Market Commentary for the Week of August 10, 2009

Is it that good?
For all the right reasons, everyone loves upticks in the financial markets. But bear in mind that all market phenomena are cyclical, not linear, and that nothing goes straight up, or down, without pause or capitulation.

The danger in ascribing too much value to the market’s short-term rise since July, then, is to fail to recognize the overwhelming evidence that we’re still in a secular bear. Albeit slowing in their downside magnitude, the globe’s economic trends are languishing nonetheless. Last week’s mixed bag of unemployment, merger and acquisition, and earnings news highlights an underlying weakness that left the averages searching for momentum.

The “problem,” of course, is that short-term gains are obviously good, and skew the mindset of investors to trade more/invest less, thus elongating the pattern of recovery which might happen otherwise.

In truth, only yield and capital gains can mollify any concerns one might have about portfolio returns and sustainability.

The engines of capital gains, consumer demand and earnings, are at their lowest levels in decades, and strongly suggesting that their demise is not overblown.

For those with a longer-term horizon the future might be brighter, but nothing assured. Vulnerable to political will, and consumer demand, the sectors of greatest opportunity lie dormant until the funding sources kick-in. “It’s not a good idea unless there is demand for it,” would be a handy catchphrase for seeking investment ideas for the next decade. Presently a lot of “good ideas” don’t have the necessary demand.

Process, always.
Investing always implies risk, even within the most conservative of objectives. The goal of any portfolio manager is to balance risk with the total reward, so as to mitigate the impact of wrong choices or market volatility. I expect the market’s risk level to dissipate during the next few months. There is sufficient worry and devaluation built into stock and bond prices so as to level the playing field for most everyone. In the face of poor consumer sentiment and an overriding mistrust of the financial community, investors have a significant chance to recapture lost value through prudent asset allocation. All that’s missing is the correct upcycle and the confidence to “get ones feet wet,” again.

There are some clues that the market will move up in time. Relative strength quotients for financial instruments are rising, making “higher lows.” Hyperbole is being replaced by good old-fashioned fundamental analysis, and demographic themes are emerging which, under the right circumstances, might turn into venture capital and capital gains opportunities.

As more benchmarks “bottom-out,” I am hopeful that magnitude and velocity of bear trends will abate. As said, the response will not be linear, but, rather, cyclical. That should afford us the time to benefit from the upswings, protect against the capitulations, and to balance our asset allocation accordingly.