Commentary

Oil tumbled $15 a barrel last month and Blue Shores clients’ portfolios appear to have benefited from its decline.   Our equity allocations posted modest gains during the month while the S&P 500 was down slightly.   As many of our clients know, we have been positioning portfolios for such a decline in oil prices throughout much of the year by underweighting energy stocks and overweighting consumer discretionary stocks.   This generally has been a contrarian position that appeared “wrong” until recently.   Our chart of the month illustrates the mostly inverse relationship between oil prices and the relative performance of consumer discretionary stocks.

In our opinion, a reactionary rally in oil prices is likely to occur over the coming weeks, however, it will be the market’s reaction to the rally (is it sold into or bought?) that will help determine Blue Shores’ future sector positioning as well as the longer-term price of oil.

It appears that the economy is continuing to operate at a level just above recession.   While we find valuation in U.S. equities compelling at current levels, we are now more concerned about future economic and earnings growth than we have been in the past.   Prior to the run-up in oil prices in June, we saw “light at the end of the tunnel” in terms of an economic recovery.   While we do not envision a deep forthcoming recession, we presently do not see signs of economic recovery approaching.  

The housing market continues to deteriorate and the credit cycle appears far from over as loan delinquency rates continue to increase.   The markets appear to be in the fourth wave of the credit crisis since the current crisis began a year ago.   Fortunately, the current strain appears to be less severe than in prior waves.   There is evidence that the new lending facilities created by the Fed to improve liquidity are generally working.  

In our opinion, the current level of uncertainty regarding future economic and market conditions is remarkably high.   As a result, rather than initiate long-term holdings, we have been allocating marginal assets to exchange traded funds (ETFs).   ETFs serve as temporary positions and will eventually be replaced with long-term equity holdings, cash, or synthetic short positions as market conditions evolve.