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Rhapsody in Red


As investors, we must ascertain if this is simply a case of the sharpest corrections occurring in the context of a bull market.

Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality


Nothing has changed. That, at least, is the party line echoed by the Matador Crowd after the worst week since 2003. Despite carnage that sliced more than 4% from the big board and almost 6% in tech, the bovine have collectively opined that the "economic expansion" in place since the back of the bubble is very much on track.

By now, we know the culprits being blamed for the decline. Alan Greenspan alluded to a recession. China and India shouldered supply for the first time since last May. Sub-prime mortgages, which were viewed as insulated and isolated, spooked the financials. Hedge funds, which were levered up to compensate for low volatility, found themselves overexposed and under-hedged as stocks cascaded lower.

That was then and this is now, we know, so the intuitive question to ponder is whether the worst is behind us. As investors, we must ascertain if this is simply a case of the sharpest corrections occurring in the context of a bull market.

For my part and from my perch, I will offer a few thoughts. First and foremost is the DNA of the marketplace that we've been discussing for the last few years. There is a difference between a legitimate economic expansion and a debt induced largesse. It didn't "matter" as long as the screens were green but it's a dynamic we must understand if we are to properly assess risk.

There were structural imbalances in the system after the biggest bubble in financial history imploded. Yet, instead of allowing the market to self-medicate, the powers that be decided to inject massive amounts of fiscal and monetary stimuli with hopes that people could wean themselves off with time. That hasn't happened and they now find themselves massively indebted, dependent on foreign players and conditioned with collective complacency.

But wait, there's more.

While global asset classes enjoyed the benefits of liquidity these last few years, the dollar declined to the tune of 30%. That, too, was deemed inconsequential by those in the know as, let's face it, we earn and spend greenbacks.

Where it matters-and one of the reasons I believe the Fed's in a box-is that foreigners holding US dollar denominated assets haven't been getting paid. That fact, on top of the geopolitical tensions in the Middle East, hasn't endeared America to the rest of the world.

In our era of globalization, we in the US need to respect our trading partners. And we'd better hope that they respect us, as our stateside livelihood very much depends on them.

So, where do we go from here?

I offered last Wednesday, after Terrible Tuesday, that the dip shtick was good and thick. That, despite the one day fright, folks came out of the woodwork to issue an all-clear to get back into the market. Never mind that it was the first two percent dip in 45 months. It was an opportunity to buy stocks. You heard it from the Street. You saw it on television. You read it in the rags.

This past weekend, that message was very much in tact and I would again note that there are three phases to any market move: denial, migration and panic. I'm not smart enough to know where the next few percent resides but I will offer that until the mainstream media shifts their focus from the looming reward to respecting the risk-until there is some legitimate fear-rallies are made to be sold.

How you position yourself is a function of your unique time horizon and risk profile. The bulls will argue that stocks are historically the best performing asset class and, of course, they're right. I will simply caution that the conditional elements for a harsher reality are in place and proactively appreciating that potential will serve you in good stead.

For by the time downside reasons are readily assigned to the rhyme, it will likely serve as an opportunity to dust off some buy tickets.

Good luck.
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