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It was a mixed month for the stock market.  Ultimately the combination of numerous weak economic data points and the debt ceiling debacle in Washington together overcame the continuation of generally strong earnings reports.  I continue to believe that the market is quite vulnerable.  Profit margins remain elevated, but with powerful inflationary forces afoot it is not difficult to see how margin compression could materialize.  Once this occurs then valuation contraction follows suit, creating a double negative effect.  On top of all of this, I anticipate that some type of financial crisis will re-emerge.  After all, the policy responses were not to restructure and clear out bad debts for the good of long term prosperity, but rather to move the pain further down the road in favor of a short-term jolt to the economy and markets.
 
All of the political theater around the debt ceiling is really a distraction from the larger issue.  The spending cuts that were agreed upon absolutely pale in comparison to the size of the problem.  The deal will accomplish close to nothing in terms of resolving our nation’s indebtedness problem.  The Federal Reserve will have to continue to conjure money to pay our debts.  Indeed, the concept of putting an end to quantitative easing, upon which the Fed had previously insisted, lasted all of twelve days before they once again floated the idea of a potential third round soon to come in response to continued weakness. 
 
I believe that investors should consider three main pillars to their respective portfolios.  First is cash, which at first glance might appear to be bizarre considering my ultra bearish view on the dollar.  However, cash is very valuable as it represents buying power in the event of a stock market retracement that creates opportunities.  While the dollar is failing as a store of value, we must accept the fact that is still remains the medium of exchange. 
 
Second is a collection of some of the biggest, strongest and most entrenched corporations in the world.  They are more financially sound than countries, and are essential components of modern life.  They also pay growing dividends that are perhaps more reliable than interest payments on sovereign debts.  These stocks by and large remain cheap and in fact are helping to disguise how overpriced the rest of the market actually is. 
 
Finally, there are precious metals.  Gold is the oldest currency in the world and the currency of last resort.  As for silver, it can be brutally volatile but has the potential to be extraordinarily profitable.  It is inextricably linked to gold but its price moves in a more levered manner.
 
Michael H. Berlin, CFA, CPA, is the founder and portfolio manager of MHB Equity Partners, a value-oriented private investment partnership.  He previously worked at Lehman Brothers, and before that at Ernst & Young.  Mr. Berlin holds an MBA from Columbia and a BBA from Michigan.
 
Michael can be contacted at mberlin@mhbpartners.com and at (631) 629-4928.
 
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.