Market Commentary for the week of October 26, 2009

In your head.
What do you think of when you think about investing? Do you dwell upon the vagaries of global economics? Perhaps you conjure a scene from your retirement, beach house and all. Or is “investing” merely a state of mind, panic or serenity?

Typically, this is the first issue I address with any new client, because the subjective processing of objective data is the most unique thing about investing, or any endeavor for that matter.

That is why we have debate, differences of opinion, marriages, divorces, elections, and Wall Street, the original “what’s in it for me” gambit amongst American traders.

I don’t want to spend too much time writing about philosophy this morning. But we do find ourselves at a unique confluence of data from which the direction of the global economy, and the markets, might be determined.

For example, some believe that deflation is working its way into the system, sparked by a decline in consumer demand and an abundance of Federal debt.

But are these price declines driven by poor consumption or a glut of inventory brought on by a decade (or more) of wasteful production excesses? Or might it simply be a case of “incentive pricing,” designed to bring purchasing back into the market and to right the wrongs of overzealous manufacturing?

Well, if it’s your house, for example, and you are the seller, it’s less about any of those data and more about you not getting that dream cottage on the beach.

See what I mean? It’s all in the perception.

So what, then, to make of the financial markets?

In the facts.
For one, the objective data indicates a snap-back in equities, and the potential for further capital gains.

Here is where it gets tricky, though. The key to capitalizing upon these “data,” or trends, is to know what type of an investor you are and, more specifically, what discipline (science) you use to achieve your specific objectives.

The worst signs of the global depression appear to be mitigating, for example. Production is rising, albeit modestly, and month-over-month data suggests that enough momentum is in the global pipeline to make an upturn more permanent.

But the psychological debate continues. The sheer magnitude of rupture transformed everyone’s thinking and made commitment to the markets very difficult. After all, wasn’t it just a decade ago that the “Tech-wreck” nearly wiped out all the speculators?

One’s time frame certainly plays a major role in determining the acceptability of risk. But I contend that statistical jargon and strict data analysis is not what will bring people back, nor make for successful portfolio allocation modeling. Nor will any “urgency” that is artificially imposed upon you by hype, television commercials, or government mandate.

Right now, the markets are performing in spite of a general feeling that it’s not time to get back in. Benign ambivalence is pervasive and now stronger than any earnings report, analyst’s suggestion, or brother-in-law’s stock tips.

How to play it? Dip one toe in at a time; define your methodology; and widen your aperture of “apparent perception” to include valuations, ethics, and merit when making your investment decisions.