Jamie Dlugosch
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Another Shoe to Drop
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March is here and spring is nearly upon us. It is my absolute favorite time of the year, but this year I'm afraid that spring will be fall with respect to the markets. One or two more shoes appear ready to fall with respect to the market and our economy. While we have enjoyed a nice rally off the mid-January lows, the rally will be fleeting. Friday's action whereby the major indexes all dropped by more than 2% may be just the beginning. Frankly it is hard to see the market doing anything but retesting the lows. The headwinds for such a decline continue to persist with no sign of receding. Inflation, or at least prices for things that matter, are going up, job growth has slowed and unemployment is rising, and the credit crunch has indeed bled beyond the sub-prime mortgage market. In early February, I was advocating a buy into the market steadily over time while keeping a small portion of the portfolio short world markets. Given where we are at today, I am not so sure that makes Rational sense. There are many reasons for feeling this way, but I think the biggest concern I have is in the financial sector. With huge numbers of variable rate mortgages resetting in May and June, the odds are pretty good that the banks will be seeing more losses and asset write-downs. There is no way for the market to truly rally without the participation from the financial sector. Until this mess is fixed, the market is at risk for more corrections that may finally result in a true bear market. I'm not trying to be pessimistic here, but these issues are not simply solved over night. Thus far the pain in portfolios has failed to match the depth of the problems. Admirably the market has hung in there quite well, but get ready for round 2 to the downside. As for my Marketocracy portfolio, I will put my monthly buying on hold and instead increase my exposure to the short side by doubling my existing short positions. I'll keep the existing long positions as a hedge to a more protracted correction. I'm on the record as stating that the next best buying opportunity in the market will be in the fall of this year. There is no harm in nibbling as I laid out to do, but when the direction is as obvious as it appears to me now I prefer to just wait. Jamie Dlugosch | ||
