Market Commentary for the week of September 15, 2008

An Editorial:


I worry, sometimes, about the influence, or lack thereof, of morality in the drama of equity investment and speculation. It seems that in the thirty years I’ve been involved in the securities markets there has evolved a “new way” of analyzing credit, balance sheets, and fundamentals.

Each generation brings its own biases and experience to bear upon its collective professional ethos, but somehow we’ve deviated so far afield that speculation and aggressiveness have become this decade’s norm, while patience has been shunned aside.

New powers and statistics have been synthesized to justify a new alchemy of synthetic derivatives whose primary purpose, it seems to me, is to generate revenue for the issuing body first and returns for the client second. I am wary of the reputation this new “science” brings to my profession and the aftershock of cross-currents it creates in its wake. During a crisis in the markets like the kind we are now experiencing there is no historical paradigm for evaluating the valuations of these instruments, nor the depth of the carnage, should it occur.

Clearly, we are walking through new territory, which is what makes these crises so scary to the first-time, and long-time, investor.

I don’t have a direct solution for these afflictions, nor do I have enough space in this column to vet the details. But I do know that the unprecedented nature of these catastrophes (dot.com, real estate, commodities, etc.) is self imposed and not the effect of natural market continuums. They are brought about by generational shifts in morality that dictate speed versus carefulness, action versus inaction, greed versus compassion.

The unconventional nature of what is today called “alternative investments” is, by itself, unsettling because I don’t see the problem with traditional equity investments or non-leveraged debt. As much as we might try to reinvent the wheel, the challenge should be to perfect the wheel we already have.

I believe the criticism for these problems should be directed at the elders of our financial systems, not the young or inexperienced. Those who are charged with the oversight of rules, regulations, and policy should know better, particularly those who have the benefit of time and wisdom from prior experience.

Failing to act when you know that the consequences of that inaction might be harmful to the capital markets, or, even worse, participating in questionable transactions without fully understanding the ramifications is simply unjustifiable behavior, in my view.

As custodians of the public’s money, and trust, we must do a better job of balancing risk and maintaining a high level of consistency to our science.

Respectfully,

Scotty C. George