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.
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