Remaining Cautious On The Markets But Bullish On Commodities

I have commented that I am cautious on the markets. In my article Continue To Remain Cautious On The Markets—20 July 2006, I flagged weak housing, high oil prices, high commodity prices, and escalating geopolitical risks. With higher interest rates, consumers and companies will find debt service more challenging.

Geopolitical conflicts appear to be strengthening. The Middle East still engaged. A Wall Street Journal article indicates that Iran's President Rejects Security Council Deadline (subscription required), which is yet another troubling problem on the horizon. And as I have written in prior articles, Venezuelan president Hugo Chavez is making far-flung alliances with Russia and Iran and various alliances with Latin American countries. North Korea remains unresolved.

When the Berlin Wall fell, I hoped that countries would take advantage of the opportunities that freedom and democracy bring. Instead, the world seems more fractured, more intent on settling old rivalries. To make matters worse, the world's most powerful leaders are not unified. If the G8 or U.N. Security Council could focus their energies toward addressing the various geopolitical problems, then substantial progress could be made. Instead, we are mired in the age-old problem of geopolitical influence. The unfortunate strategic games continue while many innocent people suffer. Sad.

With the various challenges—higher interest rates, a softening housing market, higher energy prices, and on-going geopolitical tensions—I expect the markets to struggle. I also expect the commodities to continue to do well. Even though economic activity is supposedly slowing, one, five, and ten year charts for gold and silver (see Kitco website) show that precious medals have been resilient against higher interest rates. Energy prices remain resilient as well.

In summary, I remain cautious. I think the current headwinds are too strong for the stock markets to mount a strong and sustained advance. If Bernanke announces that he has finished raising rates, we might enjoy a rally. However, I would expect that rally to be short lived. Until we get some indication that the economy is strengthening again, I am likely to remain cautious.