Monday, June 09, 2008

Latest Market Update

I've posted a new market update at the website. You can view it by clicking on the link above. Here's an excerpt:

So, it’s Obama versus McCain. A year ago the “experts” told us that Rudy Giuliani and Hillary Clinton would be accepting their party’s nominations this summer. Rudy didn’t make it out of Florida. Clinton stuck around all the way to the last primary, but in the end discovered that her Back to the Future campaign had as much appeal as the movies of the same name. Democratic primary voters opted for “change” which apparently means young, good looking and not named Clinton.

So, once again the experts got it wrong. Predicting the future is impossible and the only way to improve your odds would appear to be choosing the opposite path of the pundits. And so it goes with economic predictions as well. Recession, which seemed a sure thing to the press and the vast majority of economists a few months ago, has still not arrived. The economy, stubborn thing that it is, refuses to roll over despite high oil prices, falling home prices, rising food prices, imploding bank balance sheets and the rhetoric of politicians intent on re-election.

To be fair to the pessimists, there is some debate over the accuracy of the economic statistics that are reported by the government. The tame inflation reported in the official statistics contrasts sharply with the disgusted looks on the faces of real people at the pump or checkout line. And if the inflation numbers are suspect, then the official GDP statistics don’t reflect reality, but rather some funhouse mirror version of the economy. I don’t disagree with this view; the economy is not growing nearly as much as anyone would like and likely less than the official numbers. On the other hand, we aren’t on the precipice of the Great Depression Part II (Buddy Can You Spare a $100) either.

I finished writing the update prior to the employment report and oil spike on Friday. I considered some revisions but in the end I decided that the thesis is still intact. The oil spike on Friday was driven by short covering; the selloff in the dollar in the wake of Trichet's comments had a direct impact on the oil market. The employment report, while not great, was not the disaster that some were talking about. Most of the rise in the unemployment rate was due to younger workers entering the workforce (teenagers looking for summer jobs or recent graduates). For teenagers who can't find jobs, they can probably thank Congress; the rise in the minimum wage is not a free lunch.

Oil is giving back some of last week's rally and the dollar is up today. Stocks have rebounded (at least as I write this we're still up) some. What we got last week was a lot of volatility without much movement in the end. Since last Wednesday, the Dow is down a little over 100 points.

Our portfolio models all include commodities and we have benefited from the boom. Our portfolios are up for the year even after Friday's sell off.

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