Market Commentary for the week of December 5, 2011

Turnaround?

Any euphoria about last week’s intermittent triple-digit rallies has to be couched in a context of longer-term developing downtrends and a desire to see any positive news as “bear-busting.”  Alas, the ongoing downcycle persists and is likely to be the primary determinant to market performance for the foreseeable future.

As junctures go, last week represented a few days of post-holiday welcome relief, but hardly the initiation of a change in secular direction.

The headwinds are too daunting when analyzing market and sector relative strength quotients.  Despite some decent numbers on Friday, it is more likely that unemployment, capacity under-utilization, deficit reduction, commodities depletion, and social unrest occupy investor’s mindset and political discourse to the exclusion of nascent indications of a turnaround.

The markets are emerging from a deficit cocoon and turning into a sterile, cash-only butterfly.

That is why I feel the story gets more difficult before it gets much easier.  Mature global markets need to upend themselves and begin to provide fiscal leadership for the rest of the globe.  Simple GDP expansion could help, but it is not the panacea that returns confidence to the system.  Bear in mind that consumption and savings are elements for growth.  In today’s climate savings are lagging and consumption (the holiday season notwithstanding) is abysmal.

Or worse.

Further complicating any enthusiasm to short term rallies is the timeline of one’s perception.  For obvious reasons, short-term oriented investors are salivating at the opportunity to “make-back,” or “make-up,” portfolio valuation with quick strike efficiency.  Nothing soothes the soul like a 400 point Dow rally.  However, those who study secular cycles and demographic themes understand that sucker rallies sometimes draw you in at the top with hope of different outcomes.  Ideally, in my universe, the optimal entry point is an enduring “bottom left to top right” configuration with an inflection opportunity yielding a greatest probability of upside return.

We are today operating on the “other side” of a bull market, however.  The trend in global securities trading is “top left to bottom right.”  Along with any concomitant short upside rallies within the downtrend, the markets are generally comprised of stocks leaking oil and sputtering.

Short upside rallies offer relief but they do not change the secular condition or offer a reversal of trend probability.

My best expectation is that we will continue to see some sectors lead (utilities, consumer non-cyclicals), some lag (financials, cyclicals), and others simply meander laterally, failing to pick up steam (industrials, basic materials).

Linkage.

Markets are more synchronized today globally, as well.  Those regions which are high in natural resources and agricultural plentitude are likely to lead economic, social, and portfolio metrics.  The emerging markets are a different challenge altogether. Their growth will be measured in relative terms, and only their resilience might be enough to generate valuation changes in the long run.

The key to the next few quarters lies in ameliorating the impediments created by social inequality, fiscal austerity, and a kind-of institutional lack of respect we have developed for all centers of power, from government to Wall Street.

Until the confidence crisis is substantially addressed, all markets will suffer from the fallout of engaging on an uneven playing field.