Buffeted by worse than expected consumer price data (CPI) released by the government last Wednesday, the markets first rose, then retreated towards defensive, inflation sensitive sectors. Although I have been forewarning against such a rise in inflation, the data, and the reaction to it, only serves to reinforce the volatility of owning stocks, and the severity of the negative economic data supporting them.
As the markets rise higher (setting new benchmarks twice last week, for example) the “wealth effect” becomes a self-fulfilling prophecy. “Either you’re in the market or you’re not” is not just a statement of fact, it has almost become a mantra for justifying excessive speculation. The real question is whether we are sustaining a bull leg, or contributing to a negative aftermath which might follow.
What’s the choice?
I believe that we are experiencing a struggle between the expectations of profit growth versus the economic reality of low interest rates and poor alternatives. The most modest economic news can be turned into a buying frenzy in the right vacuum. Even as the deficit (person and Federal) grows, demand wanes, and GDP decelerates, the Dow Jones rises. My analysis shows, however, that the breadth of participation at these record levels is quite shallow. In fact my figures indicate that the balance of “new high” equities is offset by stocks topping or in a decline by nearly 15:1 to the downside. In other words, this rally may not be the rally. The advance/decline line in this new high stratosphere is historically quite feeble.
Indeed, I would like to see the rally confirmed by greater breadth and a closer correlation of earnings acceleration patterns with price increases.
Profits are shifting.
Interestingly, the U.S. economy stands as a bastion of innovation and hope for emerging markets. But the subtle message being taken from global equity performance is that the U.S. is not the only game in town. Nearly 15 percent of this quarter’s Arlington Econometrics “recommended” equities are non-U.S. companies. Domestic imbalances in demand, currency valuation, and production capacity move the momentum data further away from traditional U.S. sector rotation and towards more non-traditional foreign investment, such as communications satellites, pharmaceutical research and alternative energy resources.
I am aware, too, that the alternatives to stocks are not attractive. Watching the Fed prop up the equities markets for the last half-decade with lower interest rates might be the antithesis of base-building, in the classic sense. Without traditional alternatives to stocks, the void is being filled by speculators, mergers and acquisitions, private equity takeovers, and share buybacks, all caused by or benefiting from the low cost of money. Having played its hand, the Fed exacerbated the “new high” dilemma by allowing equities to climb without retracement thereby skewing cyclic phase models towards the upside.
It’s a chilling thought.
Buoyed by exorbitant expectations and nearly replicating the mania of 1999-2000, the market stands poised either to break out further to the upside, or breakdown in a linear response to unsustainable valuations.
In or out?
For my part, I am using the current momentum to pare down equity exposure and to lock-in profits for the near term. It’s better to prosper from the market’s exuberance than to be sucker punched by it later.
My measurements do not specifically indicate a downward path from here, but neither do they indicate a sustainable rally is likely. Using the Utility stock average as a surrogate for bonds, for example, I am seeing indications that bond yields are only entering into a secular long term upward bias. This might cool off stocks somewhat, as higher interest rates on time deposits could become competitive parking places for short term cash.
Nothing says “capital gains” like earnings acceleration. In this environment of nascent inflation and price pressure it becomes increasingly less likely that all sectors are going to rise in unison.
Instead, I am looking for defensive, back-end leadership in Basic Materials, biopharmaceuticals, global telecommunications, agriculture, and Energy.
Monday, February 26, 2007
Monday, February 19, 2007
Market Commentary for the week of February 19, 2007
Once again, and for the third time in three weeks, the markets recoiled in response to something someone (Ben Bernanke) said, someone (President Bush) did, or the thermometer. It’s not clear which one had greater influence.
What is clear is that the enduring trends have not been knocked off course. But what concerns me, and about which I’ve written extensively recently, is that investors seem locked into an almost “knee-jerk” response to short term news while disavowing any commitment to long term fundamentals and the principles of practical portfolio management theory.
All investors? Certainly not.
What frightens me is the obsession with short-term trading and corporate profiteering at the expense of long term societal or moral compass. I’ve said many times (although the thought runs diametrically opposed to my objective quantitative statistical methodology) that profit and gain absent any social connection seems empty and counterproductive to the fabric of capitalism.
Of course, the creation of money from nothing is the kind of alchemy that Wall Street specializes in. Still, others might argue that the wealthy provide influence and capital upon which society is built. I would offer as counterpoint that no one should be hungry under that paradigm, nor homeless, nor uneducated.
But I don’t think that the stampede to the trading desks following the Fed Chairman’s Congressional testimony, or the trading of heating oil futures subsequent or just prior to a major climatological event constitutes moral or societal empathy.
Rather, it represents good old fashioned trading and speculating (gambling) about the direction of psychology, capital, and greed. There’s nothing wrong with that, except that trends are generational not hourly; sector rotation is slow not quick: and investing is commitment not tom-foolery.
Still, if we are to make order from the chaos, we must observe some definitional influences over the markets at present:
Inflation is widening its influence upon earnings acceleration rates.
Without question, my data indicates that the cost of doing business is disruptive to business. Wages, raw material, transport and shipping, and research all cost more than a decade ago. Does that seem only logical? Then that, indeed, is a stealth trend that bears measuring.
Price pressure is the most efficient way for business to pass-along its core costs.
No longer do we live in an age where gum is dispensed from a fishbowl on the counter, soda is given away on credit, or the dry cleaning is exchanged for barter. This is not the 1950’s. Cost pressure and conspiratorial psychology has ushered in the “what’s in it for me” model of corporate governance. Try turning on the electricity without paying your bill, or heating your home after missing a fuel bill payment.
Wall Street looks like Main Street, and vice versa. The trading pits and the energy utilities look a lot alike. “Me first, then you, thank you very much”.
Sector rotation is influenced by earnings acceleration rates and future capital gains probabilities. Right now the market’s leadership has shifted from discretionary spending equities towards tangible assets, from unit volume growth towards price-sensitive commodities. The current rate of earnings acceleration, while slowing overall globally, is shifting nonetheless towards companies that match demand and pricing power, such as telecom utilities, healthcare, energy, and basic materials.
I am an optimist. While the markets grudgingly climb a wall of worry, the most necessary capital investment collateral is empathy and morality.
What is clear is that the enduring trends have not been knocked off course. But what concerns me, and about which I’ve written extensively recently, is that investors seem locked into an almost “knee-jerk” response to short term news while disavowing any commitment to long term fundamentals and the principles of practical portfolio management theory.
All investors? Certainly not.
What frightens me is the obsession with short-term trading and corporate profiteering at the expense of long term societal or moral compass. I’ve said many times (although the thought runs diametrically opposed to my objective quantitative statistical methodology) that profit and gain absent any social connection seems empty and counterproductive to the fabric of capitalism.
Of course, the creation of money from nothing is the kind of alchemy that Wall Street specializes in. Still, others might argue that the wealthy provide influence and capital upon which society is built. I would offer as counterpoint that no one should be hungry under that paradigm, nor homeless, nor uneducated.
But I don’t think that the stampede to the trading desks following the Fed Chairman’s Congressional testimony, or the trading of heating oil futures subsequent or just prior to a major climatological event constitutes moral or societal empathy.
Rather, it represents good old fashioned trading and speculating (gambling) about the direction of psychology, capital, and greed. There’s nothing wrong with that, except that trends are generational not hourly; sector rotation is slow not quick: and investing is commitment not tom-foolery.
Still, if we are to make order from the chaos, we must observe some definitional influences over the markets at present:
Inflation is widening its influence upon earnings acceleration rates.
Without question, my data indicates that the cost of doing business is disruptive to business. Wages, raw material, transport and shipping, and research all cost more than a decade ago. Does that seem only logical? Then that, indeed, is a stealth trend that bears measuring.
Price pressure is the most efficient way for business to pass-along its core costs.
No longer do we live in an age where gum is dispensed from a fishbowl on the counter, soda is given away on credit, or the dry cleaning is exchanged for barter. This is not the 1950’s. Cost pressure and conspiratorial psychology has ushered in the “what’s in it for me” model of corporate governance. Try turning on the electricity without paying your bill, or heating your home after missing a fuel bill payment.
Wall Street looks like Main Street, and vice versa. The trading pits and the energy utilities look a lot alike. “Me first, then you, thank you very much”.
Sector rotation is influenced by earnings acceleration rates and future capital gains probabilities. Right now the market’s leadership has shifted from discretionary spending equities towards tangible assets, from unit volume growth towards price-sensitive commodities. The current rate of earnings acceleration, while slowing overall globally, is shifting nonetheless towards companies that match demand and pricing power, such as telecom utilities, healthcare, energy, and basic materials.
I am an optimist. While the markets grudgingly climb a wall of worry, the most necessary capital investment collateral is empathy and morality.
Monday, February 12, 2007
Market Commentary for the week of February 12, 2007
Last week’s Market Outlook referenced the volatile psychological relationship the markets have with the price of oil. Almost prophetically, the volatile changes in the weather this past week triggered a knee-jerk response in the price of heating oil, gasoline, and coal. Despite any discernable difference in the fundamentals of the commodity from one week to the next, the market displayed greed, fear, paranoia and lust caused by the simple change in the thermometer.
That is not how a statistician or purist thinks about long term market phenomena.
“Price creep” is not new.
The case can be made that as far back as 1998, nearly a decade ago, the price of oil began its creep upwards, and was not benchmarked against any temperature or climatalogical subtleties.
No indeed, back then interest rates stopped their incessant disinflationary decline, and inflation began to germinate throughout the economy.
Today, the top performing equities are Energy stocks and companies related to tangible assets, pricing power and patterns of earnings acceleration. Hardly the characteristic of a one week stampede led by profiteers and fear mongers.
Greed deflects attention from fundamentals.
By pandering to the greed and fear in the market, speculators succumb to all the stereotypes that Main Street uses to describe the financial markets. Imagine if the ego of every dot.com trader had supplanted the methodology and patience of his more experienced brethren? What if investors measured the success of their investment journey only between the hours of 9:30 a.m. until 4 p.m.? What if, as my junior contemporaries remind me constantly, “it’s different this time”?
You would wind up with the tech wreck of 2000-2003, and possibly the mania of 2006-2007 that exacerbates risk by speculating in real estate, energy futures, and highly margined equity portfolios.
In the global economy as a whole, trends are inexorable. The mechanism of long-term capital gains operates with or without speculators and egotists. In fact, the collateral short cycle swings only dilute the magnitude of longer cycles and extend the amplitude, or duration, of cycle shifts. The current climate of last gasp aggressiveness poses a threat, not an opportunity, to the perpetuation of longer term themes that will endure and prosper with or without the hyperbole.
How ironic if the market must endure the near-term pain of lessons only recently experienced by the NASDAQ.
Quantitative statistics define the landscape.
By all objective measures, Energy, Basic Materials, and agriculture lead the quantitative discipline of Arlington Econometrics’ research, and respond to a secular imperative of diminishing natural resources, high demand, price pressure, and profit potential. When integrated into a geopolitical construct, those sectors hold leverage over fiscal and monetary policy for nations throughout, and if not responding to political conversation, are perhaps leading it.
Further, consumer confidence needs not be so perilously linked to events of the day if the process and destination become more important than the exogenous “noise”.
The role of the market, indeed the role of government, is to lead by defining a clear-cut mission statement and to focus the psyche of its participants on the long-term goal and reward.
Unfortunately, commissions, fees, and product hype are what drive Wall Street, and investors pay the price for that avarice.
That is not how a statistician or purist thinks about long term market phenomena.
“Price creep” is not new.
The case can be made that as far back as 1998, nearly a decade ago, the price of oil began its creep upwards, and was not benchmarked against any temperature or climatalogical subtleties.
No indeed, back then interest rates stopped their incessant disinflationary decline, and inflation began to germinate throughout the economy.
Today, the top performing equities are Energy stocks and companies related to tangible assets, pricing power and patterns of earnings acceleration. Hardly the characteristic of a one week stampede led by profiteers and fear mongers.
Greed deflects attention from fundamentals.
By pandering to the greed and fear in the market, speculators succumb to all the stereotypes that Main Street uses to describe the financial markets. Imagine if the ego of every dot.com trader had supplanted the methodology and patience of his more experienced brethren? What if investors measured the success of their investment journey only between the hours of 9:30 a.m. until 4 p.m.? What if, as my junior contemporaries remind me constantly, “it’s different this time”?
You would wind up with the tech wreck of 2000-2003, and possibly the mania of 2006-2007 that exacerbates risk by speculating in real estate, energy futures, and highly margined equity portfolios.
In the global economy as a whole, trends are inexorable. The mechanism of long-term capital gains operates with or without speculators and egotists. In fact, the collateral short cycle swings only dilute the magnitude of longer cycles and extend the amplitude, or duration, of cycle shifts. The current climate of last gasp aggressiveness poses a threat, not an opportunity, to the perpetuation of longer term themes that will endure and prosper with or without the hyperbole.
How ironic if the market must endure the near-term pain of lessons only recently experienced by the NASDAQ.
Quantitative statistics define the landscape.
By all objective measures, Energy, Basic Materials, and agriculture lead the quantitative discipline of Arlington Econometrics’ research, and respond to a secular imperative of diminishing natural resources, high demand, price pressure, and profit potential. When integrated into a geopolitical construct, those sectors hold leverage over fiscal and monetary policy for nations throughout, and if not responding to political conversation, are perhaps leading it.
Further, consumer confidence needs not be so perilously linked to events of the day if the process and destination become more important than the exogenous “noise”.
The role of the market, indeed the role of government, is to lead by defining a clear-cut mission statement and to focus the psyche of its participants on the long-term goal and reward.
Unfortunately, commissions, fees, and product hype are what drive Wall Street, and investors pay the price for that avarice.
Monday, February 5, 2007
Market Commentary for the week of February 5, 2007
Making sense of the numbers.
Measuring statistics is one thing, making sense of them is quite another. Everyday in the press, on television, in internet journals someone states a reason why something occurred the day before, or will occur tomorrow, and cites a statistic as justification, such as labor and employment data, or Fed funds, or the price of oil.
The search for meaning and order from statistics is what I call the “kitchen table” approach to portfolio management. Simply, it is the ability to tell a story which resonates around the home front, and which has enduring moral, ethical and statistical validation.
I believe that too often statistics are used as justification for things that don’t make sense at the kitchen table.
Take oil prices, for example.
Statisticians would like you to believe, today, that we are experiencing a reversal downwards in the price of a barrel of oil from its highs of seven months ago. After all, $50 (as an integer) is less than $80. True. But that argument fails to consider the secular 10 and 20 year trend of the commodity during which the price of brent crude has more than doubled in the last 5 years, alone.
In other words, you know it as well as I, that a depleting natural resource is becoming scarcer and more politicized as time goes by.
It’s more complex than it seems.
And, interestingly, the wider the aperture of discovery, the more blatant the disconnect between statistics and “real life”.
While lower interest rates might stimulate spending and borrowing, for example, they really precipitate more speculation rather than greater investment. Lower interest rates have created the home building surge and the stock market revitalization.
Aware that there is less money for discretionary purchases, corporate America uses excess liquidity to buy back shares in the open market or to acquire competitors for strategic advantage, in lieu of plowing profits or capital into research or higher dividends.
Hardly the noble purpose of economic statistics.
The cycle uptrend of global baskets is exaggerated unrealistically by the manipulation and reporting of statistics that constantly fail the kitchen table examination.
It’s less complex than it seems.
In fact, just look at the items on the table. Coffee costs more, as do grains (cereal, bread). Dairy is more expensive, as is sugar. Indeed, the overall secular trend is towards inflation and higher prices. Temporary interruptions in the secular trend by cyclical anomalies should be ignored, unless you are a trader who profits from short term gyrations in the market. Investors should pay heed, and position their portfolios into an asset allocation model that reflects the global topography and trend awareness that would yield positive long-term performance.
The future is absolutely predictable if one follows the statistics within an orderly methodology (Arlington Econometrics, for example) that is designed to mirror long term trends, capital appreciation potential, and earnings acceleration patterns.
Measuring statistics is one thing, making sense of them is quite another. Everyday in the press, on television, in internet journals someone states a reason why something occurred the day before, or will occur tomorrow, and cites a statistic as justification, such as labor and employment data, or Fed funds, or the price of oil.
The search for meaning and order from statistics is what I call the “kitchen table” approach to portfolio management. Simply, it is the ability to tell a story which resonates around the home front, and which has enduring moral, ethical and statistical validation.
I believe that too often statistics are used as justification for things that don’t make sense at the kitchen table.
Take oil prices, for example.
Statisticians would like you to believe, today, that we are experiencing a reversal downwards in the price of a barrel of oil from its highs of seven months ago. After all, $50 (as an integer) is less than $80. True. But that argument fails to consider the secular 10 and 20 year trend of the commodity during which the price of brent crude has more than doubled in the last 5 years, alone.
In other words, you know it as well as I, that a depleting natural resource is becoming scarcer and more politicized as time goes by.
It’s more complex than it seems.
And, interestingly, the wider the aperture of discovery, the more blatant the disconnect between statistics and “real life”.
While lower interest rates might stimulate spending and borrowing, for example, they really precipitate more speculation rather than greater investment. Lower interest rates have created the home building surge and the stock market revitalization.
Aware that there is less money for discretionary purchases, corporate America uses excess liquidity to buy back shares in the open market or to acquire competitors for strategic advantage, in lieu of plowing profits or capital into research or higher dividends.
Hardly the noble purpose of economic statistics.
The cycle uptrend of global baskets is exaggerated unrealistically by the manipulation and reporting of statistics that constantly fail the kitchen table examination.
It’s less complex than it seems.
In fact, just look at the items on the table. Coffee costs more, as do grains (cereal, bread). Dairy is more expensive, as is sugar. Indeed, the overall secular trend is towards inflation and higher prices. Temporary interruptions in the secular trend by cyclical anomalies should be ignored, unless you are a trader who profits from short term gyrations in the market. Investors should pay heed, and position their portfolios into an asset allocation model that reflects the global topography and trend awareness that would yield positive long-term performance.
The future is absolutely predictable if one follows the statistics within an orderly methodology (Arlington Econometrics, for example) that is designed to mirror long term trends, capital appreciation potential, and earnings acceleration patterns.
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