Enjoy the Weather...a Perfect Storm Awaits

03/15/2012 9:30 am EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

While most of the country was saved from a harsh winter, there may be some stormy weather before spring has truly sprung—and that goes for the markets as well, says Jim Lowell of Forbes ETF Advisor.

After last year’s ice dams, man-sized snowdrifts, snowbuckled roofs, and snow blowers in overdrive, every hardware store was stocked and every late Autumn customer was buying, bracing for another blow hard winter.

With 20 days to go before spring officially flowers, I have yet to turn on my venerable snow blower or do more than dust my front steps with a broom. Meantime, the first migrations are fluttering overhead and the crocuses are poking their way skyward, both early by any account.

The consensus: we dodged winter. My view: rarely do we escape the end of March without a perfect storm.

The bailout circus continues, and while everyone is focused on Greece’s high-wire act, the elephant in the room is that the safety net from and for the Eurozone is an illusion at best.

Now, to be sure, illusions can have material benefits. They raise enough confidence to get on such a wire and attempt to cross it. But I do not share the view that the bailout plan is viable any more than I share the view that without such bailouts the global recovery is doomed to fail.

As noted mid-month, I think Greece could and should revert to the drachma, and devalue it dramatically, hence stimulating buying of local goods and services versus higher-priced foreign product competitors, thus stimulating both taxable revenue and potentially stimulating job creation.

If Greece does not do this, and there isn’t a politician inside the Eurozone who would be willing to let them do so for purely political rather than economic reasons (doing so would mean that the politicians have been wrong all along about the Eurozone and Euro), Greece falls. There is no way to bail Greece out to the point where its current debt to GDP (between 150% and 180%) is brought into balance.

But if Greece does fall from the zone, I do not think our markets or even the European bourses will fall in a sustainable downdraft. Moreover, if the Eurozone can withstand a double dip, I’d be more surprised than if they actually slid into it.

I’m less worried about that than most, not that I don’t think such a recession wouldn’t have serious market repercussions here at home. It would. But I think we have turned some kind of metaphorical corner where calamity isn’t as easily bought into and the fundamentals continue to have more than a snowball’s chance.

So a market drop? Yes. 10%, 15%, 20%? Maybe. But my view is that the 10% is the more likely and 20% is an outside chance...all recovered within as many weeks or months as it takes such a Eurozone-driven fall to manifest itself.

The fact that the politicians have blurted to the world that if Greece falls the dam will break and we’ll all drown was about as inspired as it was insipid. The tactic was designed to save their own realm at the expense of the people and coins of them. Nothing could be further from that “truth.”

Ireland is on the mend. Italy is capable of self-righting. Portugal, while the weakest kitten in the litter next to Greece, could teeter to the brink of a default, but not as necessarily as politicians continue to broadcast. Spain is in rocky shape, but as far a cry away from being like Greece as politicians are from being willing to pursue and execute economic plans that can last.

Speaking of conflagrations, Middle East tensions continue to rise from Syria and from its nefarious links to Iran and Russia and China (Russia’s interest in Syria isn’t simply arms dealings, it is also Russia’s only naval port on the Mediterranean sea), and from inside Egypt, where the hopes of Arab Spring turning towards democracy are being befuddled and befouled by theodicies run amuck and warmongers running aground.

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The oil markets continue to be the best apolitical gauge of real and imagined political consequences throughout the region, and they remain tipping higher even on days when the dust settles there, because our economy continues to kick up dust here.

Here at home, gas prices are garnering more and more headline space. We’re more vulnerable to a perfect storm in the energy sector thanks to current events of our own making and the usual list of evildoers.

The history of political and geopolitical oil wars, the old questions of why it’s fine to drill for oil on one side of Florida but not the other, and, most recently, why an above ground pipeline is more environmentally unsafe than an ocean rig, are obvious fodder to the campaign wars here at home.

No matter what the pitch and squabble is, gas prices are likely to trend higher due to our own recovering economy and the global economy’s fits and starts. But higher prices still look like a temporary hurdle rather than an impenetrable wall.

Meaning? Down the road we’ll get around the issue, but over the next several months the odds favor having to drive through the headwind ($5 gallons)—which, if Syria and Iran worsen dramatically, could turn into more than a meddlesome maelstrom...and not just for higher gas price reasons.

At the heart of my optimism lies the strength of our recovery. It is a weak and tentative recovery to be sure, but it is also clearly a recovery.

Here we saw jobs and home-related data continuing to improve; albeit improving along the potential fault lines of lower salaries and underemployed millions. We saw a fifth consecutive gain in small-business confidence and gains in consumer confidence along multiple measures. There’s no way to not view each as positive. We saw US retail sales rising the most in four months.

Despite being a bit weaker than expected due to a slight dip in car sales, US consumers were spending. Moreover, while the headlines focused on retail sales missing consensus estimates, they are almost 6% higher compared to one year ago, and they’ve increased 6.3% in the past three months.

We did get weaker than expected sales; from the headline number you could see that foreign car sales had slowed in the Eurozone more than expected, while US car sales had risen more than expected.

Given that next to a house, cars are the second biggest investment most US consumers make, I’d say such spending is based on a - optimism that we’re on the road to recovery, and on an optimistic assessment that those who have their jobs today will have them for enough years to pay off that car loan.

While home sales and construction are inching toward betterment, Home Depot (HD) saw business improving in all regions. Priceline (PCLN) saw increased consumer and business traffic. Disney (DIS) saw improved profit from its domestic parks and cruise ships.

And despite the slew of Eurozone downgrades (in ratings and outlook), California’s ratings outlook was revised to positive from stable by Standard & Poor's.

I think the globe is warming to recovery. We have plenty of mileposts to figure out not only if we’re on that road to recovery, but what our rate of speed is, which in turn better enables us to glean the time it will take to arrive at a better destination than the current slippery slopes we’re on.

Of course, the threat of potential detours or Spring blizzards remains. The freezemeisters who have been tirelessly calling for a market version of snowmageddon could still be proven right. But the facts on the ground lend a gathering sense that it will take more than one storm to ice this recovery.

Still, just to be on the safe side, I’m putting neither my risk-adjusted discipline nor my snow blower away just yet.

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