Market Commentary for the week of October 6, 2008

As global credit crises pile up, our focus upon the U.S. Congressional bailout package becomes more of a distraction from the issues, than anything else. At issue is whether we delay the depth of recessionary trends or allow them to play out naturally. Despite our focus upon quarterly earnings, quarterly output, or quarterly market performance, indicators are showing that cyclical/secular downtrends cannot be averted.

The markets are already factoring-in the negative secular condition, despite gyrating, daily, to exogenous current events.

Irrespective of any plan that emerges from Congress, credit will remain tight until the borrower perceives the conditions are right to take on more debt. That means that intrinsic inflation factors, demand/supply paradigms, industrial production and job security must be factored into any market response which, might, in turn, translate into an economic policy response.

Look at the Macro.
Inflation is inextricably tied to energy production. What drives the market, besides inordinate amounts of greed, is the supply of inexhaustible energy sources. Prospects for global economic growth based solely upon fossil fuels is virtually nil. In the meantime, “he who controls the source of energy is in position to dictate the price for that commodity”.

When we are told that relieving the credit mess depends upon the largesse of financial institutions flush with cash, the argument misses the point. Those institutions created the problem in the first place, by placing profit ahead of prudence. Their practices enabled others to extend their credit line until the collapse occurred. Our markets are not a casino, nor should they be operated like a baccarat table.

One thing is certain: the landscape for capital gains opportunity in growth equities is receding, while value investors are licking their chops over exacting their pound of flesh from the littered carcasses of other’s bleeding fortunes.

Fix the causes.
Most of the solutions to the global crisis focus upon symptoms rather than causes.

Many have argued that to focus upon the causes would delay a package of immediate responses that are necessary to avert a deeper crisis. Regardless of the debate, the “solution” is not going to make the situation better. This is one of those scenarios which would have played out regardless, because greed and excess are part of the (irrational) human condition, and primary factors that got us here. Making us “whole”, averting foreclosure, or liquifying the credit markets will not open the spigot unless consumers feel safe. How do you quantify safety? Is the package enough? Too little? Too late?

The trouble with the whole debate is that we are closing the barn door after the horses have left the stable.

Be real.
Whether or not we debate the numbers, a systemic overhaul is required, beginning with a political and philosophical discussion about goals, norms, and objectives for community commerce that provides the necessary benefit to the economy’s end-user, the consumer.

Clients who will be opening their monthly statements next week don’t care too much for my professorial discussion; I understand that their savings and retirement objectives are on the line. But it is critical to establish a common good and to understand that investing involves cycles, ups-and-downs, risk tolerance, and, above all, transparency and trust emanating from the capital markets.