March 2011

In like a Lion...

After a sharp correction that was widely anticipated, the market reversed course and closed out March like a lamb, adding .04%. Our results were much less dramatic due to the hedges, and are currently posted on our performance page. The first quarter was the best since 1998, and the second best performance in history, ending with a 5.92% percent gain. As they say in the business, the market is climbing the wall (and quite a big wall at that) of worry. The Bank Credit Analyst believes that the modal (most likely) scenario is for global growth to remain above average, inflation to stay contained (at least in the developed world) and for monetary policy to remain loose. This scenario would be quite positive for both the stock market as well as for commodities and oil, but they also weigh in on the mean (weighted average of various outcomes) that are on that wall and could cause some problems down the road. Let's look at some of the positives, as well as some of the negatives that may influence the various markets:

• Spike in oil (to say $150), deterioration of Europe's debt crisis, and a new down leg in U.S. home prices present the largest risks to derail the current cyclical bull market. (BCA) 
• The recent drop in agricultural prices have lessened the fears of hyper inflation in the Emerging Markets, and China's efforts to curtail inflation should lead to a soft landing. (BCA)
• In 1970, seven barrels of oil were needed for each unit of GDP, whereas today that ratio is down to less than one barrel and seventy percent of today's utilization of oil goes to fuel the internal combustion engine. With hybrid engines on the horizon, a rise in oil prices becomes less and less a threat to the expansion of the economy. (BCA)
• With quantitative easing supposedly coming to an end in June, interest rates may continue to rise, but less than many pundits are forecasting, as much of the rise is already priced in. Spreads are still attractive, and the Bank would continue to overweight corporates and high yield.
• Commodities probably still have a few years to run as above average global growth, abundant liquidity, and tight supplies still exist. Precious metals are moving higher again, but sentiment is not nearly as high as it was at the last peak, suggesting further upside. Oil may have a longer run, as the Chinese demand for cars continues to explode. 

To conclude, the markets path of least resistance remains to the upside, but because of the continuing weak technicals (buying power below and selling pressure above the February peak) and the myriad of fundamental potential problems, I continue to believe that the best course of action is to stay the course but to take advantage of the relative inexpensive insurance to hedge the downside.

 

-Joe