Market Commentary for the week of May 10, 2010

“Too big to …”

Whether a faulty switch, or global credit crises, or that it simply was time, Thursday’s cataclysmic decline caught our attention, finally, in a big way.  In previous episodes of sharp market decline preceded by irrationally exuberant behavior, we have always had a sense of optimism that “blue skies follow the darkest storm.”  Factors which contribute to this optimism include the isolation of components and events which led to the decline, and an underlying comprehension of the fundamental mechanics of the marketplace … a kind-of back-to-basics approach.

In today’s case, while a preponderance of evidence is as above, there is also a nagging sense that we are severely testing the moral and mechanical limits of our system.  Psychology is languishing behind fundamentals and acting as a convincing barrier to our upward expectations.  Who’s going to be the first to jump headfirst into the pool?

These are not the only barriers to success, either.  There remains a qualitative debate about the role of our institutions, and the comparative advantage of the wealthy versus those not so well financially endowed.

This missive has neither the time nor inclination to wrestle with values-based issues, other than to report how those factors influence quantitative probabilities and existing data.

It’s global.

First, the economic solvency of many nations is at risk because of a period of hyperbolic borrowing and spending.  The narrative in Greece, Spain, Japan, etc. might become the narrative of other countries whose populist spending led to an era of low savings, high consumption, and unrealistic market expansion.

Could our market (U.S.) be hampered by upside resistance levels which are now perceived as faraway valuations?  And further, there appears a sense of entitlement by consumers that because their home values, portfolios, and earnings once reached lofty heights those valuations are now “owed to them” again.

One lesson we should have learned from previous boom/bust patterns is that markets are cyclical.  There is no final date, nor a final portfolio valuation.  Things are always in flux.  Indeed, we can be ever-optimistic, but we also need to be aware that things are always in an historically cyclical context.  The best thing we can do is to plan for those cyclical events through restraint, asset allocation, and prudent methodology.

Cycles always end.  If you’re in a bear, it will reverse.  If you’re in a bull, it, too, will reverse course.

Ebb and flow patterns are interrelated on this earth.  Capital markets should treat their largesse as a fortunate consequence, not a “right,” but also be mindful of those who have less.

Be better than average.

Consideration of consequences is a lost art.  Oil spills are not just economic catastrophes.  War is not simply a localized geo-political conflict.  Synthetic mortgage securities are not stand-alone profit-making sales vehicles for the banks that issue them. Incompetent switch operators on major financial markets are not only highly paid technicians with a twitch.   Rather, these are events which create reverberations and consequences that reach far beyond the local geography of its immediate source. 

Perhaps we might recalibrate our moral compass and make accumulating money less significant than capturing the nuance of why we’re here to begin with.