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Friday, November 25, 2011
EUROPE KEEPS MAJOR MARKET ETFS ON EDGE — DOMESTIC TTI SLIDES INTO BEAR MARKET TERRRITORY
While a meager S&P 500 drop of 0.27% might have suggested that markets were loaded on valium, the news out of Europe should provide a jolt to wake investors up come next week. It was a truly ugly day in Europe, although the markets did not reflect it.
The dollar appreciated to $1.32/Euro on Eurozone worries. Interestingly, the 10-year bond increased to yield 1.97% despite the fact that yields have been sliding throughout the week. Regardless, risk is still quite high with little indication that it will recede any time soon.
Italy’s financial situation is becoming incredibly unmanageable as its 3-year bond auctions yielded over 8%. The Italians are in a serious danger zone that shows no signs of reversing. Additionally, 6-month bills increased from 3.54% to 6.50%. Plus, we’ve already seen Spain’s yields shoot up while even Germany had a difficult time selling bonds. This is without a doubt the sign of a panic.
As if enough European countries weren’t going down the tube, Belgium received a downgrade to AA from Standard and Poor’s as its banking sector is under immense pressure to stay afloat. Belgium has hit a wall after having to bailout Dexia, and a debt-to-GDP ratio of roughly 100% doesn’t help either.
Meanwhile, I’ve lost all hope in Greece as it shows absolutely no legitimacy or ability to overcome its debt problems. The Greeks today suggested that bondholders should accept a staggering 75% haircut after initially agreeing on a 50% haircut. It’s clear that Greece has no adequate plan to get out of its mess, putting in jeopardy whether it will get additional bailout funds, and upping its chances of default.
This downward spiral is also impacting EFSF plans. The original intention was to leverage the EFSF to $1 trillion while providing insurance for losses, but the spiraling yields across Europe mean there’s a good chance the EFSF will be significantly scaled back.
In regards to our trends, the Domestic TTI (Trend Tracking Index) dropped today below its long-term trend line by -0.42%, while its international cousin remains stuck bear market territory by -12.99%.
With the Domestic TTI having broken its line to the downside, I will wait another day or two before issuing the official ‘Sell’ signal for domestic equity mutual funds and ETFs in order to avoid a whip-saw signal, should the markets shift into rebound mode after taking a beating for 7 straight days.
The official ‘Sell’ signal, whenever it occurs, should not have too much impact on your positions, as you should have been stopped out of all domestic equity ETFs/funds as their trailing sell stops were triggered. You did execute your trailing sell stops, didn’t you?
While I hope you enjoyed your Thanksgiving, it’s time for us all to return to the reality that is a disintegrating Eurozone with the contagion starting to batter core countries. Safety is the key right now, and I’m not planning on straying much from my small holding in consumer staples and some bond ETFs along with a large cash position.
Have a great week.
READER Q & A FOR THE WEEK
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A note from reader Steve:
Q: Ulli: I really appreciate your newsletter and blog; just a wealth of great information and a great perspective on preserving (!!) and growing investments. I have a practical question.
My funds are currently almost entirely in cash or bonds, but I did nibble in with a small ($10k) position in PRPFX at the beginning of November. Obviously it is not behaving very well, and I fear I may hit a 7% sell point pretty soon.
I don’t see that there is a redemption fee, but I have had the experience before of getting “86ed” from a fund for short term trading in similar circumstances. I would like to be able to use PRPFX in the future if it reverts to form. I am wondering if you have any experience with whether I might get shown the door if I need to sell soon?
Hoping this is all academic on my part, but boy, this market sure looks sour and unpredictable. Again, any insights would be most appreciated.
A: Steve: It all depends on the custodian, but I don’t think a small $10k early redemption will get you kicked out from this fund. My custodian, Schwab, has a $50 early redemption fee for all mutual funds, so you may get stuck with an amount like that.
Should you run into a problem, you can always use the PRPFX ETF equivalent, as shown in my model portfolio #7.
Hope this helps.
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