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8/9/2011

Global carnage in the Equity markets…No surprise at all.

We’d like to initiate our comments this week by emphasizing our continued caution as to valuations in the US Equity markets.  Time and time again, we alluded to the fact that levels of the major Indexes were in air zone and that tremendous risk underpinned these sectors.  Case in point was the nearly 300 point up-move in the tech heavy NASDAQ market that transpired in the middle of June to early July this summer.  There simply was no fundamental reason for such an extensive appreciation…and so the resulting reality is that air often is released more quickly then is pumped into assets.

We also sounded the alarm bells early on as to the weakness of the latest budget deals announced by Congress just last week.  We have also alluded to the general fragility of the US economy given the state of affairs on the Macro front.

We now would like to comment on the downgrade of the US credit rating by S&P.  Although we are by no means a proponent of this institution (as they drastically dropped the ball when rating mortgage backed paper during the real estate bubble days), we are asserting that their downgrade to US debt as being appropriate.  As you’ve noticed, the downgrade has had little affect on Treasury prices.  Over the medium term the downgrade will most likely not have a negative affect, however the outlook rendered by the rating agency should be taken by the marketplace as a red flag for the US economy as a whole that serious problems exist and will continue to exist for some time.  Criticizers of S&P are simply incorrect.  In fact, one insightful analyst put it eloquently when addressing the matter.  He asserted that S&P’s downgrade was too little too late.

Overall, the massive declines in the major Equity indexes around the world should be no surprise.  US markets were being artificially pumped up for at least a year now.  Don’t be surprised if selling continues…believe it or not but stocks are not cheap given the state of affairs in the global economy.  P&Es you say?…just remember, that metric is a moving target.