NEW YORK (Dow Jones) -- Groucho Marx once saidthat he didn't care to belong to a club that accepted people like him asmembers. As the recession's ranks swell and desperation sets in, truer wordshave never been spoken.
The year 2008 will forever be remembered as the year the perfect stormfinally arrived. The toxic combination of financial engineering, debt dependencyand immediate gratification commingled like a clap of thunder on an otherwisesunny day.
The script played out precisely as written, although that hardly made iteasier to digest.
We've long offered that time and price were the only true medicine for thecumulative imbalances that steadily built through the years. Much like a forestfire, the painful process of price discovery is a necessary precursor forfertile rebirthing and greener pastures.
With a conscious nod that the ultimate market bottom is likely a few yearsaway as debt is destroyed and social moods shift, we wanted to share five vibesthat could manifest into the year's end as conventional wisdom catches up withreality.
Reversal of fortune
As the world worried about inflation entering 2008, deflation was a centraltheme in Minyanville. We were early as the dollar dripped lower and commoditiesdrifted higher into the summer.
Since July, the greenback has appreciated 21% vs. a basket of foreigncurrencies, and commodities are down an eye-popping 48%. All roads lead todeflation, we know, but the path of maximum frustration is often paved withdetours.
Keep close tabs on the dollar, which recently registered several technicalexhaustion signals. If it reverses lower, it'll pave the way for commodities toenjoy a spirited counter-trend sprint.
Retail therapy
We suggested in August that retail therapy -- or, the need for retailers tovisit their therapists -- would be necessary as we edged toward the holidayseason.
Since that time, Sears Holdings Corp. (SHLD) has lost 70%, TargetCorp. is off 45% (TGT), Amazon.comInc. (AMZN) is 60% lower and HomeDepot Inc. (HD) has taken a 30% haircut.
There's no denying that the consumer is on the ropes and spending is onsabbatical. That's front-page news, however, and the market rarely rewards theobvious, if only for a trade.
Seismic readjustment
Equilibrium between asset classes is askew as evidenced by insane volatilityin equities, credit, commodities and currencies.
Some analysts believe that given the current state of credit, fair value onthe S&P 500 Index (SPX) is close to 600. In a finance-based global economy,further dislocation could conceivably lead to social unrest and geopoliticalconflict. Remember, world wars are historically bred from economic hardship.
We may witness a grand scale asset-class readjustment. Potential scenariosinclude wiping the speculative CDS slate clean (contracts not backed byunderlying collateral), massive revaluation (yuan), the introduction of a "convertible currency" or crude being denominated in something other thandollars.
Performance anxiety
There is widespread acceptance that we'll continue to see forced selling bythe hedge-fund community as money migrates from that once-golden goose. That mayprove true, but there's another side to the trade.
In the mutual-fund universe, the conditioned mind-set is that the only thingworse than losing money is underperforming the benchmark. Given the horridperformance in the mainstay averages, that currently isn't competing for mindshare.
Should the tape catch a sustainable bid, the potential for a "long squeeze"will manifest in kind. If that happens, look for the "master beta" plays such asResearch In Motion Ltd. (RIMM), Google Inc. (GOOG),Apple Inc. (AAPL), andBaidu.com Inc. (BIDU) to springback to life and lead the speed.
Sell hope, buy despair
Entering September, we shared that one of two things would happen ascorporate credit came due. Either the market would suffer from cancer thatchewed through the system or we would see a car crash as the wheels fell off thewagon.
We've since experienced both. The S&P 500 is down 35% in a matter ofmonths, credit continues to clog our systemic arteries and lame-duck politicianshave thrown in the towel and passed the buck to the new administration.
The biggest potential land mine in the marketplace is widespread speculationthat General Motors Corp. (GM) or Ford Motor Co. (F) will file forbankruptcy before year's end.
That could set the stage for our final surprise of 2008 -- for when the autoindustry is finally fitted for a toe tag, it may finally be time to close youreyes and buy the market for a trade.
(END) Dow Jones Newswires11-19-080220ETCopyright (c) 2008 Dow Jones & Company, Inc.