Tack's Market Commentary 3/17/08

Here's my take on the markets this week.

There's a lot to be worried about, certainly. But, even with Bear, there has been some possible light at the end of the tunnel this week, to-wit:

1. Standard & Poor came out last week and said that It looks like (gulp) that the worst of the sub-prime crisis is behind us, $285 Billion Dollars later even before Bear Sterns.

2. Inflation seems to be relatively contained given the steep rise in commodity prices. Certainly, it's more expensive at the pump, and corn flakes cost more than cold beer, but core inflation remains largely benign.

3. The Fed finally seems to have gotten the message, especially after Bear Sterns, that a lack of liquidity is only part of the story--it's underlying asset quality and excessive leverage that took down BSC and threatens the financial system. What that means is that simply cutting the Fed Funds Rate won't do the trick, and the new unconventional approaches announced last week are welcome and needed. Rarely, if ever, has the fed made so much money available in so many different ways in such little time.

I'm not saying it's all roses and lollipops. There has been and will continue to be serious pain in the housing market. I feel terrible for people that have lost their homes and their life savings. But we came too far too fast, and we forgot to care about credit quality. Here's a telling fact. Of first time homebuyers, between mid-2005 and mid-2006, almost half put down nothing at all when they bought their homes, and the median down payment was just 2%. What the hell did we expect!?

There is still room to fall in the equity markets, certainly. The dollar's journey to the center of the earth hasn't helped, and isn't done. But, smarter people than I say that signs of a bottom are beginning to appear. We've tested & retested our January lows, which says to our pointy-headed technicians we're near a bottom. More fundamentally, a lot of these smart people say that a fall in the commodities markets will be our signal that we may have hit bottom. I think this is coming soon. Don't kid yourself--$110 oil will not be here for long. The strongest performing asset class year to date has been frickin' silver, with gold not far behind. Far from a flight to quality, I think it's speculation, and I really think it's close to time to get back in the equities ring.

Bottom line in my mind: the bears should get some perspective. Cycles happen. There is real pain out there, but the sky is not falling. It's interesting to me: everyone whines about underperforming managers, when the reality of the situation is that reason most funds do fine, but most people underperform the market. This is due largely to their curious tendency to exit the market when their portfolio is down, and to hang on to their best performing assets like grim death. Don't be like most people. Concept: Buy low. Sell high. Or, better yet, get yourself an appropriate & diversified asset allocation model and stick to it, and don't have to buy or sell much of anything except your sailboats.

We've been here before, and we'll be here again. 1998 was not that long ago--remember Long Term Capital Management? Remember the Russian debt default? Remember '87? This time around has been just as painful. But we'll be back, and soon enough we'll be whining about inflation & ready to inflate the next big bubble.

Can you say alternative energy?