This is from a letter sent to clients on 4/19/2010, well ahead of the recent market sell-off:
-------- Original Message --------
Subject: Market events
Date: Mon, April 19, 2010 8:41 am
The market has been trading very light volumes over the last month and we are seeing many parallels to our calls from last July and even our recession call from October 2007.
Specifically, this market is not reacting in-line with major political or sector news, and continues to move up on light volumes in what we feel is a contrarian direction to the reality of our environment. A few major factors that have been hovering, or have come to light, that should necessitate tight stops and hedging activity in your portfolios:
1) Goldman Sachs - While I don't believe anything will effectively happen to Goldman, there are other market moving factors that will be effected because of this. The push for Financial reform, which will be publicly addressed on Thursday, should be the impetus for a correction in the Financial Sector, with a carry-over to the broader markets. While this is currently more of a psychological effect than a real constraint on earnings growth, the light volume and superior returns PM's have seen since early 2009, coupled with still wary clients, should create a downward spiral as profit taking, and risk avoidance in the Financials shake the markets.
2) Gold - As you know, we have been bullish Gold for the better part of two years now. The short term fallout from the Goldman drama should have bulge brackets and hedge firms shooting against gold trying to get in front of what many think will be a forced liqudiation of the reported large position currently held by Paulson. While I believe that this will only result in a short term decline in Gold Prices, depending on your asset mix, and how much you are up on Gold you may want to consider tight stops, or taking profits short term.
3) Economy and The Fed - While housing news has been decent, the Fed can no longer buy mortgages and act as the banks backstop on the still underwater mortgages. Unemployment is still close to 10%, and looks to remain at those levels for the forseeable future. Companies that continued to top deflated earnings estimates on cost cuts and accounting are not in a position to re-hire 3% of their workforce, and personal wage growth will remain non-existent. Add to those fact that the dollar, while strengthening, is in serious risk of a mass sell off if Moody's downgrades US Debt, our deficit grows, and (unavoidable) inflation rears its head. We have had a nice recovery because our companies were not prepared for the extent or scope of the recession and housing crisis, and have made adjustments to deal in the current economic environment. These moves are less a guarantee that we are out of the woods, than they are trying to stop the bleeding. We are now facing obstacles like commercial real estate, inflation, re-newed Greece and EU worries, etc...and there really is no money left stimulate those industries without having the general populace scream for the electerd officials heads. IN a nutshell, the macro economic view is very poor. Couple this with the expected summer jump in fuel prices (some are even calling for $4 a gallon gas again) and you have a recipe for a significant correction in the markets.
Now that I have thrown out a small part of my rationale for worry, i will try and be even more concise. The market has continued to shrug off bad news and climb as institutional and individual invetors continue to chase returns they missed prior and go along for the ride. Every time we have seen this market action there has been a double digit reversion within a few months. A lot of money has come back into the markets over the past 18 months and the government has thrown our futures into the economy to stimulate it and quickly pull us out of this mess. But there comes a time when the bill must be paid, and while i do not believe that we are in for another move below 7000 on the Dow, a strong market correction should be lurking right around the corner. Obama's speech on financial reform Thursday, along with all the other reasons above, seem to be the perfect impetus to start it. We are in an earnings season where "beats" are mostly priced in, and run a significant risk of having the perfect storm of bad news to give PM's the excuse to take profits and hedge funds to short the market looking for fast money.
Keep stops tight, remain nimble and look to hedge or take profits in your core portfolio.
Street One Financial
AOL IM: ScottFStreetOne
1150 First Ave, Suite 600
King of Prussia, PA 19406
This communication is not intended to constitute any offer or solicitation to buy or sell securities. Street One Financial (S1F) is a subsidiary of Emerging Growth Equities, Ltd (EGRO), Broker/Dealer and member of SIPC, FINRA (egequities.com
). For more information, please contact us at: 877-782-8353
Disclosure: No positions