“Cryin’ won’t help you, prayin’ won’t do you no good;
When the levee breaks, momma, you got to move.”
- Led Zeppelin, “When the Levee Breaks”

That classic Led Zeppelin tune won’t be popular in the town of Fernley, Nev., anytime soon. A levee actually did break in Fernley this weekend, along a 30-foot length of agricultural canal.

The tide of floodwater was up to 8 feet deep in places. Hundreds of homes were inundated. Boats and helicopters rescued stranded residents from rooftops. It isn’t clear what caused the break. Some speculate that varmints burrowed too many holes in the canal’s earthen banks. (Where is Yosemite Sam when you need him?)

The mix of rain and snow came courtesy of a spectacular winter storm system battering the Western states. The Sierra Nevada Mountains have gotten more than 10 feet of snow these past few days -- with a forecast for more on the way. At one point, a 54-mile stretch of interstate was shut down. Stranded motorists had to sleep on Red Cross cots. The weather service even warned, “Attempting to travel in the Sierra will put your life at risk.”

More than 2 million people lost power as a result of the storms. The governors of Nevada, California and Oregon declared states of emergency for various counties. And as if the flooding weren’t enough, sheets of ice have covered Fernley’s waterlogged yards and streets.

The news isn’t all bad: Ski resorts across the nation are ecstatic. Even the resort at Taos, N.M., has a 60-inch base of snow pack. “This is our best opening since 1977,” the Taos marketing director said.

The crazy weather is a fitting opening for a crazy year. So far, 2008 is all about extremes.

Last week, we touched on oil and gold at record highs. Ditto with commodities on fire -- particularly the grains. The flipside of that strength is weakness in U.S. equities. The Financial Times reports that Wall Street is off to “the worst start to a new year in 25 years.” Barron’s goes back a lot further, noting, “The Dow had its worst three-day start since 1932.”

The Dreaded “R” Word

The problem? In a nutshell, it’s fear of the dreaded “R” word -- recession.

Friday’s unemployment number was the worst in two years; the disappointing increase of 18,000 in nonfarm payrolls (far below forecast) was the worst in four years. This adds to the concern that Wall Street and Main Street are faltering under a heavy load.

Mark Zandi, chief economist at Economy.com, says, “The economy is on the edge of recession, if we’re not already engulfed in one.”

John Ryding, chief U.S. economist at Bear Sterns, echoes the concerns about recession: “Since 1949 the unemployment rate has never risen by this magnitude without the economy being in recession.”

2008 Recession: Send in the Choppers

You might say the levee is about to break on Wall Street. Just as helicopters had to rescue Fernley folk from their rooftops, the Federal Reserve helicopters are gearing up for a mission, too.

Forecasters at Goldman Sachs and JP Morgan see the Fed cutting rates by half a point at the end of this month. Economic heavyweights like ex-Treasury Secretary Larry Summers are publicly supporting a fiscal stimulus package. And President Bush recently held a meeting with his Working Group on Capital Markets, a high-powered economic response team chaired by Treasury Secretary Hank Paulson. (You can bet those guys are making some sensitive phone calls.)

The unspoken message is clear: The Fed, the White House and various deep-pocketed holders of dollar assets would rather pump more juice into the economy than sit on their hands. The stakes are too high, and the risk of implosion to great, to let a downturn take its course.

You can see this “stimulus” playing out in the bond market. The expectation is that interest rates will be cut sharply and soon. T-note futures have broken out in response; yields have thus fallen to their lowest point since 2004. (A bond’s price and its yield, or interest rate, are inversely correlated. When treasuries rise, interest rates fall.)

2008 Recession: Got to Move

In a market environment like this, it might feel like there’s no place to hide. But remember that the days of lockstep are ending. You can already see how certain areas of the market (ahem, commodities and precious metals) are doing well as other areas stall.

Over time, investors will get reacquainted with a “market of stocks” as opposed to a single stock market. As the old saying goes, there’s always a bull market somewhere. Certain industries and companies will be making money no matter what happens. If it was true for the Great Depression, it will certainly be true today.

Not to say that we’re headed for another depression; that’s too extreme a view. There is still a lot of money in the world -- trillions of dollars sloshing around in the pockets of America’s trading partners. And the emerging market growth story will prove far, far more resilient than many expect.

The thing to do in an environment like this is act with conviction and pick your spots. That’s good practice in general, but all the more so in periods of turmoil. There are also lucrative opportunities on the short side. For the nimble player, increased volatility means increased opportunity to make money on both sides of the fence.

As Led Zeppelin sang, “Momma, you got to move”… away from the areas that aren’t working, that is, and into the ones that are.

Here at Taipan, we’ll keep plenty busy finding good ideas to send your way.

Warm regards,

JL