Market Commentary for the week of February 4, 2008

The Federal Reserve responded to Wall Street’s lament that lower interest rates were the solution to recession buildup by cutting interest rates again last week, the second time in two weeks. The reaction however was quite boring, if not downright negative. I guess giving away money is not the answer to failed corporate governance.

Coupled with the Fed’s monetary actions, the U.S. Congress is trying to craft a “stimulus package” designed to get money in the hands of citizens immediately, the expectation being that money will be spent on goods and services.

The conventional wisdom about the efficacy of giving away money is widely debated. Some might view give-backs as justification for the corporate sector to raise prices, reduce output and cut jobs to create bigger margins on their balance sheets. Playing to Wall Street is not always the panacea for what ails Main Street.

In addition, were these plans to work, stimulating the spending side might lead to debilitating inflation and financial instability later on by driving purchasing without increasing savings levels among the general populace.

Further, any spending would be designed to move existing inventories (cars, homes, apparel, etc.) without offering any incentives to the corporate sector to increase manufacturing.

As I have said many times earlier, I believe lower interest rates are anathema to economic growth because they create too much leverage and greed. Besides, “you can lead a horse to water but you can’t make him spend” is a favorite phrase I use to remind the supply siders that all ills are not cured by money.

Tax cuts, for example, in real and inflation adjusted terms have failed to reign in runaway cost increases and have mostly gone into savings for the rich, necessities for the poor. Their effect has been to pour gasoline on the fire. And while I’m not making light of a “found” allowance of $600, I do not believe it is sufficient to solve the problem. One car payment, one doctor’s visit, one basket of groceries? The problem lies deeper than a stimulus package. Simply throwing money against the wall to see what sticks is not the proper summation of an administration’s budget and economic policies during the past eight years.

I believe the problem rests in the inability to wean off of non-renewable energy supplies, such as fossil fuels. Wall Street would certainly be more highly motivated and energized if a mission statement clearly laid out policy and incentives for shaping the globe’s economic future, and a reliable alternative energy source for creating and sustaining that growth. This is not short-term speak, like the kind from Washington D.C., but a long term, viable investment and capital gains solution.

Consider that the last time the Fed Funds Rate was above 5% (1990’s) the economy was flourishing, the budget was balanced and our investment brethren were sky-high on the possibilities of a dot.com “New Paradigm”. One doesn’t need low interest rates to incentivize new investors, one needs new ideas.

I have just returned from a one week research trip, and find myself amazed by the difference between what motivates Wall Street and the average business on Main Street. Many are not directly affected by the upticks and downticks of the market. For some, intrinsic values such as community, charity, and employee welfare are uppermost in their minds. Analyst’s projections are out there on another strata, insignificant for many, and unrelated to generational themes.

To a certain extent “profit” is not always bottom line wealth, but rather bottom line quality of life.

My clients expect performance, indeed. But they also ask me to extend their vision to cross over beyond profit potential and to use methodology to discover capital gains potential along with value based objectives.