Your Economy (No Politics)

[Bullwinkle]

Structural Imbalances Coming to the Fore
Market Views of Comstock Partners, Inc.
Thursday, March 17, 2005


The market is continuing to show signs of petering out as it ignores decent economic numbers, and a significant rise in deals. Instead it is increasingly focusing on soaring oil prices, the jump in non-energy commodity prices, the rapidly deteriorating current account balance, the recent discussion of a possible real estate bubble, the weakening dollar, the big federal budget deficit, threats by numerous foreign nations to “diversify” away from the dollar, the Fed’s apparent determination to move the long-rate higher, and bolts out of the blue such as the highly negative GM statement.

In our view these negative factors are not temporary, exogenous inconveniences that will soon disappear, but are all interrelated. They are a direct result of all the global economic and financial structural, imbalances that we have long been discussing in these comments. These are the extremely low consumer savings rate, the record level of consumer debt-to-GDP ratio, the record trade imbalance, and the federal budget deficit--all engendered by the massively easy monetary and fiscal policies designed to contain the potential damage of the bubble that burst following the late 1990s boom.

We believe that here is no easy way out of this mess, and that the chance of a benign outcome, while hopefully possible, is quite low. All past rounds of monetary restraint, particularly when combined with soaring energy prices, has led to recession or stagnant economies as well as numerous financial crises that have trashed the market. This seems particularly relevant in a post-bubble period such as the one we are in now.

Significantly, the market breakout to new cyclical highs on March 4 and 5 did not hold, and the S&P 500 fell back into its base. Typically, market index breakouts from consolidations that show real staying power do not decline back into their bases, and those that do are often followed by a renewed downturn. It is also noteworthy that the post-election rally reached 1184 on the S&P 500 as early as November 12, and now, over four months later, closed only six points higher on today’s close. Given the market’s excessive valuation, the Fed’s tightening policy, rising oil prices, and the consequences of the structural imbalances finally coming to a head, we believe the probability that a top is now forming is quite high, and that the risks to the market are rising.

http://www.comstockfunds.com/index.cfm/act/newsletter.cfm/CFID/3100225/CFTOKEN/15616716/category/Mar...