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June 29 2013 -- Weekend Market Comment

June 29 2013 -- The recent market pull back appears to be nothing more than that, a simple buying opportunity in an ever-rising market. But you know when you hit turbulence the first bounce is not usually the only one. So the Captain has turned on the fasten seatbelt sign and asked that we please return to our seats. Volatility is returning to the market and that is normal, in fact strong trending markets like the way 2013 started are only about 30% of market activity. As I said in Buy Now? We have had a great year so far, with double the normal return taking place in the first half of the year but that means we will be bouncy the rest of the year.  Look for “mean reverting” runs up and down. The technical term is a consolidating market. The bulls and bears now fight it out, until suddenly one is proven right causing a new trend in a specific direction. I think this chart showing the number of new highs on the NYSE is a good example, straight up now consolidating. 
(click any image to enlarge)

Now if you knew how this was going to end you could be ready for it, the classic buying opportunity or the end of the run and a bit pull back coming?  To know that you must look at the hows and whys.

A lot of the volatility began when Fed Chairman Bernanke said that quantitative easing may be “tapering”. I said here in the blog the US economy is a heroin addict, a junkie that needs a monthly 85 billion fix from the “dealer” the US Federal Reserve. The US economy was expected to grow at 2% this year, allowing for sequester, that could be 1% and as I said before the market run up this spring is not merited on a 1% growth economy. Still I have replayed that speech and it really is nothing new that was not said before. If things are good, like unemployment, they might slow down a bit. Bernanke himself was surprised at how the markets became less stable after that speech. If we do bounce higher here, then all this was just an overreaction to potential tapering. 

There is the good news.
There is still a lot of good news. Investors in commodities, bonds, commercial real estate and foreign economies have all been drawn to the US equities markets, the so-called “Great Rotation”. US firms have hordes of cash on their balance sheets. For example already in 2013 these firms have spent 2 trillion dollars on share buybacks and dividends, this creates wealth for their shareholders, but the corporate hard of cash is far bigger than that, the potential is staggering.  Manufacturing is rising, unemployment is dropping and consumer confidence is at a recorded high especially among high-income knowledge workers. Recently some of the riskier segments of the markets like Technology, Consumer discretionary and regional banking have done well while safe havens like utilities are not keeping up. This is also bullish.  

You might recall the green arrow graph that tells you when to buy, it is looking like a good time to buy

Gold had a great sell off, and we all made a bundle on my gold short positions, and then captured most of my profits due to trailing stops. Nicely done.

It should run up here a bit, until some suckers start buying and then more down side to come. I would not get back short in gold just yet. The good news is we are now below the current cost of production. Miners will be hedging driving down the price. Much more panic to come.

So I did a little nibbling.
On Wednesday bought a few positions. I purchased some of my Canadian Pipelines figuring the worst is over.  Here is Enbridge

My Favorite US financial Stock VISA ticker V

Two American High Flyers EFII - Electronics for Imaging, Inc

and Health Management Associates, Inc HMA

I even played some Emerging Markets.
India's Tata Motors better known to you as Jaguar and Land Rover. Nice bounce!

Look at the pretty new F Type Jag, now that is an investment!

DVYE - International Dividend ETF

There is some bad news too
I said back in 2007 that the Chinese banking system is house of cards. China’s central bank is called the Peoples Bank of China -- PBoC The PBoC has been in the background supporting inter-bank lending and repo markets in China for some years, particularly as it does not conduct market operations around the interest rate itself (which unlike many large economies is fixed).  Instead it smoothes out fluctuations in the amount of money circulating between banks by transacting in its own the point being that for some time now the PBOC has stepped in and provided liquidity to the market, typically around holidays and at key points during the calendar including tax payment time.

China right now has some real problems with lenders going over board. Property prices in Major cities can rise 7% in a month! The PBoC shocked the markets when it said it was not going to be providing liquidity. In one horrific two-day period the markets tanked and even some banks refused to allow withdrawals.

This is very scary, this is one of the largest banks in the second largest economies in the world, and this kind of thing is not confidence building. I am going to write a separate article on the situation now and the dangers of the Chinese Banking systems. For now PBoC has returned to lending, but this is a very concerning development.

My bet is the recent US market volatility has less to do with Uncle Ben Bernanke tapering and a lot more to do with the fragility of China's economy right now. So be optimistic, buy the dips, but buckle up and get ready for turbulence.