Market Commentary for the week of December 12, 2011

Trap.
Mammoth European fiscal support packages are an attempt to “close the barn door after the horses have left the stable.”  Economic dynamics, that were spiraling out of control, are contained, euphemistically, for the time being, but the test of the effectiveness of these measures is mostly psychological, particularly in the U.S. where investors clamor for any news, from anywhere, that is positive.  Since it’s all about “confidence,” the global markets were in a hurry last week to show recoverability.

More importantly, the focus was shifted from U.S. banking and economic problems to a wider aperture, globally. 

Whether or not these attunement policies work is up for debate and not likely to auger a turning point in any secular bear market expectations.  Any willingness even to address fiscal austerity amongst the EU partners does show a level of concern and cooperation that the financial markets, particularly the bond markets, needed to see.  Partners have stopped bickering and are now responding.  Although these plans don’t “solve” the crisis, they do, as noted, address the notion that they might not be addressed at all, risking reverberation and failure within the global markets.

Straining the banking system, however, is too desperate a response despite the immediacy of the problem.  In a world of tight money and limited personal savings there are few avenues, but for taxation, that can be taken.  Boosting lending capabilities is not the same as boosting lending.  Banking markets require growth, liquidity, and production to come out ahead.  Any global recovery must ultimately rely upon improving the quality of life, products, and the consumer psyche in order to flourish.  Job creation and personal savings are a good place to start.  We don’t want to rely solely on filling a government treasury with cash.

So bad.

The global markets are powering forward on all this good news, forging ever deeper into a labyrinth of trouble.  Psychological contagion in a bear market is as dangerous as poor portfolio performance.  The two feed off of each other, making for excessive betting and creating a general “momentum to nowhere.”  Just because seasonal, or short-term, numbers turn up is not necessarily a secular response worthy of excessive betting against the trend.  It will be important to see if relative strength integers in today’s hyper-performers can sustain to the upside.  I doubt it, and look for profit-taking as valuations swell.

While these price increases put the composites back in positive territory, bear in mind that most of the last decade has been negative for equities, and that today’s positive return is well below the declining peaks of valuation since the bear began.

The investment picture is mixed, at best.  We yearn for improvement, yet do not wish to lower our standards of evaluation.  Year-over-year uptrends are indeed showing some progress, but don’t factor in the bigger issues of jobs loss, savings depletion, home and portfolio devaluation and most importantly the loss of innocence/confidence that our institutions know how to do it better and can help us to sustain enthusiasm for something better ahead.