I don’t really care what the Federal Reserve said last week, and neither should you, really. Those who manage money based upon daily proclamation or news events do so with an extremely narrow focus. The vulnerabilities and opportunities of the global arena are dictated less by the clock, but more by the calendar. Using a news event as a trigger for investment decisions is extremely short-sighted, in my opinion.
Perspective is key.
Nearly all market data is verifiable and quantifiable. That is, the mere presence of patterns within data tracking periods (monthly, weekly) allows statisticians and economists to develop probability paradigms. As I’ve written before, the compression of these data into weighted probabilities keeps decision making focused upon themes and patterns that play out over longer periods of time, and which become immutable and enduring over time. Allowing for the exceptions and exogenous unforeseen influences, the numbers take on a clarity that allows the mind to focus upon what is real, rather than what emotion tells us is fashionable.
Relieving the burden of short term orientation is also good for performance expectations, since “logging-on” daily for account balances is a futile and exasperating experience.
Therefore, I highlight that in spite of the Federal Reserve, or the short term rally from the depths that we are experiencing, the dominant factor in today’s global basket is the broadening influence of inflation, price creep, and a deceleration in earnings acceleration patterns. With the exception of demand-driven and price sensitive sectors such as Energy & Basic Materials, most all sectors in my data base are suffering from this temporary, but very real, affliction.
Play the bounce.
Although the short cycle data is rebounding modestly from the lows that occurred during the last two weeks, the rise is only a reflex response to an oversold condition and a desperate search for capital gains bounces.
But even the rebound is within a longer more protracted period of decline that originated last year and is influenced by a reversal in home equity values, portfolio declines, record borrowing levels leading to bankruptcies, a rising U.S. trade deficit, lowering GDP, and diminishing household savings rates.
If anything else, understand that a comment from one Governmental official will not heal the plague of rapidly deteriorating economic statistics.
It is sad to note, but I believe that portfolio valuations will suffer this year from these data. The key to surviving the downturn is to adjust portfolio allocation towards those “safe haven” sectors in equities which benefit from the “bad” news, and also into cash or related opportunities for short-term yield.
While “buying on dips” is a time tested method for success, the current dips are not the “real deal” nor the right time.
The overall vulnerability of the global exchanges is influenced by insurance scandals, leveraged borrowing, Federal debt, and an unmotivated public that is choosing to sit on the sidelines, at least for the time-being
Monday, March 26, 2007
Monday, March 19, 2007
Market Commentary for the week of March 19, 2007
Pay careful attention to the difference between “temporary” leadership and “secular” (demographic) leadership. Losing the distinction is much the same as trying to treat a terminal disease with band-aids and a sip of ginger ale.
Temporary Pain.
The continuation of the market’s negative descent and turmoil should not surprise my readers. My halcyon call for the last five months has been about the diversion of investor’s attention away from the long-term themes towards a “feel-good” story of the Dow making new highs right out of the box this year. Should you become swept up in that euphoria you are succumbing to the story Wall Street firms want you to hear, not the reality of what they are supposed to know.
The biggest threat to the economy and to stock prices is the mania and greed that pervades Wall Street politics caused by abnormally low interest rates, high levels of speculation, and eroding profit margins caused by rising core and commodities costs. A more blunt instrument couldn’t hit you over the head any harder. Low rates, manipulated by the Federal Reserve, cause risk-taking behavior.
If you are unaware, or disinterested, in the statistics that bear these facts out consider that when the Dow made its new highs less than 25% of its constituent elements participated; all sectors within the S&P are in downtrends; the equity markets (globally) are in negative territory for the year; profits are diminishing; personal bankruptcies are increasing.
While the data may seem perverse, the risk of ignoring the statistics is not.
We’ve been here before.
Investors are inspired by greed. “If a stock is down, it must be good”, they reason. “If it’s up, it’s too expensive”. Well consider why some sectors endure within a storm and why others are catapulted here and there in the wind of emotions. If you bet against a secular trend you will pay dearly.
The inevitable ups and downs will always occur. Presently, a negative trend exists in retail, homebuilding, financials, and industrials. Investors may feel overwhelmed by the lack of safe havens. But consider that in any market climate there will be sectors that lead, sectors that lag, and those which meander coincidental to the short term flavor. Currently, the commonality of most sectors’ downward spiral inhibits a search for upside counter-cyclicality.
I believe always in identifying and overweighting my portfolio balance into those sectors and themes which resonate from a longer term demographic, and which offer the best probability of outperformance. It is likely that those sectors are Energy, Basic Materials, Utilities, and Biotechnology.
Recent declines have left investors and speculators feeling vulnerable. And rightly so, because the prospect for earnings acceleration patterns is dim, particularly in those sectors that are caught by pressure from rising constituent costs.
Quickly, the engine of market speculation (the supply of money) is diminishing, as home values decrease, equity portfolios retreat, savings deplete, and debt overwhelms.
Don’t lose perspective.
Events such as last week’s second significant decline put into better focus the incumbent risks of speculating into “story stocks” and ignoring the topographical landscape of earnings patterns and sector momentum.
And yet, I see investor’s attitude is to couple risk taking with more risk taking in order to quell the turmoil and recapture near-term losses. That is the appeal that Wall Street makes to the investing public, by seducing them with products, “alternative” strategies, “special opportunities”, and feel-good advertising.
In the original scheme of things, investing was a noble art, combining the analytics of economic performance and probability with social science and global macro thinking. Today, it is the art of seduction and sleight-of-hand, coupled with a herd mentality.
The premium you pay for this paradigm is that every time you get to the precipice of where you’ve been before, someone else urges you to jump first.
Temporary Pain.
The continuation of the market’s negative descent and turmoil should not surprise my readers. My halcyon call for the last five months has been about the diversion of investor’s attention away from the long-term themes towards a “feel-good” story of the Dow making new highs right out of the box this year. Should you become swept up in that euphoria you are succumbing to the story Wall Street firms want you to hear, not the reality of what they are supposed to know.
The biggest threat to the economy and to stock prices is the mania and greed that pervades Wall Street politics caused by abnormally low interest rates, high levels of speculation, and eroding profit margins caused by rising core and commodities costs. A more blunt instrument couldn’t hit you over the head any harder. Low rates, manipulated by the Federal Reserve, cause risk-taking behavior.
If you are unaware, or disinterested, in the statistics that bear these facts out consider that when the Dow made its new highs less than 25% of its constituent elements participated; all sectors within the S&P are in downtrends; the equity markets (globally) are in negative territory for the year; profits are diminishing; personal bankruptcies are increasing.
While the data may seem perverse, the risk of ignoring the statistics is not.
We’ve been here before.
Investors are inspired by greed. “If a stock is down, it must be good”, they reason. “If it’s up, it’s too expensive”. Well consider why some sectors endure within a storm and why others are catapulted here and there in the wind of emotions. If you bet against a secular trend you will pay dearly.
The inevitable ups and downs will always occur. Presently, a negative trend exists in retail, homebuilding, financials, and industrials. Investors may feel overwhelmed by the lack of safe havens. But consider that in any market climate there will be sectors that lead, sectors that lag, and those which meander coincidental to the short term flavor. Currently, the commonality of most sectors’ downward spiral inhibits a search for upside counter-cyclicality.
I believe always in identifying and overweighting my portfolio balance into those sectors and themes which resonate from a longer term demographic, and which offer the best probability of outperformance. It is likely that those sectors are Energy, Basic Materials, Utilities, and Biotechnology.
Recent declines have left investors and speculators feeling vulnerable. And rightly so, because the prospect for earnings acceleration patterns is dim, particularly in those sectors that are caught by pressure from rising constituent costs.
Quickly, the engine of market speculation (the supply of money) is diminishing, as home values decrease, equity portfolios retreat, savings deplete, and debt overwhelms.
Don’t lose perspective.
Events such as last week’s second significant decline put into better focus the incumbent risks of speculating into “story stocks” and ignoring the topographical landscape of earnings patterns and sector momentum.
And yet, I see investor’s attitude is to couple risk taking with more risk taking in order to quell the turmoil and recapture near-term losses. That is the appeal that Wall Street makes to the investing public, by seducing them with products, “alternative” strategies, “special opportunities”, and feel-good advertising.
In the original scheme of things, investing was a noble art, combining the analytics of economic performance and probability with social science and global macro thinking. Today, it is the art of seduction and sleight-of-hand, coupled with a herd mentality.
The premium you pay for this paradigm is that every time you get to the precipice of where you’ve been before, someone else urges you to jump first.
Monday, March 12, 2007
Market Commentary for the week of March 12, 2007
I find it curious that as the economic statistics unravel, the market serendipitously marches to another beat. Although the 400 point decline in the past two weeks has been tumultuous, please do not call it a “correction”. The likelihood of it happening again is statistically quite legitimate. A correction implies a sustained reversal in the “new-high” mentality of the markets just prior to last week’s events. Far from that, the value hunters waited patiently on the sidelines for the stampede to recede and swooped in to buy equities at lower prices.
The problem with that strategy is that the economic data do not support another powerful upleg in global equities, and that the “correction” was not quantitatively deep or sustained enough.
Good new/bad news.
The disconnect grows even wider when I measure historical earnings patterns versus the present. As cost pressure eats further into profit margins, the rate of acceleration of earnings progressions during the last two years is inverting. Anecdotally, one only needs to read the paper, or talk to neighbors, to understand how gasoline and fuel prices are eroding consumer purchasing power, the ageing of the population and industrial infrastructure is putting too much pressure upon those who finance the burden, war and global terror eradicate feelings of harmony and capital investment opportunity. Entire global regions are off limits because of hygiene, economics, infrastructure failures, or politics.
The markets of many industrialized countries, such as Germany, Canada, and Japan are changing course and losing momentum.
The capital depletion gap.
Acknowledging that all things are cyclical, these regressions will stop, and reverse back upwards over time. But it is noteworthy to reflect that the impact of commodities inflation and the erosion of natural resources is a sustained phenomenon, not a one day event like last week’s capitulation. The barriers that these obstacles place upon global development and investment are more significant than the speculators might choose to allow. The “grab and run” mentality of aggressive investors is counterproductive to building and sustaining market momentum.
Indeed, like the influence the dot.com generation had upon exposing valuation mania in traditional cyclic phases in the market seven years ago, so too are the commodities speculators ruining an orderly flow in today’s progression by gobbling up “undervalued” equities and discarding them in day-trader fashion.
While the investment bankers carve up the M&A market for their purposes, the average investor gets caught in the market froth, and ultimately pays the price for his second-class status.
Technical indicators are good.
The longer term looks much better, however. My readings indicate that the market must traverse a period of consolidation in order to raise cash and release the steam built up during a near linear acceleration dating back to last July. Such a consolidation might involve more portfolio pain in the short term, or it might simply resemble a protracted sideways distribution. In either case, my analysis indicates that the markets (U.S. and global) absolutely must recalibrate the relative strength extremes and revert to a more normal “mean valuation” before resuming any significant, sustainable upside cycle.
Domestically, in the meantime, the U.S. must deal with fiscal issues, such as the deficit, in order to prepare the landscape to benefit from any demographic changes, should they occur. We do know that the impact of the deficit and the consumer savings gap upon discretionary or corporate spending is disastrous. The burden upon future generations to pay for these IOU’s is overwhelming. My concerns as a citizen and a portfolio manager are about the depletion of psychic, moral and monetary capital needed to sustain new initiatives in energy, healthcare, education, military, and technological innovation.
I end this week’s post with a wry smile and a shrug of my shoulders.
The problem with that strategy is that the economic data do not support another powerful upleg in global equities, and that the “correction” was not quantitatively deep or sustained enough.
Good new/bad news.
The disconnect grows even wider when I measure historical earnings patterns versus the present. As cost pressure eats further into profit margins, the rate of acceleration of earnings progressions during the last two years is inverting. Anecdotally, one only needs to read the paper, or talk to neighbors, to understand how gasoline and fuel prices are eroding consumer purchasing power, the ageing of the population and industrial infrastructure is putting too much pressure upon those who finance the burden, war and global terror eradicate feelings of harmony and capital investment opportunity. Entire global regions are off limits because of hygiene, economics, infrastructure failures, or politics.
The markets of many industrialized countries, such as Germany, Canada, and Japan are changing course and losing momentum.
The capital depletion gap.
Acknowledging that all things are cyclical, these regressions will stop, and reverse back upwards over time. But it is noteworthy to reflect that the impact of commodities inflation and the erosion of natural resources is a sustained phenomenon, not a one day event like last week’s capitulation. The barriers that these obstacles place upon global development and investment are more significant than the speculators might choose to allow. The “grab and run” mentality of aggressive investors is counterproductive to building and sustaining market momentum.
Indeed, like the influence the dot.com generation had upon exposing valuation mania in traditional cyclic phases in the market seven years ago, so too are the commodities speculators ruining an orderly flow in today’s progression by gobbling up “undervalued” equities and discarding them in day-trader fashion.
While the investment bankers carve up the M&A market for their purposes, the average investor gets caught in the market froth, and ultimately pays the price for his second-class status.
Technical indicators are good.
The longer term looks much better, however. My readings indicate that the market must traverse a period of consolidation in order to raise cash and release the steam built up during a near linear acceleration dating back to last July. Such a consolidation might involve more portfolio pain in the short term, or it might simply resemble a protracted sideways distribution. In either case, my analysis indicates that the markets (U.S. and global) absolutely must recalibrate the relative strength extremes and revert to a more normal “mean valuation” before resuming any significant, sustainable upside cycle.
Domestically, in the meantime, the U.S. must deal with fiscal issues, such as the deficit, in order to prepare the landscape to benefit from any demographic changes, should they occur. We do know that the impact of the deficit and the consumer savings gap upon discretionary or corporate spending is disastrous. The burden upon future generations to pay for these IOU’s is overwhelming. My concerns as a citizen and a portfolio manager are about the depletion of psychic, moral and monetary capital needed to sustain new initiatives in energy, healthcare, education, military, and technological innovation.
I end this week’s post with a wry smile and a shrug of my shoulders.
Monday, March 5, 2007
Market Commentary for the week of March 5, 2007
With the dust having settled from last week’s near-record market decline, I am obliged to ask my readers if they really believe that the pullback was unexpected? Archives of previous weekly commentaries indicate that I have been warning about the peril of unbridled speculation and its impact upon the quantitative statistics that I use as the basis of my market allocation processes. What had only previously been a possibility became reality as investors stampeded for the exists on Tuesday, only to return with a “big-toe” curiosity on Wednesday.
But this decline wasn’t a one-off occurrence. As early as January, the economic statistics failed to keep pace with market performance essentially paving the way for a decoupling of fact and expectation. Indeed, the damage wasn’t local, but global, as well. The huge recent allocations of speculative money into the world’s bourses was exacerbated by low interest rates and a lack of any competitive alternatives to equities.
The higher the markets went, the more cash came in, particularly from fringe speculators who felt passed-by if they weren’t “in it”.
Fueling the delirium (both on the way up and on the way out) was an absence of liquidity in equities caused by share buy-backs and merger activity depleting the percentage float in the markets. Some might argue, and have, that liquidity is higher today than ever owing to lower interest rates. I would posit that while there may, indeed, be more cash, it is nevertheless chasing after fewer shares, causing the stampede effect we witnessed last week.
The Fed has the power and the responsibility to inhibit such negative characteristics, but chooses to remain a marginal player in assuming any real responsibility for regulating money supply and the incumbent speculation which accompanies the current situation. In fact, if the Fed has any culpability in this matter, it is the excessively low “relative” rate of interest which fueled equity speculation in the first place.
Instead, when a panic ensues, investors have no safety net and little guidance. Unless, or course, you are a student of my methodologies. While the market wiped out its annual gain, moving to negative territory for the first time this year, our clients maintained both absolute and relative positive outperformance, year-to-date.
While it is true that certain geopolitical and/or exogenous events exert leverage over the sequence of events in the financial markets, it is unfair to ascribe any one of these as the catalyst to last week’s tumultuousness. Taken in sum, influences such as commodities inflation, global terror, an aging demographic, failed fiscal policy, industrial and technological revolution, etc. take their turn as centers of influence. I have been writing about these factors for decades and rare it is when one of these events “causes” the financial markets to respond intraday. As I recently wrote, trends take decades to develop, not hours. A legitimate portfolio strategist focuses upon the secular, enduring trends, and does not become fixated upon television-driven mania or hyped-up business news programming.
However, it does bear repeating that my data strongly indicates the reemergence of inflation pressure upon global business. Combined with relatively lower interest rates, the two factors coalesce to create a speculative mania typified, for example, by real estate speculation, mergers and acquisitions, buying stocks “on margin”, and Federal budget deficits. The unraveling of the market last week was a linear response downwards to a near-linear, excessively speculative market trend upwards. It matters not what the trigger, or how the morning news characterized the aftermath. The trends are in place to continue this pattern of speculation/regression. The leverage and borrowing issue is within that hierarchy of fundamentals to which I alluded in the previous paragraph.
The big question in the wake of Tuesday’s collapse is the measure of vulnerability (quantified) of the markets and the psychological impact it might create. It now becomes a chicken-or-egg conundrum. Can the market pull sentiment up with it, or does sentiment drag the market? Obviously, this is not an either/or scenario but, rather a matter of degree.
My advice is to pare exposure to non-accelerating earnings equities. They have shown an inability to keep pace with cost pressure or profitability. Return, instead to prudent asset allocation strategies that mitigate the influence of daily volatility and add resiliency to portfolio return.
But this decline wasn’t a one-off occurrence. As early as January, the economic statistics failed to keep pace with market performance essentially paving the way for a decoupling of fact and expectation. Indeed, the damage wasn’t local, but global, as well. The huge recent allocations of speculative money into the world’s bourses was exacerbated by low interest rates and a lack of any competitive alternatives to equities.
The higher the markets went, the more cash came in, particularly from fringe speculators who felt passed-by if they weren’t “in it”.
Fueling the delirium (both on the way up and on the way out) was an absence of liquidity in equities caused by share buy-backs and merger activity depleting the percentage float in the markets. Some might argue, and have, that liquidity is higher today than ever owing to lower interest rates. I would posit that while there may, indeed, be more cash, it is nevertheless chasing after fewer shares, causing the stampede effect we witnessed last week.
The Fed has the power and the responsibility to inhibit such negative characteristics, but chooses to remain a marginal player in assuming any real responsibility for regulating money supply and the incumbent speculation which accompanies the current situation. In fact, if the Fed has any culpability in this matter, it is the excessively low “relative” rate of interest which fueled equity speculation in the first place.
Instead, when a panic ensues, investors have no safety net and little guidance. Unless, or course, you are a student of my methodologies. While the market wiped out its annual gain, moving to negative territory for the first time this year, our clients maintained both absolute and relative positive outperformance, year-to-date.
While it is true that certain geopolitical and/or exogenous events exert leverage over the sequence of events in the financial markets, it is unfair to ascribe any one of these as the catalyst to last week’s tumultuousness. Taken in sum, influences such as commodities inflation, global terror, an aging demographic, failed fiscal policy, industrial and technological revolution, etc. take their turn as centers of influence. I have been writing about these factors for decades and rare it is when one of these events “causes” the financial markets to respond intraday. As I recently wrote, trends take decades to develop, not hours. A legitimate portfolio strategist focuses upon the secular, enduring trends, and does not become fixated upon television-driven mania or hyped-up business news programming.
However, it does bear repeating that my data strongly indicates the reemergence of inflation pressure upon global business. Combined with relatively lower interest rates, the two factors coalesce to create a speculative mania typified, for example, by real estate speculation, mergers and acquisitions, buying stocks “on margin”, and Federal budget deficits. The unraveling of the market last week was a linear response downwards to a near-linear, excessively speculative market trend upwards. It matters not what the trigger, or how the morning news characterized the aftermath. The trends are in place to continue this pattern of speculation/regression. The leverage and borrowing issue is within that hierarchy of fundamentals to which I alluded in the previous paragraph.
The big question in the wake of Tuesday’s collapse is the measure of vulnerability (quantified) of the markets and the psychological impact it might create. It now becomes a chicken-or-egg conundrum. Can the market pull sentiment up with it, or does sentiment drag the market? Obviously, this is not an either/or scenario but, rather a matter of degree.
My advice is to pare exposure to non-accelerating earnings equities. They have shown an inability to keep pace with cost pressure or profitability. Return, instead to prudent asset allocation strategies that mitigate the influence of daily volatility and add resiliency to portfolio return.
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