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Shock & Awe

If you were even a casual observer of business news headlines the past two weeks you’ve likely heard that stock markets in North America and around the world have had a little difficulty standing on two feet. In all honesty for many investors a better description would be that they’ve had the rug pulled out from beneath those feet.

The investment boards, media sources and financial experts have provided no shortage of analysis for how we got here, why we’re here and what we each should do from here. The simplest answer is….well, it’s not entirely simple.

The difficulty with any turmoil in the markets is that there’s always more than one cause to any singular problem. Whether it be an expanding credit or technology bubble, geopolitical instabilities or a host of other issues; the bottom line during many of these times is that we’ve simply over-extended ourselves. People were naughty, greedy, naive or simply clueless to the developing dangers of risk in the market and excuses were easily found to justify the extension of a bull market well beyond its regular lifecycle. In each case, there are those who believe that this time will be different, that the fundamentals forming the foundation of cycle are too strong to stop and are slow to realize that it’s those same foundations which are fundamentally flawed or cracked.

I won’t argue that the world needs commodities. Emerging markets are now competing for resources on a global scale. Yet the danger in any of this was the belief that the interconnectivity of the global economy no longer existed with such permanent barriers and that even without a strong US dollar, US economy and cracks beginning to show on the surface of many US sectors (financials for one) that each economy could go on its way only affected in immaterial ways.

The US continues to serve as the engine for world growth and it looks as if the rest of the world solemnly found this out during the past 3-4 days. The problem is that this engine isn’t going into the garage for any routine oil change or tune up. It’s been running too hard for too long and more than one piece needs to be completely replaced or re-engineered in order for it to get on its way once again. The most serious concern I’ve shared with others is that we’re now finding out the owner of this car can’t find a way to finance the repairs very easily…the money honestly isn’t there anymore.

Sure the owner can print its way out of this mess as it has in past situations. But this situation is much different than before. The consumer, the economy is stretched thinner than in any point in history from a credit perspective. You can’t borrow from the bank because likely they already own more than 80% of your house and they’re closed to giving out new money (they have their own problems it appears). You can’t borrow from your savings because you don’t have any. You can’t even get a second job to help with the bills because those jobs have likely moved overseas to cheaper labour markets.

This isn’t a one fix wonder and I’m not suggesting that I have an answer that will provide any form of success for the future – that’s how messed up this shit is (excuse my french). When someone walks into the Emergency Room and they’re not breathing, they’re bleeding or having some serious health problems….there’s only so much that medicine can do for you. Just as healthcare professionals can only go so far to save a life, an economy can only sustain problems for so long before it shows signs of stress and/or failure.

Now…I am not suggesting that there will be a complete economic failure. But, we’re likely to see one large failure and I’m not talking about a small bond insurer or mortgage company. It’s only in the last six months that we’ve begun to see the real problems and how contagious this credit problem really was. Lower interest rates may not even help stimulate due to the fact that no one qualifies for it anymore in the first place.

What I do know is that quality at this moment holds more value than at any time I’ve seen in the past. You have to pick your spots, stay true to your strategy and be very aware of the risks you’re exposed to no matter what you buy, sell, trade or hold. We’ve seen so many new 52-week lows that I’m not even able to find a past precedent. We’ve broken resistance technically in stock prices and broad market indexes that go beyond 12-16 month supporting periods.

If you’re looking for a set of top picks, an investing strategy or approach that will promise you success in the next six to twelve months then I’ll likely be the first person to tell you that I don’t have one. At the moment I’m sticking to what I do best: value. Whether I succeed or not should be my concern solely and no one person should ever tell you what to do because honestly…it’s your money.

These are never fun times in the markets and we’re seeing that many don’t have the stomach or pockets (after margin calls) to stick around for much more of this. Yet the sad realization is that it’s not even close to being over. We’ve enjoyed a period over the last five years (as a minimum) of low volatility and a precipitous ascent in the markets. Maybe we’ve over-extended ourselves slightly or completely but no one person has the perfect answer to those questions. As with any market condition you have to stake out what priorities are most important for your investing objectives and have the conviction to stick to them.

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