The Tactical Timing System has generated a sell signal. To comply with the system the following positions were sold today. The proceeds were allocated equally between the Vanguard Short-Term Corporate Bond ETF (VCSH) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

Position    (Symbol)

Vanguard European ETF (VGK)

Vanguard High Dividend Yield ETF (VYM)

Walmart (WMT)

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Target Allocation:

30% equities; 70% fixed income
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Below is an image of the trade confirmations (click to enlarge):

SMA Comment: Investors have been forced into a high risk game of chasing equities by a Fed bent on subsidizing debt while punishing savers in its seemingly endless attempts to jump start anemic economic growth.

Benign economic statistics along with a market that continues to exhibit an upward bias has improved investor sentiment to a significant degree. The percentage of bullish investors in all sentiment polls are at high readings.

Although high bullish sentiment as a contrarian indicator certainly doesn’t guarantee market weakness, it makes the risk of a steep correction an increasing likelihood.

The Fed’s extreme monetary stimulus efforts could ignite inflation in energy, specifically gasoline, which could send prices at the pump above $4.00 in the coming months. This will curb consumer spending on a downwardly mobile society resulting in a severe dampening effect on economic growth in the second half of the year. Caution seems warranted at this juncture.

Information on the Tactical Timing System (TTS): TTS is a proprietary timing system based on research conducted over 20 years.  TTS adjusts allocation between equities and bonds by 15 percentage points when timing signals are given.  Signals are based on a combination of fundamental valuation measures and real-time sentiment gauges.  To receive e-mail notification of timing signals send an e-mail to stockmarketadvantage@gmail.com and type “Subscribe” in the subject block.

Bloomberg’s Sree Vidya Bhaktavatsalam and Alexis Leondis report that six of the 10 most expensive bond closed-end funds are managed by Bill Gross or his colleagues at Pacific Investment Management Co. (PIMCO).

The Pimco High Income Fund (PHK), managed by celebrated bond fund manager Gross, recently traded at an incredible 66 percent premium to Net Asset Value (NAV); above its three-year average premium of 49 percent. Bhaktavatsalam and Leondis attribute the overpricing of the fund to investors’s clamoring for yield.

What the mind-boggling premium of PHK also appears to provide is evidence that investors, and therefore the market, exhibit irrational and inefficient behavior.

According to the article, the premium to NAV rose when Gross recommended buying the fund in 2009. What a great reason to pay an exorbitant premium for a fund; because the manager said it was a good buy over two years ago.

Granted, PHK currently has a substantial yield of 11.5% according to the article. However, approximately 16% of PHK’s payout in December was estimated to be return of capital, according to insurer Allianz SE (ALV), Pimco’s parent.

How are some of these closed-end funds able to provide such a high distribution, or what some may call a dividend? Along with paying out investor capital, they are leveraged to some degree. According to the Closed End Fund Association (CEFA), PHK has leveraged assets of 21%.

When the bond market turns south this fund will almost certainly tumble hard as interest rates rise, or even as the economy weakens due to its exposure to the high-yield market. This makes it an unsuitable investment for conservative investors.

In my opinion, PHK should be avoided by all investors and is practically guaranteed to underperform any similar asset over any future timeframe you want to look at.

PHK is so mispriced it calls into question the notion of an efficient market. Bill Gross certainly has demonstrated his fallibility with his avoidance of U. S. Treasuries early last year only to jump back on the bandwagon after their huge rally.

Data from CEFA on PHK:

Source: Bloomberg

Jim Stack, president of InvesTech Research, was interviewed on the Nightly Business Report last Friday. He provided an upbeat assessment of the stock market’s prospects.

Stack mentioned last summer’s crisis in confidence over the raising of the debt limit. This along with a decline in consumer confidence led to a market plunge, 90% of which occurred over a three week period.

According to Stack, consumer confidence has since improved and the market has rebounded with it with a surprising amount of technical strength along with strength in the macro-economic statistics.

When asked if he believed the lows which occurred around Labor Day last year would hold, Stack said he believed they would citing the market’s typical strength going into an election. He added that bear markets and recessions in an election year are a rarity. Stack said there was only one election year since 1940 that experienced a double-digit decline, which was 2008. In contrast, Stack pointed out there have been seven presidential election years which have seen double-digit gains.

Stack said if you look beyond the macro-economic factors, based on technical factors the market is on firm footing. The breadth, or advance/decline line, hit a new high ahead of the market indexes. Stack added that if you look at leadership and his special composite, or negative leadership composite that`s used to measure downside or the absence of downside leadership, a signal was triggered last week indicating an 80 percent probability the market will be higher both six and 12 months from now.

The interview continued with Stack commenting on sectors he likes in a maturing recovery and presidential election year (energy, industrials and financials), his forecast for emerging markets and expectations for GDP growth, the prospects for the tech sector, and his view of current investor sentiment and general fear which has historically signaled a preferable time to invest.

Wharton professor and author of Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies, 4th Edition, Jeremy Siegel, presented his case that the Dow could hit 15,000 to CNBC’s Fast Money crew.

Commenting on this week’s Barron’s article by Gene Epstein speculating that the Dow could hit 15,000 by the end of next year, Siegel believes the most convincing argument is valuation. He said we are well below the long-term average PE ratio of 15 when taking into account interest rates.

Siegel stated there is data showing if you haven’t done well in the last 5 years then you have a 2 out of 3 chance of reaching 15,000. When you put the two factors (valuation and historical precedent) together reinforcing each other, he believes there is a strong case for the market.

Siegel considers the notion of Dow 15,000 by the end of 2012 modest, achievable with back to back years of 8 percent returns. He added these returns would only be slightly above the long term average, but good returns in the current low interest rate environment.

Siegel see the economy strengthening this year and the Dow having a 50/50 chance of hitting 15,000 this year. He lays odds of 70% or more that the Dow could hit 15k next year. Siegel cautioned that we know nothing is sure in the market, but we can base it on past behavior, probability and valuation.

When asked by Fast Money’s Karen Finerman what would happen when interest rates rise, Siegel stated when the Fed abandons its low interest rate policy it isn’t a problem for the market. The problem for the market comes at the end of the cycle. Siegel actually doesn’t expect the Fed will be able to maintain extraordinarily low interest rates until the end of 2014. However, he believes growing corporate profits will overwhelm the negative effects of higher interest rates.

The interview continued with Siegel’s views on headline risk and a potential downside risk of a Lehman-type event in Europe.

Marc Faber, editor of the Gloom, Boom and Doom Report, was interviewed on Fox Business yesterday. Faber said the market’s negative reaction to Greece was a symptom of a wider problem of over-indebted governments in the western world and Japan. He indicated the Greek crisis is just a small play, or appetizer, to much larger problems and a much larger crisis.

Faber explained yesterday’s market weakness to its rise of nearly 25% from the S&P 500′s low of 1,074 on October 4, 2011, indicating it is currently very overbought. He added that any excuse for profit taking is now being taken.

Faber said February is traditionally a seasonally weak month so we’ll go down first for awhile. When asked with the market down triple digits whether he would go in and buy some bargains, Faber said he would wait a little bit because some sectors have had huge gains. He gave the example of the home builders, who in some cases are up 100% from the lows and banks that are up 60-70% from the December lows.

Faber said we don’t know, but the correction could be 100-200 points on the S&P.

Faber stated he wouldn’t sell stock he bought in November and December because they are high-dividend paying shares in Asia; specifically REITS in Singapore and real estate related companies in Thailand which suffered during the flooding.

Faber pointed out the emerging markets have done best since January with India up 14%, which along with a strengthening currency, has led to the market being up almost 20%. He added that all these markets have become overbought near-term.

Faber believes developed markets could see annual returns of 3 percent. He doesn’t like the prospects for U. S. long-term Treasuries.

The interview continued with Faber humorously elaborating on why and where he likes residential real estate in the U. S., and his view on China, Brazil and the Australian dollar.

Larry Fink, CEO and Chairman of Blackrock, was interviewed by Susan Li on Bloomberg this week. Fink commented on the European situation and was optimistic that the Greek indebtedness issue would be worked out.

Fink said he was bullish on the market and there was too much focus being placed on noise including Greece. He added we would have a lot of volatility and have to live with it.

Fink said Mario Draghi has done pretty much what Ben Bernanke has done which is provide a lot of liquidity and the ECB will provide another round of liquidity. He also expected the ECB to ease interest rates 2-3 more times, steepening the yield curve, and helping bank profitability; resulting in a stabilization of Europe for the year. He added this wouldn’t result in a panacea, but would stabilize the markets.

On China, Fink says there will be a change in leadership and the economy will be a little better than expected. Instead of 7 percent GDP by the end of the year, Fink expects it to be closer to 9 percent.

The interview continued with a discussion of other European stimulus options, long-term trends and confluences leading to weak job growth, his reasoning for recommending 100% equity exposure (an easy decision), his view on bonds in that they don’t provide much yield, changes in leadership adding to risk, and the divergence in prosperity and associated cross-currents.

Matt McLennan, portfolio manager, First Eagle Funds, and successor to Jean-Marie Eveillard, was recently interviewed by Wealthtrack’s Consuelo Mack. McLennan’s First Eagle Global fund, which he has managed since 2008, is ranked in the top 20% of funds in its category for the past three years.

McLennan began the interview by discussing the challenges facing world economies and how the policy response has been focused on easy money (negative or low real interest rates and ballooning central bank balance sheets). These policies have created distortions, according to McLennan.

McLennan further stated that the illusion of stability leads to instability; also referred to as the “Minsky Moment.” The recent example being the experience in 2008. Monetary policy, instead of being palliative, is now looked at as a cure, McLennan added.

According to McLennan, over the past 10 years, central bank balance sheets have more than doubled in many instances. People are waking up to the realization that there isn’t a risk-free asset today. The risk is that there will be a de-stabilization of “man made money.”

Mack asked if there was ever a risk-free asset that provided real returns. McLennan answered that if you look at the history of government long-term bonds, they’ve produced low single digit real returns commensurate with the growth rate of the broader economy. He added that if you look at the price of gold over the very long term, it too has produced real returns in the low single digits commensurate with the growth rate of the overall economy. However, there are never totally risk-free investments, according to McLennan. Every government bond has regime risk (war, balance sheet deterioration, printing presses being open in response to other factors). And gold itself, even though it is a perpetual asset because it is chemically inert, has volatility.

McLennan said at First Eagle they’ve always invested under the assumption that there was no “risk-free lunch,” and focus on investing security by security, by and large, where you can obtain a margin of safety.

The interview continued with discussions surrounding instabilities created by central bank intervention, the current valuation of equities, the resilience of holdings in the First Eagle funds, several stocks McLennan finds attractive (Fanuc, Microsoft, Cisco Systems. Newcrest Mining), the merits of gold, “nature’s currency,” the opportunities arising in Europe (Pargesa Holding), the one investment he would recommend if he was limited to one suggestion (Shimano Inc.), and the biggest risk facing investors (paradoxically, not taking risk).

Consuelo Mack interviewed mutual fund superstar Donald Yacktman regarding his investment philosophy and strategies. Mack pointed out that the Yacktman Fund has ranked in the top 1% of its fund category in the three, five, 10 and 15-year periods.

Yacktman refers to the current environment as an amazing and unique period of time in which he hasn’t seen so many high quality, profitable businesses selling at prices this cheap relative to the stock market.

As an illustration, Yacktman said the 30-Year Treasury has a lower yield than many high quality companies (Johnson and Johnson, Pepsico, Procter and Gamble, etc.).

Mack questioned Yacktman whether these stocks were not just relative bargains, but good buys overall. Yacktman replied that stocks were absolutely cheaper at the bottom in 2008-2009, but on a relative basis a number of these companies (ex. Procter and Gamble) sell at almost the same price they did in the fall of 2008. This, while there’s been 3 1/2 years of growth in the dividends and everything else. The cash flows are much higher and they’re more valuable now than then. Yacktman said he’s finding the best bargains in the brand name companies.

Yacktman said he operates under three goals. Number one is to preserve the client’s capital. The second goal is to make equity-like returns; double digit returns. The third goal is to beat the S&P 500 over a full market cycle (10 years).

Yacktman says they look at forward risk-adjusted rates of return, behaving like a bond buyer. He says you estimate a forward return and place a quality rating on it and what he sees is the AAA’s of equity such as Coca Cola and Pepsico have very high returns relative to other things. Yacktman questioned why one would go to lower grades when they can stay with these AAA bond-like equities.

The interview (available below) continued with a discussion of market volatility, what investors can control, Yacktman’s view of his investment in News Corporation and his opinion on the financial sector, protecting capital via a margin of safety, the importance of overseas earnings, the options companies have to deploy their cash, and the one stock Yacktman believes everyone should own and why (his stock pick was Pepsico – “like shooting fish in a barrel”).

In the latest Forbes magazine Gary Shilling believes conditions are still supportive of falling interest rates, and therefore, rising prices for bonds. He predicts a total return of 10% for 30-year Treasuries in 2012.

According to Shilling he was calling for the bond rally of a lifetime back in 1981. Then yields were above a stunning 15% and he predicted they would eventually fall to 3%. For properly positioned investors the returns were remarkable:

Since then $100 invested in a 25-year zero, rolled over each year to maintain that maturity, leaped to $23,151. That’s 9.5 times the total return on the S&P 500 from its bottom in July 1982. Who would have ever believed that long Treasurys would become a ten-bagger versus stocks!

For the rally to continue the world economy will have to remain subdued. Shilling feels conditions are conducive to this scenario. He sees the Euro Zone entering a deep recession which he compares to the sub-prime crisis in 2008 as weak peripheral euro economies have already begun their collapse.

In addition to the European woes, Shilling forecasts continued slowing in China as they attempt to put the brakes on their inflation and property bubbles.

With the twin slowdowns in the huge economies of China and Europe continuing, Shilling sees demand for the US dollar and bonds reinforced because of their safe haven status.

Shilling also sees a trend with the fall of MF Global, which he believes could be the first of several financial institutions to collapse.

Shilling believes deflation is more likely than inflation under his dire scenario. This will result in 30 year Treasury yields falling to 2.5% from their current 3% and mark the end of the bond rally of a lifetime, in his view.

Gary Shilling is president of A. Gary Shilling & Co., editor of Gary Shilling’s Insights, and author of The Age of Deleveraging, Updated Edition: Investment Strategies for a Decade of Slow Growth and Deflation

Source: Forbes

Jeff Macke interviewed Peter Schiff of Euro Pacific Capital to get his views on the dovish Fed’s policy of providing virtually free money. Schiff indicated it hurts seniors who live off interest and also said it damages the U. S. economy by preventing it from restructuring.

Schiff said the Fed doesn’t care about the long-term health of the economy but just wants to, “keep the music going until the next election.” When Macke suggested the Fed was apolitical, Schiff retorted that the problem is that the Fed is very political.

Schiff said if the Fed had raised interest rates more aggressively in 2002 to 2004 the housing bubble would have burst much sooner than it eventually did in 2008, and wouldn’t have done nearly as much damage. He added that the Fed knew there was a housing bubble but didn’t want to “upset the apple cart,” and tried to nurture the bubble because it was good politics. He said the Fed was making the same mistake again, but doesn’t want to raise rates and bring the problem forward. Schiff added the Fed is just postponing the problem for a later date, but it will make the crisis much worse.

When Macke questioned what could be done to “get them off the dime,” Schiff said we need a truly independent Fed and take away a lot of its powers. He said we also need a Fed that understands economics and money and have read the constitution because the people there now, including Ben Bernanke, really are clueless about money, inflation, the business cycle and how it works. Schiff added the Fed still believes in the “nonsense” of Keynesian economics and the notion that you can print your way to properity and more government solves problems.

Schiff said if we can get rid of the Federal Reserve and frame things as designed in the Constitution around sound money and have a much smaller government we would have a much more prosperous America.

When Macke asked Schiff if retirees were forced to take on more risk, he mentioned their speculation in the long-term bond market and high priced stocks, which was incredibly risky and could end disastrously. He said investors should get out of the dollar completely and focus on three things:

1) Buy gold and silver,

3) Buy bonds denominated in foreign currencies

Schiff commented further on the riskiness of U. S. dollar denominated bonds and strategies he’s using to invest in foreign bond markets.