To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player,
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
-From William Shakespeare's Macbeth, Act 5, Scene 5
Last week saw the S&P 500 plummet from 1200 to 1100, eviscerating eight percent of its value in a few days before rallying back to 1178 by Friday afternoon.
The week was a chaotic dervish with subtle hints of 2008. Mixed in were scenes of rioting in British cities. Allusions to European bank collapses. And the helpless confusion which clings to any and all chaotic episodes. Something for every palate.
Question: What do Adam Smith and Nostradamus have in common?
Answer: Both may have predicted the current financial crisis.
Adam Smith, the famed classical political economist and author of "The Wealth of Nations" understood that it was impossible to understand politics without economics and economics without politics. Though the fields are distinct, the relationship is symbiotic.
The current economic crisis is best understood as a crisis of political economy. Having begun as an economic and financial situation leading into the 2008 recession, it has evolved into a global political crisis with far-reaching economic implications.
The entire episode gravitates around a crisis of confidence. Confidence in our economic and political institutions. Confidence in the current economic and political environments. And while the markets appear to have stabilized for the time being, this crisis is far from over.
Last week we stared into the abyss, wobbled, but regained our footing and backed away. Unfortunately, the abyss remains before us. Much work will be done before we are truly protected from gazing at-if not falling into, this dark hole.
For now, the uncertainty alone will continue to force these markets up and down.
We found it to be extremely interesting that last week's depths were plumbed at the 1100 point on the S&P 500. We are told that the 1100 point represents the exact 38.2% Fibonacci retracement of the entire 2008 bear-market collapse.
Translation? Technical analysts would tell you that S&P 1100 was exactly where bulls were supposed to step in and begin buying en masse, so reversing the decline. They did. And while it all may sound a bit too Da Vinci Code for some, it strikes us as pretty cool.
So, once the market touches that 1100 line, having dropped 14% points without so much as pausing for breath, like a swimmer touching the wall it turned and rocketed in the opposite direction, taking back much of the losses in a few short days.
And last week saw some positives (aside from the last-second avoidance of global financial collapse): stock buybacks were up. M&A activity continues. Corporate insiders were seemingly buying shares hand over fist.
So, perhaps the market is pleased with the Fed decision to avoid QE3 for now. Seriously, how many times can you continue to try something that obviously has not worked? Bernanke and crew risked looking ridiculous if they pulled that rabbit from the hat a third time. And the market would likely have recognized it for the parlor trick it is.
Where does this leave us?
Following last week's fall, the third-sharpest pullback experienced by global markets since 1965, we remain in the dark about the chances for another recession. Certainly, odds have risen. Perhaps markets will regain their 52-week highs and elevate back to the 1300+ level. Or, another shock may send markets back to retest the recent lows, or worse.
Good news though, that the unique Fibonacci retracement number at 1100 held, and so now represents the low end of what could be a trading period between there and 1200 to 1250. Last week also presented some stellar chances to pick up blue chip investments that had corrected, temporarily, to levels they likely should never have fallen back upon. But, as the market is a pricing mechanism and soon corrected its error, the fleet of foot were able to walk away with bargains.
We also continue to hold quite a bit of cash, and are seeking to bolster many of the yield-driven facets to our portfolios. The fact is, while today feels much better than last Monday, we've been at this long enough to recognize that the sunlight coming in through the window has done little to lift the fog of uncertainty that looms vaporously throughout the environment.
It is against that backdrop that we will seek opportunity, manage risk and move forward. Regardless of the objective, we will exercise caution, and urge you to do the same. Stay tuned...