Market Commentary for the week of December 1, 2008

Up…down.
The market broke no new ground on the downside last week, stabilizing around important support levels within the prevailing bear trend. It may be too early to declare the bear over, but it is a good sign that buyers came in, if only temporarily.

The economy is giving no indication of a turnaround in disastrous fundamentals, but the markets seem ready to recognize that valuation deterioration might be excessive, and at the very least, poised for upside opportunity. Despite these anecdotal snippets, investor confidence is at historically low levels, akin to the feeling of an economic depression. This morning, already, a selloff of significant proportion is underway following last week’s rise.

As long as the markets measure as they do, I am willing to give the benefit of the doubt to those who wish to “nibble”, but caution that there is still enough downside “fluff” built into support prices here that I would wait until confirmation of an intermediate trend turnaround. Whereas I tend to think of opportunity in terms of very long secular cycles, some valuation declines are too obviously a second chance to own equities at prices heretofore not recently available.

Let’s not forget, too, that bond yields offer no significant opportunity to buttress against equity risk, as is historically their counterpoint alternative. Yields have fallen dramatically in the past six months as money flows into safe haven alternatives, and as credit and pricing risk increases.

Vigilance.
As much as I want to commit cash to potential upside capital gains opportunities, and I might if the story is too compelling, sometimes a “don’t buy at all” strategy is most safe from the vagaries of uncertain trend directions. Besides, I wish to avoid any violent overreactions to economic data, good or bad, which might skew asset allocation potential from logical to excessive.

The reality today is that too many are becoming impatient. Some are concerned about already dwindling net worth and discretionary future opportunity, others are too eager to jump in midstream to confirm their suspicion that the bear is over.

I believe it is always appropriate to play the existing trend. Therefore there is little to dispel the notion that we are in the throes of a bear market and out of the woods.

The global response.
It concerns me as well that Central Banks worldwide are throwing money at this stagnation as if they perceive a clamor for purchasing and high demand. To the contrary, reaching into a satchel full of money and playing “economic Santa Claus” is shortsighted and entirely ineffective.

Instead we need to see a coalition of demand for energy self-sufficiency, demand for affordable health care, demand for infrastructure remediation, demand for agricultural largesse worldwide, and a demand for an end to irrational terrorist carnage. These “industries” alone, might be sufficient to revive economic stagnation and help to define market opportunity for capital gains in the next decade.

The question is not whether the bear persists, but whether there develops a cultural and global consensus towards solving problems through a partnership between government, the private sector, and the consumer.