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Monday, March 08, 2004

Market Correction Ahead?

I'm getting the sense that the Market needs to correct soon. Gas prices are and have been extremely high for awhile now. I key off of gas prices because gas prices are key to our economy. Every physical good and consumer is impacted by the cost of gas, so high gas prices significantly deduct from expenditures that could go into other areas of our economy. I've keyed off of gas prices before and it's worked well for me.
Another factor is interest rates. I think they're going up. See analysis below of why I think it will happen sooner v. later. If they go up, the equity markets will get hit as it increases the discount rate. Although I could make a case that this won't happen as there aren't many stocks currently being valued based upon discounted cash flows. (Isn't technical investing great?)
Also, I think that the run-up in prices over the last few quarters was initially driven by a rebound in certain markets, but is now driven by the supply and demand for capital. The last year or so has felt like the mid- to late-90's. Stock prices are rising simply because there is excess equity capital to be invested, not because equities are compellingly underpriced.
There is a difference.
Unfortunately, there aren't many places to hide right now. Bonds are at risk from a rate increase at the Fed which feels likely to be any day now. The only thing holding back the Fed is the fact that we're in an election year and Greenspan doesn't like to make changes here. I'm trying to understand if inflation pressures become undeniable and force an interest rate increase prior to the election. I give it a 50/50 shot.
Real estate will also get hurt by a Fed increase. Consumer purchases will slow dramatically as prices have inflated to a point where increases in rates will make monthly payments to high for the average Joe.
Interesting times indeed.
I'd be putting my money in international investments right now simply to catch more currency effects. I need to refine what currencies look the most attractive. However, I think one could invest in almost any country besides dollar-based economies and be fine. Remember, 80% of international investment alpha returns are based upon country selection!


At 9:07 AM, Anonymous QUALITY STOCKS UNDER 5 DOLLARS said...

Outstanding take on market moves.


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