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.