THE BLOG
03/18/2010 05:12 am ET Updated May 25, 2011

8 Waving Red Flags Hoisted

On the surface, the U.S.'s failure to win the 2016 Olympic games is no big deal. So it went to Rio De Janeiro instead of Chicago. Too bad, but life goes on. And as far as the stock market goes, judging from its ongoing strength, the loss is pretty much a non-event.

That's not the way it's seen by Selwyn Ortz, a principal of Hong Kong-based global money manager HK Investments, Ltd. He believes the market could eventually face a meaningful setback at some point because of the implications of President Obama's failure -- despite a full-court press -- to induce the International Olympic Committee to choose Chicago as the host city for the 2016 Olympic games.

The Olympics loss, as Ortz sees it, is one of eight red flags the market should be wary of. "The market's adverse reaction to this episode is not something that will happen tomorrow night, but it's on the way," he says.

"Not getting Chicago the Olympics was a significant loss for Obama," says Ortz. One ramification, as he sees it, will be to fire up the Administration's political enemies and make it much tougher for the President to achieve anything of a concrete legislative nature in Washington. Eventually, he feels, the market, confronted by legislative stalemates and much greater political bickering, including within the Democratic ranks, will get the message that Obama's honeymoon is over, and stock prices will be punished.

The Olympics loss, he also thinks, will cause the President to lose some of his international luster and support, which could embolden the U.S.'s enemies.

There's an old saying you can worry yourself sick over nothing. One of academia's leading political minds, Larry Sabato, professor of politics at the University of Virgina, reckons Ortz's concern may be a case in point. Why so? Because while he views the Olympics loss as domestic and international humiliation for the President, he doubts it will have any drastic effects on his ability to get legislation through a heavily Democratic Congress. It was a "memorable embarrassment," for sure, but memories should fade quickly as we move on to other topics, Sabato says.

Speaking of risk factors for the market, Ortz argues that Wall Street is presently blind sided by the widespread and swelling view that stock prices -- despite a more than 50% run from their March lows -- still have nowhere to go but up. Ortz, who believes stock prices, generally, are overvalued based on fundamentals, doesn't buy such optimism, contending the market has enough concerns on its plate to be wary of such exuberance.

In fact, he sees a slew of additional risks, any of which he thinks could precipitate a sharp market decline -- anywhere from 10% to 20%, he believes -- if they become a reality. Noteworthy among them:

  • Continued revenue declines, as evidenced in the upcoming issuance of third-quarter earnings reports, which would raise questions both about the ability of companies to boost profits without cutting costs and the viability of the recovery.
  • If news on the jobs front should continue to worsen, with no indications of any renewed hirings.
  • Any clear message from the Administration that a second stimulus package (which Alan Greenspan recently said was not needed) is definitely out.
  • Any hint from the Federal Reserve of some credit-tightening, which most pros feel is unlikely because it would dampen renewed economic growth, but which some insist is only a matter of time because of prospective new inflationary pressures and any renewed decline in the dollar.
  • If the Christmas season turns out to be much worse than expectations.
  • Any meaningful accelerated selloff in the highly volatile Chinese stock market, which shot up more than 100% between November and August and has since fallen more than 20% in recent weeks. Selloffs in the Chinese market now frequently trigger declines in markets around the world, the U.S. included.
  • Any negative earnings surprises from the major U.S. banks, which have evolved into new market darlings, but which are generally expected to post substantially more losses related to mortgage loans.

So there you have it: Eight waving red flags. It all reminds me of a warning Julius Caesar received about the Ides of March. He ignored the warning and, as we all know, it cost him his life. Ortz's admonition: Don't be another Caesar!

Write to Dan Dorfman at Dandordan@aol.com