How Will May End?

We continue to be worried about a big pull back in the markets. The rally has been pushed higher as the cash on the sidelines gets antsy and feels compelled to participate in the rising stock market. For every positive tea leaf, we still see negative news.

This weekend North Korea stirred the pot with the launch of a nuclear missile test. OPEC ministers are gathering to determine the fate of oil supplies this week. Finally, GM is likely to file for bankruptcy. None of these events will ease investor concerns. Furthermore, we remain concerned with the weak consumer and the pending collapse of commercial real estate. Stocks fell off a cliff in the beginning of March but now they have risen too far, too fast. If the upcoming economic news turns slightly negative, investors are likely to become scared and begin to sell stocks again. If a black swan in the form of political uncertainty in Venezuela, Russia, or North Korea arises, look out.

We are still in fragile times. The financial industry is desperately trying to heal itself by equitizing their balance sheets but the toxic assets still exist. Citigroup is not out of the woods and BankAmerica is not minting money. The global financial industry will take years to undue the sins of the past and many surprises will pop up. We believe it will be years until the world is normal again and until that light at the end of the tunnel shines, investing will remain difficult. It is easy to become bullish as stocks gallop higher but we believe economic times will remain difficult and corporate growth stagnant. Stocks discount future earningsbut the short term earnings boost is due to aggressive management cost cutting. Long term earnings growth depends upon the growth in sales. Unless the Asian export machine picks up and corporate lending is reinvigorated, we don't expect corporations to resume their growth.

We continue to raise cash and buy S&P puts but until enough tea leaves convince us that the economic turn is here to stay, we will be cautious investors in this volatile and risky environment.