Market Commentary for the week of June 23, 2008

In the imaginary “race to the finish line” that is stock and bond investing, it is important to prioritize the metrics by which one might measure success. For some, the finish line is just a short sprint from the starting gun, for others the finish line keeps moving and the game is simply to keep pace with that forward momentum. Finally, and obviously, no one is looking to fall behind the pack.

No matter which barometer is yours, a steady upside progression is the result of methodological consistency.

Are we bottoming?

As the markets contract, more concerns arise about the state of underlying fundamentals whose authenticity is the backbone of traditional fundamental analysis and economic theory. For example, I am concerned about the deceleration in corporate earnings caused by a manic spike in commodities costs. A heavy price is borne by those in manufacturing, as well as a reduction in discretionary capital by the product’s end-user, the consumer. Surging prices have caused not only a debilitating economic landscape, but have cast a psychological pall over the whole proceedings.

Clearly, the variables which impact economic and market prosperity have lost momentum during the past year, and trace their (negative) origins even further back in time. Whether or not a panic is the right response is debatable. My work indicates that we are within an economic contraction, but closer to the end than the beginning. Those prescient enough to have seen the beginning of the reversal had already taken sufficient action to mitigate its effects. For instance, our clients had reduced equity-only exposure by 25-30% as far back as last October.

Going forward, the issues revolve around the magnitude of negative performance and the duration of capitulation cycles.

It’s about the money.

Primarily, markets must deal with psychological and fiscal liquidity. During various cycles each of these requires stimulus of varying degrees. Currently both factors are quite barren, and causing the kind of manic upswing/downswing patterns we are experiencing today. It means that we have a harder time defining the prevailing bias towards or against financial instruments. As long as ambivalence rules, markets (and economies) will stagnate.

It is exceedingly difficult to quantify the “choke-point” in the market. Looking ahead, I believe a seminal moment might be the Presidential election in the U.S. We need questions answered about fuel (energy) policy, jobs growth, war and peace, economic development, and fiscal policy. The reverberations of this election might spread beyond our borders to influence attitudes and policies elsewhere. Linking nations together is part of the global flow of capital, and likely a way to stimulate industrial expenditures.

In the meantime, I am encouraged that some sectors are showing a resilience that belies talk about gloom and doom. In fact, I see a healthier, “value-type” landscape for the next few months. Maybe even some opportunity to “buy low, sell high” once again.