Market Commentary for the week of December 17, 2007

Even veteran Wall Street observers had to be scratching their heads in bemusement over the market’s strange twists and turns last week. The much anticipated Federal Reserve Board (FOMC) meeting produced a lot of fireworks but ultimately netted no change in the averages following a calamitous downdraft responded to by an ebullient upswing in two successive days following the Tuesday release.

Intraday fared no better, as stock averages surged out of the gate early in the day, retreated late, and closed flat at the closing bell.

If, at this point, you don’t need an aspirin for migraines or whipsaw, then you aren’t paying attention.

Don’t confuse the trees for the forest.

Despite the emotional responses to the Fed’s meager pronouncement, there continues to be troubling data which overhangs the probable performance of stocks, globally. Currency imbalances, poor credit, low consumer demand, diminishing earnings rates, and the threat of terrorism and war pale in comparison to rising energy costs, inflationary pressure upon raw commodities’ prices, and the aging of the globe’s infrastructure. To be sure, confidence is low and the appetite for stocks and speculation is waning, with the exception of day traders and professional profiteers who make their living off of the imbalances in valuation.

I should note that all market sectors in my universe of evaluation have either begun topping or are preparing for a reversal of existing short-term uptrends.

Before you read doom and gloom into the preceding five paragraphs let me add that cyclicality in markets/sectors is a normal thing. It represents a quantifiable build-up and breakdown in valuation that enables sectors to gain leadership over the long-term without exhausting any linear potential. Rather than using a “cherry-picking” approach to equity evaluation, I feel more comfortable relying upon leadership sectors to play out their long term secular processes, while still recognizing a natural cyclicality of capital gains/capital losses that evolves over shorter duration. Simply stated, “play the long themes; trade the short-term”.

Despite the nuance I describe above, last week’s news did little to quell concerns that the mortgage crisis in the U.S. and credit crunch globally would be sufficiently addressed. Indeed, in their own words, the Board members left open the possibility that fighting inflation (raising interest rates) is a more significant project in the future than releasing liquidity on a temporary basis.

Liquidity isn’t the problem, prices are the problem.

I think that inflation and its impact upon profit margins is the greatest threat to equity expansion, currently. But “inflation” is not simply cost creep. It is a morality play that relates to feeding the hungry, healing the sick, housing the needy, spreading the wealth, and maintaining a globe with clean and abundant natural resources for its citizenry.

With a load like that to worry about, it’s no wonder the markets can’t get out of their own way.