Some short and longer-term thoughts on the markets

The market is (so far) down about 0.5% today and is farther off its peak last Thursday. I would like to think that this may be the start of a longer-term trend but I have learned to be more careful in my short-term predictions. What I can say with a fair degree of certainty is that all of the elements for a large correction remain in place. The economy is definitely slowing, the credit markets remain glued up (though less so than a few weeks ago) and corporate profits are hurting. The general sentiment is that the situation is not that bad and the Fed is cutting so the economy will be back on its feet in no time. I continue to believe that this looks more like the end of the cycle than a mid-cycle slowdown. Anything else is probably wishful thinking.

I cannot say with any degree of certainty when the correction will take place, but when it takes place it will be rapid and it may not seem that serious at the start. People will believe that it is just another small reversal after a period of large gains. This makes it better to stay short and wait for the correction to come to me.

It is also difficult to know how large the correction will be. There has not been a significant correction (over 10%) in many years, making one long overdue. But whether it will be 10%, 15%, 25% or even 40%, depends on the evolution of the economy.

So in the short-term, I remain short equities, and I think bonds could also do well in the initial stages of the stock market correction. Looking farther out, once the correction looks like it is ending, I think the global inflation trade will be the best bet. Emphasis on 4 areas: 1) commodies / natural resouces (gold, energy, mining, etc.). These have done well over the past five years but there is still a long way to go; 2) emerging markets, especially those that produce a lot of commodities; 3) companies that produce products for commodity producers (e.g. I mentioned the agricultural equipment makers last month); 4) Japan - the return of global inflation should finally cause Japanese prices to rise, and Japanese assets will also reflate in price.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)