The seams of the global economic fabric are fraying slightly around the edges, as a shortage in liquidity brought about by credit and mortgage lending concerns intensifies. Market futures in energy are becoming more expensive, indicating that reserves and reduced inventories are finally catching up to price increases worldwide. There are many reasons to suspect that geopolitical problems are filtering into the mindset of discretionary consumer purchasing. The pain of lower stock prices is likely to intensify before it reverses course.
Such is the state of the market in the last week. Optimists see the problems as “half full”, while traders see the problems as very real, based upon reductions in volume, breadth, and enthusiasm. To its fans, the market looks increasingly less “costly”, while detractors merely think it looks like an inescapable abyss. My readings of the events of the past week indicate a widening of bear pressure during this leg in the intermediate advance of commodities equities, coupled by a psychological overlay of boredom and fear.
There was no shortage of bad information last week, ranging from a slowdown in Technology stocks’ advance, to a widening of foreclosures and bankruptcies, a slowdown in earnings within the Non-Cyclicals, and finally the dismissal of two CEO’s from the financial services sector. Who is in control and who takes the blame was topic one for media and consumers, alike.
It is unfortunate that no one can specifically identify the root cause of the market’s pain, but there is no shortage of finger pointing.
The market implies risk. Those who do the best job of balancing parameters of aggressive speculation with conservative asset allocation usually weather all circumstances. The fact that the pain endures is a sign that the root causes of the markets’ “fraying” lies well beyond one individual’s responsibility, but rather rests in the collective excesses of leverage and speculation which preceded this period. As I have written in the past, every bull cycle concludes with a period of excessive speculation. Late 2006 to early 2007 is no exception. I expect a commensurate consolidation to last into the early quarters of next year, allowing for certain counter cyclical strength in sectors that might sustain pricing power or capital gains momentum despite a bear phase, such as Energy, Utilities, and Basic Materials.
What is becoming clearer during the consolidation is the fragility of the consumer sector. Despite the best efforts of monetary boards worldwide, it is impossible to “manipulate” the consumer’s pocketbook without adjusting his/her psychology, first. I find it of little value to read about the Federal Reserve attempting to address long term matters with short term solutions. My readers have seen it before: “you can lead a horse to water, but you can’t make him spend.” Now it appears that in the face of runaway inflation in commodities, pharmaceuticals, foodstuffs, etc., our monetary policymakers hope to ratchet down the pain by increasing the amount of cash available for speculation, margin buying, and greed. It’s not a good idea, but they don’t seem to care.
There are some clues, however, that private capital investors are “getting it”. The number of alternative energy funds worldwide is expanding, and biotech research is similarly leading cutting edge drug discovery. The ill-timed hyperbole about the technology sector in the late 1990’s is finally being replaced by real solutions for information delivery and solution-making, and telecom research is providing interconnectedness throughout the globe. Finally, agricultural research is seeking ways to expand the cultivation of necessary crops to feed the hungry. While government does, and should, play a role in providing funding and solutions for these, and other, problems, the reversal of traditional financial instruments allows for the creation of alternative investment pools to become more prevalent and meaningful.
Those longer term horizon funds notwithstanding, markets are collectively hitting lows on an intraday basis. Vulnerable to precipitous swings in psychology, the market is just waiting for something good to spark a turnaround. Unfortunately, with credit woes and diminishing earnings, the bias is shifting dramatically towards negative influences. Major concerns are focused around the erosion of earnings potential due to rising inflation in core commodities, and the reduction in available capital because of declining portfolio valuations. It’s a circle within a circle, and very difficult from which to escape.
More and more benchmarks are nearing support levels. While this may be viewed as a nearing of the end, I am certainly paying careful attention to the ability of those indices to “hold” above support levels, and the magnitude or velocity with which they are able to reverse course and resume any upside direction. Remember, the problem did not occur overnight, nor will it resolve with any degree of convenience much quicker.
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