David Vomund
Special to the Bonanza

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August 27, 2012
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Market Pulse: What could go wrong?

INCLINE VILLAGE, Nev. — When I began writing this column, I’ve said that it’s okay (though at times lonely) to be an optimist, and I have been upbeat. While the financial media focus on today’s well-known problems, I’ve looked forward to what could go right, or at least go “less wrong.” Optimism has paid off. The market is up 12 percent year-to-date and 32 percent over two years. That’s not to say bad things can’t happen. They can.

Leading the list of worries is a further deterioration in Europe. Maybe Greece won’t pay their bills, or a country will be dropped from the Euro. That is what most investors worry about, but for me it is not a major concern. Why? This problem is well known. A lesson I’ve learned long ago is that you can’t keep selling for the same reason. Although European problems are blamed each time our market declines, the story is old and investors react positively every time there is even the smallest step toward resolution.

The cliff is also a worry. On January 1 the Bush-era tax rates expire and automatic spending cuts go into effect. effects of rising tax rates and cuts in government spending will negatively impact GDP by more than 3 percent. Since the GDP growth rate is at best 2 percent or so, the impact alone would put us into a recession. Naturally, since it is in no one’s interest to have a recession and one could be avoided, it is logical to assume that actions will be taken. Even if Congress simply kicks the can down the road the market will react positively. Investors will become increasingly cautious as the year winds down and we’re seeing signs of that now. Yes, it would be nice if future taxes and costs were more certain. Of course, if they were more certain stocks would be a lot higher today.

I’m also concerned about the rising tension in the Mideast between Turkey and Syria, and increasingly between Iran and Israel. If push comes to shove in either case, oil will soar, even though there would be no shortage, and stock markets would be pummeled, at least initially. Government bonds would rise. I have no more insight than you as to how the Mideast problems will play out, but they will one way or another. Investors seem to be assuming the best outcomes, though the rising price of oil shows that some are betting the other way. We’ll soon see who’s right. Maybe very soon.

Here’s the good news: As Blackstone’s market sage Byron Wien put it recently, “Disaster has a way of not happening.” He’s right, which is why it’s paid to be an optimist ... and it will.

— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.


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Tahoe Daily Tribune Updated Aug 27, 2012 04:39PM Published Aug 27, 2012 04:36PM Copyright 2012 Tahoe Daily Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.