Pardon My Absence

I must apologize for being a bit out of touch for the last couple weeks!

In addition to a 3-week bout of bronchitis, I have been on the road, traveling from New York to Doha and then, almost directly, to Las Vegas.

It has been a whirlwind tour, but an informative one. Clearly, the world is focused on the implications of collapsing crude oil prices, and the deepening economic weakness in Europe, Japan, Russia and in some emerging markets.

That's why my domestically focused portfolio, which can be seen by subscribers of "Insana's Market Intelligence," continues to outperform the S&P 500, from inception (October 7th) to date.

That does not mean I haven't made a few missteps. I bought two energy stocks suspecting that oil was in the process of bottoming out somewhere between $65 and $70 a barrel. Not yet, and prices could go lower still.

But my exposure to airline and bio-tech winners has more than offset the losses in trying to pick a bottom in the oil patch.

That's why a certain amount of diversification (not too much) and the proper weighting of positions in a portfolio can both mitigate losses and enhance performance, when done with a certain degree of discipline.

End of Year

As I have written recently, it is tempting to take profits on big winners, close out the year by simply going to cash and starting from scratch in 2015. That is not the stuff, of course, of prudent portfolio management. One should be inclined, however, to re-balance the portfolio and shed losing stocks in order to maintain equilibrium in one's equity holdings.

I am contemplating some end-of-year hedging, which will be transmitted to subscribers via our alert system, if I believe the market faces some unexpected disruptions from the crash in commodity prices.

Some highly levered energy deals could unwind in the days and weeks ahead, so I am being mindful of risk, while continuing to look for other opportunities that may present themselves in the new year.

Mini-Meltdown

With that in mind, one has to wonder whether a mini-meltdown could occur in financial markets if oil continues to plunge and some speculative plays in energy collapse under the weight of falling commodity prices and excess leverage on their books.

That's a real risk, something akin to Long-Term Capital's collapse back in 1998, or the Asian currency crisis the year before.

Markets may be both shaken and stirred, increasing volatility again and creating a little panic among complacent investors.

Of course, the broader implications of such an event mean that policy-makers would likely forego any early tightening of monetary policy here at home, while accelerating stimulus in other parts of the world.

Bailouts are bullish and we would take advantage of lower prices and increased stimulus if such a scenario were to play itself out anytime soon.

Not a Forecast

I do not raise that possibility to alarm readers but to arm them. Forewarned is forearmed. I would not make a move to hedge my portfolio exposure without informing subscribers, but to date, I have not been convinced that such a scenario is an imminent risk. But, it is a risk and one that I am watching quite closely.

The global economic outlook, meanwhile, continues to deteriorate and while there is a modest amount of overseas exposure in the Insana portfolio, the focus remains on big, domestic brand-name companies that do well in a variety of environments.

Touching Base

That is all for now. I wanted to touch base and remind you that the game's afoot. There are plenty of things to watch closely …. falling commodity prices and extremely low interest rates around the world … two indicators that could be forecasting further weakness in the global economy.

I am watching Fed Heads as they discuss possible changes to Fed policy statements that could indicate a coming hike in rates, earlier than I have anticipated. 

I am also watching holiday sales to see if there is any stall in consumer spending, even as disposable incomes rises thanks to falling fuel costs.

My core thesis about the US economy remains intact … it is the best in the world. But even as the US appears to be accelerating, one needs to remain vigilant about identifying risks wherever we may find them.

That is my job in the next few weeks … to challenge my thesis to see if it can hold up without interruption in 2015.

In my next missive, I'll let you know what I've found out.