Market Commentary for the week of January 26, 2009

Hangover?
Now that the Presidential inauguration is over, it becomes tempting to count down the markets in “Obama minutes,” as if the mere transfer of power confers ownership upon the new administration of all which preceded it.

Indeed, in the minds of many and in point of fact, the new team takes responsibility for setting a moral tone, fiscal policy and success/failure of the economic ills which envelop not only the United States, but most global economies.

But it is equally important to reflect that economic cycles are beholden to no man or single event in time. By definition, cycles are evolutionary. They transcend moments and reflect a period of time that might be generational.

No Change.
The globe’s current “bear market” evolved from a period of prosperity that preceded it, but a period also punctuated by excess leverage and speculation, increases in costs of raw materials, depletion (to excess) of natural resources, and inequity in the distribution of profits.

If the new President is responsible for anything, it is to change the tenor of conversation and fiscal imperatives which might ameliorate feelings of hopelessness and fear by those who feel “left out” of the game.

Stimulus packages are tools of that endeavor, not solutions. The President hopes, and the markets expect, that an era of shared responsibility might usher in a redirection of the current trends.

Note that a redirection is not in and of itself a new cycle. Instead, it might represent a slowdown in the acceleration of the current negative influences that exacerbate the downtrend. Success will be “U-shaped” not linear, and like all trends can only be quantified in its aftermath. We will know we are changing course when we can look back and measure the points from which we came.

In the meantime, I expect a continuation of the current bear cycles, short and long term. While governments attempt to re-liquify their banking systems, the public is determined not to be the first “test-case.” Cash is king, spending is passé. The first order of business is the balance sheet, not hope or expectation.

However…
Are things really as bad as most say? Well, opportunity is all around us. Equities are inexpensive, bond prices are so low that yields are attractive, real estate is a bargain. No one would suggest that you make silly mistakes or take inordinate risk. But a climate of potential is compelling. Our asset allocation levels are ridiculously skewed away from risk because of large cash holdings and reduced exposure from financial instruments. In that environment, one might only envision a period in which portfolio allocations return to historical denominations.

As the population ages, new discoveries in pharmaceutical medicine become significant. As the global population expands, agricultural science will provide solutions to feed the many or disadvantaged. As the demand for energy expands, alternative sourcing is required to fuel an economic renaissance.

There is no shortage of new ideas or new problems. Invest wisely, and the reward will be there.

Market cycles will continue their parabolic rhythms. The congruence with which all global bourses are behaving will decouple at some point, producing a net-sector-gain for one region versus others. Whether that decoupling is natural resources driven, scientifically driven, or militarily driven is yet to be determined.

Hierarchy is the natural order of things.