Ramblings of a Portfolio Manager 7-6-2009

Ramblings of a Portfolio Manager or The ABC’s of W’s,L’s, U’s and V’s Last Thursday, the final trading day of the holiday-shortened week, the market received some unpleasant economic data. The US jobless rate climbed to 9.5%, a 26 year high. June Job losses exceeded the 363,000 expected by economists, bringing the total number of jobs lost to 6.5million since December of 2007. There were very little encouraging facts in the data. Even the average workweek fell, to 33 hours, its lowest since 1964. The market’s reaction was swift and merciless with the Dow falling over 200 points, its worst decline on a July 4^th holiday in over 50 years. Economists and pundits were equally swift in their reactions, proclaiming the recovery either “stalled” or farther off than originally expected. These same pundits were just a week earlier calling the recession at an end and wringing their hands over inflation and when the Fed would have to start raising rates to rein things in. That talk, too, sent the market down at the time.

The metaphors and acronyms have been flying wildly since this recession began. “Green shoots,” “brown shoots,” “mustard seeds,” recoveries with charts shaped in almost every letter of the alphabet, etc.. Everyone is looking for a sound bite to describe what is going on and where they see things going. The fact of the matter is, with all deference to the PhDs, the world economy is much more complex and dynamic than might be described in a convenient one-liner for the media (they know this but it doesn’t make for good TV). This recession, unlike many of its predecessors, began swiftly, mostly unexecpectedly, and, yes, the chart was almost a straight a perfect inverted “V.” But recoveries are seldom so neat and clean. There are many cross-currents in any economic rebound. Data will often be conflicting and opinions will diverge widely. This is characteristic of any change in direction—a “bottom” in economic terms. That is likely where we are now. So what letter can we expect going forward? All of them, of course! Economies never recover in a straight line. There will be fits and starts, periods of acceleration and periods of weakness. The data will continue to be conflicting…until its not. But make no mistake, the economy will recover—just not neatly enough to be summed up in a one-liner. This is what creates markets and more importantly, opportunities. The key is to read the data in a holistic sense and not react to each piece of information that comes through as the definitive data point. The good news is that, in our immediate information age, there will be many, many more data points to which to react over the next few weeks.