Market Commentary for the week of March 12, 2012

Solid state.
Are policy makers acting responsibly about credit and financial pressures?  Judging by the speculators coming into the financial
markets, one might assume not.  Instead of playing old fashioned fundamentals, gamblers are trying to pre-empt the “true north” of the markets by risking cash on dangerous bets about real estate, commodities, energy and bonds.

In the meantime, the game continues for those who seek cover from the mayhem.  Right now, there is little support for bonds or stocks.  Yields are too low, and equity valuations have gone through a dangerous cycle.  Thus, one might expect turmoil to continue.

My risk rankings suggest that there is still more potential for the secular (bear) cycle to continue than there is momentum to reverse that course.

Could it be that the rules have changed?  This notion of “hands-off” all matters relating to economics, sets a tone which drives the discounting of financial assets, rather than encouraging accountability and commitment which could drive industries and innovation upwards.  Better yet, stronger fiscal policy might generate cash flow and open ended possibilities for regenerating economic expansion.  In other words, “there is buying and there is buying.”

Rules of engagement.

The vagaries of the global austerity response is now pandemic.  All continents are infected by a fear that economic expansion cannot be sustained by inordinate debt.  The reticence in the markets are telling us so.  Against this backdrop one might conclude that the situation is dire.  Fault and blame-laying is the new political sport.  Those in authority lack the gumption to lower the heat on their rhetoric.  Methodology and process have given way to two diametric ends of the investment spectrum:  you’re either all in or you’re all out.

Interestingly, a few relatively safe havens have emerged from the chaos.  With bond yields at historically low levels, some Utility shares have become a surrogate for income-oriented investors.  Of course, there is no direct equivalency between the two, but some have found a framework for building value in that space.

Still, I would warn that without a response to the credit crisis, these false comparisons will start to wilt by their own weight.  Historically, false compromises cannot endure as well as the real thing.

Longer and meaner.

We must also look at a willingness to part with liquid reserves.  Based upon projections, global deficits are likely to endure even with efforts at remediation.  Spending cuts and pay reductions require time to gain traction.  Regions respond differently in the longer term.  There is room for execution variables, but little tolerance for failure.  If necessary, revenue increases might be required in order for a recovery to gain traction.

So, as investors see capital losses in their home, savings, and portfolios, the question becomes “how long can the markets sustain negative pressure without building too much scar tissue?”  The battle between complacency and aggression, confidence versus fear, is the driving issue of our financial time.

In a worst-case scenario, what if we supposed a massive global credit default?  Is a down-and-dirty panic preferable to a managed bailout?  Even on this question there is disagreement.  Putting it all together, there is little reprieve from dealing with these situations, and fewer good answers.  Political wrangling poses a greater risk to our financial conundrum than does a fundamental solution, however strict its imposition.

Investors need to bear in mind that much of the problem is now out of their hands, and make a psychic compromise with themselves that all will be better in the future.