Two Minute Warning
Two Minute Warning
Believe it or not, here we are. Sound the whistle - it is time for the two minute warning for the first half of 2010.
Heading into the second quarter, the capital markets carried significant positive momentum. The momentum changed, however, on Friday April 16, when the SEC charged Goldman Sachs with fraud. Toss in a flash crash, euro debt issues, and an ecological disaster in the Gulf, and the recipe was in place for "a baseball season of frustration."
On the morning of Monday June 21, positive currency news from China positioned the markets sharply higher. Unfortunately, by the end of the day, the capital markets reversed all gains, closing lower. I believe the bearish reaction to that macro bullish news is indicative of the current market sentiment as we close-out the quarter. When the capital market "all-stars" for a particular quarter are the VIX, U.S. dollar, Japanese yen, Gold, and Treasuries, clearly it is a signal that the market has lost its bullish momentum.
The challenge for investors, as I mentioned at the beginning of Q2, is allocating properly - should you be overweight, market weight, or underweight. I have an extreme dislike for cash and fetal positions, the favorites during the credit crisis of 2008. Much of this quarter has been about downshifting, in some instances all the way to underweight. That is reflective of a market that suggests defense first. In terms of investors' appetite for assuming risk, I propose investing in assets such as Disney or McDonald versus riskier assets such as a Google.
Proper allocation will continue to be critical as the market "searches" for the next bullish catalyst. Looking forward, the FOMC will continue to provide ample liquidity. I believe that China will continue to operate as an engine of global growth. The eurozone crisis will linger, but liquidity risks evolving into solvency risks are not imminent. Unfortunately, I believe earnings have reached the "earnings exuberance exhaustion" point. The bar - expectations - for corporate earnings needs to be adjusted lower.
Geez, reading this must be frustrating, but that is what the markets are suppose to do - frustrate investors. That is why a proper strategic plan needs to be in place. Early in July we will release my quarterly commentary. I am certain you can guess at the theme - "a baseball season of frustration is upon us." But, the underlying message is simple - I want investors to play defense, manage the downside, and have position flexibility for an eventual return to the prevailing bullish trend in the fall.