Taking A Step Back

Sometimes it is helpful to take a step back, and view the action from above the fray.

Economy
The economic future is clouded. This uncertainty feeds market uncertainty. Signs of stabilizing abound. Signs of recovery are not quite there yet, but the market has rallied in response to the postponement of Armageddon and some expectation of recovery. Further market movements are likely to be based on future data points (the proof is in the pudding).

Valuation
Valuation based on forward expected earnings and normalized earnings infer the S&P is probably pretty close to fair value. If you believe in a normalized recovery story, then the stock market is probably pretty attractive (and you ought to be fully invested). If you believe in a less than normal recovery outlook, then you ought to have a decent lick of equity exposure, but you may also want to keep some of your powder dry (as you wait for data confirmation).

Flow of Funds
Deleveraging means higher savings, paying off debt, reduced consumption, and more money for investment. The critical thing for a money manager is anticipating where the sources of funds are going to come from (US savers, Asian central banks, European doctors, Middle Eastern SWFs) and where they are likely to go. My suspicion is that the rapid rise in US savings will become a more prominent feature of the market in time to come. Anticipating where those savings go will be critical. The collective deficits of the world economy poses as a substantial black hole for savings.

Stay tuned.