Market Commentary for the week of July 21, 2008

This is getting interesting. Do you believe the numbers….or the numbers?

Despite going from recent historically low levels to just plain poor, stocks showed little initiative last week in breaking out of the bear slide. In fact, the up-down-up paradigm was predictable, if nothing else.

Knock, knock…
What we saw last week was a series of reflexive reactions to inflation, jobs growth (or lack thereof), the banking crisis, and poor earnings reports. With many traders on summer hiatus and retail investors avoiding this mousetrap like the plague, there was little cash, and therefore little breadth, in volume or trading activity. By their own neutrality investors are exacerbating the magnitude of daily swings.

My models continue to show diminishing earnings acceleration patterns.

Even in high-demand industries, like Energy, valuations and price push are eating into profit margins. The risk of these secular trends expiring is low, but since nothing performs in linear (straight-up) fashion, even the most successful sectors (Energy, Basic Materials, Technology) might capitulate downwards into a semi-parabolic response.

There are few signs indicating that psychology will turn the market around, so we just have to wait for alternative responses or better earnings to recapture the imagination and pulse of the public.

But wait!!
Acknowledging that all things are cyclical and quantifiable, I am confident that even these negative market responses will abate, too. But it is noteworthy to reflect that because earnings erosion is so closely linked to global inflation trends, the commodities and natural resource cycle must “break” before earnings can possibly respond more positively.

No longer does the dot.com paradigm of “grab and go” function in today’s market. Instead we see the vulnerably exposed underbelly of greed and traditional business as usual. Indeed, the requisite “new paradigm” that we need today is a moral compass that shares the risk/shares the reward. Momentum is being lost because wealth and profits are isolated in too few industries and social strata.

The longer term actually looks better to me as the bear market progression unfolds. In fact, we are closer to the end of portfolio pain than we were before the bear commenced last year. That is not to suggest that the burden falls from traditional fundamental analysis, but rather to identify that parabolic phases in the market are to be expected and are usually finite. Unfortunately it’s only after the phase reverses that most claim to be prescient in having predicted its change of course.

The pain in portfolios is real, and not to be scoffed at. But the burden is not upon investors to change the morality of greed but upon the corporate stewards into whose companies we put our money.