Editor: What's Bugging The Markets?

A few months ago all news was good news, now all news is bad news – no matter how good it may be – how our perspective has changed!

The jobless recovery is now accepted as a given. Inflation and a series of interest rate crawls are also a given and factored into the markets. But there is more. The recent record oil prices are now starting to cast a cloud over global growth as so much of world economies and manufacturing are oil fuel dependent. At the local US level the record deficits are a new element. Add to that the on-going geo-political risks and there is not a lot to be excited about if you were contemplating entering the stock market or adding to your positions.

The bears are out in force, but remember bears don’t make money themselves – nor do they make you money. But really it is all about how we perceive the future and we vote accordingly. Remember also, markets over extend themselves – they either over sell or over buy. With oil at record levels what is the likelihood of the oil price continuing higher? It may well go to $45 but the real big move is over. The move in fact started in December last year when it rose from a base of around $30. It is only now that it’s on the front pages!

But true, there has been no real reason to push the equity markets ahead and there is one major element in my view that is weighing most and that is the leveraged equilibrium. When the markets were emerging from the early 2003 lows, large numbers of investors started to leverage their early entry and continued to leverage as the markets climbed. These investors did exceptionally well particularly those who leveraged using freely available low interest capital from the so called “carry” markets - from low interest rate countries such as Australia. With the prospect of interest rate increases there is no incentive for these players to stay leveraged and in fact there is every reason for them to exit their positions. The propensity for any increase in the value of their positions is far outweighed by risk to the downside. Why take the risk? Right now any moves up seem to be more short coverings rather than new investment momentum and hence do not have legs.

So whilst I believe we are unlikely to see a market rout it is not a good time to be holding stocks that are weak – clean them out! And at the same time there is no need to buy cheap looking stocks as they may well become cheaper – best to await some real consolidation of any pullback before buying the so-called dip. Nothing wrong being cashed up – cash is king in a rising interest rate environment.

Enjoy the ride!

Tom Scollon
Editor