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10/21/02  

Should You Be Bearish? 7/21/03

We have been advising raising cash levels, largely because valuations were not compelling and the markets were technically overbought. While pundits, including this one, expect a stronger second half, we sure aren't laying rubber as the improvement gets off the mark. 

But there are other reasons why caution is advisable. Here they are:

1. Bonds have backed up considerably, normally a negative for markets. We have had a precipitous decline in bond prices along with the accompanying jump in interest rates. This has occurred across the whole curve and seemingly without regard to credit quality. Normally, high yield spreads contract, even as treasury yields rise, largely because the increased economic activity bodes well for leveraged companies. Additionally, stronger equity markets could allow some refinancings. However, so far, all bonds are getting shellacked. 

2. The political and geopolitical situations are deteriorating, and the political funny season is beginning in earnest. This endless bashing and negativity wears on investor psyches. Additionally, the consciousness of a serious event is raised. 

3. This is typically a weak time for equity markets. 

4. Multiples are predictive of a serious economic lift, which is not fully in evidence. 

5. Companies still have serious pricing issues and overcapacity abounds. 

6. We are losing jobs at both the skilled (help desks, programming, etc.) and unskilled levels which could prevent job creation from following an improving economy. In essence this could provide stiff headwinds. 

7. We are accumulating colassal deficits in trade and government. The federal tax cuts may be offset by local and state increases, thus blunting fiscal stimulus. The effect on debt and currency markets, thus far, has been negative. 

All in all, it is time to rest and see what the economy is really doing. It is also a time to be patient and pick lower entry points. 

JTD

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