HOT 'N COLD
 

When you have pre-teens in the house as I do, you can't help but stay current with what's topping the Pop Music charts.  A recent Top-10 hit summarizes the stock market over the past few months.  Maybe you've heard Katy Perry's song, "Hot N' Cold."   Here's one section of the lyrics I can show you without bringing foul language into the wholesome environment that is "GreenThought$":
  
...'Cause you're hot then you're cold
You're yes then you're no
You're in and you're out
You're up and you're down
You're wrong when it's right
It's black and it's white...
 
And so it goes with the equity markets and the emotions of its participants.  Every day at 3PM EST, one hour before the U.S. Stock market closes, its like the "Rocky Market Picture Show" - the movie that gets played over and over to the point where you know what's going to happen, so you sing along.
 
The economic news is undoubtedly bad.  But we must admit to an increasing feeling that much of the bad news we've seen so far is already reflected in the over 50% drop in the S&P 500 over the past year (from peak to trough).  Actually, the stock market has long been considered a "leading indicator" of the economy.  In other words, when the market started falling in October, 2007, the economic news was still OK, and many "experts" were telling us that the U.S. and the rest of the world would see an economic pullback, but avoid recession.  How's that forecast working out? 
 
As our colleague and Emerald technical analyst Michael Kahn said recently is his Quick Takes Pro newsletter, "we have to keep the economy and the stock market separate. Stocks already crashed ahead of the economy and they will recover ahead of the economy. And while the market heals, there will be tradable rallies and then tradable declines."...Dow 4000(ie. a huge decline from current levels) is not in our forecast.  Economic pain, unfortunately, looks to be with us for a while.
 
I recently looked back to a January issue of Investment News, one of the finest publications in the investment industry.  Each year, they choose about 15 market strategists to predict stock prices and major market influences for the coming year.  The S&P started the year at 1468, and their predictions for where the S&P 500 would close in 2008 ranged from 1810 down to 1309.  With that index closing at 876, it is fair to say that most experts were not prepared for the possibilities this year.  My point is not that this is bad forecasting.  It is to warn you about overreliance on forecasts.  Forecasts are more a game than an element of long-term success.
 
Investing is not about guessing, and even when one makes a forecast, remember what I learned from staid economist Stephen Roach, then and now of Morgan Stanley, many years ago when I toiled at that firm.  It goes something like "always remember to account for what will happen if your forecast is wrong."  And that, very succinctly, is a powerful lesson for 2008. 
 
So, investors should be investors, NOT GUESSERS.  Yes, it is all an "educated" guess, and you should aim to find the best educated guessers you can, because the difference between one investment process and another is the difference between retirement and a longer working career.  One of the best things you can do is avoid the "all or nothing" philosophies many investors are tempted to adopt in times of economic and market stress.  If you approach wealth management as "its black or its white," or "in or out" (the Katy Perry song, remember) you are introducing an unnecessary large amount of luck into the equation. 
 
Do you feel lucky?  Unfortunately, many are stuck between "do I go to all-cash" and "I rode it down, I'll just have to ride it back up."  In our opinion, both of these philosophies are extremely risky, given the short-term and long-term risk-reward analyses we are doing here at Emerald.  There is an element of skill, which can be applied through thoughtful, flexible and adaptive asset allocation (not the mass-appeal versions of allocation invented in the 1980s and still clung to today by too many investors and advisors).  We'll talk more about our "21st Century Asset Allocation" approach in many upcoming issues of GreenThought$.  Of course, if you don't want to wait for the published segments, just call and talk to us about it. 
 
Now, here's some excellent guidance the aforementioned Stephen Roach, who is now Chairman of Morgan Stanley-Asia.  He wrote this about the U.S. economy and consumer in the New York Times on November 28.   ...This is a painful but necessary adjustment. Since the mid-1990s, vigorous growth in American consumption has consistently outstripped subpar gains in household income. This led to a steady decline in personal saving. As a share of disposable income, the personal saving rate fell from 5.7 percent in early 1995 to nearly zero from 2005 to 2007... .   ..Crises are the ultimate in painful learning experiences. The United States cannot afford to squander this opportunity.  Runaway consumption must now give way to a renewal of saving and investment. That's the best hope for economic recovery and for America's longer-term economic prosperity...  

We'll leave you with that thought until next time.
 

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