Not So “Fast”
In what almost seems like a race to beat your neighbor, media and investors tout the “fast way” to make money. A recent occurrence in the financial markets is to rely upon television, internet, and instant access to information to provide quick and immediate decision-making.
Of course, it all seems so easy when everything is going up. Like throwing darts, it’s nearly impossible to lose if you simply systematize your buying patterns without thought or due diligence. That is why “if you see it on television Friday night, it creates order flow on Monday morning” has become a mantra of the do-it-yourself, trade-at-home crowd. How nifty if medicine were to adopt such an impersonal, try-it-yourself paradigm?
For some reason Wall Street falls victim to the speedy solution for those who are foolish enough to believe that economic science is garbage wrapped in a suit.
Markets
The global credit crisis is not an isolated event. It had its origins in the excess of the previous bull cycle, whose last stages were exacerbated by greed and low interest rates. Such is the current dilemma in today’s financial markets. Embroiled in a panic sell-off initiated by the uninitiated, we find it easier to find fast solutions to fast problems, rather than recognizing the true cyclicality of all financial phenomena.
Not unlike its predecessor bear cycles, the regularity and form of this crisis could have been predicted in advance of its occurrence. In fact, I did predict the likelihood of such an event as far back as 2006, during the transition from internet to oil as the surrogate for investor expectations.
The problem became aggravated, however, by fiscal and monetary influences that fostered an environment of leveraged spending. All the while, a new problem was emerging from the shadows, inflation.
Those who forget the effects of stampede greed at the end of each bull cycle are destined to repeat the unfortunate negative consequences. Every generation in market history has been punctuated by a technological renaissance followed by a short period of (in)digestion, after which the upcycle re-energizes. The 1930’s were the era of manned-flight development, the 1940’s saw the advent of television and radio, while the 50’s and 60’s began the computer age.
Today, following the shake-out of internet and dot.com stocks 8 years ago, we find ourselves truly on the cutting edge of technology, particularly in bio-sciences and energy. I believe that agriculture and earth environmental sciences will follow. Perhaps, later still, a new generation of space science. The famous photo in 1968 from space of the first “earthrise” above the moon, puts into perspective the fragility and priority of our problems here on earth.
But back to the issue, real panic and crisis ensue when your portfolio goes down.
Strategy
There is solace in the fact that these bear cycles happen over and over, and for a reason. Not all factors are negative, today, though. It is appropriate to be careful right now, but not every sector is in a down cycle. True to their description, the “counter-cyclical” equities become safe havens during a downleg, and orphans during a bull cycle. Today, safe haven is found in basic materials (tangible assets), technology, cash, and dividend growth shares.
Despite reductions in analyst’s consensus predictions for most economic sectors, value is spread more dramatically around the globe in several bourses and at many price points. While “traditional” names are still represented among top relative strength performers, so too are non-traditional names from countries which heretofore have been largely underrepresented. And while many stocks have seen debilitating price breaks, the average P/E multiple in today’s basket more closely approximates historical 15x valuations. Interestingly, from amongst the chaos comes a wider and more balanced selection opportunity. Our portfolios show a greater global asset allocation than anytime in the last decade.
Although the tapestry is broader, this is not a clarion call to jump in without investigation. There has been no significant change to my economic models from a top-down perspective as a result of the credit crunch, the market pullback, or any of the efforts to ameliorate the situation. The facts remain to indicate a slowdown in global economic activity and profit-making. In the aggregate, that could wipe out nearly a percentage point from domestic GDP forecasts, perhaps slightly less worldwide.
Stocks will not return to a robust, post dot.com formula in the immediate future. To benchmark portfolio expectations to the S&P might be to misplace one’s analytics. Indeed, we are in transition mode during which “good” gains are nominal, if there are any gains at all. With interest rates in a state of flux, neither is the Treasury bond any good as a barometer for success.
The hybrid in the equation is the sentiment consumers bring to the data. A continuation in the war in
The pessimist will see the glass half-empty. Others might see the early stages of an accumulation opportunity.
I am always looking to find the buy-side of the equation. Arlington Econometrics focuses its analysis upon the prevailing trends, their magnitudinal potential, and the necessary portfolio rebalancing, ongoing, that delivers a risk/reward quotient unique to each client. Objective quantification of the data leads to the answer that is most suitable. As many readers know, we have navigated these cycles successfully in the past, and prepared well in advance, for each cycle to unfold.
Conclusion
There are too many exogenous (outside) influences adding their voices to a subjective review of the market. There is nothing wrong with opinions. But all too often the drone of media muddies the waters of objective thought. I abhor the notion that “fast (anything)” is always the most expedient way to go. The very title annoys me, and should be objectionable to anyone who believes in complex solutions, supported by facts, not opinion. Today’s media-darlings remind me of the same arrogance as the dot.com generation, sleeves rolled up, shirt collars open.
What would you have, for example, if the market pandered only to greed and speculation, rather than fundamental long term economics and analysis? What if every tip was a “gotta have it” opportunity? What if experience was supplanted by the next wave of technology genius? What if you had one eye on the calendar counting days until retirement, and the other eye on the 9:30 a.m. opening bell each day? Certainly not a sense of perspective or longevity.
It seems that the immediacy of unimaginative corporate executives and their boards of directors spurs stock-buybacks rather than creative planning. Immediate, and “short-term”, goal setting doesn’t inspire creativity and research. Rather it sets up a day-to-day dilemma about how to respond to that day’s market activity. Some stocks are being run into the ground by executives with very short horizons. Last year (2006) saw almost 60 percent of all S&P companies execute some form of share repurchasing or float reduction.
By all objective measures, we are in a changing economic climate punctuated by rising inflation, cost creep, and slower earnings projections. The vast landscape of stocks is an opportunity for capital gains. You just have to apply a strict regimen of screening methodologies to uncover the right blend for you. I’d rather have a moderate accelerator than a fast disaster.
Asset Allocation:
Equity 51%/Fixed Income 24%/Cash 25%
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