Market Commentary for the week of March 14, 2011

Where we are.

Despite last week’s contraction in global equity prices, the activity seemed mainly focused upon energy stocks and the turmoil in Libya and the Middle East.  Of course, the world is also shocked and spellbound by the earthquake tragedy in Japan.  More significantly, there seems to be no cohesion of thought about whether these disruptions are ultimately (1) good for shareholders (2) bad for economic recovery.  Instead, the debate rages on as to the sustainability of any short market rallies or the viability of real economic recovery in the face of pricing pressure upon commodities, particularly energy.

I remain skeptical that we are in anything but the second downleg within a secular bear market in global stocks.

Most of these short, quick rallies are driven by excess liquidity sitting on the sidelines, and speculators whose focus is on a 24 hour trading day.

Fact-based investing.

Because of our lack of wiggle room on the geopolitical front, monetary policy has lost most of its significance in creating the conditions for economic revitalization.  Clearly, the price and supply of oil plays a more important role in determining economic viability than do low interest rates or stimulus packages.  In fact, my profit projection models are indicating a diminished acceleration pattern for the next two quarters at least.

Commodities price creep, and the incumbent inflation which follows, is the largest stealth tax invasion upon consumers, and is by itself a form of global terrorism.  It’s impact upon corporate profits, equity capital gains, and consumer confidence is, today, negatively measurable in its scope because one can’t quantify what might happen or is likely to occur.

Our accounts are carefully marking time by taking profits where appropriate, and by monitoring asset allocation to be sure that probabilities of upside/downside response are balanced in favor of lower risk.  In my world, earnings and profit patterns are paramount, which leaves the landscape of candidates quite shallow.

The lone positives in this paradigm are heavy demand/high profit equities such as Utility shares and Consumer Non-Cyclicals, particularly food stocks and pharmaceuticals.  Risks of these secular winners evaporating are small, and would require months, or years, during which their rightful asset allocation positioning could change.  These patterns hold true globally as well as within the U.S. market.

So?

There are few things that can derail a stock market like the absence of psychological support.  (The other is the absence of capital.)  Today the markets are trading in such a volatile, short-term pattern because there are few “convictions” around which to build a buy-and-hold structure.  Until the stresses upon corporate profits and household solvency are ameliorated the markets are likely to trade upon conjecture, daily news, risk, and hypothesis.

It seems like it has been a long time since the markets were in perpetual ascendancy.  Not since 2006 have the global markets traded in synchronicity upwards.  Despite current attempts by speculators to elongate short-bull upswings, I would not chase stocks at the top of their short cycle patterns.  Instead, I would try to seek out longer thematic opportunities, perhaps to trade, but whose behavior is less enigmatic than the flavor-du-jour.