Market Commentary for the week of June 16, 2008

Real returns, as well as relative ones, took a huge beating last week as concerns about earnings sustainability in the face of rising costs caused a pause in positive sentiment. So far this year energy prices have risen at a double digit rate.

A common theme amongst all global exchanges is a reduction in momentum, cash, and sentiment. As evidenced by the flattening of the advance/decline ratio, most markets look ready to take a long summer hiatus.

While those who do own stocks are experiencing frustration, not all are leaving for the exits. Fundamental long-term projections are for solid growth in the coming years, just not right now. After a near-linear ascent earlier in the year, the equities markets are in a nominal retracement that might bring valuations into a more suitable equilibrium from where they can resume bullish direction. That, too, is my expectation for the latter part of the year.

After all, those who predicate their earnings analysis upon retail sales and demand are missing the bigger picture. Discretionary capital is now going to pay non-discretionary expenses, and, besides, there is too much negativity to sustain a consumer-led economic expansion. The relentless advance in prices has many believing that margins will not expand significantly this year.

Globalization is proving a boon to dormant sales categories as China and India take their place amongst the globe’s consumer leaders.

However, the commodities markets still command the most attention because it influences so much of the economic price scale worldwide. This category affects profit potential more than any other. Irrespective of geography or ideology, oil, food and other raw materials are influencing a decline in economic affluence.

As an earnings-driven specialist, I find fewer companies that are creating counter-cyclical profit expansion. With no bias towards any discipline, region, or sector, I see the landscape of earnings candidates dwindling slowly. This is a cyclical, short-term phenomenon, but real and pervasive currently, nonetheless.

To me the most compelling statistic to watch is not the fundamental data, but the ethereal psychological components. Generally speaking, this type of data is difficult to quantify, and has little to do with underlying fundamentals. But this is a different time, following on the heels of a record run in many sectors, that is defined by expectations about lifestyle and security. Without discounting the significance of my own research, and the larger macro picture, personal margins are suffering disproportionately to the economy as a whole.

At a time in the market’s cycle when optimism and liquidity are so badly needed to sustain capital gains, neither is in large supply. The most formidable task in front of us is to weather the short-term and to hold out for a better equilibrium in the not-too-distant future. As we near the official start of Summer, I look for the markets to quiet down and await a “start over” in the Fall.