Author: John King, Quacera
Covestor model: QPM Radar
June reversed May’s downturn, and the S&P 500 finished the month up 3.25% but down 3.37% for the quarter. Our model was down 5.7% in June and was flat for Q2.
Stocks were mixed and somewhat choppy for most of the month, but toward the end hope for the 19th attempt by the EU to fix its bank and sovereign debt problems provided some charm.
The Quacera Early Warning Report indicates either a bear market rally or a reversal to the upside. The big move on June 29th came as a result of quarter-end window dressing and hope that the ESM bailout will work.
On a fundamental basis, the economy is dragging slowly through this debt destruction-intervention period. If this were the first time excessive debt had to be reduced in economic history, we could understand the complacent attitude of the Fed as it pursues piling new bank reserves on top of the heap. But we reached a similar impasse in 1939 when bank reserves had increased 500% from the 1932 levels and still failed to stimulate borrowing. It was not until the 1950s that the U.S. economy finally recovered and in 1954 the Dow got back to its 1929 high.
That Bernanke & Friends continue to ply their plans means that we will probably be in this quagmire for years to come. Moreover, our reading of the EU announcement that added kindling to the market’s fire is even less inspiring than the headline would indicate. The funds for this rescue are to come from an ESM that has yet to be approved as an entity by EU members. The rally-triggering mechanism, an agreement that ESM funds will not be senior to existing debt, applies to Spain alone, not Greece, Portugal, Ireland or Italy.
The ESM, if finally authorized, must go to the markets and sell bonds to a world that realizes it will fall into the queue behind other bondholders who will be recipients of the funds those new bond holders have lent. In addition, Spain will not be responsible for this debt, so new bond buyers will be propping up banks that, on average, have debt ratios of 26:1.
The pact also requires a new entity be created to supervise any banks thus salvaged and until this happens all bail-out money will continue to add to Spanish government debt. Our visit to Spain this past month was no more comforting. Riots, begging and inventory dumping are the pastimes of the populace while the Government provides bread and circuses in hopes of keeping the lid on.
If there is no strong follow-through to the month end upsurge, we expect to see reconfirmation of our current QPM Radar at less than 20% positive.
