Hope for the Best. Prepare for the Worst.

November 8, 2011

Looking back on the fourth quarter of 2008, one recalls the sudden voracity of the market's plunge. Heading into those final three months, the markets had performed poorly. Not yet disastrously.
From October's beginning through mid-November, the market plunged a merciless 22 percent. Stocks. Corporate bonds. Commodities. Nearly every asset class dropped like Penn State football recruits.
Few were prepared. And while we like to think that we learn from our mistakes, here we go again.
The European Union has all the staying power of a Kardashian marriage. And if our friends across the pond determine to call off their grand experiment, the global repercussions will be swift and tumultuous.
Yes, Berlusconi has resigned. Greece has been offered a lifeline. Merkel and Sarkozy forge ahead in their attempts to right the ship. Yet, for all of the running in place, very little has been accomplished.
There is no solution available that does not first force the patient into a coma. Every road ahead, by all appearances, leads to financial pain and fiscal decimation.
Europe's problems are systemic. And much of the continent is helplessly bankrupt. So, the Europeans will aggressively write off their debts and declare the banking system insolvent, after which a restructured European Central Bank cranks up the printing presses in a means reminiscent of Zimbabwe, so killing the purchasing power of the entire E.U.
Oversimplified. Yes. Really bad? Absolutely.
Yet, there are few other scenarios offering rosier outcomes. Greece will not default. It already has. Anytime creditors are forced to take a haircut on their capital then the joke's already on them.
Expect more of the same from Italy. Portugal. Spain and France. And their northern brethren can only offer so much support. At some point, the political goodwill from those in Germany and Brussels will dry up.
And then? Well, there are many ways by which the dominos can fall. None of which are good. But, unlike 2008, we can see this train wreck as it takes shape. We can prepare for it. Place risk management parameters within portfolios in order to alleviate some of the inevitable downside.
Remember, the market mechanism will go out of its way to disappoint the largest number of investors as often as possible. So, before any of this downside scenario takes shape, we expect the market to rise into year end.
As of now, the market is trapped in a range between its 50- and 200-day moving averages. Per 10 of the last 12 years, we expect the market to finish strong. Goose the performance for many of the institutional money managers who need to enhance their returns. Who trailed the market indices for most of the last few years. Whose career risk dictates that they get their butts in gear.
After the New Year's holiday? All bets are off.
When will all of this occur? Nobody knows. At this moment, European bankers are buying all of the time they can to prepare their balance sheets for the worst. Make sure that you and your advisors are doing the same.

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