Uncertainly seems all around us. The financial media is full of angst! For the last six months, the first half of 2013, we have seen tremendous swings in global asset prices (mostly down), leaving investors seemingly bewildered of future asset prices and their direction.
Meanwhile here at Model Price, life and the financial markets are unfolding according to plan. The math of model price is leading the way in our world of certainty and clear headedness.
Let me spend the time piecing together the blog posts that I have written over the last year that gave readers and investors a roadmap to where we are today.
I started back on July 17, 2012 laying out my thesis and what I was looking for in terms of the US economy turning the corner economically by introducing readers to our ‘Solvency Curve’ of the US economy.
What is going on with the world of finance, and how do you fix it!
October 11, 2012 just before the US presidential election I first made reference to the ‘Fiscal Cliff’ and make my case the US should go over the ‘Fiscal Cliff’.
What is going on with the world of finance, and how do you fix it! (Update 2)
As tension mounted between the President and Congress on the ‘Fiscal Cliff’ deadline of December 31, I blogged on December 30:
Fall Over the Fiscal Cliff, Please!
And they did!!
On February 24, 2013 I observed a phenomena that I don’t think I have ever saw before using model price charts for the last 15 years or so. Three major gold stocks, each having a negative transit in the same week! So as usual I had to write the blog:
$76 Billion Reasons to Sell Gold Stocks!
In March with the passing of the “Budget Sequestration” and the positive signals given by model price with a potential positive transit of EBV+3 led me to write:
S&P 500 – Why the US Stock Market is going up (Part 1)
S&P 500 – Why the US Stock Market is going up (Part 2)
In April I wrote one of my personal favorite blogs that discussed “Paper Money versus Physical Stuff”. This blog had nothing to do with model price math but talks of one of favorite secular indicators.
In May of this year, using a traffic light analogy I developed last year in my monthly strategy blogs on the S&P 500, I switched the color from yellow (caution) to green. The color green designating a positive secular call on US equities as an asset class prognosticating that rates of return should be good over an extended period of time (a 3 to 5 year time frame).
See my blog; May 2013 – Monthly S&P 500 Market Strategy Update
Summary of Investment Returns for 2013, so far
Trends in rates of return of different global asset classes where trending lower at a slow pace throughout the first five months of 2013 except for US equities and excluding Japan. Interest rates were creeping up, bond prices going down, marginally. Gold shares and bullion were trading materially lower from my February 24 blog however no sign of panic selling.
Then June 19th happened.
On June 19th, Mr. Bernanke stated the obvious, saying that ‘QE forever’ will be “tapered” as the US economy increases in strength. Asset prices and investment fund flows accentuated the trends already under way that I highlighted above before Mr. Bernanke made his “tapered” comments. In the last two weeks of June US Treasuries, especially the thirty-year long bonds have declined in price showing negative returns for the first half of 2013, down almost 9%. The selling of gold shares and bullion reached panic levels as the price slide of this asset class accelerated. (I guess the gold bulls thought Mr. Bernanke was going to print money forever!) Emerging markets, the primary beneficiaries of the outflow of money from the United States over the last five years, suffered large negative returns as reversals of money flowing back to the United States, again occurring primarily in the last two weeks of June.
From my reading of the business press everyone seems a bit confused here.
Model Price Chart
S&P 500 Index with weekly price bars with EBV Lines (colored lines).
As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.
After hitting a high on May 22, 2013 of 1687 the S&P 500 took the next six weeks to trade back to EBV+3 or 1588. (1588 was the EBV+3 level for the month of June.) S&P 500 market pullbacks to support, like this, can and will occur anytime. The red line or EBV+3 is support for the market going forward. As I have noted in the model price chart above, EBV+3 is 1604 for the month of July.
What the US Equity market is saying?
The equity market tipped its hand back in March with a positive transit of EBV+3 and I highlighted this fact in my May blog. This positive transit signaled the US equity market was comfortable rewarding a higher valuation to US equities because of the US economy is getting stronger (more solvent) and more supportive of equity valuations.
Of course, the pessimists are in full swing. “The business press is so negative”, one client says. One reads US equities are in ‘bubble territory’ says another. The US economy is so weak screams the talking head on CNBC. “What about the debt levels?” inquires another client and …the list goes on!
THIS IS NOT WHAT THE US EQUITY MARKETS ARE SAYING!
It’s time to be optimistic. The model price math is leading the way. Economic life evolves. Economic life changes. The 2008 financial crash was about solvency. Over the last 5 years economic policy was used to get the US economy, through its economic actors, back to a solvent condition. In the last stage of this economic healing, the only remaining and most important insolvent economic actor left was the US federal government. Going into 2013 with the ‘Fiscal Cliff’ and the ‘Budget Sequestration’ high jinx, leading some to call Washington dysfunctional, actually solved the ‘solvency’ problem of the US federal government. This is a big secular change in the investment landscape – doesn’t anyone recognize this?
So what global asset class had the most muted response to Mr. Bernanke comments on ‘tapering’ – you guessed it, US equities – which lazily traded back to EBV+3 and still up by a healthy margin in 2013.