Market Commentary for the week of August 18, 2008

The value of owning financial securities remains exposed to risk, as last week’s economic announcements clearly reinforced the notion that price creep/inflation exert significant influence upon profitability worldwide. In the past, one might allow for geographical inconsistencies in these data, but we now know that nations West and East are seeing producer prices increase, raw materials deplete, and consumption decrease.

The average global inflation rate today has far outpaced any historical comparisons or previous benchmarks.

Where’s the blame?
We owe this phenomenon to the stewards of our money: central banks, politicians, and corporate boards. Through their actions, worldwide lending and speculation exploded during the last decade like no other time in history. Exacerbated by greed and synthetic calculations the world’s economy sat perched atop a mountain of debt and leverage. Its unwinding is merely the net effect of the excesses which preceded it.

Likewise, the consumer was either duped into, or followed willingly, a pattern of credit-card largesse which now results in the lowest savings rate per capita ever recorded. A growing number of bankruptcies and foreclosures harkens a period when “depression” was used to describe both the economic condition as well as the mental state of the investment community. This at a time when the eco-system is ageing and the population grows older.

Market disconnect.
With most sectors unresponsive to short-term stimuli, it is tougher to seek portfolio solutions with any traction. Unfortunately, most sectors’ prevailing trend is negative for the immediate future.

However, we do know that bear markets do end, and this one is no different. The emphasis upon immediate gratification has sullied the mindset of investors to such an extent that historical norms and rates of return have become irrelevant to clients who expect their monthly statements to reflect ever-growing portfolio valuations, rather than the real exercise of properly diversifying risk so as to diminish the magnitude of risks associated with any type of investment. The shorter the client’s attention span and investment horizon, the more volatile the portfolio appears. Obviously, those with an appreciation for risk/reward tolerance and a sense of history understand, and tolerate, the ravages of short-term economics.

The bottom line: stocks will always produce an outstanding return if given the horizon of long-term expectations.

Getting real.
I find that those so infatuated with leverage, hedge funds, alternative investments, and day-trading fail to grasp the significance of the exercise itself, and bring very little moral philosophy to the ownership of public (or private) equity.

Thus, many of these short-term strategies have run into trouble by being unidimensional and hermit-like in their approach to diversification and social conscience. No one knows if a single strategy might endure forever, so many have seen their halcyon days come crashing down without prudent methodological science to protect them.

Short-term investing requires a subjective judgment about what to buy and what to avoid. Sometimes, the influence of such a risky strategy can be corrupted by things outside of its control and lead to results and expectations that are less than ideal.

The stakes are high. Remain committed to a discipline that works over the longer-term.


Please note: There will be no Market Outlook published next week. The next publication will be Tuesday September 2nd.