It’s time to rebalance.
Be prepared for additional market recoil as energy prices ease into the spring and summer driving season. Refineries began mixing their lighter “summer blend” of gasoline last week, one which requires a recomposition of the mixture used during the winter, and therefore more expensive to produce. The amount of damage inflicted upon the economy by rising gasoline and energy prices is unknown, but the evidence is clear its effect will not be positive for corporate earnings, or your pocketbook.
I also expect subtle shifts in other natural resource indices in the next months, particularly in agricultural products (foodstuffs) and metals. Without debate, the trends are inflationary and pointing towards higher thresholds. My long range forecast for tangible assets is solid, bullish, and consistent.
A little perspective.
Just one year ago, the market was on a precipice, but clearly not in decline. Consider that late in 2006 an energized equities market was rolling along in the fourth year of a post dot.com bull. Concerns about earnings abatements had not yet permeated our thought, and housing (as well as financial equities) was a boon to the economy.
Not so today, although predictably it was bound to happen.
Sustaining growth by lowering interest rates, and a decidedly greedy corporate body, exacerbated a normal growth cycle by “leveraging” average investments and encouraged “incentive pricing” in retail (autos, furniture, etc.) and housing. The net result of the expansion of this bubble was no different than the irrational exuberance of our dot.com friends ten years earlier.
In fact, it is curious to me that investors fail to acknowledge the excessive price spike which follows nearly all long-term bull phases. History has shown us time and again that you must capture the rally early to mid-stream, but avoid the greed of manufactured expectations at the back end. Instead of focusing upon the humanism and social responsibility of equities, the last stages of a bull market are about hoarding and collecting the most personal reward.
Arguably, it is not easy to dissuade the emotions of speculators during these volatile periods. But it is easy to quantify the excesses from an arm’s-length perspective. When the broader altruism of the equities market becomes subordinated to a short-term EPS (earning per share) perspective, it is time to rebalance one’s expectations.
Tectonic shifts.
The subtlety of this observation might be too overblown for some. But consider that monetary policy is sometimes predicated upon a herd mentality, not on a broader secular theme. If that were untrue, today we would be seeing higher interest rates, not lower.
As the dollar declines, psychological and fiscal damage widens. The punitive impact of a dollar decline is an unnecessary tax upon commerce and manufacturing. It is probably time to reign-in spending, not to encourage it with cheap money and lower interest rates.
In the meantime, commodities-rich emerging markets are leading an expansion in economic development, and laying the groundwork for supplanting the West as the engine of innovation and commerce.
The situation is quite complex, but not dire. Cycles expand and contract. We will see a reversal of the equity bear phase and we should prepare now to identify earnings leaders that will be remuneratively rewarding to our portfolios. Time is the ally of today’s negative expectations.
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