Speed Bump or Pothole for the Financial Markets?

The market pundits moved quickly last week from an universally optimistic market outlook to pessimism in the blink of an eye. It's as if all of them are hoping for a correction to prove themselves right after being essentially wrong for months and years. 

Even the famed Baron Roundtable is not too optimistic on the economy and the financial markets. If you have the time and inclination, go track their record over the last 10 years. Only the stock pickers in the bunch fared well. This is a market of stocks rather than just a stock market.

Certainly we acknowledge with concern the events in Iraq and also the failure of Eric Cantor to win his primary against a Tea Party member. But let's step back and put both in perspective before jumping off the deep end.

Iraq produces approximarly 3 million barrels of oil a day, Opec produces approximately 30 million barrels per day and the world produces and consumes approximately 90 million barrels per day. Also, the United States' oil strategic reserve stands at around 700 million barrels. The price of crude rose around $3 a barrel last week as tensions escalated.  Boone Pickens was out there saying that oil could rise to $160 a barrel if things get out of hand. Maybe he had a personal interest in saying that?  Yes, we live in a turbulent world and yes, things can happen that are unforeseen but let's put it all  in its proper perspective. 

The problem in Iraq is its current government.  The Maliki government  has pissed off just about everyone in its own country and here, too.  The insurgents are really a small force compared to the country's army trained by the U.S. but the army really doesn't support the Maliki government either.  The United States is in a bind as how can we support a government who is not supporting its own people in a democratic way. So maybe we and others will force positive change in Iraq. I hope so. And then what happens to the price of crude? We need to watch the events closely, for sure.

Russia supplying natural gas to Western Europe is a far greater concern to me, especially after its deal with China. These two countries ar forging an economic bond that bears watching.

Like everyone else, I was surprised and taken back by Eric Cantor's loss to Dave Brat in the Virginia primary. Eric Cantor was not onlly the House Majority leader but also trying to lead the Republican party closer to the middle from the far right. Also, remember that he is pro business and pro-Wall Street which were the key reasons for his defeat. He overspent his adversary over 10 to 1 and still lost by a large margin.

Here again, let's put this event in its proper perspective. The implication is that the Republican party will have trouble moving closer to the middle on its platform therefore chances of the Republican party winning a national election are slim to none, at least now. However, this may not prevent the Republican party from gaining control of the Senate while retaining control of the House. Sounds like gridlock and stalemate remains in Washington. Is that really bad for the economy?  We acknowledge that change is needed in D.C. regarding regulations and tax policy to accelerate long term growth.  Needed change may take longer than initially hoped but the direction is there. Be patient!

Last week proved to me once again that stock selection is the key to out-performance. Did you see the gains in Restoration Hardware and Intel which are both core holdings in our portfolio?  There is a time to be long, a time to temper your enthusiasm, and a time to go short. Stock selection both on the long and short side of the markets is what sets fund managers apart--while controlling risk at all times. Maintain ample liquidity and buying power always. Anticipate rather than following the trends. And, yes there is a difference beween hedge fund managers.

To wrap up, the global economies are recovering, albeit slowly. Interest rates are low while the prospect for earnings growth is improving. Commodity and labor costs remain under control as isinflation. The dollar will remain strong and the monetary authorities are providing wind at your back for owning risk assets.