Market Commentary for the week of November 10, 2008

Post election euphoria was short-lived last week as investor’s focus shifted back to reports of slowdowns in global earnings. After rising abruptly earlier in the week, a kind of pre-presidential honeymoon, the market snapped back just as quickly to its bear market bias.

In essence, the markets are worried that underlying cost pressures, weak retail follow through, the ubiquitous credit crisis, and poor sentiment will have a more lingering effect upon profits (and share prices) than will a change in political leadership.

A continental non-divide.
The globe is losing jobs, not creating them and these data are changing the psychological landscape for owning equities, or for investment speculation of any kind. Net last week, global bourses were down.

It is important to realize that near-term euphoria (current events) cannot quell or diminish the negative velocity of longer-term systemic “bear” quantifiers. While there is a glimmer of suspicion that we might soon see a reduction in downside velocity as valuations gather “near the bottom”, we are not at that point just yet. Results (earnings) are simply not justifying any logic for speculators to abandon caution now, and jump in with both feet. Besides, psychology, not fundamentals, will drive the next wave of buying in global equities, and while there certainly is an appetite to get back in, there is no justification for doing so absent any confirmation.

I must hasten to add, though, that at this late juncture in the bear’s evolution and with valuations as inexpensive as they are, my next decision will be “what to buy”, not “what to sell.” Without ascribing blame any longer as to who’s at fault for these crises, the absolute imperative for portfolio managers today is to position their clients so as best to take advantage of any redirection upwards when it does occur, and to reflect accurately the risk/reward tolerances of their clients through prudent asset allocation methodology. I know that ultimately the downside erosion will reverse, and usher in a new bull phase, complemented by a new “tone” and belief about the prudence of “being long” financial instruments.

Negative everywhere.
I believe that global markets are uniform in their current downside response. Higher prices for commodities (oil) caused profits to diminish, and set in motion a chain reaction in capital expenditures, employment, wages, and discretionary retail spending. These data are not local or regional. Their scope is global and magnified, unfortunately, by the age of technological interconnectedness, such that the response is more immediate and more prolific.

The flip-side to this argument is that the response upwards might be more immediate, as well. Today’s “recession” does not look like a global pandemic. Rather, it is a multi lateral association of vectors which unfortunately got off course congruently. The speed and scope of policy responses globally is a good sign and might substantially reduce further downside possibilities.

One last variable.
One cannot predict accurately, however, the psychological response to “the low”, or to any other strategic global initiatives. Fear is so pervasive that I anticipate more redemptions from investment accounts than additions. The impact of these data is to increase market volatility. When I see a reversal in my data’s volatility vectors then I will feel comfortable predicting an accumulation phase which could precede any price mark-up.

Therefore it is important to pre-qualify clients now towards the notion that equities need to be a part of our overall portfolio strategy. With exposures below 20% in equity presently, I expect to begin rebalancing upwards as uncertainty subsides and, if my data indicates the potential for capital gains. It would not be appropriate to try to recoup yesterdays “lost” values, but with prudence and time on our side, history has shown that market bottoms can be staging areas for potential upside opportunities.