Market Commentary for the week of November 5, 2007

Say goodbye to low gasoline prices if, in fact, you are one of a minority who still believes that gas is inexpensive. In what surely is the worst kept secret in the global economy, energy companies had one of their worst trading days last week after reporting that low “pass through” revenues negatively affected their profit margins. In stating that the rising cost of energy production was not being matched by the cost “at the pump”, these megaliths set the stage for price hikes which you, the consumer, are going to be forced to pay later on.

And yet, crude futures, already trading at record intraday levels above $96 a barrel, continue to rise, perhaps over $100 a barrel in the next few weeks/days.

Combine these exacerbated inflation pressures with the ongoing trouble in the financial sector and you get a sobering look at what had been the two highest-flying elements of the global economy. Declines in home sales and prices, coupled with rising energy prices are producing a profit squeeze on equities like none in the last twenty years.

The wrong remedy.

But still, the U.S. Federal Reserve rode its white steed to the “rescue” and lowered interest rates for the second time in a month. It puzzles some to think that turning on the spigot in the face of rising prices might avert inflationary pressures. Indeed, the dollar dropped significantly after last week’s Fed response and interest rates, which are unquestionably in a secular rise, fell too, as bonds became a temporary safe-haven parking place.

No amount of priming the pump, however, can assuage consumer unrest and uncertainty. Manufacturers are sensing this malaise while cutting back on expenditures, hiring, and manufacturing. In fact, production data declined for the fourth consecutive month in October.

It seems that with earnings and profits squeezed by poor margins, the declines are going to be offset by higher prices, layoffs, and dividend reductions. In some cases, we have seen the first signs of consolidation when companies sell assets to boost capital. Already this year, mergers and acquisitions activity has increased in an effort to find efficiency.

As I alluded last week, those CEO’s who command these failing corporations are feeling the heat in record numbers. Write-downs and losses are standard operating procedure for hedge funds, banks, and brokerages that took unnecessary gambles with customer’s money and lost. Of course, you and I are not as “privileged” in our household accounting simply to walk away from poor investments. In fact, the rate of bankruptcies in the U.S. has more than doubled since last year.

Hands off, for now.

The solution to these problems is not to manipulate the cycle of ebb and flow that exists in the economy, but rather to allow the cycles to play out over a natural time progression. Painful? Yes. But more effective than trying to jigger a sales explosion from a cash-strapped (and disbelieving) public.

In the big picture, attention spans are getting shorter, while patience for longer-term cyclic evolution is non-existent. Today, seemingly unrelated events are being made to correlate artificially though market manipulation and persuasion. How is it, for example, that terrorism is correlated to unemployment, or that manufacturing might negatively influence discretionary consumer spending? Of course, one can connect the dots between almost anything. But is there a true correlation between human emotion and the markets, or do they work independently?

Does it matter what investment discipline you select (to get from point A to point B) if the “half-life” of any investment process is three months and influenced by investment bankers and synthetic strategies?

There is far too much complexity built into the markets today, and it’s starting to hurt the practitioners and theorists who believe that investment capital should be allocated for a higher purpose than simply manipulation and speculation.