resulting from exotic deductions, the special tax treatment for his Bain Capital retirement package and the low tax rate on capital gains. These same politicians look a bit ridiculous when they expect companies to pony up 35% taxes with no fight at all.   

It is a fine line, come down too hard and you cripple the golden goose, no one wants to see Samsung beat Apple due to Washington incompetence. The billions American companies have off shore is telling the government something, Americans must rethink how they tax business