The Final Four is in place and it doesn’t include KU -- or basketball at all, for that matter. The Final Four I speak of will be shaping the markets for the near future, and here they are listed below in no order of importance:
- The invasion or rather imposition of the no-fly zone over Libya. While Libya provides less than two percent of global oil output, surely General Gaddafi is a thorn happily removed from this paper tiger's paw. Speculators pounced immediately and have thus far driven the price of oil up over 20 percent. Iraq has since flexed its pecs in response and publicized its goal of ramping up oil output to 10 million barrels of oil per day by 2014 from the current 2.7million barrels per day, filling any output gap and potentially becoming the largest oil producer in the world.
- The China Syndrome redux now playing out in Japan. The markets continue to seesaw on any rumors of containment and then contamination. Early estimates have this disaster shaving anywhere from one-eighth to one-half of one percentage point off global GDP. I would anticipate that being near-term. Not to be insensitive or morbid, but longer term this area will need significant investment in order to be rebuilt and should be quite stimulative and pro-growth. One other potential consequence of this disaster would be pro-growth domestically. Over the past three decades, the U.S. has witnessed firsthand the benefits (low cost labor and production) of outsourcing. With this nuclear disaster has come a disruption of the very supplies and production we’ve come to rely upon. We may just see a repatriation of some of those thousands of jobs back to U.S. soil in response to secure the supply chain and prevent future production disruptions.
- Sovereign defaults and austerity measures. ‘Nuff said? Not really. European Central Bank head Jean Claude Trichet once again has donned his inflation hawk gear rather prematurely. At a time of uneven economic revival amongst the euro zone's emerging markets, along with potential debt defaults, hiking rates seems akin to a seagull flying in the path of a 747 jet engine, potentially taking it down. There is undoubtedly a need for fiscal restraint. However, at a time where EU members Portugal, Greece and Ireland are attempting to renegotiate the rates of interest they currently pay on outstanding loan balances, a rate hike would seem absurd. But what do I know? I was wide awake during the financial crisis, while Rip Van Trichet hit the snooze bar.
- The Docking of QEII. No, not the ocean liner that continues to move vacationers about in absolute luxury; the Federal Reserve’s Quantatative Easing (QE II) vessel that Captain Ben is docking after its hopefully last journey. QE II has done its job, purchasing $600 billion in assets and thereby injecting $600 billion into the banking sector for investment and distribution. The plan was/is to re-inflate asset prices, with equities being a main beneficiary. Unfortunately, we have to live with the unintended consequences as well, such as much higher commodity prices and a weaker dollar. This is part two of the Fed's plan, the one less spoken of was to “penalize” people who were hoarding cash in savings, checking, money markets and cash equivalents. Force savers and investors to take on risk by paying them zero on their money? Mission accomplished. Cash flows have been moving out of cash equivalents and into equities steadily.
So be prepared for some real March Madness as we close out the quarter and head into earnings season. There are a lot of moving parts. First quarter GDP should come in close to 3%. Job creation is trending unevenly higher. The Middle East is ... well, the Middle East, a hornet's nest of activity. The potential default by an EU zone member should make for interesting theater.
Back to the domestic shores: The Presidential election is inching ever so closer, and with it comes the strong re-emergence of partisan politics. While it’s always easier and less labor-intensive to peer over the hedges at your neighbor's lawn and note the brown patches, it surely doesn’t spread Miracle-Gro and fertilizer on your own lawn. The U.S. must refocus on its own backyard, cut back where necessary, seed where mandatory and heap on a heavy layer of manure (our fearless leaders seem to have mastered the last one without any prodding).
This all points to a heightened level of volatility or market swings. Earnings season and the Federal Reserve should propel the markets near-term; however, as we progress forward on many of these fronts, we’ll narrow the field to the all-important championship game or final two, which should make for one heck of a Presidential race come 2012.
Income and Growth investors may want to investigate SeaDrill (SDRL). The company carries a fairly high debt level, but the offset is the long term contracts for its best-in-class growing fleet of drilling rigs. With the search for new sources of oil leading E&P companies offshore, SDRL is well-positioned for growth and investors are well compensated with its hefty 7.8% dividend yield.
For now, we maintain our aggressive posturing as the current resiliency of the markets and laser focus on domestic fundamentals has trumped global distractions. Thus far, the market has trended sideways with a positive bias. We’ll keep a close eye on earnings and be wary to any change in investor sentiment as we get closer to the expiry of QE II. Should we see a need to adjust our strategy we’ll be in touch immediately.
Disclosure: I am long SDRL.