Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Sustainability Should Top the Economy's To-Do List

By

Check off one thing at a time.

PrintPRINT
I'm becoming increasingly convinced that the upcoming earnings season will produce bifurcated results with larger companies generating at or above consensus results while smaller, more US-centric companies come in at or below consensus readings.

In light of the fact that the smaller company stocks have led this rally, it's fair to assume that any such disappointment will likely result in large stock outperformance for the current quarter and possibly beyond.



This is not to say that stocks will rise. Rather, the odds suggest that stocks are likely to have a sideways to downward fourth quarter, with the larger risk resting on a meaningful divergence (in both economic and stock market performance) between the large-cap issues and their smaller brethren.

The issue at hand is sustainability. The economy needs it, and so do the equity markets.

Since early March, the stock market rally has been driven primarily by fast-money hedge fund types (along with a considerable amount of short covering). This is unsustainable.

Longer-term investors must come into this market, a fact that the fast-money crowd is betting on because the cash from longer-term investment money sitting on the sidelines (in near-zero interest rate money-market funds) is considerable -- more than $3.5 trillion.

The sustainability factor is at play in the real economy as well. Government spending followed by corporate spending (mostly in the form of capital expenditure and inventory rebuild) must be followed by end-user demand -- aka consumer spending.

The end user is always the key to a sustainable economic advance and the single most important underpinning for a rising stock market.

While this morning's economic report showing a modest upside surprise to US consumer spending has no doubt lifted the bulls' spirits, the less-noticed warning regarding consumer spending from the just-published report from the IMF provides the more substantial information.

With credit availability still constricted, deleveraging still underway, and consumer balance sheets still in repair, expecting a robust economic advance and a further equity market rally to emerge out this soup of stress is a concoction only for the most optimistic and most hidebound to formulaic thinking (such as low inflation justifies above average P/Es).

Investment Strategy Implications

I've stated for the past several months that a further rallying in the equity markets will be met with further selling in accounts managed by my company to not just maintain the equity exposure but actually lower it.

I now add to this the probability that further selling may result from any signs of technical analysis divergence between the large- and small-cap issues as well as any further deterioration in the price performance of the Chinese stock market.

Therefore, it's highly likely that accounts managed (which are presently around 85% invested in equities) will be at or below the 80% level in the coming weeks or months.

Then again, more declines -- such as what we're experiencing today thereby producing lower equity values (as a percent of the total portfolio) -- may do the job for me. At that point, the contrarian in me would have to consider buying into the weakness. At least for the very short term.

Being flexible, especially during times of transitional economies and markets, is a valuable portfolio management skill. Like my Walk the Talk article from two weeks ago, this is always easier said than done.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE