Liquidity Crisis As is now clear from headlines blaring globally, a full-blown liquidity crisis is threatening markets of all asset classes. Commodities, credit and equity markets are all simultaneously feeling the effects. This presents investors and traders with some very real dilemmas. First, we have no idea how long such a crisis may run. Is it something acute or the symptom of something that may become long-run and disrupt all economies? We can see by the response of the ECB and other banking authorities around the world yesterday and overnight that the situation is at crisis levels. More liquidity is being injected into the global system than at any time since the aftermath of 9/11. We are also now hearing from companies such as Countrywide Financial (CFC) and Washington Mutual (WM) that earnings and liquidity will be disrupted due to "unprecedented conditions" in credit markets . Here we would offer is the first sign of companies dealing rationally with the issue by confessing to what markets through price have already been telling us for several weeks. We would be half-way through the cycle if everyone that was to be adversely impacted would tell us so. The next step then is a sober assessment of what these very serious conditions will mean to Main Street and Wall Street going forward. The bad news is we have not even started to see the impact on Main Street yet. It could be many months before the ripple effect impacts jobs and spending. And worse we have no idea how long run the impact will be. We know that credit has fueled the rise in assets of all kinds over the last five years. So a major disruption to that market is going to force repricing broadly and perhaps quite deeply. That makes judging the fair value of stocks in particular a real problem. We have not seen much of a reaction yet from the analyst community or the punditry on what a recession would mean to market multiples, EPS growth and price targets. There have indeed been many crises along the way in bull markets. Anyone who traded in 1997 during the Asian currency crisis, 1998 during the Russian default and during the LTCM crisis knows that at a point the long trade makes sense and that one has to do it precisely when it seems like madness to do so. We are not sure if we are there just yet. As we can see in the failure of quant trading models highlighted in the WSJ yesterday, technical systems are not much of a help in these sorts of situations. They depend on some form of rationality in markets to work. When there isn't any, they don't. On a sentiment basis it would be very helpful to see a washout in terms of very high volatility (not just relatively high) and a broad "bids wanted" situation. We are not there yet. One positive note, advisory sentiment slipped this week quite sharply. Mark one in the positives column.