Market Commentary for the week of October 13, 2008

Perfect performance?
At a time when the markets are searching for perfect solutions to what ails the global economy, it might be prudent to scale back and look for small, “imperfect” responses in order to quell the magnitude of the destruction. As with any problem-solving, looking at the enormity of the task creates immobilization, whereas one small step at a time might not be a solution, but a start nonetheless.

Part of the “perfection analysis” inertia begins with making unfair, and useless, comparisons to where we were, one year ago, five years ago, even last April. The fact is we are here now, markets are cyclical, and the crisis was not unforeseen. Seeking unattainable standards of upside momentum is destructive to the psyche, and part of the justification given for why financial gurus saw fit to leverage away their prior gains.

Besides that, playing the blame game is a circuitous route that attempts to vilify the victims of the crisis, and brings us right back to ourselves, without creating a framework for positive results.

In effect, the failure to recognize that markets gyrate through cyclical changes ruins the result before the first dollar is invested.

We cannot falsify the task to set up an unattainable standard.

Trust.
Our current debate focuses upon the deterioration in credit markets. Consecutively, solid borrowers are falling by the wayside in part because of credit worries, but also because buyers on the other side of the trade have no will to step up and commit capital during this slide. All capital gains potential, and most lending, has evaporated in a psychological tsunami that paralyzes the global economic landscape.

Bailout packages or political referendums actually accelerate mistrust because those doing the proposing are the same bunch that got us into the crisis. When investors are loathe to trust, the markets calcify as a result.

Driven by a sense of self preservation, many are bailing-out on the whole process. I believe that is an unwise decision. My science, and my gut, tells me not to jump ship in the middle of the chaos, but to evaluate after the worst of the crisis has abated.

It is not inconsistent to believe that rebalancing after the shock might net a higher return as a result. Markets will not go to zero, and in perspective, we are simply giving back some of the accelerated gains that led many to think that upside momentum was immutable law.

Stick with a plan.
It won’t assuage many to talk science or theory, but I can’t stress more strongly that without a methodology, a road map, it would be even more difficult to assess where we are or where we are going with our investment portfolios. Secular, or intermediate, downtrends don’t endure indefinitely, any more than uptrends do. We may have it backwards when measuring risk, as I believe that market peaks (and excess bubbles) are more dangerous than the condition we are in today.

While my data shows no current pent-up demand for financial instruments, I do believe the next decision is “what to buy?”, not “what to sell?”

From amidst the wreckage will come a new equilibrium in valuations, and certainly a new opportunity for recovery. This capitulation is excruciatingly painful, but filled with enormous potential to marginalize the damage in the long-run.