To All,

The markets have been rough. The S&P 500 was down (-7.18%) in September and is down (-10.04%) for the year. In my last blog, I surmised that we were entering the next phase of the bear market. On the first day of trading this month, the S&P 500 index closed below 1100, down -19.37% from the 2011 high set in late April. This selloff is just shy of the -20% that “officially” defines a bear market. When the market breaches that milestone, the financial media will reluctantly call a spade a spade and admit that this is not a mere correction.

Maybe the financial media will also concede that the economy is already in another recession following the most shallow economic recovery in U.S. History by most relevant measures (i.e. unemployment, GDP, etc).  I can think of one measure that is inconsistent with that reality… Corporate Profits.

Profits of the 500 largest American corporations (S&P 500) swung from negative aggregate earnings in early 2009 to record earnings in 2011. Of course, this growth in net income cannot be attributed to revenue growth. In fact, corporate revenues have remained generally stagnant over that same period. Instead, companies improved their margins by cutting variable costs and increasing productivity. That is code for, “companies laid-off millions of employees and those who still have jobs are working harder.”

The problem is that companies will only achieve a fleeting boost in corporate margins through layoffs. If you think about it, the employees they laid off are consumers who, without jobs, can no longer afford to buy their products. Already, topline revenues appear to be rolling over and margins are beginning to get squeezed. When that happens, stock prices fall.

What’s the market’s downside risk from here? I don’t have the answer, but I do have a statistic. During the average recession, the stock market declines about 40%.  Investors beware.

Catamount portfolio investments have performed well in the face of recent market declines. Alternative Investments and a substantial allocation ot cash certainly helped. See the following Catamount portfolio data.

While a near-term rally is expected, we are currently positioned for more downside. It’s been said that, “Offense wins games, but defense wins championships.”  Fittingly, capital preservation is our overriding principle right now, but we will get more aggressive and optimistic at lower asset prices.

Please let me know if you have any questions.

Best Regards,

Greg

For several years I have asserted that the US Stock markets would endure a prolonged cycle of extraordinary volatility and below average returns.  In financial circles, these cycles are coined “Secular Bear Markets.”  Anyway, my conviction that we were in the midst of a secular bear market was so strong that I published that belief indelibly into the Philosophy section of my blogsite when I took it live in late 2005.  Under Belief #4: Market Cycles Are Real, it reads:

“Capital markets tend to move in 15-20 year secular (long-term) cycles. Since 1900, the U.S. stock market has enjoyed 3 secular bull cycles that were characterized by superior returns and endured 3 secular bear cycles that were characterized by lackluster returns. In each of the secular bull cycles, P/E ratios peaked in the low 20’s and in every secular bear cycle, P/Es bottomed in the 6-8 range. Bond markets also tend to experience similar cycles. We believe that we are in the early stages of a secular bear market for U.S. stocks. We are also concerned about the prospects for the domestic bond market. The current climate for U.S. capital markets may prove challenging for buy and hold investors.”

The Catamount blogsite went live on September 15, 2005.  On that day, the S&P 500 opened at 1227.  Almost 6 years later the S&P 500 is at 1119 .  Of course, as of that publication, I believe we were already more than 4 years into the current secular bear market which officially began in March of 2000.   That means this bear may already be 11 years old.  If the typical bear market lives 15 years, it is entering the later stage of its life cycle.  When it ends, a new secular bull market should begin and this will usher in an extended period of above average returns on stocks.

With that said, new bull markets don’t typically begin until P/E ratios bottom near 7 or 8.  We’re not there.  The markets have not properly priced in the structural economic problems facing our country.  I believe markets will eventually reflect reality.  Perhaps the recent market action is signaling that next stage of cleansing is underway.  The S&P slid 17% wiping out $ trillions in the last 30 days.  In the absence of further central bank and government interventions (i.e. quantitative easing or TARP), I expect the markets to head significantly lower albeit not in a straight line.

Until circumstances change, investors who are heavily exposed to stocks might be well advised to sell the rallies.  Of course, it should be quite clear by now that Catamount is, and will remain, agnostic about the direction of the capital markets until fundamentals prescribe a long-term directional bias.  Our investments are performing well under pressure and we continue to carefully scale into attractive alternative strategies and private placements.

Some of my comments today will sound a little too much like “trader talk” for my liking. But after all, I have been saying that there’s nothing from a valuation standpoint that a money manager can hang his hat on these days.  At today’s stock prices, investors are paying too much for future earnings to achieve an acceptable return unless a greater fool will pay him a higher price in the future and, I might add, the global economic backdrop doesn’t promise a significant and lasting improvement in earnings for the foreseeable future.  In other words, investors are speculating that prices will be higher in the future based on unsound valuation principals and poor economic prospects. This is called trading, not investing.

The current phenomenon in the capital markets is analogous to paying too much for a rental property. A real estate investor that intends to buy a property for cash flow should pay a price that will allow him to yield an acceptable cash flow stream by renting the property at market rental rates. Otherwise, he’s just speculating that a greater fool will pay him a higher price in the future. That speculation can either work for him or against him, so he’d better be good at prognostication.

In my opinion, if an investor invests in stocks based on valuations right now, he should sell them short, or in other words, bet that stocks will go down. However, that strategy would have devastated a portfolio over the last year as stocks have soared despite poor fundamentals. So, In the absence of fundamentals, stocks have been better to rent (trade) than own. Trading is a momentum game, a difficult game at that. But from my perspective, if I have to trade with momentum, I’m much more comfortable trading when market momentum is heading in the direction where stock valuations should be – which in my opinion is down. The stock market’s momentum seems to be shifting downward and in the direction that will align it more with fundamentals. Now, here comes the trader talk.

The stock market fell below key support levels today. As I wrote in my June 29 comments, the S&P 500 needed to hold above 1040 or technically the rally since March of 2009 would be broken and a new downtrend established. The S&P 500 breached the 1040 floor today. From a pure technical trading perspective, this is a clear sell signal among many other sell signals that are flashing. One word of caution about technical trading is that the entire financial world seems to understand technical trading rules, especially the big boys who have the muscle to push the market around to their advantage. Therefore, they often trigger everyone’s sell orders just before pushing the market in the opposite direction. So, this sell signal could be a false signal that will result in a big rally from here. If it’s an authentic signal, this market will head significantly lower.  We will find out in short order.

I believe, despite all of the day to day noise, the market will eventually reflect true fundamentals and harsh economic realities. When it finally does, stocks will be a screaming buy.  You never know, but that could come sooner than later. The S&P 500 rests no higher than it was in January of 1998.  So, theoretically we’re in the 13th year of zero returns for buy and hold investors.  That trend will not continue forever.

In the meantime, Catamount Capital continues to implement alternative strategies in both public and private markets in order to successfully navigate this environment.

Best Regards,

Greg Mattlage

To All Clients,

The market is near the precipice of serious trouble.   The Dow is trading below the psychologically important 10,000 level and the S&P 500 has fallen almost 15% in the last 2 months.  Although the short-term oversold market conditions may provide a good setup for at least a brief rally, I’m not too confident that stocks will find lasting traction.  The major indices have not reversed the uptrend that began in March of last year, but a break much below current levels would signal a key reversal and the beginning of a new intermediate-term downtrend.

Over the past year, government stimulus programs successfully pulled demand from the future and spurred temporary improvement in business activity.  At the same time, corporations momentarily resurrected their profit margins by shedding employees.  Stocks reacted accordingly by staging a very large rally. But the last of the stimulus programs expired in April (namely the home buyer tax credit) and the economy must now limp along under its own power.  The prognosis doesn’t look encouraging if the employment situation is any gauge.  A close examination of the recent employment report reveals an extremely wounded and cautious private sector.  While 431,000 jobs were added to the economy last month, the preponderance were temporary government census jobs – low paying at that.  Private employers added only 41,000 to their payrolls.  Hello! There are many millions of unemployed people in this country. Those numbers won’t make a dent.

Since last summer, “predictive,” or otherwise known as “leading” economic indicators have pointed to recovery. However, real or ”coincident” economic indicators have been telling a different story, having merely flattened-out at record low levels.  As an aside, certain sectors and pockets of the country have fared better than the overall economy.  For example, some anecdotal observation suggests that business may be better in Texas than many other regions.   Just remember that the New York Stock Exchange is not a regional or local market.  It’s global.  It reacts to circumstances in California, the gulf coast, Greece etc.

Anyway, the leading economic indicators, one of which is the stock market, are now showing signs of retrenchment.  Yet most economist will not lend any credence to a double-dip recession scenario, nor will the general public.  Of course any unwillingness to consider this possibility is akin to an ostrich burying his head in the sand, because the evidence of real and present danger is available to any observer who cares to look a tad further than the evening news.  Denial is an effective coping mechanism, but Charles Darwin would not consider it an effective survival instinct.  In my judgment, the stock market, like many other leading indicators, over-reacted on the upside and could react adversely to a more sobering economic reality.   The bottom line, if the S&P 500 ultimately falls much below 1040, the next visible target would be around 948 – approximately 10% below current prices.   Beyond those levels, I will not comment.  Many traders are carefully watching this general price level. If the floor doesn’t hold, traders may sell stocks with abandon.  If it holds, expect a short snapback rally.

As you probably know, I have remained defensive with portfolios anticipating a relapse of volatile markets and difficult economic conditions. A few weeks ago, I used market weakness to add a few select stocks to the portfolios bringing our total equity exposure to about 15%. These companies are less vulnerable to slower commerce and have performed better than the broad market.  However, the timing of these trades proved premature and the markets have convulsed and ultimately continued to slide.  So, I promptly reduced our equity exposure to about 5% by selling a couple of tactical positions in index funds.  In addition, I have been in, out, and back into, an investment vehicle that essentially bets that dollar will appreciate against a basket of foreign currencies including the Euro.  Those trades have been profitable.

A “sell on strength” mentality rather than a “buy on dips” mentality could be developing.  If this pattern is confirmed, I will change our posture from relatively neutral to bearish.  In the meantime,  I’m trying to add value by pursuing alternative strategies that promise returns under any market conditions.

Incidentally, the S&P 500 is still down -33.8% from its high in 2007 and down -31.3% for the decade.

Best Regards,

Greg

It is old news that the market has enjoyed a very strong rally since last March. In my opinion, it has occurred on the back of misguided confidence that the next economic boom would soon follow.  I give an abundance of credit to the news headlines, government stimulus, and market interventions for encouraging a short-term burst of economic activity which has everyone salivating again.

Like Pavlov’s dog, Americans have learned that when the NYSE’s bell rings or the government spends, they get fed.  We have been conditioned to think that this business cycle will unfold like other cycles in our recent past, a steadily rising market and a vibrant economy a foregone conclusion.  However, this cycle feels different and diligent analysis reveals economic circumstances are significantly more severe than anytime since the end of World War II.

After pausing to think, I believe investors are beginning to perceive the divergence between the stock rally and the economic reality.  The S&P 500 shed 7.6% over the past two weeks.  Maybe market participants realize that a recovery may not be sustainable without consumers, 18% of which are now under-employed and must spend sparingly while the other 82% have chosen to spend frugally out of fear that their incomes may be at risk.  To add insult to injury, credit and money supply continue to contract.

The market was overdue for a selloff.  Corrections of similar magnitude have given birth to a series of large rallies and higher stock indices since March, but my market indicators  have flashed an intermediate sell signal. If the market does not stabilize right now, you can count on a damaging selloff from these levels.  Investors should lighten stock and commodity holdings on any market strength.  Better yet, lighten anyway.  If you smell smoke in a barn full of dry hay, flee the barn.

Greg Mattlage

The following represents an email I sent to Catamount clients on November 27, 2009.  I’m publishing the email on my blog because it has particular relevance to topics that I intend to discuss in the near future.

Dear Clients,

The markets produced neurotic action today in the wake of Dubai’s debt default.  The stock index futures were down substantially in overnight trading, but the U.S. markets recovered a lot of the losses in the early hours of today’s trading session.  The S&P 500 Index only lost 1.63% in what promised to be a more precipitous fall. Many traders, anticipating a continuation of the 9 month stock rally, probably treated this as a buying opportunity.  It could be just that – another buying opportunity.

However, any circumstance involving a country defaulting on its sovereign debt warrants close surveillance because many severe market dislocations have occurred on the heels of similar events.  An example would be the Asian Paper Tiger crisis in 1998 which took the S&P 500 down 22%. Given the fragile state of the nascent economic recovery, it wouldn’t take much to rattle confidence in overextended financial markets.  We’ll have a better read on the situation by Monday.

It’s interesting to note that, while investors were dumping commodities and stocks in reaction to the Dubai news, the U.S. Dollar rallied sharply against a broad basket of the world’s currencies.  In other words, investors were apparently fleeing risk assets for the safety of the greenback.  This gives us some insight into how certain markets might respond if global economic conditions falter.

Coincidently, the U.S. Dollar Index rests very near where it bottomed on July 15, 2008.  Oil prices hit all-time highs on July 14, 2008.  In the ensuing 4 months, the U.S. Dollar rallied 20%, oil prices fell 55%, and the stock market shed 40%.  This is not a prediction, only an attempt to point out that this could be a pivotal juncture for the financial markets.  If the dollar reverses and rallies, commodities and stocks may swoon – and this could foreshadow deteriorating economic conditions.   If the dollar breaks below this key support level, the risk trade will likely continue – and maybe the economy will continue to mend.

Best Regards,

Stocks have been rallying with little pause since March 9.  Last Friday, the Dow Jones Industrial Average closed above 9500 for the first time since November of last year.  After falling 58% from the October 2007 high, the S&P 500 has rallied 54% from the bottom.  Still, the market remains 35% below peak levels.

The rally has been fueled by expectations of an economic recovery.  Those expectations have been largely driven by increases in a series of economic statistics that are reputed to have strong predictive value about the direction of the economy.  These “Leading Economic Indicators” have risen for the last 3 months possibly signaling that economic conditions may improve in the near future. On the other hand, certain “coincident economic indicators,” in free fall until July, have yet to confirm that the economy is on the mend.

On the surface, the rebound in certain economic data, including a revival of the stock indices, appear encouraging.  What lies below the surface should still give pause for concern. The decline in economic activity has leveled off, but at extremely low levels.  As most of you know, consumer spending drives nearly 70% of the economy and the consumer remains notably absent from this so called “recovery.”  In my view, consumer spending has been and will remain anemic for some time.  I cite soaring unemployment rates as the primary reason among a host of others.

Involuntary unemployment rates are at the highest levels since the Great Depression.  While the unemployment rate reported by the mainstream financial media stands just below 10%, a more accurate measure released by the Bureau of Labor Statistics (aka: U6) but not widely disseminated, calculates unemployment closer to 18%.  The U6 definition includes those who have given up the search for work, those who have exhausted their unemployment benefits and subsequently fallen off the unemployment rolls, and those who want full-time work but have involuntarily settled for part-time work due to economic circumstances.

According to sources, the U6 definition of unemployment more closely reflects the method that was used in the 1930s.  If this is truly an “apples to apples” comparison, today’s unemployment numbers are not that far below the 28% unemployment experienced during the Depression.  Oh brother! Or should I say, “Oh brother can you spare me a dime.” This is obviously not a laughing matter since the typical American family has a minuscule pile of savings and maxed-out credit to fall back on. They absolutely need their jobs to put food on the table and shelter over their heads.

Most economists would argue that employment is a “lagging indicator,” meaning that the job market is the last thing to improve coming out of a recession. Then again, unless these economists are pushing 80+, most have never seen unemployment this high and I think all will agree that this has not been a run of the mill recession. It never is when a massive debt bubble collapses. During the Great Depression, extremely elevated unemployment rates became more the cause than the consequence of low economic activity.  I would hate to see high unemployment cause a self-reinforcing negative feedback loop leading to further economic deterioration.

Let me be clear, I’m not forecasting the greater depression. Hopefully, the vast money printing initiative that our leaders have embarked upon will lead us to lasting expansionary cycle chock full of new high paying jobs.  Of course, when the government spends a dollar, it must come from the private sector’s pocket through higher taxes or loss of purchasing power.  That’s one less dollar that can be used toward creating private sector jobs.   I have serious doubts about whether robbing Peter to pay Paul will create a high quality job market, but I suppose anything is possible.

On the other hand, the stock market seems to be pricing in a much more robust consumer spending cycle than the unemployment picture can support. The equity markets are overextended by almost every measure going into September which is historically the worst month for stocks followed by October which is only a scant better.  Any hint that the recovery is illusory could lead to much lower stock prices. Of course markets can remain irrational longer than anyone might anticipate. We should be prepared for anything.

We have plugged our noses and waded into stocks because nobody wants to be on the beach when everyone else is having fun in the water. All the other kids are probably laughing because we are wearing our life preservers, carrying spear guns to ward off sharks, and holding onto lifelines to prevent being swept away by deadly riptides.

In other words, we’re partially invested in the markets with tight downside risk controls.  I will be watching for signals to add or reduce exposure. I look forward to the day when it’s advisable to throw caution to the wind…. For now let’s proceed with care.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

In my Year End Review, I predicted that the capital markets would present historic challenges for investors in 2009.  Though my writings have been plenty fervent for more than two years, that quote may go down in history as an understatement.  It could be analogous to the weather man forecasting a severe winter storm and getting a blizzard….worthy of Everest!  My sincere hope is that non-client readers have heeded my warnings and taken cover.  Catamount Capital’s Managed Portfolios continue to survive the onslaught.  Here are the results through the end of February 2009.

2008           2009

Catamount Managed Portfolios                 -2.66%          -1.11%

S&P 500 Index                                         -38.49%        -18.62%

Dow Jones Industrial Average                 -33.84%        -19.52%

The S&P 500 closed today down -56.3% from its all-time high on October 11, 2007 - chilling numbers for buy and hold investors.

Consider unwinding the “buy and hold” brainwash and finding an investment manager who “gets it.”  Admittedly, that is no easy task in today’s myopic investment world!  Read my February 22, 2009 comments.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

Lately, I’ve been fielding numerous calls and emails from people that have recently engaged in gut wrenching conversations with their investment advisors about their hemorrhaging portfolios. Apparently unsatisfied with the answers, they have asked me to provide a second opinion. The range of explanations follows a common theme as investment advisors attempt to justify why they chose to remain fully invested and took little action, if any, to mitigate their client’s losses. Since the comments follow such a common thread, I thought it might be an interesting topic to write about. Here are my thoughts.

Most of the excuses cited by these professionals fall along the lines of the typical group-think propaganda that now pervade the industry. I’ve heard comments like, “You can’t time the market,” “no one could predict this mess.” I have also heard attempts to fend off redemptions and preserve client confidence such as “It’s a mistake to lock these losses in,” “The government stimulus will save the day,” “stay the course,” “fight the good fight,” “the worst is already priced in the market,” and “Invest for the long haul.”  Recite those cliches to a 60 year old who bought them in 1997 and whose portfolio has not earned a dime. Watch his reaction.

When I was rookie at a major Wallstreet firm, I was encouraged to recite the same shallow wisdom and sell the very investment programs that most advisors employ in their practices today. These programs rest their philosophy on some version of Modern Portfolio Theory (MPT). The key tenant to MPT is the assumption that investors are generally rational and rational investors diversify their holdings in the market and, therefore, the market is inherently efficient. The theory further suggests that, because the market is efficient, attempting to outperform the broad market can be regarded as an exercise in futility. Because the broad markets generally trend upward over long periods of time, MPT prescribes that investors simply commit their capital and remain fully invested in a diverse portfolio through all market cycles. Advocates of MPT preach that you must “stay the course” to achieve investment success.

This theory inherently discourages the use of cash and ignores the merits of alternative strategies (i.e. market neutral, short selling, hedging, non traditional asset classes, etc.)  Of course, a traditional diversified portfolio will essentially mimic the market and, therefore, investors committed to this approach must be willing to endure difficult market cycles and resist “timing the market” in order to realize long-term gains. With some due credit, this philosophy advocates diversifying company, industry, size, and geographic specific risks.  However, by nature, MPT leaves investors entirely exposed to “Systemic Market Risk” and ignores the fact that most asset classes are closely correlated.  As evidenced by the facts outlined stated in my January 14 blog, you can see that modern portfolio theory is just a “theory” and bears, in my controversial opinion, several colossal shortcomings at least as it relates to practical money management for individual investors.

For one, it assumes that individual investors can wait long periods for their returns. But, if the average lifespan of an individual is 87, who can wait 10,20, or even 30 years for a return on their investments? Originally, MPT was used primarily by institutions (i.e. endowments, pensions), organizations that could afford to take a very long-term (30+ years) view. However, over time, MPT has been adopted in mass by the investment industry and applied to non-institutional investors (individuals). Today, the basic philosophy of MPT has become popular convention even among investors with very rudimentary understanding of investing and the capital markets.

In my view, investment professionals have taken this line of thinking much too far over the last 10 years. It has become the herd mentality of most investment advisors and investors. I believe it is one of the primary reasons why 99% of all funds and money managers posted huge losses last year. The herd was fully invested in a market that was systemically overpriced.  The buy and hold mentality failed miserably in 2008 and has for a whole decade. Factually, the S&P index is little higher than it was in 1997.

Please don’t misconstrue my comments. I’m not suggesting that markets can be timed precisely, diversification is useless, or long-term investing is a farce.  As I stated in my last blog, I don’t consider myself a market timer.  Furthermore, I use reasonable diversification as an effective tool for managing risks, and I believe that investments are worth holding for long periods if bought and held at prices below intrinsic value and sold when above intrinsic value. But theoretical investment models should never replace common sense, critical thought, and/or fundamental analysis.

At the end of the day, a portfolio’s success rests on the investor’s skills and the time he or she devotes to it. Sometimes it is better to pick a small number of out-of-favor investments and wait for the market to turn in your favor than to rely on market averages alone. That is precisely what we are doing at Catamount Capital.

Investors need to do some soul searching.  There have been several 15-20 year cycles in stock market history that were flat or down.  So far the S&P has posted a full decade of 0% returns for “buy and hold” investors.  Can you really afford to ride out an entire market cycle even if that means zero or even negative returns for another 5-10 years?  Are you willing to endure further and potentially significant losses?

If your advisor promotes a narrow minded approach or lacks a robust analytical process, make a change.  It may be imperative to your financial well being.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

The numbers are in. The S&P 500 Index returned -38.5% in 2008 and -41.9% since the bear market began in October 2007. Most of the world’s stock markets behaved worse. Virtually every asset class including real estate, commodities, & bonds suffered severe losses.

Of the 10,720 domestic and 3,333 international equity funds, only 1 professional fund manager posted a positive return. Most of those managers lost 35-50%. On the other hand, Catamount Capital’s managed portfolios just barely slipped into negative territory after being up through the end of November. Catamount’s clients fared well compared to 99.992% of professional fund managers and the vast majority of the investment industry for one primary reason. We pared and hedged our exposure to the capital markets before the bear market began.

A number of investment professionals have criticized my tactics saying “Isn’t that market timing? Market timing is a losing proposition.” Here’s my response.

First of all, I really don’t consider myself a market timer – just a conscientious student of history, economics, finance, and the capital markets. From a macroeconomic perspective, anyone in my field who was paying attention could see that an enormous credit bubble was forming and that asset prices had become divorced from real fundamentals. I saw burgeoning credit, widespread real estate speculation, soaring home prices, and unbridled consumer spending. The evidence was everywhere. For instance, the savings rate for Americans was negative for several years while real wages and income from “productive” work weren’t rising. People were financing their lifestyles with debt and asset price appreciation. Credit was available for anyone and everyone regardless of their ability to repay, ordinary people had second homes (investment property), low income earners were driving expensive automobiles, and everyone was spending their home equity on vacations, boats, and flat screen TVs. It was the biggest credit bubble in history by a long shot – a perfect prelude to a meltdown.

Nobody can predict exogenous shocks (wars, natural disasters), but, it was not an exogenous event that caused the credit crisis, the bear market, or the recession. The Federal Reserve simply began withdrawing the gushing liquidity from the credit markets and the artificial boom came to an end. Like any bubble that bursts, the fallout has been messy but not completely unexpected given its magnitude. I’ve heard investment professionals refer to the Lehman failure as the exogenous event that caused the market meltdown, but let’s be honest. Lehman wasn’t the root cause of the stock market meltdown. There were a host of financial institutions that failed (i.e. Countrywide, INDYMAC), were severely impaired (i.e. Fannie & Freddie), or were bailed out (Bear Stearns) before Lehman closed its doors. If analyst couldn’t see in advance that the housing/credit bubble would end badly, certainly they should have been on alert well in advance of Lehman’s demise.

So there’s my global macroeconomic view. For grins, let’s consider the situation from another analytical perspective to see if we would have reached different conclusions about the prospects for the market in 2008. Let’s look at stock valuations.

From a pure bottom-up perspective, stock valuations across the board were toward the high end of the historic range before the stock market tanked, particularly when you consider that corporate earnings were at record levels and being propelled by record “debt driven” consumer spending. In other words, corporate earnings were artificially inflated by debt driven consumer spending and were bound to suffer “reversion to the mean.” Mean reversion of corporate earnings would portend that stock prices were very high relative to normalized corporate earnings. I would think bottom-up investment analysts would factor this into their models but evidently they did not. In my calculation, the vast majority of stocks as an asset class were priced for absolute perfection before the bear market began. Historically, stocks have not been a good long-term buy and hold investments unless they are bought well below their average P/E ratios. Stocks should be sold when they are trading above their intrinsic value.

To me, there was no top-down (macro) or bottom-up rationale for investing in equities in 2007. Therefore, participating in the stock market (on the long side) represented pure speculation or momentum investing. If you are momentum investor, you had better have a method to follow trends, track momentum, and assess market sentiment (some form of technical analysis) to let you know when momentum is no longer working in your favor. In the absence of sound macro economics and compelling valuations, I leaned on technical analysis and intuition to navigate through the bear market. The technical indicators for the broad markets began to deteriorate in August of 2007 and have not signaled a definitive change in market direction since. In conclusion, fundamental, macroeconomic, and technical analysis all pointed to difficult markets.

As you know, I have expressed grave concerns about the condition of the capital markets and economy for 3 years. My comments may sound like Monday morning quarterbacking. But, take a look the chart of the S&P 500 attached to your email. On the chart, I have superimposed a series of comments I published and archived on my blog site. Catamount portfolios have trounced the S&P 500 Index by more than 12% annualized since inception. Catamount Capital opened for business in January 2006, 3 years ago.

From my lense, the economy and capital markets will present historic challenges for investors in 2009. Tremendous opportunities will follow for investors equipped to navigate these waters. Catamount remains at the helm and alert for what lies ahead.

Here’s to a better year in 2009.

All the Best,
Greg