Musings from the Editor:
Then and Now…

One of life’s great ironies is the fact that we must often look back to move forward. No mystery there, as so doing provides us with perspective. Now that we’ve come through the opening month of the year and find ourselves perched just shy of record levels for the broad indices, it makes sense to step back to a point similar to ascertain whether there is insight to be gained that will help us better understand where we stand currently” and where we might be headed.

A then and now assessment, as it were”

Now some would say we need to step all the way back to 2007 to gain perspective, given that’s when the record highs were set. Certainly some comparative and relative lessons to be learned in such an endeavor, but the fact is the fundamentals underpinning the markets at that time versus now are vastly different – we were on the highway to perdition then versus the road to redemption now.

We really need look no further than a handful of months back to gain perspective – namely September/October 2012. At that time the broad indices had climbed to multiyear highs and appeared ready to challenge the record highs put into place back in 2007. This was occurring during a period of great uncertainty, marked by widespread skepticism as to the state of the global economic recovery. Many continue to hold that same view now.

The obvious question at that time was whether the indices could set new high marks. The more relevant question was what doing so – or failing to do so – meant in the scheme of things. Had we finally started to turn the corner on the worst economic period to befall the world since the Great Depression? Or were we chasing fool’s gold in the form of inflated market values that reflected little more than artificially bolstered demand that had been created by over-accommodation policies on the part of our Fed and other such institutions worldwide?

Fair questions all”which is why we examined them in the October 2012 edition of TEI. Our approach then was to look at the economic hotspots to gain understanding of the real issues and how they might influence the big picture”and in turn the trading markets here. Our approach now is to revisit those same hotspots and issues”and in so doing hopefully gain invaluable insight and perspective.

Domestic Front

Back in early October we examined three home-front issues that were providing some serious headwinds for the economy and the market. The most important issues was that of the just initiated QE3 program, given what it implied about the state of our economy. The second issue was that of the pending election, due to the uncertainly of which fiscal path we would take and the fact that it put everything on hold – most importantly budget negotiations. The third issue was the draconian cuts tied to the fiscal cliff that was fast approaching.

On the election front, once we cut through all the hype and dire prognostications put out by each side, we got what had long been expected – more of the same. Like it or not, the outcome provided better clarity, which is something Wall Street much prefers to uncertainty.

The fiscal cliff – well, it’s come and gone”and remains still. Although everyone was focused on this man-made disaster, fact is the market had been gradually discounting the event well in advance of the year end. Whether we got something done prior to or just after the New Year, there never was much credible doubt that a deal would be fashioned. While that deal amounted to little more than a can-kick down the road, it confirmed what the “Street” had long recognized – the pols would act in the 11th hour to save face and their jobs.

Although the automatic cuts still loom as of today, and the media is primed to scare the hell out of the general public with yet another round of headlines proclaiming “fiscal cliff doom,” it’s safe to assume that ill effects this time around will be diminished and short-lived within the markets – such is the nature of reruns and human beings.

Which brings us to what was and remains the real issue – that of sustainable organic growth in our economy. Back in the Fall of 2012, there was considerable skepticism regarding the possible impact of yet another round of easing on the part of the Fed in an attempt to jumpstart growth in the economy. The indicators were heading in the wrong direction and the economy was decelerating into what looked like a sure double dip. Weighing heavy on sentiment was the emerging recognition that the much-anticipated recovery that was to finally take hold in 2012 was illusionary at best – the light at the end of the tunnel was fast fading and the Fed had nothing left in the arsenal to stave off recession.

Well, we did decelerate, as demonstrated in the recently released GDP numbers for the 4th quarter of 2012. But, not so much as peeps had feared”and not across the board. Housing and some other key areas actually continued to improve during that period. And while they are far from where they need to be, employment and housing are trending in the right direction, which is reflected in the sentiment numbers and the record-challenging levels for the key broad indices.

At this point, few economists place us on a glide path to recession in the coming months”or at any time in 2013. There’s much to debate in terms of where this economy is headed, but it’s become more of an issue of the pace of growth and recovery versus the fear of falling shoes that prevailed near constantly over the previous five years.

Comparative Outlook – Steady and Improving

Middle East

At the time, the tension in the Middle East was palpable and the potential for war between Israel and Iran seemed to grow with each passing day – thus reflected in spiking oil prices and depressed sentiment. The fear premium priced into crude was further exacerbating the problems in Europe. And there was justifiable fear that inflated oil prices would be the nail in the coffin for the nascent recovery in the U.S. Even more troubling was the concern it would speed China’s deceleration at a time when the entire world was banking on the behemoth to bootstrap the rest of us.

Oh yeah”and there was the nuclear issue itself – scary indeed, as it represented a “game changer” for the entire world.

What happened? In quite puzzling fashion the situation has quieted and tension has somewhat ratcheted down – at least on the surface”for now. Will the tension re-emerge? With certainty! Egypt, Iran, Syria and frankly most countries in the region remain powder kegs – each dealing with internal and external discord. And there’s much debate in Israel itself as to how to deal with its neighbors and enemies.

So, now as then, the Middle East is the “wild card.” Uncertainty and resulting fear WILL remain for many years to come”a reality the market and its participants have long accepted and dealt with. But unlike the past, we are fast approaching the date when Iran, and in turn other nations in the region, will have nuclear capabilities. The only certainty is the fact there will be acute periods when all eyes are focused on the region and we are all forced to ponder the unthinkable” We can all surmise the impact on the markets in such a situation, but until such time we’ll collectively continue to treat it as a “see no evil” scenario.

Comparative Outlook – Uncertain and Slightly-less Acute


Europe, Europe, Europe” uttered in chasten fashion like wife to husband or parent to child – love and disappointment intertwined. Back in October I sarcastically asked what hadn’t already been said and written about Europe. Fact is we had all grown fatigued with the situation – best described as a slowly unfolding foreseeable calamity. Much that had occurred had been openly discussed years prior to the actual formation of the EU and the adoption of its shared currency. An unfavorable outcome had been mocked and discounted, with peeps arguing we were operating under a new set of rules. Twas much the same type of flawed logic put forth here during the midst of the Y2K craze and crash – we’d entered a new paradigm where value and economic principles mattered not due to our potential to innovate and produce at a pace never before envisioned.

Hmmmm”. The Irish have an appropriate label for such thinking – malarkey!

Foolish or not, I did suggest in October that while the situation was far from resolved and there was still a good chance we could see exits from the Union (forced or voluntary), as well as the currency, we appeared to be finally turning the corner into a less-acute phase. That does indeed appear to be the case now. Granted, growth remains anemic and the disparity between the “haves” in the north and the “have-nots” in the south grows wider still. But the entire group has shown tremendous resolve to hold steady and weather things collectively”and there’s much to be said about that.

I said it then and will do so again – they aren’t going away and however it plays out (with some or none exiting the EU) the European parties will emerge and once again exercise collective muscle on the world stage.

Comparative Outlook – Steadied and Improving


Big question mark”still! Said back then that our real problem when it came to China was our lack of understanding of its market, culture and the strength of its economy. Truth is we had become reliant on China’s ability to maintain 8-percent plus growth to prop up the Western markets during our period of peril. But we didn’t really know how fast they were or weren’t growing”we don’t still. Illusion or not, we needed to believe they were continuing to click along”despite warning signs in the form of slowed demand for raw commodities from countries such as Australia. So when they came out the second-half of last year and said they would be growing at a slower pace (albeit far faster than what we consider strong growth), we justifiably got freaked.

Truth is we still don’t have a solid feel for where they stand economically. Their demand numbers have been mixed, as has been the flash numbers on productivity and orders, but no one out there believes they’re about to take an economic header. And with our own situation stabilized and improving, and Europe arguably stabilized, a Chinese hiccup is less of an issue for all collectively. What’s sure is they are gonna grow considerably still going forward – the question is simply a matter of the pace of such growth. As stated back in October, China is flush and will take all necessary measures to move forward themselves and the rest of us. Sure there will be bumps, but betting against them and their ability to “spend” the rest of us into growth is not a bet I’d take.

Comparative Outlook – Steady and Improving”we think!


No doubt there remain myriad issues and headwinds here and abroad”and much pessimism. That’s not surprising in that when measured in absolute values or without the benefit of comparisons or perspective, things continue to look quite bad just about everywhere you turn. And frankly it’s easy to get caught up in absolutes when it comes to making judgments on the state of economic health here and abroad. You need look no further than the U.S. balance sheet to understand ours is a broken system that is beyond repair.

That said, you have to be real careful when it comes to viewing/judging situations in absolute values, divorced of comparative valuation and/or the benefit of derived perspective. Life doesn’t happen in a snapshot or a vacuum. Yes, our economy is messed up big time, but compared to most others, we’re doing pretty well and remain the envy of the world.

Moreover, when it comes to the markets, the problem with judging things on an absolute basis is the fact that the market is a discounting mechanism that seeks price discovery on a relative basis. Simply stated, judging things solely on an absolute basis ignores the true manner in which the market operates”a perilous approach, indeed!

Fortunately we have the benefit of perspective that we can draw on”as well as solid comparisons that allow us to better gauge where we stand now in relation to where we came from. Viewed in such relative light, the picture brightens. Certainly not out of the woods, but there is little doubt that the acute conditions that prevailed over the past five years seem to have abated in measurable fashion”at least in terms of their ability to provoke outright fear…sans the Middle East situation. From a relative standpoint, the market levels as they stand now seem justified as compared to those same levels when approached roughly five months prior.

Bottom line, regardless of where the broad indices head going forward, there has been some real improvement on the economic front here and abroad”and we’ve seen stability come into areas just a couple years removed from what seemed sure disaster. There is one additional development that must be noted. There appears to be a new fear emerging – that of missing out on a market rally. In stark relief to the 2009 recovery rally off the financial breakdown lows (few trusted the rally and the majority missed out on the bulk of gains), this time around the bandwagon seems to be filling up quickly”relatively speaking!

Time will tell”


Louis Horkan



Louis entered the biz in the late 80s and spent over a decade working as a trader, instilling him with unique insight into trading and the markets. In 1998 he switched gears to become the group editorial director for a large network of award-winning, trading-focused newsletters. In 2002 he became the founding editor-in-chief for two financial trade magazines – each served approx. 40,000 independent financial advisers nationwide. He’s appeared on business TV, in the business press and on numerous biz-focused radio programs in the past. He writes market commentary and analysis most days and trades on a daily basis.

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