Saturday, January 05, 2008

Financial market comments

Before settling in for football and debates, different games, here are a few brief thoughts on the uncertain financial markets:
---Over the last six months the equity markets have been characterized much more by volatility than any aggregate negative performance. Volatility, however, can make investors accident prone, and has created significant losses in certain sectors and for certain investors. Especially with the recent economic news flashing yellow on recession, the overall tone of the market has become more negative than recent performance would dictate. That being said, markets look forward.
---The trade-off between the equity market and other markets, fixed income and short term cash, is increasingly leaning toward equities. Money must flow somewhere and piling into money markets and bonds does not look promising. Thank God for the squeeze on bank credit, as CD's are outpaying almost everything, but institutional investors can find limited liquidity there.
---The distribution of debt into all segments of financial markets, instead of just being held at banks, had been viewed as a great way to mitigate and spread risk as in reinsurance within the insurance industry. With the prevalence in recent years of mark to market accounting in all securities, however, the credit market issues have become more like a virus that infects everyone instead of a flu that a few wait out until it passes. This has exacerbated the downturn in all markets, but could it also jump start the upturn when the time comes. These changes, plus the elimination of the rules against shorting on downticks in July, are the reasons for the heightened volatility.
---There is a kind of general feeling in the markets among commentators and technicians that there is a prevailing equilibrium nudged up and down by statistics, so we hear the talk of markets being oversold or overbought. It's a kind of faith based approach to investing that happens to be very American(and I'm not talking Huckabee). The markets have been down but they'll turn soon enough. On the other hand, one could have the view that at the end of every market week investors have spoken and what you see is what you get. Anything, absolutely anything, can happen next. That could be called an existential based approach to investing that is susceptible to a bigger market picture that is more psychology driven, and it is much less reassuring.

Go Redskins.

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