Market Commentary for the week of December 15, 2008

Darn it!!
One might easily be forgiven for verbalizing displeasure and exasperation with the markets, as every day seems to be a roller coaster ride of higher hopes or dashed expectations. “When will it all end? Where will it all end?”, I am asked.

I must quickly remind readers of my oft-writ admonition that the markets are not the economy, and the economy is not the financial markets.

By this I wish to convey to clients that a parallel disconnect exists sometimes, in which it appears that the two are moving simultaneously and congruently. Often, it is the case that one serves as the predicate for the other. More often, however, economic fundamentals and market performance seem linked but are really moving through entirely different phases. Such is the case today.

Although it looks as if both the economy and financial markets are declining, the performance of financial assets began de-linking from fundamentals well before anyone was generally aware. Similarly, despite the volatility in market performance recently, risk is diminishing in the securities’ markets while fundamentals remain persistently poor.

This hypothesis is not to suggest that “it’s time” or that frustration can easily be explained away by low valuation in stocks and bonds. But it is easier to digest the tumult by acknowledging that cycles take years, perhaps decades, to develop or unravel. Lower valuation and speculation is not a decoupling from forecasts and projections, but rather an opportunity which affords higher probabilities for upside performance.

Time is on your side.
In the meantime, waiting for fundamentals to reverse can be a lengthy and frustrating experience. After all, doesn’t every teenager wish to be an adult? Your response, or experience, with that question probably reflects your frustration level with the catastrophe in the housing markets, healthcare system, financial markets, economy-at-large, and political process. One simply can’t “wish away” all the bad things we confront, or leap frog over a necessary maturation process.

Downbeat forecasts have become investment opportunities, for some, in energy, basic materials, consumer non-cyclicals, and technology shares. In all likelihood these shares might be higher in price within 2 years. The data has many wondering “when is the right time to redeploy resources into the market?”

While some indices are suggesting a cessation in the rate of downside velocity, I still urge caution, if only temporarily, about jumping in with abandon. I am sensitive to the sucker punch “bottom fishing” might present, and am willing to play within acceptable margins of risk (after an uptrend has been confirmed). That requires staying power and confirmation that lows being tested today have held support and are experiencing a turnaround in momentum characteristics.

In or out?
Does that make me late? Perhaps, but our track record of outperforming the averages by wide margin is predicated upon efficient use of methodology which governs our asset allocation balances and purchase/sale decision making.

Besides, while the fault with the economy’s performance might lie elsewhere, you don’t want to be the cause of a radical sympathetic decline in financial markets by contributing good money after bad.

What concerns me the most is that economic data are not yet responding well enough to stimulus packages, bailout funds, or political rhetoric. At the center of the issue is you, the consumer. Quite simply, discretionary purchase decisions are declining, and have been for several months. Economic activity is not yet reflective of a reversal in confidence (upwards). Therefore, the parallel disconnect about which I wrote earlier remains firmly in place.