I have been having a number of one-on-one conversations/emails with investors in the past few days, highlighting my views on markets and how there’s been a "negative creep" into my global market view, making me somewhat more cautious near term.
Overall, and for the medium/longer term, I remain quite positive on global growth and on the global infrastructure build-up that I’ve written/talked about for well over a year. But some of the recent geopolitical developments are clearly representing headwinds, and in some cases, might even become "gale force" winds to slow or reverse any equity rally.
Among the most concerning issues is the heightened level of risk in the Middle East and North Africa which raises the chances of some form of oil supply disruption, or at the least, a continuation of the spike in oil prices that we’re experiencing.
There’s also the "supply chain" effect of Japan’s recent calamity that is already impacting production cycles of manufacturers that rely on Japan for products, parts and services. While that’s likely to be a short term phenomenon, nonetheless, crippling the third largest economy on the planet is unquestionably a near term negative for earnings and stock valuations.
Here’s another little fly in the ointment that has raised concern. With regard to the eurozone, the market has almost assumed that all bad news quickly goes away and that the EU and IMF will put up whatever funds are needed to solve Europe’s financial mess. I have essentially held a view pretty close to that. But of late, the rise of non-center parties (read: far right of center, such as True Finns in usually centrist Finland and Le Pen’s National Front in France) are posing yet another major risk to the whole Euro bailout program. This Reuters article
focuses on the True Finn situation, but overall the message in Europe is that the fiscal austerity is going to be severe, and the demographics of the unemployment numbers are far more heavily weighted to youth over age. So the risks are growing for more public protests and election outcomes that challenge the EU bailout mechanisms, namely, the ESFS or the longer term permanent ESM. That could surprise market participants who thought that all a country has to do in Europe is cry “bailout” and the money just flows in.
Finally, market confidence seems out of whack, overly complacent ... bad jobless claims, bad durables even ex Transportation, awful housing numbers for both new and existing, oil at $105-plus, and several companies already providing very sober guidance after which their stocks got hammered (Walgreen (WAG), Nike (NYSE:NKE
), Paychex (NASDAQ:PAYX
), Cree (NASDAQ:CREE
)) ... and yet the market is up strong!
These are all red flags, or at least yellow.
For now, I’m riding the market’s optimism, but find myself in a position quite contrary to the “buy on dips” mode that has prevailed for much of the past year. It may be time to look to consider lightening up into strength.
(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Disclosure: I am long PAYX, NKE, WAG. Additional disclosure:
Also long many stocks in SPX, QQQ and VWO. Positions may change at any time without notice.