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.
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