Two questions:
What if you threw a party and nobody came?
What if people lined-up on your doorstep, and there was no party to be had?
In response to the latter question, I would say you would have the Dow Jones Averages so far this quarter.
In a shockingly aggressive way, the market is inviting all participants, even though there is no “party” being given. The evidence is conspiring against these revelers and could foretell some seriously negative consequences.
One should be aware that the upside mania becomes a kind-of “forest for the trees” metaphor, in which the good times seem never-ending. Absent any sense of perspective, it is easy to get caught by the rising tide of expectations.
But upon further review, and a much wider aperture, nothing has changed regarding the serious erosion of profits by cost creep, or the dissolution of household savings. In fact, the spate of earnings accelerators from which we hear all the hype are doing so through price increases and the wanton disposal of human resources.
The mindset of the market is to tread lightly, but enthusiastically. With one eye on the tech-wreck of 2000-2002, most hope to avert such a disaster, but plunge ahead, nevertheless. Today, the mania is in Energy and Consumer safe-havens, but the behavior is identical to its antecedents. Additionally, the craziness spreads into merger and acquisition activity, in which the hunter and the preyed-upon try to outduel each other for competitive advantage. Besides, with the cost of money so low, it’s cheaper to buy profits than to create them.
It troubles me that I see excess nearly everywhere, without fundamental substantiation. The premiums in stock prices do not warrant the new-high mania serving as a baseline valuation. A docile crowd of followers seems willing to follow any suitor, even if it means sacrificing fundamental methodology.
While it is possible to quantify data, the variable that is most troubling is the “lemming effect”, in which psychology sometimes outpaces the fundamentals. Keep in mind that this sequence typically occurs at the tail end of an up (or down) cycle and is punctuated by hyperbole (or despair) depending upon how long the previous cycle may have run.
Therefore, while one cannot reasonably predict the timing of the mania’s demise, historically it occurs anyway.
I believe the excesses in the market are exacerbated by the poor performance in stocks during the first quarter and a thirst to get something, anything, going during April. With money at low cost, margin and borrowing are fueling the valuation expansion at a rate of speed that is outpacing the expectations of even those who are participating.
While I expect a pullback, I am not hoping for one. The constituents of strength in the global economy remain Energy, Basic Materials, Technology, and Industrial development. The rate of increase in these share’s prices is not commensurate with their ability to sustain demand, price pressure, and earnings expansion.
As the search for undervalued opportunity continues, I am trying hard to maintain balance in my sector weightings, and prudence in client’s asset allocation.
I may “nibble” in some selected equities in here, but I will not be seduced by anything which contradicts quantitative theory and methodology.
Monday, April 30, 2007
Monday, April 23, 2007
Market Commentary for the week of April 23, 2007
After a remarkable whirlwind market last week, one in which the Dow and S&P closed to within new record high levels, it would not be garish to expect that this week will set yet another new high precedent. But at what cost?
Bear in mind that of the eight market categories that Arlington quantifies (which equate to the 11 S&P sectors) all of them are in downtrends or retrenchment, not advances. This is because in spite of the valuation levels accelerating, the relative strength indicators (RSI), a measure of the rate of acceleration during an advance or decline, are precipitously and perilously losing ground, usually a preindicator of valuation declines in the future.
Further, the fundamentals which underlie the equities within most global averages are eroding significantly. Last year, for example, inflation eroded profit margins by over 3% worldwide, more in specific regions or sectors. Core costs, globally, simply are rising.
As a result, I expect the cost of money to rise, too. This inflation-linked data is a precursor to negative economic growth rates.
The consumer, while smitten with the fact that Q2 already looks a lot better than Q1 in terms of portfolio performance, might be getting ahead of himself if he believes that Dow 13,000 is anything other than a number. These surprise price spikes tend to be self fulfilling prophecies which do no good methodologically and which certainly skew the quantitative (and purely objective) data.
In a not so subtle shift from fundamental analysis, investors seem to get giddy “at the top”, and become fixated by their own psychological good mood. Throw out all resistance and support levels, while knee-jerk euphoria takes hold and you have a formula that is no different from its inverse situation when defeat and despair rule the heart when portfolios and markets are “at the bottom”.
In spite of all of the mania, rising commodities prices, including gasoline and food, give rise to a scenario in which earnings acceleration patterns are contracting. We see this in reports of reduced capital spending activity, and a reduction in jobs growth.
It is also interesting to note that last year more than 60% of the companies in the S&P bought shares in their own company (buybacks) which has the effect of reducing float (shares outstanding) and heightening share price volatility. This is, perhaps, another reason why limited activity might accentuate valuation acceleration patterns, while fundamentals remain virtually unchanged. In addition, a multitude of investment banking and merger deals are whittling away at the inefficiencies in the equities market by swallowing up and spitting out the weaker players.
This week the market expects “better” earnings results form reporting companies. I believe this is due to efficiency and productivity (layoffs) efforts as well as a concerted effort to pass any margin-killing expenses along to the consumer. I would ask you to decide if the extra money you pay for milk, fuel, and pharmaceuticals is the stuff of Wall Street exuberance, or if there really is a fundamental disconnect here, someplace.
It is noteworthy that leading the earnings parade in U.S. equities last week were Defense stocks and Energy companies, a commentary upon geopolitical events, I’m sure.
Bear in mind that of the eight market categories that Arlington quantifies (which equate to the 11 S&P sectors) all of them are in downtrends or retrenchment, not advances. This is because in spite of the valuation levels accelerating, the relative strength indicators (RSI), a measure of the rate of acceleration during an advance or decline, are precipitously and perilously losing ground, usually a preindicator of valuation declines in the future.
Further, the fundamentals which underlie the equities within most global averages are eroding significantly. Last year, for example, inflation eroded profit margins by over 3% worldwide, more in specific regions or sectors. Core costs, globally, simply are rising.
As a result, I expect the cost of money to rise, too. This inflation-linked data is a precursor to negative economic growth rates.
The consumer, while smitten with the fact that Q2 already looks a lot better than Q1 in terms of portfolio performance, might be getting ahead of himself if he believes that Dow 13,000 is anything other than a number. These surprise price spikes tend to be self fulfilling prophecies which do no good methodologically and which certainly skew the quantitative (and purely objective) data.
In a not so subtle shift from fundamental analysis, investors seem to get giddy “at the top”, and become fixated by their own psychological good mood. Throw out all resistance and support levels, while knee-jerk euphoria takes hold and you have a formula that is no different from its inverse situation when defeat and despair rule the heart when portfolios and markets are “at the bottom”.
In spite of all of the mania, rising commodities prices, including gasoline and food, give rise to a scenario in which earnings acceleration patterns are contracting. We see this in reports of reduced capital spending activity, and a reduction in jobs growth.
It is also interesting to note that last year more than 60% of the companies in the S&P bought shares in their own company (buybacks) which has the effect of reducing float (shares outstanding) and heightening share price volatility. This is, perhaps, another reason why limited activity might accentuate valuation acceleration patterns, while fundamentals remain virtually unchanged. In addition, a multitude of investment banking and merger deals are whittling away at the inefficiencies in the equities market by swallowing up and spitting out the weaker players.
This week the market expects “better” earnings results form reporting companies. I believe this is due to efficiency and productivity (layoffs) efforts as well as a concerted effort to pass any margin-killing expenses along to the consumer. I would ask you to decide if the extra money you pay for milk, fuel, and pharmaceuticals is the stuff of Wall Street exuberance, or if there really is a fundamental disconnect here, someplace.
It is noteworthy that leading the earnings parade in U.S. equities last week were Defense stocks and Energy companies, a commentary upon geopolitical events, I’m sure.
Sunday, April 15, 2007
Arlington Econometrics 2nd Quarter Commentary
Crossfire
Although the market’s first quarter performance was nearly microscopic, broader and bigger themes materialized which overshadow the movement of stocks during just one quarter. Anecdotal and specific economic data confirm that the rate of acceleration in equity earnings patterns is dissipating, and that inflation is creating disorder within households and corporate boardrooms. It is becoming more likely that stock appreciation might be stopped by patterns of disinterest and fear.
The best that can be said about the first quarter is that no harm has been done if you own stocks. However, probabilities and potential are diminishing probably for the next several months.
Prices rise
To varying degrees, the influence of “price creep” upon corporate margins and household spending depends upon the industry or the level of discretionary decision making. Without a doubt, pharmaceutical/agricultural/energy price increases hurt the average consumer. Such a drain upon purchasing power transcends, therefore, into unit volume sales patterns and winds up hurting certain industries more than others. The depletion of capital worldwide for expenditure of energy is the most egregious of the trends which manifested during the last three months. The extent of these exogenous influences upon equity valuations is not going to go away. Export/import imbalances within energy, food, and consumer sectors is likely to render negative performance to earnings expectations and leave a psychological confidence gap in their wake.
In fact, the psychological legacy of the “news of the day” is becoming as important as the statistics and fundamentals proffered by professional analysts and pundits. The most significant price hikes upon consumers in areas like healthcare, energy, food, tuition, etc. resonate locally and globally, exacting a toll which I believe is in the equities pipeline but yet to be quantified. The enduring legacy of energy price increases, for example, is more significant than the dot.com mania of the late 1990’s.
Sectors are diverse
But anecdotal inflation is not restricted to energy prices. Agricultural development and processing is the next wave. The cost of producing a pound of food, worldwide, is rising faster than the cost of crude oil. Despite technological advances in planting and cultivating, the supply/demand curve is tipping perilously close to a danger zone. Like no other consumer-related product, food might represent the one commodity which influences humanity as much as the performance of stocks, bonds and portfolio performance.
And yet, in the face of these data, consumers ignore the warning signs. Household savings rates, globally, as a percentage of take-home pay are at historically low levels. Credit-driven spending is rising, bankruptcies are rising, and despair amongst the “have-nots” is rising.
My estimates of the impact of these data upon earnings forecasts is less than positive. Consumer spending is not without limits. The market’s first quarter meandering is an indication of fundamental and psychological discomfort. While the long-term prospect for stocks is “always” good, it is the tide of negative expectations which is preventing clarity from overcoming. The age of chasing anything indiscriminately is ending. Historically, equity performance depends upon unit volume growth and earnings expansion. But certain sea-changes are preventing most sectors from gaining traction.
A reduction in unit volume purchases is morphing into a self fulfilling prophecy and becoming a price-driven inflation trend. In spite of productivity gains derived from downsizing and outsourcing, multinational commerce is impacted more by a reduction in sales than by margin expansion from price maneuvers. Specific instances might refute this claim, but globally the trend is unmistakable. The sectors that show positive price performance in their stocks are emblematic of price pressure, and unit volume demand, like Energy, Basic Materials, Healthcare and Consumer Non-Cyclicals (food).
Markets
Although the subtlety of this argument might be lost on some, the market is an efficient barometer. Beset by knee-jerk responses to daily news events, the equity markets nevertheless react to long term trends. I urge caution in delineating the differences between bottom-fishing for good value and owning patterns which are orderly and quantifiable. Investors who deny the probability of trends, refute the possibility of longer term rewards.
The most effective way to quantify those probabilities is to separate patterns of price performance into leading, lagging, or coincidental geography. Recognizing that the market is cyclical, not unified, allows this analyst to create a probability scale which places patterns on earnings and price performance into an asset allocation model. Indeed, the nuance of price patterns is the heart of the matter. The characteristics which separate one energy stock from another, and one energy stock from other sector’s performance is the essence of Arlington Econometrics’ methodology.
Since earnings acceleration is the truest barometer of future performance, the measurement of a company’s fundamentals is part of the top-down science I bring to sector location and equity selection. No matter what stocks one might own, there is a measurement and locus of its current position and probability of future performance relative to other stocks within its grouping.
Strategy
While I expect only modest performance from equities during the next quarter, I see the make-up of price gains changing significantly. When measured by global demand scales, the markets will start to abandon cyclical companies in favor of tangible assets. A tidal wave of new demand is not in the offing. Whereas low interest rates might have spurred purchasing in the past, credit levels today are nearly exhausted and unsustainable. The incalculable effect of the cost of money upon capital expenditures is the next shoe to drop.
The effect of global military and political turmoil is also weighing heavily upon the geopolitical agenda. While it is difficult to quantify the impact of these events upon the financial markets, there is a noticeable inertia that sets in during periods of psychological uncertainty.
I believe the time to make up ground in stocks will be later in the year. Upon reflection, the markets might have time to sort out the influence of inflation and “price creep” upon spending patterns. Similarly, the global interconnectedness of regions, one to the other, will play out in a carefully crafted ballet between demand and politics. Worldwide, margins will be squeezed more tightly by cost pressure. The likelihood of earnings acceleration is dim. As if wishing might make it so, investors seem hopeful that we can resume forward momentum in stock prices. But methodologically I foresee a necessary stagnation in equity performance in order to buy time necessary to recalibrate the impact of inflationary trends upon sectors and leading stocks. Just as the catalysts for negative performance late in the 1990’s were set in motion before the bear market fall, so too must the germination of positive influences be taken into account before a bull market phase reemerges.
I remain suspicious of overnight trends or news-driven capital gains. I choose to focus upon the nature of long term cause and effect. If we can be patient through the next quarter, I could foresee a strong close to the year.
In review, the quarter’s most significant themes are:
· Expect a slowdown in earnings expansion/acceleration patterns.
· Reduced margins owing to inflation and price creep stagnate equity performance.
· Psychological influences are as significant as fundamental data.
· Sector rebalancing means that tangible assets will outperform cyclicals.
· Bond yields must continue their rise to quell unabated discretionary spending.
Asset Allocation:
Equity 50%/Fixed Income 25%/Cash 25%
Although the market’s first quarter performance was nearly microscopic, broader and bigger themes materialized which overshadow the movement of stocks during just one quarter. Anecdotal and specific economic data confirm that the rate of acceleration in equity earnings patterns is dissipating, and that inflation is creating disorder within households and corporate boardrooms. It is becoming more likely that stock appreciation might be stopped by patterns of disinterest and fear.
The best that can be said about the first quarter is that no harm has been done if you own stocks. However, probabilities and potential are diminishing probably for the next several months.
Prices rise
To varying degrees, the influence of “price creep” upon corporate margins and household spending depends upon the industry or the level of discretionary decision making. Without a doubt, pharmaceutical/agricultural/energy price increases hurt the average consumer. Such a drain upon purchasing power transcends, therefore, into unit volume sales patterns and winds up hurting certain industries more than others. The depletion of capital worldwide for expenditure of energy is the most egregious of the trends which manifested during the last three months. The extent of these exogenous influences upon equity valuations is not going to go away. Export/import imbalances within energy, food, and consumer sectors is likely to render negative performance to earnings expectations and leave a psychological confidence gap in their wake.
In fact, the psychological legacy of the “news of the day” is becoming as important as the statistics and fundamentals proffered by professional analysts and pundits. The most significant price hikes upon consumers in areas like healthcare, energy, food, tuition, etc. resonate locally and globally, exacting a toll which I believe is in the equities pipeline but yet to be quantified. The enduring legacy of energy price increases, for example, is more significant than the dot.com mania of the late 1990’s.
Sectors are diverse
But anecdotal inflation is not restricted to energy prices. Agricultural development and processing is the next wave. The cost of producing a pound of food, worldwide, is rising faster than the cost of crude oil. Despite technological advances in planting and cultivating, the supply/demand curve is tipping perilously close to a danger zone. Like no other consumer-related product, food might represent the one commodity which influences humanity as much as the performance of stocks, bonds and portfolio performance.
And yet, in the face of these data, consumers ignore the warning signs. Household savings rates, globally, as a percentage of take-home pay are at historically low levels. Credit-driven spending is rising, bankruptcies are rising, and despair amongst the “have-nots” is rising.
My estimates of the impact of these data upon earnings forecasts is less than positive. Consumer spending is not without limits. The market’s first quarter meandering is an indication of fundamental and psychological discomfort. While the long-term prospect for stocks is “always” good, it is the tide of negative expectations which is preventing clarity from overcoming. The age of chasing anything indiscriminately is ending. Historically, equity performance depends upon unit volume growth and earnings expansion. But certain sea-changes are preventing most sectors from gaining traction.
A reduction in unit volume purchases is morphing into a self fulfilling prophecy and becoming a price-driven inflation trend. In spite of productivity gains derived from downsizing and outsourcing, multinational commerce is impacted more by a reduction in sales than by margin expansion from price maneuvers. Specific instances might refute this claim, but globally the trend is unmistakable. The sectors that show positive price performance in their stocks are emblematic of price pressure, and unit volume demand, like Energy, Basic Materials, Healthcare and Consumer Non-Cyclicals (food).
Markets
Although the subtlety of this argument might be lost on some, the market is an efficient barometer. Beset by knee-jerk responses to daily news events, the equity markets nevertheless react to long term trends. I urge caution in delineating the differences between bottom-fishing for good value and owning patterns which are orderly and quantifiable. Investors who deny the probability of trends, refute the possibility of longer term rewards.
The most effective way to quantify those probabilities is to separate patterns of price performance into leading, lagging, or coincidental geography. Recognizing that the market is cyclical, not unified, allows this analyst to create a probability scale which places patterns on earnings and price performance into an asset allocation model. Indeed, the nuance of price patterns is the heart of the matter. The characteristics which separate one energy stock from another, and one energy stock from other sector’s performance is the essence of Arlington Econometrics’ methodology.
Since earnings acceleration is the truest barometer of future performance, the measurement of a company’s fundamentals is part of the top-down science I bring to sector location and equity selection. No matter what stocks one might own, there is a measurement and locus of its current position and probability of future performance relative to other stocks within its grouping.
Strategy
While I expect only modest performance from equities during the next quarter, I see the make-up of price gains changing significantly. When measured by global demand scales, the markets will start to abandon cyclical companies in favor of tangible assets. A tidal wave of new demand is not in the offing. Whereas low interest rates might have spurred purchasing in the past, credit levels today are nearly exhausted and unsustainable. The incalculable effect of the cost of money upon capital expenditures is the next shoe to drop.
The effect of global military and political turmoil is also weighing heavily upon the geopolitical agenda. While it is difficult to quantify the impact of these events upon the financial markets, there is a noticeable inertia that sets in during periods of psychological uncertainty.
I believe the time to make up ground in stocks will be later in the year. Upon reflection, the markets might have time to sort out the influence of inflation and “price creep” upon spending patterns. Similarly, the global interconnectedness of regions, one to the other, will play out in a carefully crafted ballet between demand and politics. Worldwide, margins will be squeezed more tightly by cost pressure. The likelihood of earnings acceleration is dim. As if wishing might make it so, investors seem hopeful that we can resume forward momentum in stock prices. But methodologically I foresee a necessary stagnation in equity performance in order to buy time necessary to recalibrate the impact of inflationary trends upon sectors and leading stocks. Just as the catalysts for negative performance late in the 1990’s were set in motion before the bear market fall, so too must the germination of positive influences be taken into account before a bull market phase reemerges.
I remain suspicious of overnight trends or news-driven capital gains. I choose to focus upon the nature of long term cause and effect. If we can be patient through the next quarter, I could foresee a strong close to the year.
In review, the quarter’s most significant themes are:
· Expect a slowdown in earnings expansion/acceleration patterns.
· Reduced margins owing to inflation and price creep stagnate equity performance.
· Psychological influences are as significant as fundamental data.
· Sector rebalancing means that tangible assets will outperform cyclicals.
· Bond yields must continue their rise to quell unabated discretionary spending.
Asset Allocation:
Equity 50%/Fixed Income 25%/Cash 25%
Monday, April 9, 2007
Market Commentary for the week of April 9, 2007
Don’t be surprised if you start to see a rise in household/daily use commodities prices. Already, the most egregious of this “price creep” phenomenon has been the acceleration in price increases for gasoline at the pump. As conflict pervades in the Middle East and usage rises in China, expect to see further increases in crude oil costs and a widening of the oil reserves deficit.
Anecdotal reality.
But now comes word that in addition to pharmaceutical cost increases, paper cost increases and raw materials cost increases comes an increase in the cost of milk and other foodstuffs. Keep in mind that these announcements are “anecdotal” in nature, drawn from headlines and inferences or expectations.
But do you really expect anything less? As grain and feed and fertilizer costs rise, dairy farmers naturally pass along their costs to the consumer. Some might heed my message as alarmist. After all, price increases are the natural order of things. A hot dog doesn’t cost a nickel any longer, and gum isn’t sold for 25¢ per pack.
Whether by accident or design, however, today’s cost push derives from significantly different factors than evolutionary or generational change.
As the profit margin of business shrinks, owing to diminishing unit volume sales, the consumer becomes the end-user of last resort, forced to carry the burden of rising prices and diminishing sales. In other words, the mistakes of poor product engineering or failed fiscal policy are being heaped onto the backs of those who are innocent of the crime.
Few solutions.
One might conclude that the onus of fixing deficit spending falls upon the government, but it won’t or can’t address the problem. Further, one might expect that the burden of creating product demand and “buzz” rests with the corporations that manufacture and distribute products to the marketplace. But instead, they outsource jobs and raise prices to effect a margin expansion that is specious, at best.
One might expect the Federal Reserve to reign in aggressive or negligent monetary policy to avoid a manic speculative bubble that manifests in stocks, or home-building, or mergers and acquisitions. Instead, they sit back and wait, allowing the financial market to fall off the precipice.
Bond yields are so low, historically and actually, that a nominal bear market retreat can’t happen progressively and logically without witnessing speculators profiting from gains derived with “borrowed money”.
Consumers don’t know whether to laugh or cry, whether we’re in a boom or a bust.
The subliminal message while goods are cheap is to keep spending, whereas the anecdotal data says we’re running out of discretionary funds.
Cover your bets.
The market is still relatively overvalued even though its performance year-to-date has been anemic. I would prefer a correction and recalibration of valuation and relative strength levels, but each decline is met with new borrowing, new purchasing. Only time can rebalance the starting point under those manic conditions.
The best thing to do is to measure portfolio asset allocation levels and to make sure that one is overweighted in sectors that benefit from price creep and to avoid speculation in “value” stocks until the near term clues recalibrate.
There will be no Outlook published next week. Please watch for my second quarter forecast entitled “Crossfire”, being mailed the week of April 15th.
Anecdotal reality.
But now comes word that in addition to pharmaceutical cost increases, paper cost increases and raw materials cost increases comes an increase in the cost of milk and other foodstuffs. Keep in mind that these announcements are “anecdotal” in nature, drawn from headlines and inferences or expectations.
But do you really expect anything less? As grain and feed and fertilizer costs rise, dairy farmers naturally pass along their costs to the consumer. Some might heed my message as alarmist. After all, price increases are the natural order of things. A hot dog doesn’t cost a nickel any longer, and gum isn’t sold for 25¢ per pack.
Whether by accident or design, however, today’s cost push derives from significantly different factors than evolutionary or generational change.
As the profit margin of business shrinks, owing to diminishing unit volume sales, the consumer becomes the end-user of last resort, forced to carry the burden of rising prices and diminishing sales. In other words, the mistakes of poor product engineering or failed fiscal policy are being heaped onto the backs of those who are innocent of the crime.
Few solutions.
One might conclude that the onus of fixing deficit spending falls upon the government, but it won’t or can’t address the problem. Further, one might expect that the burden of creating product demand and “buzz” rests with the corporations that manufacture and distribute products to the marketplace. But instead, they outsource jobs and raise prices to effect a margin expansion that is specious, at best.
One might expect the Federal Reserve to reign in aggressive or negligent monetary policy to avoid a manic speculative bubble that manifests in stocks, or home-building, or mergers and acquisitions. Instead, they sit back and wait, allowing the financial market to fall off the precipice.
Bond yields are so low, historically and actually, that a nominal bear market retreat can’t happen progressively and logically without witnessing speculators profiting from gains derived with “borrowed money”.
Consumers don’t know whether to laugh or cry, whether we’re in a boom or a bust.
The subliminal message while goods are cheap is to keep spending, whereas the anecdotal data says we’re running out of discretionary funds.
Cover your bets.
The market is still relatively overvalued even though its performance year-to-date has been anemic. I would prefer a correction and recalibration of valuation and relative strength levels, but each decline is met with new borrowing, new purchasing. Only time can rebalance the starting point under those manic conditions.
The best thing to do is to measure portfolio asset allocation levels and to make sure that one is overweighted in sectors that benefit from price creep and to avoid speculation in “value” stocks until the near term clues recalibrate.
There will be no Outlook published next week. Please watch for my second quarter forecast entitled “Crossfire”, being mailed the week of April 15th.
Monday, April 2, 2007
Market Commentary for the week of April 2, 2007
The stock market traveled much the same path as weeks earlier, opening strongly early, falling back upon the announcement of weak economic data and then holding its breath towards the end of the week. It makes some wonder why they even bother to hold equities in the first place.
Data versus fear.
And so it is that “no news goes unpunished”. The data last week involved upticks in inflation (though some thought the increase was more tepid than expected) and a decrease in existing home sales, perhaps foretelling a downturn in discretionary spending.
Manufacturing levels remain modest, but good. The fear is that low interest rates alone are not a sufficient incentive to recapture the sort of psychological and fiscal stimulus required to move goods off the shelves. As I’ve written earlier regarding low interest rates, “you can lead a horse to water, but you can’t make him spend”.
What I see, further, is that incentive pricing extracts a huge toll upon corporate profitability. Even the leanest organization is having trouble surviving in a world without buying.
Within that context, it is appropriate for the market to meander, then decline. My focus, specifically, is on earnings acceleration patterns, typically derived from increases in unit volume output. It is clear that the number of equities that qualify for purchase under that scenario is diminishing. Although these thresholds are guidelines, they are usually a good preliminary indicator as to the potential mark-up in a stock’s long term performance.
While the market is driven by fundamentals, another key dynamic is perception. One has the feeling, much like after 2000-2002, that there is a palpable fear of “going in the water”. Perception is that war, healthcare, inflation and other factors are sucking the enthusiasm out of owning equities, thus influencing portfolio management practices, Wall Street advertising, daily news programming, and household kitchen-table conversation.
Investors need direction.
Just as the negative response was overdone then, so too is it now. It just seems that the explosiveness of stock price movements is so volatile that investors need guidance in evaluating and navigating through all the delirium. In my opinion, the market’s lateral-to-negative bias is not only a reaction to today’s data, but also the near-linear uptrend which preceded our current valuation. It is impossible for stock prices to go straight up. They must recalibrate and rest at some point along the way.
Few are forecasting a bear market, anyway. Most observers believe, instead, that a pullback is required to reenergize and recapitalize the next bull upleg.
Methodology always defeats uncertainty.
I am trying to recognize the intrinsic strength in sectors that typify my own bias towards price appreciation, earnings acceleration, and relative strength. While purchasing power is a desired constituent, the sea-change in equities is that pricing power is playing more of a role in corporate profitability than at any time in the last 20 years. Inflation data and profit reports confirm that observation.
To that extent, this isn’t a bear market in stocks but a bull market opportunity in the “back-end” of the economic cycle.
Having completed a generational cycle of disinflation, one which created and sustained the previous bull market emanating from 1982, we are now in an economic phase punctuated by rising core commodity and natural resource prices, higher interest rates, tighter budgets, and broadening emerging market opportunity.
Data versus fear.
And so it is that “no news goes unpunished”. The data last week involved upticks in inflation (though some thought the increase was more tepid than expected) and a decrease in existing home sales, perhaps foretelling a downturn in discretionary spending.
Manufacturing levels remain modest, but good. The fear is that low interest rates alone are not a sufficient incentive to recapture the sort of psychological and fiscal stimulus required to move goods off the shelves. As I’ve written earlier regarding low interest rates, “you can lead a horse to water, but you can’t make him spend”.
What I see, further, is that incentive pricing extracts a huge toll upon corporate profitability. Even the leanest organization is having trouble surviving in a world without buying.
Within that context, it is appropriate for the market to meander, then decline. My focus, specifically, is on earnings acceleration patterns, typically derived from increases in unit volume output. It is clear that the number of equities that qualify for purchase under that scenario is diminishing. Although these thresholds are guidelines, they are usually a good preliminary indicator as to the potential mark-up in a stock’s long term performance.
While the market is driven by fundamentals, another key dynamic is perception. One has the feeling, much like after 2000-2002, that there is a palpable fear of “going in the water”. Perception is that war, healthcare, inflation and other factors are sucking the enthusiasm out of owning equities, thus influencing portfolio management practices, Wall Street advertising, daily news programming, and household kitchen-table conversation.
Investors need direction.
Just as the negative response was overdone then, so too is it now. It just seems that the explosiveness of stock price movements is so volatile that investors need guidance in evaluating and navigating through all the delirium. In my opinion, the market’s lateral-to-negative bias is not only a reaction to today’s data, but also the near-linear uptrend which preceded our current valuation. It is impossible for stock prices to go straight up. They must recalibrate and rest at some point along the way.
Few are forecasting a bear market, anyway. Most observers believe, instead, that a pullback is required to reenergize and recapitalize the next bull upleg.
Methodology always defeats uncertainty.
I am trying to recognize the intrinsic strength in sectors that typify my own bias towards price appreciation, earnings acceleration, and relative strength. While purchasing power is a desired constituent, the sea-change in equities is that pricing power is playing more of a role in corporate profitability than at any time in the last 20 years. Inflation data and profit reports confirm that observation.
To that extent, this isn’t a bear market in stocks but a bull market opportunity in the “back-end” of the economic cycle.
Having completed a generational cycle of disinflation, one which created and sustained the previous bull market emanating from 1982, we are now in an economic phase punctuated by rising core commodity and natural resource prices, higher interest rates, tighter budgets, and broadening emerging market opportunity.
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