Monthly Archives: July 2014

Argentina creams US Markets / Aug 1 Update

Well, Argentina has successfully creamed US Markets, at least for one day, by defaulting on July 31 one minute past midnight.    This default was briefly touched on in my June 29 post on this site.   Interesting is that the Argentina default was not mentioned much in the “other” sites (to include Marketwatch, Motley Fool, etc.) until now.   My June 29 post discussed my feeling that our markets will recover from this, which I still believe, but the fact remains that our markets have taken numerous hits over the last few weeks, and one is left to wonder when (and from where…) the knock-out punch will finally occur.   The fact that the markets are still hanging on, is a reflection in my opinion that a recovery is not impossible.  I don’t think anyone will argue the statement that the world is in challenging times right now.   

The Dow Jones Index closed down 317 points, with both the Dow and SP 500 Indexes down for the month of July (July is now over).   In my July 18 post I discussed some challenges facing the markets, and how the YTD returns for the TSP Funds have been lackluster.   This assumes you were in the funds since January 1, your returns have been 6% to 7%.    Now we have an additional challenge:  Argentina in default.    The various financial sites are linking today’s market sell-off due to multiple reasons (most sites have journalists behind them, not traders or folks with skin in the game).   However, I purposely stayed up July 30 night from 10PM, 11PM, thru midnight, 1AM, 2AM, and literally watched the SP 500 Futures (which trade at night) rollover and go downhill in-sync with the approaching default, and past midnight, the default.   Of course I was cringing on July 31 morning when Wall Street opened.   

Now before we panic over Argentina, let me make some observations, listed below, about why I believe (aka “opinion”) that this is not something to panic over.    Observe that I like Argentina as a tourist and have been to Buenos Aires and really enjoyed it.  But, this is not about tourism. 

Some Reasons the markets should not panic over Argentina

1.   Argentina is not a player on the world economic or financial arena.   China, England, Russia, Saudi Arabia, Japan, USA, are.   If a country, via governmental policy or political actions, can cause financial harm to the United States, then they are a player.   If not, they are not.   This is my definition, not your typical definition Money Magazine definition.

2.  Argentina produces no critical/crucial, products for the United States consumer (wine is not one of them), in which product price-change or currency rates may impact the United States.   Argentina does not produce or source products for Wal-Mart’s zillion stores (China does), it does not produce crude oil, and it’s banks are not safe-havens (far from it) for money or locations of investment.   Asia and Europe, are (amongst others).

3.  No critical thinking, ground breaking thought or ideas, are coming from Argentina or any of Latin America for that matter.   Japan brought us the Sony Walkman and the Honda Civic, England brings us a military and intelligence ally, and China brings us the ability to manufacture a zillion widgets for one dollar, keeping the price cheap for the consumer while allowing profits for the corporation.  Korea builds the Samsung phone.  If any of the above face a default, this could impact our country.   Argentina ?  

4.   Argentina does not have a huge labor force used (via outsourcing) by US manufacturers.   Such a labor force needs to be paid (currency rates), fed (food availability), retained (Company A offers better package than Company B), etc.  Mexico does (Ford builds cars in Hermosillo).   China, obviously, does (ask Wal-Mart).   India does (call Citibank customer service, your call is answered in India).   Argentina ?

So as you can guess by now, I don’t think (again, opinion…) that we should panic over Argentina.   As I have touched on in prior posts, the markets REACT to things (another reason we, the investor, should REACT to the market, versus try to predict something that spends its entire existence itself reacting to other stuff).   Panic and Greed are common reactions expressed by the market.    As most of us know, in a panic situation (think “Fire” in a movie theatre), the masses flee out the doors without looking back at the progress of the fire or verifying if a fire indeed exists.  It is everyman for himself.   If a bunch of people are swimming at the beach and someone yells “Shark”, nobody is sticking around to verify that indeed a shark, and not another type of fish, is swimming in the area.  The markets, composed of people, are no different.

With the “you are starting to ramble” warning light illuminated, let me move forward to some charts.   My opinions about Argentina aside, the market is indeed displaying weakness and has had numerous days of “Distribution” in recent weeks.   This in almost all cases will send an index into a new downtrend.

1930 is our new support level to watch for the SP 500, which was hit today and represents that the index has been placed on re-wind back to June 15.   All gains from June 15 to present have been erased.

SP-500-07.31.14

SP-500-07.31.14-comments

With July 31 daytime trading now over, I am pleased to see that the SP 500 Futures (evening July 31) have recovered (slightly).    This does not mean the bottom cannot fall out, but lets keep our fingers crossed.

SP-500-FUTURES-07.31.14

SP-500-FUTURES-07.31.14-comments

As can be seen above, the evening SP 500 futures session may have “come to its senses”, with trading action having not gone below the July-31 day session.

In final testimony to my “we should not panic” argument, is Gold, the default “panic currency” which basically did nothing in response to Argentina.   In theory, it should go up, as people panic because the world is about to end.   Gold did nothing.    See chart:

GOLD-07-31-14

GOLD-07-31-14-comments

In summary, I am “monitoring the situation” and as discussed, the market indeed is showing signs of weakness.   I remain 50% S-Fund and 50% C-fund however this can change at any time.   Also, we need to watch the 1930 level on the SP 500 as any action below that is undesired.

I apologize for the long post, but a 300 point loss on the Dow Jones is not exactly “short story” material.   I wanted to put forth my perspectives and opinion on what is going on.  

NOTE:  Fridays are typically bad days in general for the markets, as people tend to unload holdings prior to the weekend, in case the world ends over the weekend.    Friday August 1 may be a down day, but this in and of itself may not be “additional bad news” it may be typical Friday behavior.   The volume on the index will assist us in determining what is going on.

As always, please share this site with your friends and colleagues.

Talk to everybody soon and thanks for reading….

– Bill Pritchard

* This August 1 update released on July 31 / 11:15 PM CDT

July 18 Update / My TSP Allocation: 50% S and 50% C-Fund

Hello Folks

Well as we now know, Malaysia Airlines lost a B-777 airliner over Ukraine yesterday July 17, which was clearly a tragic event, with early reports indicating a surface to air missile being the cause.  It is my opinion, that this reflects the difference between trained, professional, soldiers, in an organized military force of a flag-bearing nation (even if “enemy”), versus caveman-savage rebels/terrorists with varsity level equipment at their disposal (Surface to Air missiles).   This is a TSP site, not a political one, so I will stop there.  I commented on a previous IL-76 cargo plane shoot-down in my June 16 post, regarding unarmed cargo planes being shot down.   One month (almost to the day) later, a commercial, civilian, airliner is shot down.

Not surprisingly, the market sold off hard the same day, and as I have commented before, almost all market behavior is psychological in nature and the result of humans acting out of fear, greed, and (at times) optimism.

I, like all of you, was taken aback by the market sell-off but I have chosen to remain invested in stocks and the TSP stock funds.    Since we cannot predict “Black Swan” events such as the above (or anything else for that matter- many talking heads on cable TV news claim however that they can predict stuff….), I choose to respond to the market itself.   In most cases, past behavior is reflective of future behavior.    It should be noted that the next day, July 18, the markets rallied, with the Dow Jones index closing up 123 points.   

The SP 500 index has had multiple days of selling, on above average volume, also called “distribution”, in recent weeks.  This is not healthy for any uptrend, and multiple days of selling can stall and reverse the uptrend into a downtrend and into a new bear market.  This activity requires that we keep our trigger fingers close to the G-Fund trigger guard.    It should be also noted that the S-Fund (small cap stocks) have taken a drastic turn to the south, largely due to the BioTech sector taking a beating in the press.   The leading fund is currently the C-Fund.

Historically, when a bull market “tops out” (reaches the highest point it can go, then goes flat, then starts into a bear market), large cap stocks (such as the C-Fund holdings) are the last ones to fall, and are outperforming everyone else.   This is because the “big money” investors (hedge funds, mutual funds, retirement plans aka TSP) typically gravitate towards larger stocks and perceived blue chip “stable” companies.   It is easier (and your customers won’t be asking questions) to invest $50 Billion into Microsoft or Boeing stock than it is into smaller company stock such as a Biotech with a pending FDA approval or a company selling solar panels for your house.   However, this very behavior (large cap stocks outperforming all others) can be used to identify turning points in the market, and shifts in sentiment.

It should be noted that in the early stages of a new Bull market, people are excited, and motivated, and tend to invest in the riskier, “next big thing” companies, which are in almost all cases small-cap stocks.  Therefore, when you see small cap stocks start to outperform large caps, and you have additional indications (volume, index price performance) that a market trend change is occurring, you can often get into position for a new Bull market way ahead of everyone else, usually with profitable results.

Lets cut to the chase, I am moving my TSP Allocation to 50% S-Fund and 50% C-Fund.   I am not going fully 100% C-Fund because I think (my opinion) that the small caps have taken some underserved hits over the last 30 days and I anticipate some health returning to that category.   I could be mistaken, but these are not “normal times” and I can’t remember in over 20 years of active trading experience, markets facing so many issues at the same time.   We have crude oil and middle east problems, and serious problems with Iraq violence.   We have a possible American exit from Afghanistan, a source country of terrorism.   We are sanctioning Russia, a country we “need” to serve as referee when other countries will not listen to us.  Many emerging market nations, as if the above issues are not enough to swallow, have ongoing debt and fiscal issues (Portugal, Argentina, etc) which can have a viral affect into world markets.

YTD returns (we are now into the second half of the year, July 2014) reflect a 7% return on the C-Fund and 6% return on the S-Fund.   While this is better than nothing, it is not that great either.   And our TSP row-boat has had to ride thru a lot of storms and waves on the way to any gains.   This is why I advocate the G-Fund in times of market turbulence.    Yes, it is hard to quantify or establish data to “justify” going to the G-Fund, especially when the market resumes up a week or two later.   However electing to not use the G-Fund as a tool in our tool box would be like electing to not pay home owners insurance, because “I have never had a fire in 20 years.”   The “past data” of no fire history reflects that you probably will not have a fire next year either.   But what if you do ?   Can you recover from that ?   Do you want to try ?  Roll the dice ?   G-Fund is akin to insurance, it is safe-haven in times of market problems and turbulence.   Yes, exiting to G-Fund affects overall percentage gains.   However it is a trade-off for peace of mind (at least for me) versus enduring elevated risk in times of market turmoil.

In summary, I am 50% S-Fund and 50% C-Fund as of now.   Due to the various international problems, I am refraining from investing in I-Fund at the present time.  We need to keep an eye on things, as the current bull market may be topping out, with a new bear market possible in the months ahead.   At the end of the day, nobody can predict or crystal ball things, and we must react to the market itself.

Thanks for reading and talk to you soon.   Please continue to share my site with friends and colleagues.  Have a great weekend everybody…..

Bill Pritchard