Market Commentary for the week of November 3, 2008

The capital markets deflected bad news about the credit crisis last week by focusing, instead, upon valuations, P/E ratios and interest rates. As if waving a handkerchief to distract you from last week’s current events, the markets simply shifted focus without specifically fixing what ails us. To be sure, the Fed’s anemic attempt to resuscitate the economy looked more like them firing their last bullet as the town became surrounded. Remember the old cartoon of the painter painting himself into the corner?

Fool me once shame on you. Fool me twice ….

Too little too late.
Everyday, conventional media tries to offer reasons why events might/might not occur. Fed funds, labor statistics, the price of copper, or housing starts taken individually mean very little. However when analyzed in sum they create an enduring secular theme that is undeniable: resources are becoming scarcer and more expensive.

Short term fixes to recapitalize the credit markets are having the opposite effect in the near-term. Aware that consumers have no current appetite for discretionary spending or speculation, financial institutions are using “excess” liquidity from the bailout package to buy back shares in the open market or to acquire competitors for strategic advantage, in lieu of putting that money to work in the public domain. The policy of interventionism by global central banks has unrealistically elongated the cycle duration of the economic downturn, whose causes were excess, leverage, and speculation.

As a scientist, I am loathe to deal in observation or anecdotes. But look at your kitchen table this evening. Grains (bread) cost more, milk costs more, cable TV costs more, your children’s tuition costs more. And your reward for these data? Your home is worth less, your portfolio is down 30 percent, your healthcare coverage is woefully deficient, and you might have to work longer to offset losses in pension benefits.

The near future is predictably uncertain because the economic landscape is not settled or peaceful. Diminishing profits affect market momentum, capital gains probabilities, and your sense of psychological well-being. I think the media’s fixation on 24 hour problem-solving is harmful and deceitful.

However….
Interestingly, as the market gets “cheaper”, the landscape of potential opportunity expands. It is unwise to jump in now to try to capture a downhill snowball, but there will be a point at which these downside vectors coalesce, rest, and rebound upwards.

Secular bear markets are natural events and don’t need to be thought of as perpetual or enduring. They are an economic outcome which results from periods of sustained growth, then excess speculation. We’ve been here before.

Besides, after the markets adopt a “it can’t get much worse” philosophy, expectations are sufficiently low to lower the bar, from which it might only “get better”. Without getting ahead of ourselves, the only salve for these economic wounds is time and prudent heads.

So?
All evidence points to a bit longer volatility before any upside response. The bigger question is how to measure the magnitude of this continuing bear cycle. Last week’s triple-digit upside surprises had been preceded by weeks of triple-digit downside carnage, or had you forgotten?

A true global economic recovery will, and must, be steady and multidimensional, not just value hunting by speculators and traders. I believe a psychological catalyst is necessary, as well. This is a volatile situation, one which requires fundamental due diligence, patience, and moral stewardship.