The Pause That Is Not Refreshing
Given the current market riot, I want all investors to keep two things in mind. First, keep it simple works best in this environment. Don’t attempt to implement any complicated strategies or analyze beyond the obvious. Second, in a time of panic, do exactly the opposite of what feels “easiest” to do. What is harder will work best.
Over the past several months, I have suggested that the markets are troubled by “a pause” that will refresh. In fact, I identified four potential heroes to counter the villains in Washington D.C. and Europe in our third quarter commentary:
- Potential Hero #1: Manufacturing
- Potential hero #2: Corporate earnings
- Potential hero #3: U.S. fiscal policy
- Potential hero #4: China
As the calendar moves perilously close to year end, I am concerned that time is running out. I expect many uncomfortable moments in November, as the deadline for the Super Committee is on November 23rd. The ideology that has certified gridlock in D.C. at the worst possible time will not be beneficial. The odds of U.S. fiscal policy filling the role of a “Hero” have sunk to a longshot.
Global manufacturing figures are not contracting in a way that suggests a recessionary environment. However, there is a “rebound” absence. October U.S. ISM and China PMI will be critical. The market will remain highly sensitive to what is reported. The clock has not run out on manufacturing acting as a Hero; the odds are better here than for U.S. fiscal policy.
Corporate earnings remain robust. Just in the past week Oracle and Adobe reported earnings that confirm enterprise IT spending is strong. Bed Bath and Beyond reported earnings that suggest the U.S. consumer is still spending. Nike’s blockbuster earnings on Thursday, September 22 are highlighted by a surge in U.S. revenue of over 16%. Corporations have learned to do more with less; productivity has never been better. The condition of U.S. corporations provides the most evidence that this NOT 2008 all over again.
Finally, in my estimation, China’s tightening cycle is over. It just has not been officially announced. In the month of October, if the global pause is to refresh, a rebound in export, import, and manufacturing figures are needed from China.
Over the past few months, I have stated that I am more concerned with “the next three weeks, than the next three months.” The 2011 pause is not refreshing. In this environment, I emphasize a continued defensive strategy including the following:
- Municipal bonds
- High-end consumer discretionary names
- Exposure to the emerging market consumer
- Investment grade corporate bonds
- Large cap global integrated energy companies with proven global reserves
Let’s keep it simple. The indicator to assume more risk once again will be the U.S. dollar. Any reversal in the current counter-trend rally that returns the U.S. dollar to its secular downtrend will have an appreciable impact on the S&P 500 Index. It assists monetizing the debt, tilts the needle away from deflation toward inflation, and will support exports.
U.S. DOLLAR INDEX