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Introduction To be quite frank, there are a lot of mixed signals out there.

Things out there feel like gloom & doom with a possible market top in place. However, we have to respect that the bull market is still alive, at least for now. On one hand, the reason confusion is arising is because we havent experienced a wash out in sentiment and overbought levels. But on the other hand, the money has already been fleeing risk assets for over a quarter now and finding its way into safe haven assets. Therefore, this weeks newsletter will focus on the specific issue of money flows. Fleeing Risk While there might not be a complete sense of capitulation from classic sentiment survey, money has been fleeing risk assets. Furthermore, money is flowing out of risk assets like stocks and commodities at a very rapid rate.

Source: Barclays Capital Consider that in May and June, commodities have experienced the strongest outflows since they bottomed in February 2009. This data includes flows into indices, electronic traded funds, notes and other products.

Source: ICI, The Short Side Of Long According to ICI, Junes retail fund flows for the US equity mutual funds reached the largest outflows since October 2008 crash. What is interesting to note is that June outflows were surprisingly larger than May 2010, when the Dow Jones experienced a one day 1,000 point flash-crash drop. Back than the market was down 15% into July 2010, while today, the market is down barley one third of that decline. Outflows in July currently stand at over $15 billion with one week left to report and looking back at the way this week have played out, with all five trading down days in the row, one could assume that final July outflows are going to be even larger than Junes.

Source: Lipper FMI, SentimenTrader Lipper FMI fund flow data confirms this outlook. According to their data, this weeks outflows were the biggest since August 2010, when the S&P 500 put in a strong bottom at 1040. Also to note is that 9 out of the last 12 weeks have been outflows, which is completely different environment from early in the year. Imagine for a second that investors did not follow news headlines at all and just based their investment decisions by judging the actual price of the asset itself...

Keeping that in mind, if one was to look at the price of S&P 500 solely on its own, without all the background noise and media baggage, one would realize the price is currently about 6% away from its recent peak. So why are investors jumping out of the equity and commodity markets like paratroopers? Looking at the recent headlines should pretty much answer all the questions.

Source: Google Search Flight To Safety There is fear out there and the money is flowing into safe haven assets. It all started with a Crude Oil spike in February which was linked to Libya and MENA turmoil. That was followed by Japanese earthquake and the Fukushima incident, than came along the commodity rout in early May due the economic slowdown, followed by Eurozone fears of a Greek default. Early in the month US jobs report was a huge disappointment, while Italy was thrown into the cocktail mix as their yields on the 10 Year Government Bonds jumped over 6%, a figure not seen since the late 90s. Last, but not least, US consumer confidence plunged due to slowing economy and fears of a default if the debt ceiling is not raised, and as of last night the GDP posted a near flat print of 0.4% growth rate for the quarter.

As a result of all of these problems plaguing the world markets, investors who have been taking their money of commodities and equities, have been piling into safe haven assets like Gold, Swiss Franc, Japanese Yen and US Treasury Bonds (as well German Bunds or Japanese Government Bonds). Lets have a look at each of these: Gold

According to the SPDR GLD electronic traded fund, which tracks the price of Gold by buying the physical asset as a backing, retail investors have poured in over $8.66 billion since the 01st of July. That is a 15% increase in the overall fund in just four weeks. As we can see from the chart above, which shows a four week moving average of fund flows, every time investors became excessively bullish on Gold, it resulted in at least a decent correction. On top of that, the above trend is quite mature, where the price of Gold has more than doubled since November 2008. Usually, even the most powerful bull markets need to take a rest after such a strong run up. 5

Swiss Franc & Japanese Yen

Such is a love affair with safe haven currencies like Japanese Yen or Swiss Franc in the chart above, that when I did a Google Trends search for "Swiss Franc" I noticed the results of both the search volume as well as news references are at an all time high, just like the price.

Source: Goole Trends 6

Source: SentimenTrader Sentiment surveys for both of these safe haven currencies have also reached a 20 year extremes in bullish sentiment. The fear trade is now so recognized, that the regulars on CNBC or Bloomberg are concluding the current market environment as a win/win for the Swiss Franc. Pundits are saying that if the Greece defaults, Franc will gain, if Italy defaults, Franc will gain, if EU breaks up and Euro crashes, Franc will gain, if US defaults next week, Franc will gain, if North Korea attacks the South, Franc will gain, if Saudi Arabia has an uprising, Franc will gain, if the economy does not recover, Franc will gain and the Franc will rally during "Risk On" as well as "Risk Off" environments. In their own belief, no matter what happens, Franc will gain... something that is also known as too good to be true. 7

Treasury Bonds

Source: Federal Reserve, The Short Side Of Long With inflation running at 3.4%, one has to be an ultra bear, with a bunker mentality to buy a US Treasury Bond right now. If we look at the interest rate across the whole yield curve spectrum, from the 3 Month Bill to the 30 Year Bond, we can notice that every single Treasury Note up to the 20 Year is paying a negative real interest rate. Consider the following: 2 Year Note is currently at 0.36%, which is yielding a 3% negative real interest 5 Year Note is currently at 1.35%, which is yielding a 2% negative real interest 7 Year Note is currently at 2.09%, which is yielding a 1.3% negative real interest 10 Year Note is currently at 2.82%, which is yielding a 0.6% negative real interest 20 Year Bond is currently at 3.77%, which is yielding a 0.4% real interest 30 Year Bond is currently at 4.12%, which is yielding a 0.7% real interest I would find it absolutely insane, if someone was to tell me today to buy a Treasury Long Bond due to the current economic slowdown, which yields 0.7% real interest rate over the next 30 years. As Chris Puplava said in his commentary this week: Think about it for a moment, what would you rather invest in for the next ten years, a 10-Yr UST yielding 2.78% or a blue chip Dow stock like Proctor & Gamble with a dividend yield of 3.3% and a 5-year compounded dividend growth rate of 11% that is more than three times the inflation rate and does not provide a flat income stream like UST? More than 80% of the stocks within the Dow have higher dividend yields than a 10-Yr UST, and have sizable dividend growth rates to boot. As baby boomers move into retirement they are going to need income from their savings and the UST market just isnt going to cut it, with solid blue-chip high dividend paying companies like those in the Dow providing great alternatives. 8

Source: Citigroup, The Short Side Of Long After bottoming out in February, just as everything was fine and dandy and the US economy was beating economists expectations on regular basis, its as if the Treasury market already start predicting all of the up-and-coming problems coming our way and started rallying. Since than, Treasury ETF has rallied more than 11%, and for 6 months now has been pricing in European debt problems, US economic problems amongst others. Judging by the Citigroup Economic Surprise Index, which is a mean reverting tool, majority of the bad news has now been recognized by majority of the market participants. To a certain degree, the upward move in Treasuries could have more juice in the short term, but is ultimately setting itself up for one of the great shorts.

Cash The retail investors who arent piling into safe haven assets like the ones mentioned above, are sitting on large amounts of cash. Bloomberg recently reported that many fund managers, including Jeffery Gundlach and George Soros have above average exposure to cash.

Source: Merrill Lynch Fund Managers Survey Survey of over 260 money managers, with almost US$800 of assets under management, confirms this, as it showed that a substantially large number of managers were overweight cash (chart above). This is despite the Federal Reserve keeping rates at zero percent, meaning that these money managers, who are under constant pressure to perform, are watching inflation erode their cash value. The type of current readings resembles the May, June, July and August period of last year, where investors ran into cash due to the possibility of a double dip recession. Fast forward 12 months and we have a dj vu on our hands.


Source: The Short Side Of The Long Finally, I ran a poll asking the readers of the blog to tell us what they have been buying, if anything, over the last week or so. Despite relatively low votes, not surprisingly one third of those who voted said they were holding cash. One quarter of those who voted said that they were buying stocks, while one sixth said they were buying the US Dollar. Conclusion If I analyze the current environment, I come to the conclusion that the money which has been fleeing equities and commodities over the last quarter, is moving towards perceived safe havens such as Gold, Treasury Bonds, Japanese Yen or Swiss Franc. These trends, at least over the short term, seem extremely overdone. Looking at all of these events, which should have effected the equity market. it is actually quite remarkable that the equity markets have held up so well. Maybe Mr. Market is trying to tell us something... While I think we are slowly approaching a possibility of a bear market for risk assets and another global recession, I do not think it is about to happen right here, right now.


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