Stock Market -- Longer Term Issues

The bear market which started in the autumn of 2007 has been
dramatic enough to badly fracture long term bull trend lines
which ran from 1982 and 1987. The market at its recent low point
dropped down into the center of a broad 50+ year range, a range
it had eclipsed to the upside over the 1997 - 2007 period. As a
consequence, there is simply no close parameter guidance to
follow going forward.

To me, this situation implies that the fundamental dynamics that
powered one of the greatest bull markets in history are no longer
aligned, and that a new epoch for stocks has begun. The great bull
was powered by faster than historic earnings growth, rising ROE%,
and downtrends of inflation and interest rates which elevated p/e
ratios. Investor confidence, heightened by such superb basics,
was strong enough to suppress risk premia and produce a roaring
bull which ended in major highs for small and mid - cap stocks
well above the highs for the large cap group, which peaked in 2000.

When you have a new ball game, you have to put aside the gambits
that powered the old one and look forward only. I see a period
ahead of lower global economic growth, difficult to manage volatility
in inflation and a range of burgeoning fiscal, monetary, financial and
trade imbalances which will wreak further havoc if not contained
and managed. At the least then, I see a higher risk premium for
stock investment going forward, which mean lower earnings
capitalization or p/e ratios. The potential for economic and
markets instability going forward is phenomenal in the post WW2
era.

The most pressing issues at hand are: 1) the swift contraction of
asset values underway globally and 2) high volatility for many cost
factors of production vs inflexible wage structures -- Too many
folks can go from comfortable to underwater in to short a time when
costs are allowed to escalate rapidly vs. the wage. In this latter
regard, tax rate cuts and rebates only subsidize the sharp cyclical
upswings in the cost of living.

More as we go along. Suffice it to say for now that much work lies
ahead in charting the course going forward. I have never been much
for buy and hold. As a money manager, It was my view that a good
stock picking system ought to turn 1/3 of the portfolio over every
year. If I was a young guy interested in investing for the longer
term now, I would anticipate wide swings in asset allocation geared
as much to dodging bullets as to seizing opportunity. You cannot get
rich dodging bullets, but you can stay solvent.