The markets have resumed their pattern of large daily swings.  Much of the volatility has been centered within the banking sector (down 17% Tues, up 16% Wed, down 8% today), where loan loss provisions are increasing and uncertainty is back to extreme levels as many banks cut their dividends to bare bones levels.  There are some who believe that all banks are essentially insolvent, a view which doesn’t sit well with the markets when so often espoused.  Even though financials are no longer the king of the S&P 500 (25% in 2007 versus a scant 10% today), it will nevertheless be difficult for the markets to do well without their participation given their importance in the credit creation process.    

With the renewed concerns over the banks, it is not a surprise that the S&P has retraced a sizable portion of its bear market bounce.  We still expect that the lows have been reached and could likely be retested at 740 (820 today).   For most of 2009, we will likely be range bound between this low of 740 and 1100 on the upside as the economy digests the good, the bad and the ugly.  Earnings are decidedly negative, which is to be expected, with a few rare twinkling stars, including Apple last night.  For every Apple (up 8% today),  there are generally many more Microsofts, which is down 10% on the day.  As we should expect, new unemployment claims continued to climb this week, reaching levels last seen in 1982 while new housing starts were the lowest since 1959.  

As we get through earnings, we believe the markets will once again find their footing and turn back up in search of economic recovery.  For those that think such things impossible, many are pointing to the 65% rally enjoyed by the Dow in 1933, during the Depression years.  Moves can happen very quickly to the upside, just as they will on the downside, so we advise all investors to consider your place within the aforementioned range when committing new money to the markets.

We believe the short to intermediate term risk reward ratio is now skewed to the positive, which is consistent with the fact that it feels much harder to buy today than it did just one month ago.  I wouldn’t expect it to feel any differently, which may be confirmation in and of itself that such a view could prove prescient.