Market Commentary for the week of January 14, 2008

It is doubtful that the roller-coaster effect of the first two week’s trading is likely to end anytime soon. Anticipating results for the upcoming earnings season, I would expect to see more disappointments than upside surprises. Further, it seems probable that we will not be making new highs in the averages for the foreseeable future.

It is early, or late?

With just a few trading days having passed by, patterns are already emerging that represent a continuation of cyclical trends begun last year. In most cases, and with only a few significant exceptions, sector strength throughout my database is topping or has already begun a bear-type consolidation. The most notable exception to that pattern is the Basic Material sector, more specifically precious metals and gold.

Considering the turmoil in earnings acceleration patterns, it is no wonder many are forecasting a market and economic slowdown.

Regular readers of my commentary know, however, that these reversals are not new. While I appreciate the validation of “recession-speak” by some of my Wall Street market strategist compatriots, take note that I discussed these factors early last year, particularly when addressing productivity reports. You see, I believe “productivity” is code-speak for unemployment. Making fewer workers do more, and paying them the same or less, is not productive. It is psychologically destructive to those left behind who carry on, while “empty lockers” remain a constant reminder of the threat to “do more or you’re next”. Therefore, today’s unemployment numbers took root in last year’s productivity reports.

A slippery slope.

The market cannot hype its way out of a downturn. Stocks trade on the expectation of future earnings growth. Consumers will not flock to your storefront unless you build them a better mousetrap. I believe it is imperative for corporate planners, politicians, and philosophers to weave a fabric of goals and expectations which might lay the groundwork for global work projects that motivate creative thinking and consumer spending.

In the face of mounting debt and declining portfolio valuations in the U.S., tax cuts and interest rate reductions fail to solve the problem. Thursday’s announcement by Fed Chairman Bernanke strongly hinted that he was voting to lower interest rates significantly, in order to quell an economic slowdown. By freeing up the money supply he hopes to make expenditures less costly. I have said many times that “you can lead a horse to water, but you can’t make him spend”.

Working in the market’s favor, though, is the intricate tapestry of global commerce. It is easier to make up for sales lost in the domestic market by crediting more sales to overseas partners. Real-time technological connectivity has created a 24 hour marketplace. In a very real sense, this is the New Paradigm spoken about during the technological revolution. These tapestries now allow for sales and efficiencies to manifest without borders by eradicating seasonal variances, the time clock, and cultural disagreements. The dollar’s decline, borne out of domestic inefficiencies and poor policy, has proven to be a boon for commerce.

It’s not local, anymore.

In a global market, there is little time to bemoan local problems. A dramatic shift is developing, which is reorienting the balance of power from government statehouses to financial boardrooms. Because of this, bear market cycles are isolated to an industry, a company, a region, rather than taking down an entire market basket or economy.

During the coming year, I believe my work will identify pockets of sector and regional acceleration, as I have done successfully before, and make investing more practical and efficient for my readers. In the past, the consumer drove the economy. Today, I believe that nations must drive the consumer by creating conditions that posit a strong moral and economic dynamic.