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Financial Staying Power


As a prolonged crisis looms, keeping afloat is a must.


"Once in a while you get shown the light in the strangest of places if you look at it right." --Grateful Dead

The New York State Lottery tagline used to be "You've got to be in it to win it." The same can now be said for mainstream society as a whole.

Nestled within last week's corporate communications of human resource related freezes, capital expenditure reductions and non-strategic business divestitures was perhaps the single most important catchphrase for 2009.

Alcoa (AA), commenting on the current business environment, offered that it would "identify and implement effective responses that strengthen market competitiveness and financial staying power during the economic downturn."

"Financial staying power" isn't a term often used by corporate America as it infers that a more pronounced and prolonged downturn looms. It is, however, something we must consider on an individual basis, as it will define our ability to navigate the prickly path that lies ahead.

While the market has a knack for traveling the path of maximum frustration and humbling us all, all indications are that the forthcoming year will be ripe with risk.

There are two primary ramifications; the first is financial and the second social. In terms of the performance, several elements are vying for our attention. Viewing the market through our four primary metrics allows us to compartmentalize the process.

  • Technical Analysis: Perhaps the most daunting dynamic of the price action following the November lows is that mainstay averages have worked off oversold conditions as a function of time rather than price. This is called "churning" in trading parlance and points to lower prices still.

  • Fundamental Analysis: While news is always best at the top and worst near the lows, the operating environment has shown few signs of stabilization. All indications suggest business "fell off a cliff" into year-end but the reaction to the imminent earnings will speak louder than the news itself.

  • Structural: As the equilibrium between asset classes remains elusive, the single greatest risk remains a seismic readjustment in currency markets. Therein lies perhaps the most profound path of maximum frustration, one that punishes the savers who proactively prepared for the current crisis.

  • Psychology: While negative sentiment creates fertile ground for bear market rallies, aggregate risk appetites are contracting as voluntary and involuntary thrift collide.

This continues to manifest despite efforts by government officials to induce borrowing rather than allowing for the painful yet necessary debt destruction required for a more stable economic foundation.

The other side of our finance-based global machination-the same foundation that allowed subjective mark-to-market equations to determine our collective health-is that we, the people, are now tied to the performance of financial assets. As go the markets, so goes society, for better or for worse and regardless of socioeconomic standing.

As we often say in Minyanville, social mood and risk appetites will determine our financial fate and by extension, the way in which we live our lives. That was positive reinforcement during the era of conspicuous consumption but has troublesome implications as we edge through the age of austerity.

Last month, a report by the U.S. Army War College discussed the possibility of Pentagon resources and troops being tapped should the economic crisis lead to civil unrest, such as protests against businesses and government or runs on beleaguered banks. While the notion of social upheaval once seemed foreign to many, it is entirely more realistic as the bear market claws at those we love.

Here in the heart of New York City, where the financial crisis is most acute, social mood has taken a turn for the worse. Last week, no fewer than eight of my friends were laid off, broke up or told me they're going through a particularly tough stretch. Each and every one of them is fighting depression, which begs the natural question that if society is a sum of our parts, what does that portend for the direction of society as a whole?

We're at a critical crossroads, one that will have far-reaching ramifications for future generations. Some would offer that the mere mention of such topics is out of bounds but I prefer to take a different approach. It's healthier to discuss these directions while we're still in a position to affect positive change. Indeed, if policy makers were more proactive, we would have mitigated our risk long ago.

Staying power indeed. Now, more than ever, it's incumbent upon us to remember that if we're not part of the solution, we're part of the problem. That introspection and execution is not only necessary for a prosperous existence, it's a foundational element of the way we live and the legacy we'll one day leave for our children.

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