I’ve been a bit derelict in my investment update. I completely missed the January update. Given the state of the markets, my comment would’ve been the same as it is this month. It wasn’t good.

2009 is turning out to be as brutal as 2008. Personally, I don’t expect a bottom anytime soon. I don’t think this a bad thing. The fact is the markets cannot continually rise. Yes, we’re back at 1996 levels, but given the huge bull market run between 1980 and 1996 still means we’re still at “highs.” The continued rally of the late 90s and rerally in the mid 2000s have to be taken for what they actually were, smoke and mirrors.

The late 90s were marked by the Internet bubble, and mid 2000 rally was a product of financial wizardry rather than real productivity growth. I think it’s easy to understand what happened in late 90s. It was wild speculation through and through.  People brought higher because it “might” go higher. Not all that different from a Ponzi scheme.

The rapid recovery of the market in the mid 2000s is a more interesting story, and one I’m still trying to unravel. The market followed generally speaking, corporate earnings growth which is sensible enough. The problem with much of this earnings growth, especially in the financial sector was that it wasn’t real in any sustainable way. There are generally two ways to grow earnings. 1) Find new areas to profit in 2) Expand the current business and sell more product at a lower prices.  Both ways are valid, but 2nd method for a financial institution can be dangerous especially when coupled with high amounts of leverage.

Banks and other financing firms effectively grew their businesses by issuing debt, and then pushing out risky financial products to consumers (mortgages) and other companies (CDOs, CDs, etc).   Poor credit risks who would never have gotten mortgages in any other era were getting mortgages because this was only way Banks could turn the excess money they were borrowing into earnings.  It didn’t matter how poor the risk were or the rate or return.  The magic of leverage allows someone to make investment that returns a mere 1% percent look like it has 100% return just by borrowing 100 times over.

The poor performance of the market, and my portfolio these two past years is merely a sympton of that unraveling of the schemes of the last 10 years.

Let’s hope this year’s chart turns out much better for all of us….