The Market Is a Discounting Mechanism

March 17, 2011

Equity markets have snapped back today, but the environment is still fragile and incredibly volatile. My inclination, although a little bloody, is to continue to hang in there pretty fully invested. There’s too much panic and radiation misinformation floating around to sell. I have added a substantial position in both the Nikkei index and the Japan ETF EWJ.

I’m not sure, however, if we are out of the woods for good. Bahrain is in serious trouble, and any unrest in Saudi Arabia that threatened oil production would justifiably terrify global financial markets. In addition, the latest data on U.S. existing single family home prices showed another 3% decline to a new low, and the fundamental data, particularly the huge shadow inventory, are very disturbing. New housing starts also have plunged, and the three-month average is on the verge of a downside breakout. Although the high-frequency data show the U.S. economy is steadily strengthening, the recovery remains delicate and vulnerable to a shock. Europe is no healthier, and the sovereign debt issue is not resolved although some progress was made last weekend.

My bet is that after a steep near-term decline, the Japanese economy comes on strong in the late summer and first quarter of next year. They are tough, resolute people and they will get their act together. Thus unless the Bahrain or house price black swan flaps its wings, the world is going to look okay for a while and stocks ...

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