Uncertainty High Heading into September

 | Aug 24, 2012 | 10:30 AM EDT
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Thursday saw the first triple-digit loss on the Dow for August and the market feels increasingly tired at these price levels. The overall market is poised to deliver its worst week in the last three months of trading.

One of the nice things about running a long/short portfolio is that there can be positive nuggets even on down days. One of my largest short positions, Salesforce.com (CRM), was down a couple of bucks in the regular session yesterday. More importantly, it delivered earnings and guidance that disappointed the Street.

On the long side, one of my recent long positions, Foster Wheeler (FWLT), bucked the down trend and was up more than 3% on a significant contract win from Petrobas (PBR) to build an oil to gas facility in Brazil. I think this aspect of energy infrastructure is going to be strong over the next few years as companies like Cheniere Energy (LNG) get financing in place to build multi-billion dollar plants to turn natural gas into liquid. I think the stock is in the early innings of a significant move.

These positives aside, I continue to grow more pessimistic about the performance of the stock market over the near term. In my opinion, there is a high likelihood that the market has seen its highs for the year. Investors should bank some of their double-digit gains in the overall market and build some cash for a pullback that is looking more and more like a probable event in September.

I have myriad concerns about the market, but at the top of the list are the following:

Europe: The market has had a nice run while most of the continent took their long annual summer vacations. But the politicians and bureaucrats of the EU are about to return to work. They have a full slate on their agenda with the situations in Greece and Spain rapidly deteriorating. There is no easy way to split the difference between the needs of the struggling South and the more prosperous and stable North. The time for half measures has passed and I think there will be at least one major hiccup or worse in September that will rock equities.

Earnings and Revenues: It has been a solid two months in the market even though 60% of S&P companies reporting put up revenues that missed estimates (even as earnings were OK). Third-quarter earnings are now forecast to be down y/y from a predicted mid-digit gain just a few months ago. I don't like the directional momentum of these trends and with Europe going into their second recession in three years and anemic job growth domestically, I don't see a catalyst on the horizon to arrest this downward momentum in the intermediate term.

Domestic Uncertainty: From the outcome to the presidential election to the looming fiscal cliff, domestic uncertainty is high right now. Add in rising gas prices, the worse drought in 50 years and tepid GDP growth. It is hard to see much to buoy consumer confidence and spending in the next few months.

China: The country just had its worst inventory report since it started to be tracked in 2004. Inventories are building up quickly as export growth falls off in Europe dramatically. I believe China could be at an inflection point on its growth trajectory as a country that will see lower growth within its economy in the coming years. This is starting to have worldwide impacts as major commodity producers delay or cancel major mine expansions. It is an underreported story, but one that could impact the markets at some point and worth keeping an eye on.

Be careful out there.



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