Market Commentary for the week of June 8, 2009

Half-way there.
Our response to the market’s first half of the year volatility has been to position our portfolios into a risk-averse mode. Relying on our exposure to fixed income for the latter part of 2008, our portfolios took significant hits because of the banking and credit crisis. As the credit markets improved earlier this year, we recovered most if not all of the pricing inefficiency that caused a late-year swoon, allowing us to use excess cash for equity purchases.

Certainly, if the global economy shows growth this year, our bet on stocks will pay off. Concurrently, I would expect interest rates to rise, making bonds more risky than equities.

Further, if our “growth” scenario ensues, a rise in the cost of money might have an anecdotal impact upon inflation and higher prices, thus limiting any acceleration in the rate of profitability from corporations.

Of course, predicting these cycles is a balancing act, and not an “event” that might be recognized, except in hindsight. The best we can do is stay true to our methodological tenet that top-down, macro trends guide our asset allocation decisions.

Today’s landscape.
Presently, the rate of change in market cyclicality is accelerating. This poses a risk to the “buy and hold” investors because a rapidly changing price continuum means holding stocks might create extreme volatility in one’s portfolio. Obviously, risk is part of investing, but we are lucky that our methodology allows us to calibrate cycle measure values, thus, hopefully, we can eliminate buying at an inefficient inflection point.

Despite these data, I am becoming more comfortable with equity ownership, as valuations “bottom and accumulate” following last year’s shakeout. On the strength of such indications, I will look to add percentage allocations to equities in sectors with strong price, earnings and relative strength (RSI) rebounds.

These upside indications are also showing for global stocks. The world has long sought a globalized synchronized economy. It appears the global recession has provided us with an equilibrium starting point. World currencies and equities are also bottoming and accumulating. It is no accident that last quarter’s recommended list had its largest number of non-U.S. equities in years. A powerful surge for industrial development is overtaking our economic landscape, and might certainly be a harbinger of successful equity markets in the next decade.

If these trends emerge as anticipated, I would expect to see sector leadership in Energy, Basic Materials, Industrials, Technology and Utilities. As noted, I would expect a depreciation in bonds as interest rates rise. A secular schematic on interest rates tells us that the generation of disinflation and cheaper money is reversing. The 1980’s and 90’s were a wonderful time. Get ready, however, for a new paradigm.