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Recovery Is Still in the Eye of the Consumer


Their actions, or lack thereof, will determine the financial future. Until then, we wait.

I haven't been posting much lately for a couple of reasons. First, due to my "day job," I've been working in some areas where there is no Internet connection.

Second, and most importantly, nothing much has changed.

In terms of fundamentals, the economic data is sending mixed signals. However, I remain constructive because of the favorable technical environment.

I have only two positions at this point representing about 15% of the portfolio -- Bank of America (BAC) and Apple (AAPL). The rest is in cash.

I was stopped out of the modest short I had on gold (GLD) today. My fundamental outlook on gold remains unchanged, as laid out in Will Gold Stay in A Sweet Spot?

Gold will act as a cyclical. If growth is good, gold will rally, even if it's less than other cyclicals. If global growth falters, gold will falter, perhaps severely.

Regarding my overall outlook for financial markets, looking forward, I believe one must take into account the fact that earnings season has been a major positive catalyst for financial markets during the last two quarterly reporting periods. In this regard, I expect the trend toward positive earnings revisions to continue. This obviously has bullish implications.

However, I don't have a more aggressively bullish stance because earnings data is fundamentally backward looking.

This wouldn't be a problem in the context of a strong economic recovery. However, the more forward-looking economic data points are flashing some mixed signals regarding the recovery.

Ultimately, one must assess the market on a forward-looking basis, and I confess to be uncertain about the medium-term economic outlook. I believe it could go either way.

My own investment philosophy is that high-frequency trading tends to lead to mediocre results. The best results are attained when major "bets" are limited to situations in which an "edge" is clear.

This doesn't happen that often. It happened to me in mid-2008 when I predicted a meltdown of financials and oil, and it happened to me again in March of 2009 when I predicted a major counter-trend rally.

Right now, I don't have a clear edge on the short- or medium-term future for the market. Therefore my overall exposure is light. And I will probably remain "light" on my Minyanville postings until I see another major opportunity. That could happen in a week or in a couple years.

In articles such as Solving the Consumer Demand Dilemma, I've outlined some of the key indicators I'm looking at closely. The Institute for Supply Management Services Index is one of those indicators, and today's number provided a positive sign.

I suggest that investors monitor everything related to private consumption. And when looking at indicators of private consumption -- whether they're anecdotal or statistical -- be empirical. Forget your ideological biases.

Everything hinges on the aggregate behavior of consumers. If consumer data perks up, the pick-up in the economy won't be a temporary phenomenon. The recovery will become self-sustaining -- even if it's just for one business cycle.

On the other hand, if private consumption patterns falter, the current pickup in production activity won't be sustainable and the economy will experience a "double dip" -- only that the second dip could be more of a crash.

This is the current dilemma. Contrary to popular belief, debt levels aren't a major impediment to reigniting and sustaining another business cycle. There's plenty of scope for consumers, businesses, and government to sustain and even significantly expand current debt levels. And banks have plenty of liquidity and capital to expand credit.

The only real impediment to a sustainable recovery is ultimately in the minds of consumers.

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No positions in stocks mentioned.
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