Perspective

(21 Jan) Thursday's market continued to act like Rocky - taking the flurry of punches of bad news, seemingly ready to go to the mat when, all of a sudden, the head clears and we're up - still groggy - but ready to go to the next round.

I think this underscores a couple things.

First, when the information first is seen, it's like, "omigod - what can this mean?" and then the stock - in the case of earnings - or the market - in the case of economic reports - proceeds to fall. The first hour or so of activity is usually driven by emotions created by the overnight news and not so much by thoughtful action. What then happens during the market day is that the information is analyzed more carefully and the realization is that this isn't really "news", it's just the result of the bad stuff we've been going through and already know about. This takes a lot of the sting out of the info. Experienced investors and traders then look at the value and quality of the issue/market in terms of - NOT where it is - but, much more intelligently - where it's likely to go.

The other point I feel it makes is that the market doesn't want to stay down. While we've approached the lows of last November a few times, we have yet to really be in danger of penetrating them. This "behavior" is also representative of market bottoms and the gathering of the forces that will bring it "back to the light."

About that real estate

Housing starts and building permits continued to decline in December, hitting record lows dating back 50 years. Most of the problem is with two of the usual suspects, California and Florida.

Home builders across the country continue to clear out excess inventory by focusing their work crews on finishing homes that were already under construction. Further, as you may have noticed, December weather was worse than usual. There may continue to be a slight reduction in housing starts in the months ahead, but there's just not that much room left for future major declines.

According to Dr. Brian Wesbury, if you look at the new home building rate as it is today, the average house would have to last 236 years before it got replaced. That's roughly the age of Jefferson’s Monticello! A nice place - but I'm not sure if most homes can last quite that long. Typically, the “replacement rate” is about 70 years. In other words, building is well below the long-term sustainable pace in order to work off excess inventories.

In summary...

Please do not look at market performance - good or bad - as your primary determinant of how you invest. Identifying personally important goals, establishing individually appropriate asset allocation mixes to achieve each and then doing little or nothing in response to news of any sort is much more likely going to stand you in good stead over time.

Don't worry about what's "working" now - the fad or fear of the moment. Bear markets such as this are part and parcel of the ebbing and flowing of efficient markets - always have and will be. We've had 13 of these things since I first showed up on the planet. That's about one every five years and the average - average - amount of the drop has been 30%. This time does not seem any different to me.

Adjust/adapt/amend your perceptions. If you're to be successful in investing in the stock market - with whatever choices you select - you have to understand that this very success is based upon historically-based probabilities. It has nothing whatever to do with the remotely likely catastrophes the financial media has - and has always in these times - put forward.

What is key is an inherent faith in the future. Living in the US, I don't know how you can't just default to that. If you don't have that faith, stay in bonds and the like and just understand that your assets cannot expand at anything remotely close to the rate of stocks - based on those same historical probabilities.

You know my view - the future's so bright, I have to wear shades...