Market Commentary for the week of July 30, 2007

Well, that was quite a ride the markets took last week. As the swings become more pronounced, and the volatility more staccato, investor’s fear and paralysis becomes more overt.

As I have written, the credit crunch is decimating more portfolios than previously thought, while stocks continue to meander then tumble. It’s not out of control, yet, but it does inflict pain in greater and greater numbers than earlier in the year. Arguing against hypothesis or theory, the unraveling of leveraged securities’ transactions leaves little satisfaction in its wake.

I have also previously stated that earnings are specious, seemingly supported by anecdote or hyperbole. Certainly there is less discretionary demand built into the economy, and now it appears that capital expenditures are being monitored quite closely. Some worry about cash flow altogether, in a market devoid of incentive-style lending rates.

The pain is not restricted to the United States, either. Across nearly every industrialized global bourse, the leverage is unwinding.

The problem, as I see it, is that investors are trying to be too perfect. They tend to measure their performance, and satisfaction, against an artificial legend, such as the Dow, or S&P. By comparing themselves to these standards their emotions, rise and fall like the barometer itself. Their pension assets, IRA accounts, personal portfolios and mutual funds are “tied” to these indices, so, therefore, is their security and emotional well-being.

In fact, those indices are not a measure of perfection, but rather marketing. Investing is not, nor should be, anything but the gamble and selection upon trends that endure as opportunities to make money from global (secular) phenomenon. We should hail the scientists and strategic thinkers of our era, the political statesman, the capitalists and industrialists who put social and societal development ahead of personal gain. Don’t you hate it when executives “cash out” with a golden parachute?

The concept of investing “perfectly” ruins many opportunities for diversification because too often we focus upon hot trends and overweight the odds. By losing sight of the meaning of investing, one places at risk the very security and safety he wished to achieve. The dot.com phenomenon was the last/best test of this theory. Greed is good, diversification is better.

Investing is better if unimpeded by emotion or fantasy. However hard it might be to divorce subjective review from the process, it is necessary, nonetheless.

The rally of April (2007) is fast unwinding. Nothing goes straight up. But all is not lost amidst the chaos.

If indeed the task is to find and isolate secular pockets of upside momentum, then it is important to step back and widen the aperture of analysis.

We need fuel to power-up industrial development. We need a healthy populace to come to work every day. We need institutions which perpetuate morality and responsibility. We need businesses that provide service, satisfaction, and comfort to its’ end-users. We need natural resources and food to sustain the people, and we need technological and brick-and-mortar infrastructure to provide for the execution of society’s mission.

As an economic scientist, the key for me is to develop a top-down landscape that supports my investment hypotheses. The data must support that theory, and the results must prove it to be compatible with the climate in which it operates. Based upon current assessment, the margins are shrinking and the road of accelerating probabilities is narrowing.

I would be cautious about which sectors I add to my accounts, and very careful to underweight the laggard stocks that, thus far, have contributed very little to total performance.