An Accident Waiting To Happen . . . Does:

June 18, 2012
	The briefing was updated yesterday and can be found in The Briefing Room. What happens in Greece, DOESN'T stay in Greece.  It seems that Spain and Greece are vying for the greatest illegitimate child award.  It gets tiresome writing about these guys, but you can't ignore them since they are the ones moving our markets right now.   Although it looked like the market may have shown a short term bottom a week or so ago, I was happy that our client's money wasn't exposed to the Greek election this weekend.  Currently the market seems to be digesting what was a 10% loss at the bottom.  Had the election gone the wrong way, the digestion process could have been over followed by a voracious appetite for further losses.  As it is, the "Austerity" party eeked out a win and believe they can put a coalition government together that will continue the cutbacks required to receive further bail out funds from  big brother (Euro Zone). This new party has a glaring challenge in front of them.  Nearly 2% of all bank deposits in the country are leaving each week.  Any of you who know how the fractional reserve banking system works, this means that 9 or 10 times  the money that is leaving must be reigned in from what is loaned out (to businesses and individuals).  We have heard this called "de-leveraging" in our own debt crisis.  If a bank loses a dollar in deposit then they must decrease what they have loaned to others by approximately 10 dollars.  At this rate, simple math tells us it won't even take a year for the banks to have zero deposits.  In all reality, unless something changes, the 2% per week will increase dramatically as more become aware that it could be headed for zero and decide to leave as well.  With the cash gone, the collateral is worthless and well . . . you get the point. Spain looks like Greece did three years ago, but with a couple exceptions;  their economy is worse and theyalready have a banking crisis.  As Spain's loans come due, they don't have the money to repay the principal, therefor must borrow to repay.  Unfortunately the market won't lend them money now at a rate that Spain can pay back.  The term for this is being "shut out" of the market.  Its like a person with bad credit trying to get a loan.  The bank with reasonable rates turn you down while the loan sharks step in to make a killing from you. This leads up to the saying in general "When an accident is waiting to happen, it usually does."  At PivotPoint, we would rather lose a few opportunities of quick money to avoid the loss of principle.  As Don mentions in the briefing this week, we look like fools on days the market  jumps up and we are sitting on cash.  On the other hand we look like geniuses on days the market takes huge losses and we don't - due to our large cash position.  We simply must hold to our conservative convictions until the  market conflicts resolve themselves. Don has laid out our position very clearly in this week'sbriefing.  Please take a peek! Have a great day!! John Norquay CEO PivotPoint Advisors		In order to view the graphs and charts in our newsletter, please click the link at the top of your email to "always show images from PivotPoint Advisors" Resources Check out our Youtube Channel  Like our FaceBook FAN Page We manage money inside 401k plans. Know anyone who may want to use us? Click "Forward to a friend" (immediately below) to share this newsletter with friends you think may appreciate our services. Forward to a Friend Twitter Subscribe to the Weekly Briefing Report Unsubscribe Update Subscription Preferences View Email In Browser

When Things Fall Apart

Today I am posting a guest article from Charles Hugh Smith.  Charles is a sought after financial columnist whose works are published in most of the major publications.  I am on the same wave-length as him with the current market, so I thought I would share his thoughts.

The global "shadow" banking system is unraveling, with dire consequences for financial assets and failed policies.

We're not used to things falling apart, and so our first reaction is disorientation. What we've been trained to expect by constant intervention in supposedly "open" markets is that Central States and central banks will "save the day" with a new intervention: an interest rate cut, a new round of money-printing, emergency loans, new bailout funds, the list has been almost endless since the initial evidence of the Great Unraveling appeared in 2007.

So when official interventions are announced to great fanfare and then fail to goose the market, we're disoriented. John Hussman neatly summarized the insanity of a market propped up only by constant official manipulation: We represent the Lollipop Guild:

Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth.

The problem with depending on intervention "sugar" for sustenance is that the market slowly loses its sensitivity to the mechanisms of control (insulin), and at some point the sugar no longer generates a response. We are very close to that point now, as the expected "grand EU treaty agreement" is duly issued as expected and global markets are holding their breath, hoping that some new intervention will keep the teetering financial system from falling over the edge.

This is desperation. In market after market, participants don't really have any faith in the future resilience of the fundamentals which supposedly underpin global markets; rather, they are desperately hoping the next intervention will work better than the last one. But like insulin insensitivity, the market is on a one-way slide: every intervention works its magic for a shorter period of time, and markets respond with increasing torpor to the "fix."

The next phase is chaos, as participants finally grasp that interventions will no longer save them. Then the mad rush to the exits (selling) will begin, and many will be trampled, as the bid will disappear across entire spectra of assets.

We should recall that nothing fundamental has changed since 2007. Here are two fundamentals of many which haven't changed at all: wealth is still concentrated:

and the global financial system is still overleveraged and over-indebted, meaning that every decline in asset valuation triggers a "reverse wealth effect."

As I type, the morning injection of hopium crack into the market's veins is already wearing off. We are still in the desperation stage, as central bank manipulators and Central State apparatchiks are rushing around in a panicky search for some new supply of "sugar" intervention to prop up what has been unsustainable since 2007.
The manipulations have one ironic accomplishment: the resulting crash will be larger and more chaotic than the one in 2008 because the faith that State/central bank interventions are limitless magic will have been irrevocably lost.

The big meetings in Europe last Thursday and Friday had one major outcome.  Germany won.  This means that there won't be any big money being printed by the European Central Bank and that the countries that are in trouble are just going to have to suck it up, learn from their mistakes and get stronger.  In other words, we will see some major vomiting with the flu bug that comes from the major amounts of tightening that will have to occur.

Boy do I feel like a pessimist!!  But like I always say, the good news is. . . I don't have to be right!! 

False Bravado?

France and Germany in yet another meeting

We have had one heck of an uptick in the market this last week.  The market gapped up on both Monday and Wednesday and again this morning (Monday).  I had mentioned last week that we may expect a bounce after all the selling that went on the two prior weeks, but expected nothing to THIS magnitude.

I'm sure most of you have heard that the major central banks of the world got together and provided "Easy Dollars" for cash strapped Europe.  Why would OUR Fed help bailout Europe you may ask?  Well, MarketWatch financial reporter Jon Markman reported last week "There were persistent rumors that a major French bank was on the verge of going bankrupt and that common financial transactions were on the verge of a total halt."

Remember back in 2008 when Bear Stearns and Lehman went out of business while at the same time Freddie and Fannie were taken over by the Gov't (and just a few weeks ago MF Global went BK)?  All these banks / financial firms (as well as others who were bailed out) were leveraged 45+ to 1.  What does that mean?  Basically that for each dollar they had as an asset - such as a savings account, checking account, loan, etc, - they had borrowed $45 to make other investments.  When you owe $45 for every $1 you have on the books, if ANYTHING goes wrong with the $45 investment, it sends your $1 into turmoil.  This is the current scenario with the major banks in Europe.  They invested a lot of their $45 into loans to countries like Greece, Italy, Spain and Portugal.  And anyone who can read knows those investments aren't going so well.

Anyone know what mark to market means?  You might say who cares, but it is huge.  If you bought a stock for $45 per share and it is only worth $20 per share today, would you want to know about it?  There are a lot of people who stopped opening their 401k statements in the last recession who might say NO, but savvy investors  want to know.  Mark to market means to report the current value of an investment on a daily basis.  The loans for these European countries are still on the books for the full $45 even though they might only be worth half.  Since they don't have to mark to market - report today's true value - they can run around with their head in the sand until someone forces their hand.  These easy dollar loans allow them to keep their head in the sand for another day or two -  like giving a junkie a fix instead of sending him to rehab.

Europe can't get institutional investors to lend them money, so they are trying to get it from our Federal Banks.  The institutional investors remember 2008 and how even money market funds were frozen.  They want to avoid living that again.  The European Cental Bank won't print money because of Germany, but that won't stop ours from printing.

Gaps:  Gaps can occur when something unusual happens in the market.  The gaps I'm referring to occur over night.  If the market closes at $1,000 and opens the next morning at $1,100, there is a $100 gap.  You can't buy in the morning at $1,000 or $1,025 or $1,050.  If you want to buy it must be at the gapped up price of $1,100.  There is a saying in technical analysis that gaps are always filled back in.  When a gap occurs to the upside, if you are patient and hold on, the price will come back to pre-gap levels.  

This last week, we had such artificial steroids added to the markets, they did nothing but go straight up without allowing any low risk entries.  The first gap hit its head on resistance and the second gap went through the ceiling and to unsustainable highs for the short term.  The big question?  Will these market steroids build a foundation to a sustainable recovery or will they wear off quickly and find ourselves filling the gaps on the way back to the lows of a week ago?  Time will tell, but headlines this afternoon said that the S&P has put the major european countries on watch that they could be downgraded based upon results of meetings this week.  France could lose two notches which would be a disaster.

Europe is still moving our market tremendously giving our markets volatility beyond belief.  Visit the briefing room to see how we are viewing the current market movements and what we are doing about it.

Those of you who are lucky enough to watch Badger and Packer football heard during both games how they were similar to heavy weight bouts.  Maybe this is a new Fox sports term, but one I would quickly add to watching the bulls and the bears.  This is one heavy weight  bout that is exciting to watch.  One of these days, the bull or bear will win and it will become much easier to make money.

Its Beginning To Look A lot Like . . . 2008

MF Global accepting client deposits

Last week was the worst Thanksgiving week the market has had since 1932.  What am I thankful for?  We didn't participate in it.  In fact, as Don points out in the briefing, the last 9 market days have brought an 8.5% drudging to the markets.  We participated in none of it.

I've written about the events going on in Europe weekly for the last few months.  It seems something big is happening in the news every week over there.  This last week was no different.  There is such a stigma regarding Europe in the investment community that Germany, one of the only responsible adults in the entire European community couldn't even borrow the amount of money they wanted this last week (read bond offering).  Belgium, one of the only other responsible adults just got their debt downgraded by S&P.

Europe is a hot potato that no one wants to touch.  This next week, the rest of the sinister family is going to see if THEY can borrow enough money to pay their bills.  The more reluctant investors are to lend them money, the higher the interest rate will be.  The higher the interest rates, the lower our stock markets will go.  Have I spoken about dominos before?  A very interesting week is lining up on the heels of a very interesting weak.

I can't help but use this opportunity to plug technical analysis.  As many of you know, wall street says the only way you can invest is to buy and hold.  Asset allocate and diversify.  Bend over, grab your butt and hope for the best.  If that were truly the case, our portfolios would have experienced much larger losses from their highs than the 2 to 5% we've experienced while the S&P 500 gave up 20%.  Our models are currently about 15% above the market since February.

Rodrigo Campos of Reuters said in an article this week that euro zone crisis is causing stocks to be sold regardless of the underlying company's strength.  This is one of our underlying tenets of technical analysis vs. asset allocation or individual stock selection.  When the market goes down, it takes everything with it.

As we have mentioned so many times, technical analysis isn't about always being right.  Its about being wrong just a little when you are wrong and letting your winnings run when you are right.  We know there isn't a perfect investment approach out there, but actively managing the one you have does wonders.

Normally you will see a bounce up after record breaking downs.  We will see how that plays out this next week with so many European countries trying to borrow money.  Don't expect market volatility to decrease yet.

Please visit the Briefing Room to get that warm feeling that goes with the Holidays and the knowledge your money is being looked after on a daily basis.

U.S. Stocks Decline Sharply

Don't Get Caught In THIS Interview!

The headlines this morning for the market "Stocks Open Sharply Lower" in and of itself is a good reason why you should read this weeks briefing room.  Don explains why we are not participating in this market.  This morning's large losses in the market shows that our outlook on the situation is correct.

It appears in the Euro Zone's infinite wisdom putting their big deal together, that they missed some unexpected consequences.  Many institutional investors are ditching the bonds (loans) of Euro Zone Countries, which is making it more expensive for these Countries to borrow.  This is akin to your credit rating dropping like a rock, so when your loan comes due at the bank and you must refinance it, the interest rates go through the roof.  The only thing keeping Italy and Spain interest rates below 7% is the European Central Bank's buying up the slack as best they can.  This is like having your dad be the president of the bank, but soon he must report to the board (the market).

We will continue to watch these developments as they create major amounts of volatility for our markets.  You can rest assured we are doing everything in our power to insulate you from the negative developments that will only continue and probably get worse.

The bright side?  These sharp downturns always create nice upturns.  It doesn't take too many of these upturns to make for a nice annual return.

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I've updated the chart for our Moderately Aggressive and Moderate Models.  I also included the risk and reward tables.  Our value, spoken in terms of return compared to the S&P 500 is about 12% for each.  You can see by viewing the charts that the ride is a little smoother for the moderate model.  Both actually have positive returns while the S&P 500 is down 12.84% from its high (Current Draw Down).  This has been accomplished with substantially less volatility than the index.