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 May 2013 Investment Journal 


Markets generally moved lower during May, as only the S&P 500 (U.S. Stocks) showed a gain.  Emerging markets equities continued their underperformance, and gold added another large monthly decline.  Bonds are now in the red for 2013 joining commodities and emerging markets stocks.
From the three year chart below, it is clear that U.S. stocks have led the pack over other major asset classes for the most recent periods, and last three years:
The big story this month was the resumption of a declining trend in U.S. government bond prices. The graph below is the price of the 30 Year US Treasury bond, a real benchmark for global investors. After trying to rally this year, bonds are starting to break down, indicating potential future weakness:


   30 Yr Tsy  

Fed Chairman Bernanke testified before Congress last month about the possibility of "tapering", which is a shorthand way of saying "we might slow down our purchases of bonds if the economy improves". For now, investors are taking that to mean that a giant buyer of Treasury bonds might not be as active going forward, so prices are coming down anticipating less support (yields are rising). Not coincidentally, mortgage applications are plummeting, as buyers react to higher mortgage rates.

The Japanese bond market was also notable last month for its hair-raising volatility. The benchmark 10 year bond rose by 40 basis points (4/10th's of one percent). That may not sound like much, but a move from .5% to .9 % is a gigantic change in yield proportionately:  the one month decline in price was the most since 2003.

The government there is determined to INCREASE inflation and stimulate demand, so they are flooding the market with yen to make their exporters more competitive, and thus boosting profits and their stock market. While the Nikkei is up 14% year to date (making it the #1 developed foreign stock market in the world), it also closed down 5% the last week of May, so a strong stomach may be required to ride this trend going forward. (It doesn't hurt that their central bank also agreed to buy stocks, ETF's, including Japanese Real Estate Trusts, corporate bonds, commercial paper, and all sorts of non-government loans, in an expanding program of financial support.)


U.S. stocks continue to be well supported, with reasonably strong price momentum. There is a lot of talk about "the great rotation", the idea being that many investors have yet to "rotate" back into stocks from low yielding bonds, and that this big wave of buying will drive stocks higher even if earnings don't pick up from here. For now, there is net buying going on, keeping markets in an upward trend.


In any event, most observers expect some sort of "pause" in the market's advance soon, but that well-telegraphed pessimism seems to keep stocks from turning down. (Summer months typically have less volume, so it is a good time to prepare for sharper moves one way or the other.)

Many observers are also pointing to the underperformance of developed European stocks versus the U.S. The graph below shows the difference in returns for the past 2 years for U.S. (SPY) versus European (IEV) stocks:

SPY v IEV 05312013


While the Euro has had its problems, there is a train of thought that says their central bank is ready to step up "growth" measures to revive their economies, especially with the German Federal elections coming up in September. "Out with austerity" is the catchphrase. It will be worth watching the Eurostoxx 50, FTSE 100, and other large Euro stock indices to see if their price trends improve.


Lastly, precious metals and commodities have really hit the skids, and are very much out of favor with traders/investors. Sentiment is at multi-year lows, which means a near-term bottom may be forming. "Real money" investors are snapping up physical gold and silver bullion, with shortages reported among major retail dealers in India and China, two of the largest buying pools in the world. Central banks also continue to quietly accumulate the precious metals. There seems to be more notable skepticism about "paper receipts" backing financial instruments holdings gold, thus the "flight to bullion" that is underway.

Commodities have been impacted by a "slowdown" in China, where the new government looks like they want to "take the hit" on slowing economic growth early, so they can blame prior administration policies. Copper and iron ore are weak, and trending down. Oil is relatively flush in the U.S., with huge increases in production coming out of the upper Midwest due to fracking, so the price advance has been muted. Global demand is still suffering from a tepid economic recovery, and prices look set to be range-bound for a while (unless there is a Mideast flare-up).

Thanks for reading our Journal, and we hope you have a great start to your Summer!  


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