Market Commentary for the week of March 26, 2007

I don’t really care what the Federal Reserve said last week, and neither should you, really. Those who manage money based upon daily proclamation or news events do so with an extremely narrow focus. The vulnerabilities and opportunities of the global arena are dictated less by the clock, but more by the calendar. Using a news event as a trigger for investment decisions is extremely short-sighted, in my opinion.

Perspective is key.
Nearly all market data is verifiable and quantifiable. That is, the mere presence of patterns within data tracking periods (monthly, weekly) allows statisticians and economists to develop probability paradigms. As I’ve written before, the compression of these data into weighted probabilities keeps decision making focused upon themes and patterns that play out over longer periods of time, and which become immutable and enduring over time. Allowing for the exceptions and exogenous unforeseen influences, the numbers take on a clarity that allows the mind to focus upon what is real, rather than what emotion tells us is fashionable.

Relieving the burden of short term orientation is also good for performance expectations, since “logging-on” daily for account balances is a futile and exasperating experience.

Therefore, I highlight that in spite of the Federal Reserve, or the short term rally from the depths that we are experiencing, the dominant factor in today’s global basket is the broadening influence of inflation, price creep, and a deceleration in earnings acceleration patterns. With the exception of demand-driven and price sensitive sectors such as Energy & Basic Materials, most all sectors in my data base are suffering from this temporary, but very real, affliction.

Play the bounce.
Although the short cycle data is rebounding modestly from the lows that occurred during the last two weeks, the rise is only a reflex response to an oversold condition and a desperate search for capital gains bounces.

But even the rebound is within a longer more protracted period of decline that originated last year and is influenced by a reversal in home equity values, portfolio declines, record borrowing levels leading to bankruptcies, a rising U.S. trade deficit, lowering GDP, and diminishing household savings rates.

If anything else, understand that a comment from one Governmental official will not heal the plague of rapidly deteriorating economic statistics.

It is sad to note, but I believe that portfolio valuations will suffer this year from these data. The key to surviving the downturn is to adjust portfolio allocation towards those “safe haven” sectors in equities which benefit from the “bad” news, and also into cash or related opportunities for short-term yield.

While “buying on dips” is a time tested method for success, the current dips are not the “real deal” nor the right time.
The overall vulnerability of the global exchanges is influenced by insurance scandals, leveraged borrowing, Federal debt, and an unmotivated public that is choosing to sit on the sidelines, at least for the time-being