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OK, we’re well into earnings season with not much in terms of surprises. Financials are showing generally good strength, but there's really not much to focus on. At least earnings should be the focus. Obviously, it really isn't. So what's then is the focus?

Geopolitical tensions related to:

1. War: Possible regional war involving Israel, Lebanon, Syria, Iran ... there’s some talk out there about this being the start of a world war although that's quite a big jump ... however, think about what started WW1 and WW2, regional wars in certain parts of Europe

2. Oil supply disruption: Nigerian pipelines again

3. North Korea: No one foresees a war there because China (business is good), Japan (too much to lose) and Korea (still growing well) all are too close to eachother to risk going nuclear. NK might not be there in terms of launch capabilities, but who knows if their nukes can be dirty bombs?

4. India bombings: More bad news for emerging markets who really got hurt in the past few months

5. Cold relations between the US and Russia. Bush and Putin seemed to talk nice in the G8 meeting but the trend does not look like they’re getting closer together. It’s in the US’ interest to figure out something … they have to with oil prices at all time highs and Russia pushing its agenda in eastern Europe (as well as its ally in China ... think war games exercises held jointly by both armies last year).

6. With all of the above, it's almost like Iraq isn't an issue but you can't say that with casualties still occurring on all sides and US dollars continually being spent there.

And so where are the markets now? About where they were at the market low (June 13/14). Nasdaq is actually quite a bit lower.

I was hoping for markets do drive up to new highs and then drop down to push past the lows of June 14th. It's happening sooner than I thought. No one could have predicted this since it's mainly due to the action in Israel/Lebanon. With oil very close to 80 (some talk of 90), can the US economy keep humming along. Numbers from China continue to amaze me. They’re traveling around Africa and other corners of the world buying up expensive oil (among other commodities), but they’re still moving in high gear.

What's the chain reaction? Inflation numbers up globally. Central banks continue to tighten globally. Liquidity dries up globally. Hunkering down (less spent on travel/leisure, reduced discretionary spending by consumers, business and governments, etc.) leads to slower economy continuing the concerns of slower and possibly even negative growth. Stagflation?

Why did the 10 year blip downwards on various occasions last week while the short side of the curve moved up a bit? The very short end is going to go up if the Fed (in addition to other central banks) continue to raise rates. Inverted curve not discussed as much these days but it could be a sign that agrees with my stagflation argument above.

I saw online that Bill Gross is talking about possible rate cuts by early next year. More fears of negative growth over inflation.

A very confusing time. In confusion, you must do the following:

1. Remember, keep high cash balances to prepare for shopping when prices are really depressed.

2. Watch the VIX (market volatility index). Buy at-the-money VIX calls when VIX is anywhere close to 12.

3. Keep the portfolio diversified. Keep minimal positions in stocks, bonds, cash and alternatives (gold, REITs, hedge funds, etc.). Despite the fact that correlations spike to 1, thus losing its benefit, its still better than putting all your eggs in one basket. If there is a bias to anything, it should be cash, then maybe gold.

4. Stock up on commodities. I stilll like gold. I still like energy. The various geopolitical events causing greater uncertainty works well for these (more the commodity itself than the stocks). However, in the case of both gold and energy, I strongly believe in owning both the commodity (futures if possible) as well as the stocks in that sector (ETFs if possible or direct stock selection).

The equity markets have basically had a straight line up since early 2003 through April 2006. It was time that the markets gave back something. The declines of May/June brought markets back to where they were near the beginning of the year (S&P 500 dropped to prices last seen in early Nov 05). So markets have basically given back six months of gains. But they were big gains (9.0% from Nov/Dec 05 to highs of 2006). I’m not certain if the “give-back” was enough. My view is that markets may retest the highs but won’t go far beyond if they do. My greater concern is for the market to strongly test the lows of mid June before the end of this year. By how much, no one can know.

Some say fundamentals look good now, better than they've been in a long while. With all the stimulus on the market now, the time to buy is when fundamentals look even better and there is greater clarity on many subjects, both macroeconomic and geopolitical. It may be too late to sell but investors should hold minimal amounts of all major asset classes anyway, assuming they have long term objectives. Still too early to buy. Now’s the time to accumulate cash where possible.

Source: Market Outlook: Too Late to Sell, Too Early to Buy