Reading Mr Market’s Mind

Judging from the run that the market has been having in the past month, including a successful tech IPO on the NASDAQ (a games company from China which says a lot in itself), you might think we are headed out of the economic doldrums.

I think that is wishful thinking and that this "bounce" is unlikely to be the cure for all the problems our economy is facing.

There are some positive signs; housing in some of the hardest hit regions might be bottoming, healthy banks are making money and sick banks are making money in their good lines of business, and consumers are not in as foul of a mood as they were at year end.

But the macroeconomic picture is not good. We've got a federal government running up staggering deficits, we've still got trillions of assets that have bid/ask spreads that are so wide we don't have functioning markets in some assets, and we've got an auto industry that at best is headed for a wholesale restructuring this year.

A rally was inevitable. People can't keep their money under mattresses forever. A small shift in sentiment can lead to big moves at the extremes.

My head is in the same place it was last October and November when "the world was coming to an end". I think we are in for a bad 2009 and a weak 2010 and maybe a better 2011. I also think we are going to see many large industries changed fundamentally by this downturn.

So what is an investor to do? First, I believe you must be investing, but carefully. Second, pick your sectors with care and stay away from sick companies, balance sheets, and industries. And third, have a defensive posture with plenty of cash in reserve.

It's certainly not as bad as many thought in the fall of last year and it's not as good as everyone secretly wishes it would be. We've gone from greed to fear to something else now. It's a better place but not necessarily a safer place.

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