Yellow Flags Signal Caution Across Markets

Market euphoria in recent days has been greeted with enthusiasm by ‘longs,’ frustration by ‘shorts’ and consternation by both! In the face of less than vibrant US economic activity, continued unrest (read: revolution) in the Middle East, financial woes in Portugal and elsewhere in the Eurozone, and the still-of-great-concern disaster in Japan, the markets have found a way to rally into the last day of the quarter, poised to close out with a YTD run up of over 5%.

While I remain constructive on equities for longer horizon portfolios and have in recent months moved some weightings from international toward US exposure (expressing optimism on the US recovery and some slowing in Emerging Markets countries from formerly torrid paces), I have hoisted some ‘yellow flags’ in the past few days that should be especially relevant to shorter horizon portfolios and others who have cash to invest and are considering when to strike.

Most of my views are expressed in my two recent articles published on SeekingAlpha.com, “Will Headwinds Stop This Bull?” and “The Risks of a Merciless Market as the Earnings Parade Begins.”

To what is already cited in those pieces, I’d also suggest a read of two items that hit my inbox yesterday morning. The first is written by my friend and former colleague from Salomon Brothers, Des Lachman, who is a resident fellow at the American Enterprise Institute in Washington DC. His article appeared Thursday in the Financial Times as an FT Exclusive Comment, entitled “Portugal will follow Greece and Ireland to failure”. While the title essentially says it all, the detail in the piece is a must read for appreciating the severity of the Eurozone situation.

The second is from the global intelligence service, Stratfor, entitled "AQAP and the Vacuum of Authority in Yemen" (republished with permission of STRATFOR). If you’re not familiar with what AQAP stands for, read the piece! And pay particular attention to the embedded map, which highlights the geopolitically critical position of Yemen as it relates to the all-important sea-lanes of traffic in the Middle East.

Taken together, and weighed in the mix with higher commodity prices and the potential for upcoming earnings-guidance-sobriety especially as it relates to margin pressures, it appears that the “risk-ometer” has shifted with the needle swinging more vibrantly toward higher levels.

So what should investors be considering at such a time of heightened global risks?

Oil: does it stay high? Go higher? Do oil servicing and drilling companies continue to soar as elevated global demand spurs a faster pace of exploration? (I think of the impact on names such as Halliburton (HAL), Schlumberger (SLB), Weatherford (WFT), just to name a few).

Energy: Will natural gas finally take off in the US, especially on the heels of President Obama’s speech in which he stressed more efforts to greater energy independence for the US? How about companies impacted by natural gas, those who convert diesel trucks, or those who provide liquefied natural gas fill-up stations for already converted trucks? What about solar? Will the knee-jerk reaction to solar stocks on the heels of the Japanese nuclear disaster continue? And how about nuclear? Will utilities that are big in that space remain under pressure? Or will those utilities suffer near term as the political heat remains intense, but recover when it cools? (In this section, I think of the impact on names like Clean Energy Fuels (CLNE), Westport Innovations (WPRT), Devon Energy (DVN), Exelon (EXC)…again, just to name a few).

Earnings: What’s in store when the “earnings parade” begins in early April? Will the market punish stocks that express caution about input price pressures on margins in coming quarters? Will the market show some mercy to recent casualties who already expressed concern about margin pressures? (Here, one has to ponder Nike (NKE), Cree (CREE), Paychex (PAYX), Research In Motion (RIMM).

There’s plenty to consider and as always, each reader/investor has to opine and decide on his or her own the appropriateness of everything expressed in this article to his or her unique financial profile, risk tolerances and investment goals. In my personal view, the underlying ‘global growth thesis’ are likely to prevail over the near term risks cited here and in my two previous articles. That said, the next few weeks present meaningful headwinds that could slow the recent rally if not reverse it significantly for some time.

Regardless of how you decide to move forward, awareness of the broader array of complex risks and a dynamic assessment of their respective evolutions should help control enthusiasm, reduce frustration and alleviate consternation…..though, the way things have been unfolding around the globe……maybe not!

(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. As I mentioned earlier, each investor is obligated to opine and decide the appropriateness of anything said in this article to his or her unique financial profile, risk tolerances and portfolio goals).

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Disclosure: I am long PAYX, NKE, EXC, CLNE, DVN, WFT, SLB, HAL. I also have positions in many stocks within SPX, QQQ and VWO. Positions may change at any time without notice.