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June 1 2013 Weekend Market Comment

June 1 2013 -- WOOSH Big Sell Off -- Well if you had a three-martini lunch on Friday and went home early, you got a rude surprise this weekend when you reviewed your portfolio. Unless of course you have been listening to me about not opening new positions, raising cash and playing safe. The Dow plunged over 200 points mostly in the final hours of trading. Even more bizarre is that the Toronto exchange should have been right there with it – it was only about half as bad.

It all began when the Wall Street Journal declared that the dreaded Hindenburg Omen had arrived. You can read about the indicator in the Wikipedia. In fact they had to stretch the numbers even to make that work.  I have seen these things before and all it really says is “hey we are overbought -- so volatility is up”, well duh, we know that. You can read in the second paragraph of "Buy Now?" where I had laid out lots of concerning overbought indicators before this blimp showed up. But the “now what” is the question. We were over bought before every major crash and we were overbought before every minor pullback, that became a buying opportunity. So the pundits are telling you that from here the markets will fluctuate. Really? Go figure?
(as always click on any graphic to enlarge it) 

Div Crush
The jump in bond yields during the month of May contributed to heavy selling of dividend paying stocks -- mainly telecom, utilities, and REITS.  But hey -- did I not say DVY the dividend ETF was a safe hiding spot? Yup I did, and you will see the sell off in DVY was not hit as strong as the broad market and this weekend investors are rethinking the whole risk reward number.

The World has Caught a Cold
Emerging markets have not been the place to be for a while. As you recall from Pop Goes the Commodity Bubble what did work, no longer will. Boy did we get a dose of that in May. China is down 10% and it is dragging Brazil Russia and Australia with it. Currency traders are all short the Auzzy dollar, and miners have been crushed. With gold in a great unwind and miners striking, the South African rand is the weakest among emerging market currencies that saw significant drops in value against the U.S. dollar this week. The rand reached the lowest value in four years as poor economic data and labor market tensions weighed on sentiment.  During the last five months, commodity prices fell -4% while the U.S. Dollar Index gained 4%. Emerging market ETFs are off about 4% in May alone.

However the baby is out with the bathwater, many solid global economy ETFs sold off last week in nations with no commodity exposure. After the pull back look seriously at buying the dips in the Philippines and Germany.

Japan Was No Help This Week
The last straw that upset the market this week was wild swings of volatility in Japan. For some time now we have been riding the DXJ trade, which we dumped a few weeks ago as the trade got too crowded. This week the Nikkei index had big 5% swings, often in after hours trading. One reporter on TV said this was a mystery; well it is no mystery at all.

Japan's experiment dubbed by the economist magazine “Abenomics”. By a QE like process, Japan is weakening the Yen.  Even though this does boost Japanese exports and stock prices it also makes imports more expensive.   But Japan’s youth unemployment is high. Also labour Unions in a nation that avoids conflicts, seldom strike and wage demands are often slowly phased in. What global investors figured out in Japan, is that consumer prices are rising, but wages are not. That is not the inflation they wanted, it’s the most dreaded of all economic conditions – stagflation.

Like the whole world, only more so, what Japan needs is a “Paris Hilton” gluttonous spending spree. What they are getting is a scared ultra-conservative population hoarding wealth in gold coins and savings accounts.

The Mad Hatter Tea Party is Almost Over 

Meanwhile back in the USA Ben Bernanke continues to try stuff a dormouse into a Teapot. We have entered into this bizarre world where market volatility is backstopped by Fed reserve policy.  If economic news shows a stronger economy, the market quivers at the thought of the Fed taking off the QE economic training wheels. On bad news the market will rally in a “In Ben We Trust” boom of exuberance.

If I sit quietly my cat often will come visit me, curly up to drain off my body heat. If I pet the cat gently, she purrs with satisfaction. However if I gently hold her in place and restrict her movements I get a low growl, ears pull back, followed by darting glances, then an explosive pounce out of my arms and indignant saunter off to freedom. The more the Fed insist on controlling market volatility the more explosive the reaction will be when animal spirits do return to the open market.

This coming Friday the US report Non-farm Payrolls and Wall Street will react, probably the opposite way it should. Perhaps we will not see it in this report, but clearly America’s employment picture is brighter. Bloomberg news reports some 78% of jobs from the boom years of 2007 are back. At the current rate of acceleration over 90% of jobs will be back by January 2014. In Dallas, there has been 200% job growth from 2006 and it is not all energy, much of it is tech, services and manufacturing.

Volatility is the New Normal
We have been enjoying this ride so far this year with stocks marching ever upward. But the truth is the VIX hates to be too low too long. When the VIX was down almost 12 a few weeks ago I mentioned I was buying VXX as a hedge and because the VXX was cheap. Things have gone well so far on that. It pays to buy volatility when it is on sale.

But There is a Catch
As volatility returns to the market next week, there may be a short-term return to bond buying. This could hurt our TBT trade, but I believe in the long run TBT is the best bet. So you can play this two ways,  if you are a trader you could step out of TBT for a while, if you are buying and holding -- TBT still works long term. TBT is up 6% in the past few weeks since I recommended it.

Solar Sunburn Coming  
Amazingly since January 4 out of the top 5 top performing U.S. ETFs are related to clean energy -- gains mostly coming from Solar Stocks. Years ago these stock rose because of breakthroughs in technology making these panels nearly in line with the cost of diesel engine based electricity production. However the 2013 boom is coming from government market manipulation as many nations are subsidising solar projects and the EU slapped a big tariff on Chinese solar panels. Many US solar firms are abandoning hard core manufacturing, stopping R & D and relying on offshore sub-assemblies but are making a killing on the installation and maintenance contract business.  

But the party may already be over for clean energy solar equities. As I said before we are soon to be swimming in oil. With fracking, steam recovery, horizontal drilling and other new drilling technologies dramatically increasing oil production, cars being far more fuel-efficient, Americans driving less, plus trains and ships converting to natural gas power we may not have to be so careful with hydrocarbon energy soon. Blow number one will come if oil declines to $66 a barrel. Read The new Momentum . Also with success come scrutiny, with the US government knee deep in sequester cutbacks, clean energy subsidies look like an easy target, in light of the eye-popping profits being made in Solar.

What Works Now
Well frankly CASH, I have been 50% in cash for weeks now. It is always great to have some dry powder for bargain hunting. For those of you  in Canada, for god sake get some US dollars. The days of the Canadian Peso are returning and parity will not be here forever. The current exchange rate is a gift from the market, the Canadian dollar is headed the way of the Australian dollar -- soon.

Of course, our key indicators are all rolling over, Here is the 50 day Overbought indicator. Now almost 1/2 the NYSE is below the 50 day moving average. Notice MACD went below zero this week.

After the Pull Back consider these three super stocks to pick up on a bargain

CYH Community Health Systems

Micron Technology

Norbord - Canada's top stock super star

Also after a pull back look at Canadian pipelines, CP rail and a good deal on getting back into Iron Mountain.

If this sell off gets going don't forget to buy HDGE

An ETF for All Seasons.
Perhaps not exactly today, but one day when this correction bottoms you might be asked this. What would you buy if you could just buy one security for a buy and hold investor for a 20-year time horizon? Consider ticker VT, this is Vanguard World Stock ETF. It really is the whole world in one low fee ETF. It tries to reflect the performance of the FTSE Global All-Cap Index, which includes both developed and developing market stocks. It is very diversified, holding nearly 4000 equities around the globe, Emerging Markets 14.1%, Europe 22.9%, Pacific 12.4%, Middle East 0.3% and North America 50.3%. It has a modest expense ratio of 0.22%, a 3% dividend and it is up 28% this year. Granny please listen, this is way better than a bank CD.