Market Pulse
I’m issuing a cash call at this point in time – while those with more risk tolerance may consider going short.
As noted in my last missive, I’ve been bullish on the market based on an economy improving at a rate that has been higher than expected. At this point, I don’t see a recession ahead. However, there are significant storm clouds on the fundamental horizon that suggest a significant market pullback.
The primary argument right now for a continued bull trend is that the U.S. is a “safe haven” and that investors are “rebalancing” their portfolios to more heavily weight the U.S. and Western economies versus the emerging markets. I don’t see this as a sustainable proposition – as one CNBC commentator put it, that makes the U.S. market the “prettiest horse in the glue factory.”
On the bear side, here’s what concerns me. First, we are already in the middle of a very nasty cost-push inflation squall. On the food side, we’ve had drought-related wheat shocks in Australia, China, Russia, and the Great Plains area of the U.S. while livestock herds on down as well. In addition, we are already in the middle of rising energy costs and with the turbulence in the Middle East, this is unlikely to abate.
Second, the U.S. is entering the next stage of its economic crisis. This is the fiscal policy shocks that are likely to result as some of America’s largest states face budget crises and implement cutbacks and tax hikes. Third, the U.S. budget remains out of control, interest rates are rising, and this is acting as a brake on the housing market recovery.
On top of this, I see a lot of the underlying bullish trend in the stock market attributable to robust surges in energy and commodity stocks. However, robustness in these sectors contains the seeds of any market’s destruction because of the underlying supply side shock implications. In moving to cash, I know I am going a bit against the grain here as some leading economic indicators continue to point to an above trend recovery. However, the ECRI Leading Index is losing momentum and I’m trying to anticipate the effects of the post-Mubarak world we are about to enter into.
So in such times, cashing out and sitting on the sidelines a bit is not a bad strategy. While I will maintain my positions in my small cap biotechs and rare earth stocks, I’m mostly in cash with small shorts on both the Chinese and U.S. markets.
