Wednesday, February 14, 2007

Is Bernanke Right?

Although I didn't make it to Disney World, I did spend a few days in Orlando last week. I took part in a panel discussion for the CFA Society of Orlando, and I participated in the World Money Show.

The CFA Society panel discussion focused on the outlook for the markets. It was moderated by Vinny Catalano. The other panelists were Kathleen Camilli, Chief Economist of Camilli Economics; Timothy Hayes, Chief Investment Strategist at Ned Davis Research; and Lee Schultheis, CEO and Chief Investment Strategist at Alternative Investment Partners, LLC.

Catalano pointed out that most strategists these days are bullish. So far, they've been right. Stocks continue to flirt with new highs. The Dow is closing in on 13,000. His concern is that there is too much consensus. I think he is right. A few concerns that came up during the discussion were the sub-prime mortgage markets and investor complacency when it comes to emerging markets.

I moved on to the World Money Show, which was filled with newsletter editors and money managers. There I took part in a panel discussion of several Forbes newsletter editors including Ken Kam, Jim Lowell, John Christy, Richard Lehmann, and James Stack. Interestingly, this group did not seem overly bullish. Caution was the rule of the day. One thing I pointed out in both discussions is that OPEC and other oil exporters have learned that the world can easily tolerate higher oil prices. They no longer fear causing recessions by restricting supply and raising prices. That's not very comforting.

Yet Ben Bernanke is pleased with moderating energy prices, which he says takes some heat off inflationary pressures. In other words, don't expect another rate hike. That's why stocks rallied today. But what if he's wrong and energy prices move higher. Oil is already up almost 20% since bottoming recently at $50 per barrel. And what if the housing market has not bottomed as many expect. Each day seems to bring more bad news about canceled orders and fewer homes being built. Yet investors are not giving up on the housing stocks. I think those who remain cautious are right to do so.