Down…but not out

Ufffff….despite wishing there was a more positive opening tone to what is the last week (already) of the first month of the year – next thing you know we’ll be wishing one another a Happy Easter, having swiftly passed through the fake-but-commercially-viable mine field that is Valentine’s Day – there is not much to be jumping up and down about with joy. In fact, since the terrible Haiti disaster, unfortunate plane-crashes, shrinking bonuses (ok, certainly nowhere near as bad as the first two but still a little disturbing for some), set-backs for Obama losing that Massachusetts seat, the now well-documented desire to overhaul the “too-big-to-fail” system of banks – read: re-introducing Glass-Steagall – not to mention jitters cruising through the investor community as a slew of US earnings miss a few targets or at least fail to out-do expectations, markets and general attitudes to the strength of late 2009’s recovery have stuttered, shuddered and now slanted steadily south.

Losing steam…
Whereas some may be tempted to return to (negative and disheartening – so I hear) talk of bear markets, double-dips, hidden monsters-in-the-unemployment-closet, not to mention prolonged reliance on the investment community drug-of-choice otherwise known as “super-huge-amounts-of-liquidity”, recent falls which may well continue in the short-term do not necessarily signal the beginning-of-the-end. Sure, 2009 was a great year for equities…we all loved the great big green numbers on our screens after a rather aggressive yet welcome bear market bull-run that started in April and never-looked-back, but logic would indeed dictate that fast-paced momentum eventually loses steam.

That “hiss” of deflating market returns you heard at the end-of-last-week was the first release of built-up-anxious-vapour..a pause in the midst of an optimistic movement. With red on the screen for the last few days, and again today as Asia falls at least around 50bps across most markets, with China’s CSI even lower (-1.1%), Hong Kong shedding 62bps and recently well-performing but now back in negative YTD return land Japan falling 74bps on its Nikkei flagship, the very human desire to slow-things down when a watershed presents itself has made itself apparent. Apart from the obvious turn of the year divider, Obama’s (or we should be honest and say Volcker’s) bank-busting-plan provided more than enough reason to relieve pressure on the accelerator for a moment, or two, or three…

Can’t really blame such emotive responses over the weekend (prophesising huge market trouble ahead) when considering the S&P amongst other global markets have just experienced their worst performance in over 5 months. These market woes are being reflected in Obama’s Oval Office – serious creaks in his administration and a continuing resistance to his new wave of thinking. His short-lived “yes we can” period of hope replaced by such silly initiatives symptomatic of the less amiable elements of US politics; allowing unlimited payments to political parties from lobbyist groups for example. Worries about just how far the US really travelled down “the new path” growing with each day he loses more influence.

Not-so-blind-faith…
So what to do in the next few days and weeks faced with such volatile markets? Many would suggest you take caution along with the rest and sit back. They would be wrong. Instead, sit-up and think about what we are going through and it may become clear that now is actually a great time to buy into the dips for the medium-to-long-term. As mentioned above, we had a great run for most of 2009. Don’t forget that before the bulls took over, markets had continued their stomach-churning falls through till March, dropping almost 30% across the majors. Sentiment turned quickly then, and through the eye-of-the-storm of the “twilight zone” – where earnings forecasts are downgraded even as markets start to rise – great gains were made (+40% YoY for many major indices) by those that were first to respond and believe, before any proof was offered – faith in other words.

A modicum of faith is now required if the dips are to be bought into. We are not talking blind-faith though as history - as it so often does - points the way. After the rush comes the pause for rest. Once rested, the fitter are the first to speed-up again. It was seen in the 1930s (where there were several dips and surges), in the recessions of the 70s and 80s, and even after the tech-bust in 2001. Those that feel they missed out last-year should be the first to feel lucky to have the opportunity to get in for their turn in 2010. Those that did well in 2009 will likely exercise more caution but again – that’s only human. Those stocks and markets that brought (moderate) joy to investor spreadsheets over the last few months will make way for the laggards and the overlooked. Much of it is in the charts, and much of it is in the gut.

Intravenous
There are gains to be made across emerging markets (again) some forgotten developed markets (Japan) and some well-chosen firms listed in weak markets (the UK) but operating internationally and effectively in emerging markets (Cadbury, now Kraft, springs to mind).

Markets and the general economic environment will be tough for the rest of the year, notwithstanding that the investor community will face a difficult recovery process once their super-caffeinated-infused-directly-into-the-artery-liquidity-drink runs out of its juice.