Market Commentary for the week of May 4, 2009

The markets suspended the "blame game" last week, just long enough for the markets to go up. Subliminally suppressed for now are any recriminations about the Fed, the banking system, one's broker, or any other targets previously the domain of investor's anger.

Could it be that all the market's ills have been solved simply because of an "up" week? It can't be that easy.

Client's portfolio problems never were Fed related, or the result of Congress. No, portfolio problems are the offshoot of poor portfolio planning and methodology. Anyone stubborn enough not to have seen the potential pitfalls of excess leverage or unduly high valuations has only himself to blame. Simply, the failure to plan, or to restructure one's asset allocation, is the investor's fault. One must be nimble in down and up markets, alike.

The enormity of the economic collapse leaves no one blameless, and has wreaked destruction upon all asset classes. But the severity of the decline might have been mitigated by having a fluid methodology, rather than a static insistence upon one strategy only. In all markets, one needs to adapt to the changing environment and data.

This is not to suggest that traditional "buy and hold" methods are antiquated. Nor would one presuppose that day-trading is an antidote to failing economic statistics. But if one is sitting with losses of 40% or more (consistent with the return from most global bourses) then he has violated his mandate for capital preservation, and must hold himself, or his financial representative, culpable.

Last year, for example, I wrote extensively about rebalancing requirements for our accounts as a result of highly leveraged equity returns and fixed income pricing. In fact, as far back as 2007, we were making the necessary accommodations to rebalance account asset allocation from risky to risk-averse. Because of the change in momentum indices, our data mandated a change in asset allocation. Our clients were protected from the ravages of 2008 because of a fluid adoption of the principles of earnings-driven and momentum-based analysis.

To be fair, we were accused of "bailing out" on equities too soon, and today of not participating on the "value hunt" that has driven the bear rallies recently. Our rejoinder is that historically we have outperformed the averages by better than two-to-one. I will pick my spots for re-entry carefully.

Too much of today's investing is driven by the television pundits that proliferate our media. My best advice is to turn the darn thing off and focus upon long term fundamentals. Daily news is merely a "snapshot" of what is happening today. These events are not indicative, or accurate, representations of the longer term secular trend that truly drives fundamental investing. Nor is a fixation upon the calendar, which by practice has become a new benchmark for performance returns. Market cycles are not sensitive to the calendar, or today's date. Such exogenous noise is anathema to quantitative science.

Trends, and their quantitative calibration, are long term phenomena. As such, a good money manager is governed by demographic data, not emotion. Today, in fact, is one of the best investment and capital gains opportunities of our investment lifetime.

Although hardly anyone is ready to lay down all their bets today, historical perspective tells us that the landscape is quite compelling. Think of it this way: would you be willing to invest when the market was at the top, or at the "bottom"? Well, we are closer to the bottom than we were when the decline began nearly two years ago. My concern is that the same architect who got you into this mess is now the salesman trying to convince you to stay the course and to "trust" that he/she knows how to generate portfolio returns. Believe me, dart-throwing is not an investment methodology.

I would no more expect you to recover from a 50% decline than suggest you even try. If you find yourself in that situation, your expectations for breakeven are unrealistic. The blame lies, as I suggested, with a failure to plan and your investment methodology. Trying to recover through a series of one-off "hot ideas" is a syndrome, not a cure, for portfolio ills. More than anything else I know, that is more true today than anytime you might have known previously.