Fundamentals. Fundamentals?

We will likely hear much confidence expressed today that the current sell-off is just a normal correction and represents a buying opportunity largely because the fundamentals of US companies are terrific--p/e ratios are low, corporate balance sheets are strong, M&A activity is high to name a few.

I really don't pretend to know, but I spent some time yesterday reading Martin Armstrong's review of the 1929 crash. I don't mention the crash to insinuate anything--I'm categorically NOT insinuating anything other than this: I don't think that the market fundamentals are at issue here. Rather, I think that that the credit market--that murky area that has CDS's, CDO's and CMO's AND to include the carry trade and leverage taken on in the search for yield--are the stars of this show. These are the sharks in the water. So if you dip your toe in, these are the fella's that might enjoy it as a tasty snack.

I read carefully Chapter XVI, Armstrong's Fundamental Review. I wanted to highlight a couple of things that I found interesting:

First he leads with the following: "Often there are so many complex relationships existing simultaneously that any attempt to sort them out and place them in the proper order becomes impossible."

Second, he states (I'm taking pictures of text!) (P. 535) regarding the amount of bonds v. stocks on the market:
I found the highlighted text interesting, particularly as it related to the credit derivatives and carry trade positions that are not really shown on the indices anywhere but rather make up the underpinnings of debt in the market place. It is precisely these transactions that end up being exongenous events when they begin to unravel. Armstrong concludes:



He goes on to talk about the inter-relation of the market places which is ironic in that it was the US that was once the greatest creditor nation, now it is the largest debtor nation. But it highlights some of the stumblings of the trade surpluses and the political bumblings that exacerbated the misery.

I have no idea if the credit structure will collapse or not, and I'm not portending that it will. But I am cultivating my own awareness that the optimistic and TRUE declarations that corporations are healthy and market fundamentals are fine do NOT encompass the sharks in the water. Think about Enron's "off-balance sheet" shenanigans. The credit derivative market is much like the market's "off-balance sheet" issues.

Keep your toes and wits about you.