Meanwhile, if you are a bear you should be rooting for another surge in oil prices next week to finally break the back of the bull. However, I am quite skeptical on how much longevity the recent spike in oil prices will have. Jim O’Neill of Goldman Sachs Asset Management had the following to say in his weekly viewpoints:

“Having observed the beginnings of the stabilization of the longer term price since late 2009, I find it a lot more difficult to be as bullish as many others, and indeed as I used to be for most of the last decade. (To suggest a parallel, it is not unlike being bullish for the Euro/$ above 1.50 or bearish below 1.00 if its “equilibrium” is close to 1.20.)….It also raises the possibility that if policymakers wanted to “do something” to try and get the spot oil price back down, it might be easier than in previous years. Certainly if I were a policymaker, it would be something I would contemplate.”

 The Prospect of Additional Fed Easing

By most estimates there is roughly a 40% chance that the Fed will embark on QE3 (I personally don’t like the term QE3 because it seems to me that QE3 has already been launched in previous announcements which did not include explicit promises of additional asset purchases). Most FOMC voting members have stated that the Fed is falling short of fulfilling its dual mandate, therefore additional monetary policy easing could be warranted.

The first and foremost problem with the Fed further expanding its balance sheet is that it is highly unclear as to what will actually be achieved. What in the real economy will be ameliorated by the Fed forcing investors into even longer duration, riskier assets? Interest rates are already at historic lows and if you can’t get a mortgage it’s almost surely because you don’t have adequate employment – How exactly will another $500+ billion being heaped onto an already bloated Fed balance sheet help Joe the Plumber in Ohio become “fully employed”?

The second and more market moving challenge in the short term comes in the form of surging oil prices. We know that QE1 and QE2 helped to weaken the dollar and led to increased speculation in asset markets – with Brent crude priced in euros currently at record highs and US gasoline prices quickly approaching April 2011 high levels the political fallout from additional large scale asset purchases from the Fed might be too much for Bernanke to bear. However, the Chairman was bold and correct in his mid-2011 call that the energy price spike was “transitory” at the time, and I can make a strong case that the current price spike is also transitory. But what if it isn’t? John Burbank of Passport Capital speaking to Bloomberg last week stated “I don’t think oil is going to stop until the economy breaks” 

Market Outlook

Two weeks ago I stated: “My base case is for the major indices to digest the recent move within a 2-3% range for the next few weeks while there will continue to be significant opportunities among individual names and sectors.” I am sticking to this forecast for at least the next week as I believe equities will continue to trade in a choppy if not sloppy range until the next powerful catalyst emerges. In the week ahead this next catalyst could come in the form of a large up/down move in oil, news regarding the ECB’s LTRO 2, China manufacturing PMI on Wednesday, or additional clarity from a variety of Fed speakers, etc. However, I believe it is more likely that the market will continue to frustrate both bulls and bears alike before making its next 5% move.

Finally, I will leave you with my favorite pearl of wisdom from Warren Buffett’s latest letter to shareholders:

“If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”

 

 

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• Why Shorting Is Difficult: A Lesson From 2008 (robertsinn.com)
• Julian Hebron CNNMoney Front Page (thebasispoint.com)
• Why Facebook won't start trading at the opening bell (CNNMoney.com)