“If a battered stock refuses to sink any lower no matter how many negative articles appear in the papers, that stock is worth a close look” — J. Fraser.

1. Sarkozy and Hollande win through to final round — Nicolas Sarkozy and left-wing challenger Francois Hollande will face off against each other in two weeks’ time after they received the most number of votes in the first round of France’s presidential election. Run-off is scheduled for May 6.
2. Eurozone looks to be sinking deeper into recesson — Eurozone factory activity continued to contract in April as PMI fell to a preliminary 46 in April from 47.7 in March and vs. expectations of 48.1.
3. FOMC stays the course — the FOMC announced no major change in policy. The committee sees moderate growth with strains in global financial markets providing a big downside risk. Revised 2012 forecasts: jobless rate at 7.8-8.0% from 8.2-8.5%; inflation at 1.9-2.0% from 1.4-1.8%; GDP growth at 2.4-2.9% from 2.2-2.7%.
4. U.K. sinks into double-dip recession — the U.K. has slid back into recession for the second time since the financial crisis after Q1 GDP unexpectedly fell a preliminary 0.2% on a quarterly basis following a fall of 0.3% in Q4.
5. Banks scramble to prevent ratings cuts — the WSJ reported five major banks facing potential downgrades from Moody’s – and $22B in extra costs – CEOs are pushing back against the ratings agency with an aggressiveness not seen since before the financial crisis.
6. Business spending drop limits U.S. growth to 2.2% — Marketwatch reported that GDP misses economic estimates after surprise drop from business sector. The Commerce Department said gross domestic product rose at a 2.2% annual rate between January and March, slower than the 3.0% pace in the prior three months.
7. Standard & Poor’s downgrades Spain for the second time this year— S&P slashed Spain’s sovereign debt rating to BBB+ from A with a negative outlook. The ratings agency said the downgrade reflects worries about increased risks of the country’s government debt balanced against difficult economic conditions, as well as the potential need of more support for the banking sector.
8. AAII Sentiment Survey — according the the latest survey from AAII, Bullish Sentiment fell to a 7-month low to 27.6%. This is also the fourth consecutive week that bullish sentiment has been below its historical average of 39%.

This week’s AAII Sentiment Survey results:
Bullish: 27.6%, down 3.5 percentage points
Neutral: 35.0%, unchanged
Bearish: 37.4%, up 3.6 percentage points

Historical averages:
Bullish: 39%
Neutral: 31%
Bearish: 30%

The week ahead — Economic data from Econoday.com:

“I keep hearing “Should I buy?” – When I start hearing “Should I sell?” that’s the bottom.” — Nick Moore (PM).

1. $60B pledge from Japan to help IMF reach $400B goal — While Spanish borrowing costs soar, IMF chief Christine Lagarde hopes the IMF will reach “critical mass” in raising more than $400B from contributing governments.
2. Buffett Rule falls in the Senate — with a 51-45 vote, Senate Republicans blocked the “Buffett Rule” to make those earning $2M annually pay federal tax of at least 30%. The measure fell nine votes short of the 60 required for the debate to continue.
3. China home prices fall in March, raising concerns of a major slowdown — according to MarketWatch — out of the 70 cities surveyed by the National Bureau of Statistics, 46 reported weaker prices from the previous month, up slightly from 45 cities that reported declines in February. Dariusz Kowalczyk, Credit Agricole CIB economist, said in a note “sliding home prices will lead to weakness in residential land prices, which will in turn add to the financial strains already weighing on local governments”.
4. Facebook aims to IPO in May — Facebook (FB) plans to carry out its IPO on May 17, TechCrunch reports, as long as the SEC signs off on the company’s paperwork in time. As expected, Facebook will aim to raise under $10B at a market cap of $100B, reflecting recent trading on secondary markets.
5. China set for further easing — The People’s Bank of China might cut banks’ required reserve ratios, among other easing measures, in order to boost liquidity and bank lending, Xinhua reports.
6. France votes, investors fret — France held a Presidential election this past Sunday, with polls showing that the left-wing Francois Hollande to beat Nicolas Sarkozy but only after a run-off on May 6. Hollande has pledged to renegotiate the EU fiscal compact to tilt it away from austerity and towards growth, putting him on a collision course with Angela Merkel and providing the potential for further market chaos.

The week ahead — Economic data from Econoday.com:

Investment houses espouse an investor’s portfolio should be fully invested at all times and allocated across multiple asset classes; domestic stocks (large-cap, mid-cap, small-cap), foreign, commodities, emerging markets, bonds, etc…

Below is an excerpt from one of the biggest investment companies,

“The goal of diversification is not to boost performance but to help manage risk. Diversification doesn’t ensure a profit or guarantee against a loss. And while it won’t maximize returns in up markets—in fact it will likely reduce them—it can help you ride out swings in the market, because as one part of your portfolio struggles, another may be performing well. That can be very important, particularly for people in or nearing retirement who depend on their portfolios for income.”

From 2000 to present, major market index returns are nearly flat. During the market crash in 2008, investments of all asset classes suffered major losses; stock funds, corporate-bond funds, real-estate stocks, commodities. One important measure of the broad market index is the S&P500. The S&P500 declined by nearly 56% in 2008. The simple math is that for an investor to break even from a 50% decline, he would need to gain 100%. A chart of the S&P500 (courtesy from Doug Short) depicts the timeframe from March 24, 2000 to the present. It shows $1,000 invested in the S&P500 would be diminished in value to $812 as of 1/31/2012 when adjusted for inflation.

An unspoken secret of investment company ‘s is that fees are collected by the investment of assets. As an economy of scale, the more assets under management actively invested, the more fees collected. A managed account typically charges somewhere between 1%-to-3% per account. A $1,000,000.00 account generates $10,000-$30,000 in revenue. Multiplied by many accounts one can see that this fee is substantial. This fee is charged regardless of whether an investor makes or loses money in any given quarter or annually. During the 2008 market collapse, managed fees from one ‘s portfolio would further decrease the principal balance of the account.

Some major brokerage institutions during the recent 2008 housing debacle, were trading against the customers whom they were advising. One large institution was accused of overcharging for two sets of mortgage-backed securities that it sold to a hedge fund client. This institution was accused of lying about the securities’ expected performance; not providing timely, accurate information about the securities’ true value; and failing to disclose that the firm was actively betting against the securities at the time of the transaction

Based on the past decade, we have learned that world stock markets become more inter-related and that changes in one country/market will have a ripple effect across all other markets. Additionally, the rise of ETFs (Exchange Traded Funds) that bundle stocks together coupled with the depedence on leverage forces fund managers to liquidate positions quickly to cover losses. Institutions have also increased usage of High Frequency Trading contributing to stock market volatility.

An example of this market dependency is the 2008 US housing crisis. During this period, the U.S. housing market not only affected the US market, but it also brought down major institutions around the world. Case in point, before the 2008 collapse and the general financial crisis, RBS Group was very briefly the largest bank in the world and for some time was the second largest bank in the UK and Europe (fifth in stock market value), and fifth largest in the world by market capitalisation. Subsequently, with a slumping share price and major loss of confidence, the bank fell sharply in the rankings and had to be rescued by the UK government. Lehman Brothers Holdings Inc. , the fourth largest investment bank in the USA (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) declared bankrupcy in the fall of 2008.

Since 2000 (aka, the lost decade), the 2000 – 2002 dot bomb, the 2008 Financial Crisis, Euro-quake, the Flash Crash, Flash Trading in general, Dark Pools; the average investor may be left with the feeling the game is rigged. As a result, investors have withdrawn a record amount of money from mutual funds as the market lurched from one event to another. Based on a recent note from the venerable Investment Company Institute, a staggering $75 billion has been withdrawn from equity mutual funds.

Recommendations:
What ‘s an investor to do in this time of uncertainty? As one of the greatest investors of our generation Warren Buffet stresses “Capital Preservation”. He is famous for his 2-rules; Rule No. 1 “Protect Your Capital” and Rule no. 2 “Go Back and See Rule no.1”.

We recommend one should invest based on the current economic cycle and NOT be fully-invested at all times as preached by the investment companies. By investing based on the business cycle, investors are likely able to produce better average returns. This approach also helps long-term investors to identify when to buy or sell. Click here for the link to “Sectors and the Business Cycle: A Primer” by Bob Johnson for additional details.

In times of major economic uncertainty, “capital preservation” is key to one ‘s portfolio and cash or short-term money markets are best to preserve capital while waiting for better opportunities.

“I always keep these seasonal patterns in the back of my mind. My antennae start to purr at certain times of the year.” Kenneth Ward.

1. China Consumer Prices Rise Faster-Than-Estimated 3.6% — Bloomberg News reported that China’s inflation accelerated more than forecast in March on a pickup in food prices, signaling that policy makers may exercise caution in adding stimulus to boost growth.
2. Servicers Face More Rules — WSJ reported that The Consumer Financial Protection Bureau plans to propose new rules that would force mortgage servicers to be far more transparent about the costs faced by homeowners and to provide warnings before any interest rate changes. The rules, if approved, would affect such giants as Wells Fargo (WFC), Citigroup (C), BofA (BAC) and JPMorgan (JPM), as well as the smaller mortgage servicers.
3. Santorum quits White House race — trailing in polls and fundraising, the conservative former Pennsylvania senator suspended his campaign and cleared the way for Romney to clinch the nomination to face President Barack Obama in the November 6 general election.
4. Germany, Italy suffer poor bond auctions — Germany has experienced very weak demand at an auction of 10-year Bunds, able to move just €3.87B of paper vs. a target of €5B. The bid-cover ratio was just 1.1. The notes were priced to yield 1.77% – a record-low for an auction. Italian yields jumped in an auction of €11B of 12- and 3-month paper as Spain’s budget woes hit other vulnerable countries.
5. Spain Default Insurance Costs Hit Record — the cost of insuring Spanish government debt against default via instruments known as credit default swaps, or CDS, hit an all-time high Friday as worries mounted over the country’s banking sector. The spread on five-year Spanish CDS widened to 505 basis points from 476 basis points, according to data provider Markit. Spanish banks’ borrowings from the ECB jumped nearly 50% in March to €227.6B, as they took up 29% of the central bank’s late-February LTRO. “A consequence of the (LTRO) is that the correlation between sovereign risk and banking risk increased all over Europe.”
6. Growth in China cools down — Chinese Q1 GDP grows 8.1% Y/Y vs. expectations for 8.3% and 8.9% growth in 2011 Q4. Industrial production: +11.9% Y/Y vs. estimates of 11.4%, and retail sales +15.2% vs. 15.1%.

The week ahead — Economic data from Econoday.com:

“The market is voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.” — Graham & Dodd

1. Euro zone unemployment reaches new high in February — according to Reuter, Unemployment in the 17 nation euro zone rose to 10.8 percent in February, highest in almost 15 years – as expected by economists’ polled by Reuters – and compared to 10.7 percent in January.
2. SEC poised to charge Goldman over another mortgage bond deal — the SEC is likely to soon bring charges against Goldman Sachs (GS) over a mortgage-bond deal called the Fremont Home Loan Trust.
3. Regulators Move Closer to Oversight of Nonbanks — according to NYTimes, The Financial Stability Oversight Council, the country’s top financial regulatory body, moved closer to increasing its oversight of nonbank financial institutions, like hedge funds, private equity firms and insurers. Possible candidates include BlackRock (BLK), GE Capital (GE) and Berkshire Hathaway (BRK.A).
4. FOMC gets more hawkish over QE — Fed policy makers expressed less interest in another round of bond buys at their March 13 meeting, with only a couple of members suggesting more easing could become necessary if the economy lost momentum.
5. Spanish yields jump above 5.7%; Italian yields up — Spanish and Italian bond yields continued to rise on last week, as the broader European equity market declined. Yields on 10-year Spanish government bonds added 5 basis to 5.71%, the highest level since December last year. Yields on 10-year Italian government bonds jumped 11 basis points to 5.4%

The week ahead — Economic data from Econoday.com:

“Good judgment is usually the result of experience and experience frequently is the result of bad judgment” — Robert Lovell

1. Enbridge, Enterprise plan U.S.-Canada pipelines — Enbridge (ENB) and Enterprise Products Partners (EPD) are planning to build new pipelines that will transport up to 850K barrels of crude oil a day from Canada to refineries along the Gulf Coast by mid-2014.
2. France discussing strategic oil release with UK, U.S — according to Reuter, France is in talks with the United States and Britain on a possible release of strategic oil stocks to push fuel prices lower, four weeks before the country’s presidential election. Such a release could happen “in a matter of weeks”, Le Monde daily stated.
3. EBay Targets India Growth — eBay (EBAY) is targeting growth in India, investing more money and fine-tuning its strategy there as it tries to steer Indian customers away from low-margin electronic goods to higher-margin purchases like clothes and shoes. The stakes are huge, with India’s online shopping market expected to hit $70B by 2020 from just $600M currently.
4. Facebook plans IPO for May — Facebook (FB) intends to hold its IPO in May, The Wall Street Journal reports, with the company planning to release another amended S-1 prior to its offering after filing.
4. Euro-zone boosts anti-contagion firewall — Euro-zone finance ministers agreed to temporarily boost the lending capacity of the region’s rescue funds to 700 billion euros ($934 billion) from €500 billion in an effort to convince markets they can contain the region’s long-running sovereign debt crisis.

The week ahead — Economic data from Econoday.com: