Friday, December 19, 2008

Slowly Slowly Catch a Monkey

I admit it, listening to the constant drone of certainty that THIS is the bottom from the media one is tempted to dream. There is an instinctual need to declare an all clear and move to more pleasant times. I THINK we MIGHT be near something approximating a buying opportunity but looking at the market action I just don't see it yet. It feels like short covering rallies followed by lack of buying interest.

The fundamental discomfort with the economy and the serious deflationary data prevents more than a tepid backdrop for buying into equities, or for that matter into automobiles, houses, plasma televisions or just about anything that requires credit or a job.

We've not seen a serious positive move over the 50 day moving average on the Dow since April Fool's Day and for all the drama of the past ninety days, the broad indices are where they were in early October. Irrationality and fear remains firmly in place and dictates caution but long term valuation provides some hopeful optimism.

The market is technically somewhat over bought and I would like to see another test of lows in an oversold condition to put a toe into the market or conversely a reasonable and understandable move above the 50 day moving average.

This weeks immediate positive reaction to the Fed move to our own zero interest rate policy (ZIRP) had me scratching my head. Since much of the demise of the markets has been led by the banks, I was puzzled how structuring interest rates in a way that is negative for banks (a flat yield curve) was cause for euphoria. Fed action created two signals for me. First the usual profitability of a, "borrow short, lend long" policy of banks has become highly compressed. Second, interest rates of essentially zero aren't a very ringing endorsement of the economy's strength.

We're looking across the valley to the next economic cycle, but the reasons to invest are all of the, "it can't get worse" variety. The clues will be in the bond market and will tell us when its safer to come out of the bunker.

John Barnyak