Saturday, October 18, 2008

Fundamental Market Conjecture

Be warned that for some reason I remain a perennial optimist.

It strikes me that a lot of the current analysis is based on credit spreads and other esoteric measurements with an eye towards what current values would have implied during past periods.

I'm not saying that this analysis of fundamentals is wrong, but consider this for a moment. Every time something surprising happens we end up looking backwards and seeing an obvious exception to rules that everybody had been following.

If you don't know what I'm talking about think back to the great depression. It taught us that the government should not greatly restrict money and spending during tough times -- or else. That event greatly advanced our thinking and until recently we had constraints on capitalism in order to protect ourselves.

So, what, if any, shaky assumptions are we all basing our fundamental analysis on?

I wish I had some concrete ideas.

What about adopting the T. Boone Pickens plan? Pushing that amount of money into natural gas, and the companies and employees that would produce it, would be a tremendous economic stimulus. Think about it. Instead of throwing money into the ocean to pay for foreign oil the US would be paying it's own citizens to produce energy resources. Those citizens would get off of the unemployment roles, spend their money on goods and services and even pay taxes.

The analysis on moving from oil to alternatives has not taken into account the tremendous effects of the velocity of locally spent money.

Hey, what about winding down war time spending and bringing home the majority of the US troops abroad? Once again, all of the consumable products and services being purchased from foreign suppliers could be eliminated. In short, it's another way to stop throwing money around the world and stoke the internal flames of the US economy.

Does anybody know if China is still on the map? I can't believe that all the people in China will suddenly stop consuming good and services. Who are they going to buy their commodities from? Just as the parabolic spike to high prices was a gross mistake, so is any reverse parabolic spike to prices well below the bottom of the last parabolic rise.

Perhaps over the centuries we've developed a little bit more investor intelligence? I know, I know, this is hard to believe under the current meltdown, but there are people out there with untold amounts of capital under their management. They are going to be spotting bargains very soon now -- and they can step in and properly capitalize companies that have excellent long term value if the current owners find themselves in a position that forces them to sell.

I don't know what will or won't happen. However, I do know that having a global credit crisis right before an expected global economic slowdown has driven panic to levels that are perhaps unheard of. This implies that market mood will be driven down to lower levels than would be appropriate for either crisis alone. At the same time, many companies that refuse to or are unable to get capital are going to find themselves facing pent up demand -- assuming the end of the world does not quickly ensue.


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