Market Commentary for the week of December 8, 2008

Is it time?
In the absence of any specific fundamental factors, most global exchanges closed mixed-to-lower last week. It was a quiet week in terms of announcements and volume trading. Despite this, there are signs that depressed valuations are providing some incentive for market traders to come in and do some bottom-fishing.

My work is showing a slight deceleration in negative velocities affecting sectors, countries and individual equities. To what extent the market has already factored in profit-taking and low valuation is not yet determinable. But it is incontrovertible, if only anecdotal, that risk-taking is coming back into play.

Whereas my preference is to wait for the froth to dissipate, and the intermediate uptrends to reappear, I am closer to a bullish stance today than any time since the bear began in July 2007.

There’s always a “but”….
Having said that, I am aware of my fiduciary responsibility to my clients not to use my discipline indiscriminately or carelessly. Therefore I am still cautious about the potential stumbling blocks within the economy that might derail even the most compelling of value stories and potential capital gains opportunities. Bear in mind that there is certainly less risk in owning stocks today than there was a year ago, but there are still significant risks for a sustained upside response, nevertheless.

I consider any triple-digit upside intraday activity to be the braking effect upon downside velocity whose response over time is a manifestation of a potential accumulation phase with subsequent upside probabilities. But these upside responses are simply bounces within the existing trend, that trend being down.

Consider that the markets are more safe than before, but perhaps not safe enough just yet.

Sectors, markets not responding yet.
Not helping matters is a coordinated bailout of select industries and accommodative monetary policy which is bringing interest rates to ridiculously low levels. The late Senator Everett Dircksen once said “A billion (dollars) here, a billion there. Pretty soon you’re talking about real money!”

In addition to common global equilibrium, there is also the emergence of sector trends within yield equities, energy, commodities, and consumer non-cyclicals. These data paint a tapestry of risk-averse, current events driven equities being the most attractive magnets for early allocations of cash from the sidelines.

We will know that the markets have turned the corner when they become less reactive to data that otherwise might be construed as “exogenous noise.” When investors stop looking for reasons to panic, and return to solid fundamental and balance sheet analysis, then equities can assume a mark-up period that is warranted by existing data. Indeed, in such a climate, the only surprises might be “stronger than anticipated” news releases.

Another “but”….
At present the consensus climate is not yet conducive to such a fantasy scenario. The parts don’t fully comprise the whole. Stocks are still sliding and finding a difficult time gaining fundamental traction. My assessment is that stocks are a woeful alternative to bond yields, and still frozen by psychological inertia and mistrust.

There are few alternatives in which to invest at present, but I don’t see the status quo as an interminable end-point. Instead, the capitulation was a necessary but unfortunate by-product of an excessive valuation expansion, which now offers the potential for extraordinary capital gains opportunities in the next half-decade.