4 themes that cannot be blamed for the latest selloff

Do you remember when Fukushima was going to be a game-changer?  So do I.  Do you remember when it stopped mattering?  Harder to pinpoint.  The media trailed off but there was no decisive moment when it stopped moving the markets.  Or more correctly, when the markets stopped caring about the story.

There have been several themes vying for our attention in the last year.  Each story battering the market as it rippled through the media.  None of them individually turned out to be truly remarkable, but collectively they’ve planted the seeds of doubt in the minds of those whose job it is to put capital to work.  Investor sentiment is low, cash on corporate balance sheets is high.  While these stories matter, none of these themes can be blamed for the selling pressure we’ve seen over the last couple weeks.  Like Fukushima, the markets just don’t care about them anymore.

Eurozone crisis

Spain, Greece and Italy are far from out of the woods but something wholly undiscountable happened on the road to Euro-geddon.  The German people compromised.  The crisis was stemmed when leadership (Angela Merkel) gave the ECB a green light on limitless sovereign bond purchases.  Set your watch for another flareup in a couple years.

Upheaval and tension in the Mideast

Ahmadinejad is a repressive psychopath whose people would have deposed him long ago if not for his brutal authoritarian tactics.  Still, he would rather have the US remain a far away scapegoat than thisclose pressing a boot to his neck.

Possible recession in China

China is in the midst of a once-in-a-decade leadership transition at the highest level of the communist party.  This, in concert with other factors, has obviously got the Chinese elite a little worried.  There’s been wholesale capital flight and a general cooling in all risky activities.  Once people get to know Xi Jinping, China will be back to high single-digit growth for at least another couple years.

Fiscal Cliff and US Elections

No matter who wins, the can will be kicked.  End of story.  Apart from ideological and social issues the most important differentiation from a market perspective is that Mr. Romney is hawkish on QE.  Regardless of your political affiliation, the market doesn’t seem to be discounting any outcome at this point.  Incumbents are historically difficult to unseat.

What’s Next?

There have been plenty of bearish themes emerge, but what is the bull case?  For the last two years the main bull case has been:

  1. It isn’t that bad.
  2. The bears are probably wrong.  Abundant bearish sentiment yet we had already discounted near end of capitalism meant that bears were likely out of step with the market.
  3. QE.

My concern is that unless a true bullish theme emerges we will not be able to maintain upward momentum.  Don’t get me wrong, the QE train can keep chugging for a while, but I prefer the idea of a more organic catalyst.  My feeling is that the next bullish theme will come from the energy space.  A non-deflationary reduction of energy input cost would go a long way.

What are you seeing as the next torch bearer for the bulls, or the next theme for selling?  The market doesn’t seem to care much about the ones above.


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