Is a market selloff justified?
As proof that the market is looking for any excuse to sell, last week’s performance in stocks was tribute to an inverse response perspective. The latest labor market data portrays a slowing economy, yet the Federal Reserve is dropping hints that its fight on inflation is not yet over.
A slight increase in interest rates on Thursday set off an across-the-board selloff, stopping the early January momentum in its tracks.
The government’s own data doesn’t support economic expansion.
Curiously, as numbers feed in slowly from last year (2006), the profit and growth picture looks even more cloudy relative to why the market is exploding and why the Fed thinks it needs to quell excess growth.
Over the last two months of 2006, payrolls stagnated (with the exception of Wall Street bonuses), growing at an annual rate of less than 2%. A deceleration in jobs expansion coupled with a more conservative bias for capital spending puts annual Gross Domestic Product (GDP) below 3%, suggesting that a slowdown is in the offing, if not already here.
Yet the Fed wants to fight slow growth with even slower growth by raising interest rates to counteract the effects of inflation upon economic activity. The trouble is that the kind of inflation the Fed seeks to attack is not borne out of excessive consumer spending or demand, but rather from a hoarding of natural resources by foreign enemies, and nefarious domestic corporations.
Profits are not always where you find them.
The full impact of this greed can be seen in the localization of profit in the tangible assets companies while the cyclical and consumer-driven equities languish. This concentration of wealth can intensify the appearance of growth-related statistics, but in truth it only masks the effects of diminishing discretionary wealth and negative psychology.
Upside resistance or support.
Yet, the continued outperformance of stocks, despite indications that valuations are stretched, remains the story. It appears, from my work, that the elasticity of share prices is being severely tested. When measured against more benign statistics such as earnings acceleration rates, revenue growth, or net profits the market is at historically dangerous resistance points.
This is not to say that I favor abandoning stocks altogether, nor that there has been a fundamental change in the methodology for evaluating cyclical performance characteristics. The case might be made, in fact, that as the market contracts laterally, not cyclically, we are creating a new floor of support building upon previous upside resistance levels. Using historical comparisons as a basis of study, I would posit that while this could be the case, the likelihood that it is true is quite small.
Recall that interest rates are rising, not falling, and that the number of stocks advancing versus those in decline are outnumbered nearly 15 to 1 to the downside. In other words, I consider the early year new highs to be aberrations of the facts, not corroborative.
Diminished earnings acceleration might be negative for stocks.
In the current climate, earnings forecasts are suffering from poor demand, global competition, and price pressure. The burden upon the consumer is too heavy to rescue stagnant growth by spending us back to prosperity.
The impact of rising commodity prices upon global commerce is reflected in the fact that nearly all of the 40 global market baskets I study are in long term declines, or “distribution” patterns. Acknowledging that there are always individual equities that are exceptions to a broader rule, I find pockets of potential in biotech, land and water resources, agriculture, energy, and telecommunications.
The process of identifying those companies with expectations for earnings acceleration and capital gains potential is the mandate I am given by my clients and the essence of my methodological study.
Monday, January 29, 2007
Monday, January 22, 2007
Market Commentary for the week of January 22, 2007
Everyone talks about the weather, no one does anything about it. No one can do anything about it. But beyond the centerpiece of dinnertime discussion, the weather is having profound influences on the pocketbooks of global investors.
Regular readers of my column know that I have targeted agriculture and food-related equities as the next leg in a commodities-driven capital gains explosion in the world financial markets. After spectacular gains in metals, mining, timber and energy during the last decade, my attention now focuses on the next inflation-led and price sensitive tangible asset.
Indeed, recent warm weather in the northeast and frigid cold in the Plains and West, have turned the economy upside down. Retailers couldn’t sell winter wear in New York, while California juice harvests have come up fallow. Anecdotal statistics indicate that almost 70 percent of current orange juice crops have been ruined due to below freezing temperatures in the United States’ west coast.
In the meantime, the price of oil (declining) has Wall Street ebullient, thinking that we have broken the price-hike spiral and turned a corner on inflation and price pressures that had driven the energy sector during the last year.
Not so fast.
Milder temperatures throughout the globe have simply enabled the stockpiling of traditional Winter supply which, in turn, has created an oversupply in the general market. As a result, prices for a barrel of oil have declined by almost 20 percent since last August.
But don’t be fooled by the supply chain. Weather-induced statistics are anomalies to the broader secular trend. Industrialization in China, global and regional unrest, an insatiable appetite for fossil fuels, and a lack of political leadership in developing alternative energy supply sources are imbedding a permanence in the price gouging and inflation sensitive nature of capital gains in that sector.
One would rather see a change in the kind of economic stimulus and activity which fosters an energy exorbitant lifestyle, than to ignore the exogenous influences of El Nino and its impact upon fuel supplies and prices.
The correction in the Energy group is a transient event.
In like manner, the effects of the weather upon agriculture are finite influences within a much broader secular phenomenon. Whereas oil is the fuel of industrial development, food is the fuel of industrialized civilization. Advances in chemistry, hydroponics, and soil management have added significant knowledge and profit potential to the sector, but global demand is outracing the supply chain. No citizen of this planet should be hungry. The responsibility of government is to ensure that its constituents are fed and clothed. I fear that beyond my acumen about Wall Street, Main Street is not always fulfilling its responsibilities. Therefore, as a data analyst, my attention is always directed towards trends and opportunity.
I am tracking profit potential in juices, grains, soybeans, wheat, meat, legumes, and fertilizers during the next year. Not a bad shopping list for Saturday’s trip to the market, either.
Regular readers of my column know that I have targeted agriculture and food-related equities as the next leg in a commodities-driven capital gains explosion in the world financial markets. After spectacular gains in metals, mining, timber and energy during the last decade, my attention now focuses on the next inflation-led and price sensitive tangible asset.
Indeed, recent warm weather in the northeast and frigid cold in the Plains and West, have turned the economy upside down. Retailers couldn’t sell winter wear in New York, while California juice harvests have come up fallow. Anecdotal statistics indicate that almost 70 percent of current orange juice crops have been ruined due to below freezing temperatures in the United States’ west coast.
In the meantime, the price of oil (declining) has Wall Street ebullient, thinking that we have broken the price-hike spiral and turned a corner on inflation and price pressures that had driven the energy sector during the last year.
Not so fast.
Milder temperatures throughout the globe have simply enabled the stockpiling of traditional Winter supply which, in turn, has created an oversupply in the general market. As a result, prices for a barrel of oil have declined by almost 20 percent since last August.
But don’t be fooled by the supply chain. Weather-induced statistics are anomalies to the broader secular trend. Industrialization in China, global and regional unrest, an insatiable appetite for fossil fuels, and a lack of political leadership in developing alternative energy supply sources are imbedding a permanence in the price gouging and inflation sensitive nature of capital gains in that sector.
One would rather see a change in the kind of economic stimulus and activity which fosters an energy exorbitant lifestyle, than to ignore the exogenous influences of El Nino and its impact upon fuel supplies and prices.
The correction in the Energy group is a transient event.
In like manner, the effects of the weather upon agriculture are finite influences within a much broader secular phenomenon. Whereas oil is the fuel of industrial development, food is the fuel of industrialized civilization. Advances in chemistry, hydroponics, and soil management have added significant knowledge and profit potential to the sector, but global demand is outracing the supply chain. No citizen of this planet should be hungry. The responsibility of government is to ensure that its constituents are fed and clothed. I fear that beyond my acumen about Wall Street, Main Street is not always fulfilling its responsibilities. Therefore, as a data analyst, my attention is always directed towards trends and opportunity.
I am tracking profit potential in juices, grains, soybeans, wheat, meat, legumes, and fertilizers during the next year. Not a bad shopping list for Saturday’s trip to the market, either.
Monday, January 15, 2007
Market Commentary for the week of January 15, 2007
A cloud of uncertainty permeated last week’s market activity. Fresh from a New Year’s high, the market took on a tone of realism as investors digested lackluster sales and earnings figures from the month prior. It doesn’t matter what the political or economic rhetoric says. The primary engine of the markets is still psychological euphoria, of which there is little to be found.
While the New Year is always a time to hail the arrival of new benchmarks, it is the old benchmark that still has a grip on capital. To measure exactly how business is doing, one need only to look at year-end earnings acceleration rates and realize that only the speculators and investment bankers finished the year with a flurry.
Metrics hardly suffice when trying to gauge how the average investor feels about stagnant wages, diminished savings, terrorism, government gridlock, and rising inflation. A huge sigh of relief went up two weeks ago after the holidays. But an overview of the economic landscape leaves many scratching their heads wondering what’s in store for 2007. Hardly the stuff of celebration.
The tenor of the markets is also changing for the worse. My data shows a quicker, more staccato pace to trading. This is reflective of a gambler’s market in which capital is left on the table for shorter periods of time. Traders seem to outpace long term investors, destroying the parable that says “to the steady come the rewards”.
In a way, the infestation of inflation into the economic markets is seen by some as a good thing. Permanent price hikes pave the way for profit expansion, but only in selected sectors. If the economy doesn’t catch up to cost increases, the consequences would exacerbate the negativity.
The bearish implications to that data are already in the pipeline. If companies rely too heavily upon price increases to leverage earnings acceleration, the market will have no further ability to accord valuation increases. As it is, the markets are bumping up against valuation barriers even as it makes new “highs”. My conclusion is that peaks will become less magnitudinal while cycle declines become more frequent. Either way, I don’t envision a psychological shift sufficient to mount a new bull leg during the first half of the year.
Last week was also important because the breadth of selling pressure expanded even into sectors that had secular immunity, such as Energy and Basic Materials. Consider that market “leaders” must now dig out from a 5 percent decline to achieve gains for the year.
Because the data on earnings is so inconclusive, the market is looking for a spark to dissipate the inertia. Unfortunately the spark is not coming from Washington D.C. which remains embroiled in its own territorial spat.
I would look for leadership in counter-cyclical areas from which a perpetual search for innovation and profitability always seems to emanate. As a hunch, I read my own data to say that ecology, agriculture, biotechnology, pharmaceutical and life sciences, and energy would form a good place for a soft landing.
While the New Year is always a time to hail the arrival of new benchmarks, it is the old benchmark that still has a grip on capital. To measure exactly how business is doing, one need only to look at year-end earnings acceleration rates and realize that only the speculators and investment bankers finished the year with a flurry.
Metrics hardly suffice when trying to gauge how the average investor feels about stagnant wages, diminished savings, terrorism, government gridlock, and rising inflation. A huge sigh of relief went up two weeks ago after the holidays. But an overview of the economic landscape leaves many scratching their heads wondering what’s in store for 2007. Hardly the stuff of celebration.
The tenor of the markets is also changing for the worse. My data shows a quicker, more staccato pace to trading. This is reflective of a gambler’s market in which capital is left on the table for shorter periods of time. Traders seem to outpace long term investors, destroying the parable that says “to the steady come the rewards”.
In a way, the infestation of inflation into the economic markets is seen by some as a good thing. Permanent price hikes pave the way for profit expansion, but only in selected sectors. If the economy doesn’t catch up to cost increases, the consequences would exacerbate the negativity.
The bearish implications to that data are already in the pipeline. If companies rely too heavily upon price increases to leverage earnings acceleration, the market will have no further ability to accord valuation increases. As it is, the markets are bumping up against valuation barriers even as it makes new “highs”. My conclusion is that peaks will become less magnitudinal while cycle declines become more frequent. Either way, I don’t envision a psychological shift sufficient to mount a new bull leg during the first half of the year.
Last week was also important because the breadth of selling pressure expanded even into sectors that had secular immunity, such as Energy and Basic Materials. Consider that market “leaders” must now dig out from a 5 percent decline to achieve gains for the year.
Because the data on earnings is so inconclusive, the market is looking for a spark to dissipate the inertia. Unfortunately the spark is not coming from Washington D.C. which remains embroiled in its own territorial spat.
I would look for leadership in counter-cyclical areas from which a perpetual search for innovation and profitability always seems to emanate. As a hunch, I read my own data to say that ecology, agriculture, biotechnology, pharmaceutical and life sciences, and energy would form a good place for a soft landing.
Monday, January 8, 2007
Market Commentary for the week of January 8, 2007
And so it goes. The turn of the calendar gives one pause to reflect backwards, and to offer hope for something better tomorrow. But anything more than poetic musings, particularly by Wall Street, does injustice to the turn of the page.
As my regular readers understand, I accord no poetic significance to the change in the calendar when discussing trends, earnings, or relative strength. Unless or until one can wipe the slate perfectly clean at the completion of the year, existing trends remain. Previous momentum statistics morph into current momentum statistics.
To subscribe to any other discipline is to abandon science altogether and tantamount to changing horses mid-stream. Instead, “calendar theorists” look interesting on television, but no more significant than they did the day before.
The market knows no such calendar delineation. January, June, August are all names with no significant statistical value individually. Trends begin, mature and expire on a timeline more enduring than any particular anniversary. My work at Arlington Econometrics is dominated by the categorization and quantification of global and domestic phenomena, and the integration of that data into portfolio and asset allocation decision-making. It is highly improbable that any week, or day, measures more statistically relevant than any other. Quantitatively the markets start 2007 exactly as they ended 2006.
The most compelling current trend is the reversal of earnings derivation from consumer/unit volume increases to price/inflation origins. The impact of price pressure upon capital gains and earnings momentum is at its greatest influence than any time in the last decade.
It seems, as well, that the impact of this trend upon corporate governance is having a negative effect upon Wall Street. Investors are micromanaging their portfolios and expectations to reflect daily price increases or reversals, exposing themselves to increased volatility and potential disappointment. Even the broadcast media gets swept up in the stock-of-the-day mentality. I am frequently asked by interviewers to guess the market’s direction for that day.
This emphasis upon reducing the aperture of perspective causes CEO’s and boards of directors to abandon long term strategic planning and instead try to save their jobs by imprudent and impetuous capital spending.
Product innovation and consumer demand are the single most important components to economic stimulus, earnings acceleration, profitability, share price capital gains and a healthy portfolio.
Last year the existing trends peaked, fell back and rallied again completing a classic head-and-shoulders top configuration. I believe the peaks this year will be less high, while the interim consolidations might expand. The secular advance in Energy and commodities could stall slightly because of existing valuation excesses. While I believe the market to be muted this year, I still believe in historical rates of return in equities, between 6-8% by year end. Beware of capital diminution in bonds, however, as rising interest rates might negatively impact upon long term bond prices.
The markets are changing their focus from West to East. The industrialization of China and emerging markets offers the best new hope for existing brick and mortar companies, as well as the introduction of new technologies from the dot-com paradigm of the late 1990’s. It’s hard to believe that the tech phenomenon was 10 years ago, but that’s the cycle I was discussing (10 years ago) that needed to mature before inclusion in any meaningful statistical quantification.
The most important thing I would urge readers to do is to relax. The demarcation between success and failure is wider than you think and there is plenty of time to reverse anxiety.
Read me weekly, but check-in with me in twelve months.
As my regular readers understand, I accord no poetic significance to the change in the calendar when discussing trends, earnings, or relative strength. Unless or until one can wipe the slate perfectly clean at the completion of the year, existing trends remain. Previous momentum statistics morph into current momentum statistics.
To subscribe to any other discipline is to abandon science altogether and tantamount to changing horses mid-stream. Instead, “calendar theorists” look interesting on television, but no more significant than they did the day before.
The market knows no such calendar delineation. January, June, August are all names with no significant statistical value individually. Trends begin, mature and expire on a timeline more enduring than any particular anniversary. My work at Arlington Econometrics is dominated by the categorization and quantification of global and domestic phenomena, and the integration of that data into portfolio and asset allocation decision-making. It is highly improbable that any week, or day, measures more statistically relevant than any other. Quantitatively the markets start 2007 exactly as they ended 2006.
The most compelling current trend is the reversal of earnings derivation from consumer/unit volume increases to price/inflation origins. The impact of price pressure upon capital gains and earnings momentum is at its greatest influence than any time in the last decade.
It seems, as well, that the impact of this trend upon corporate governance is having a negative effect upon Wall Street. Investors are micromanaging their portfolios and expectations to reflect daily price increases or reversals, exposing themselves to increased volatility and potential disappointment. Even the broadcast media gets swept up in the stock-of-the-day mentality. I am frequently asked by interviewers to guess the market’s direction for that day.
This emphasis upon reducing the aperture of perspective causes CEO’s and boards of directors to abandon long term strategic planning and instead try to save their jobs by imprudent and impetuous capital spending.
Product innovation and consumer demand are the single most important components to economic stimulus, earnings acceleration, profitability, share price capital gains and a healthy portfolio.
Last year the existing trends peaked, fell back and rallied again completing a classic head-and-shoulders top configuration. I believe the peaks this year will be less high, while the interim consolidations might expand. The secular advance in Energy and commodities could stall slightly because of existing valuation excesses. While I believe the market to be muted this year, I still believe in historical rates of return in equities, between 6-8% by year end. Beware of capital diminution in bonds, however, as rising interest rates might negatively impact upon long term bond prices.
The markets are changing their focus from West to East. The industrialization of China and emerging markets offers the best new hope for existing brick and mortar companies, as well as the introduction of new technologies from the dot-com paradigm of the late 1990’s. It’s hard to believe that the tech phenomenon was 10 years ago, but that’s the cycle I was discussing (10 years ago) that needed to mature before inclusion in any meaningful statistical quantification.
The most important thing I would urge readers to do is to relax. The demarcation between success and failure is wider than you think and there is plenty of time to reverse anxiety.
Read me weekly, but check-in with me in twelve months.
Wednesday, January 3, 2007
Arlington Econometrics 1st Quarter Commentary
Just Around the Corner
· Going global means expanding the capital gains horizon.
· Focus upon enduring, secular trends, not themes or fads.
· Asset allocation opportunity is shifting from consumer-led to tangible assets, from unit volume to pricing power.
Information, and access to it, is shrinking the perspective investors have about how and where to allocate their resources. It is now possible to see real time geopolitical and economic events unfold at our desktop. Events in Tokyo, Basel, New York, Caracas, Miami, and Moscow are available and digested instantaneously, and their effects are immediate, as well. Ubiquitous information is changing the meaning of the word “neighbor”.
This means that risks and rewards are more easily analyzed and that global strategies are domestic strategies, too. No longer does the professional or part time investor feel disassociated from the events which interconnect to form his landscape or methodology.
Many companies are “world-class” even though they may be local, because the end use of their product might have far-reaching consequences in the scheme of global commerce. It is possible for your neighborhood baker to be as well known in London as he is down the street. In the next decade, the definition of global investing will change and we need to adapt to those changes.
Arlington Econometrics, my proprietary quantification and analytical product, has proven to be an excellent resource for market timing and distribution of assets. All signals seem to be pointing towards a shift in commerce from unit volume increases to pricing power, from neighborhood/regional to continental/global. The value of my tools and models is that they can distill markets from their regional barriers by focusing on earnings acceleration patterns and sector momentum irrespective of location or capitalization.
To whit, it can help us focus upon companies that are participating in the kind of capital gains momentum which positions investors away from high risk speculation and towards themes which have been vetted for their intrinsic and potential value.
By asking the model the key question about perpetuating earnings and price acceleration patterns, one can eliminate at least one element of “hope and pray” investing that can ruin portfolios.
Without prejudice going in, Arlington Econometrics can find opportunity that represents better-than-average potential for achieving desired portfolio performance. That is why I believe the data to be correct that earnings potential and capital gains opportunity is more global than at any time in our professional lifetime.
Markets
What seems to permeate the landscape right now is a sense that if you’re not in the market you might miss the opportunity, altogether. I believe differently. Since markets are cyclical, not linear, in their development, they always offer reflexive entry and exit points, which I refer to as “inflection points”. These are periods, not points, during which one can calibrate the level of accumulation going in, or distribution coming out.
Therefore, trends are not points but generational opportunities which endure. For example, if one looks at the current Energy sector performance, one might focus solely upon the price-at-the-pump surge in equity prices from July through the end of December. But behind the diminished aperture of that perspective is the notion that as far back as 1998, just prior to the Tech stock run-up and subsequent disastrous fall, Energy stocks (in fact, commodities of all type) were gestating and reversing a negative secular trend which had lasted nearly 15 years prior.
Whether one focuses upon the 13% price performance increase of the sector in 2006 or the nearly 1000% performance of the group during its nascent 2002-2006 bull cycle is reflective of the perspective one brings to solving difficult portfolio allocation questions. As my metrics have shown, our performance and ability to adapt to the changing climate of earnings derivation makes the issue moot in the long term.
Obviously, there are no guarantees about the future. However, cyclical phase methodology and sector momentum analysis trumps bottom-up, or wishful thinking, analytics.
The dollar’s continued decline diminishes the U.S. market’s value both financially and psychologically. When the U.S. fails to compete successfully, it impacts upon our share of market capitalization as well as upon the psychological influence our markets and product wield.
It is quite clear that world market shares are shifting. Whether influenced by finances or psychology is a question for others to ponder. As an analyst, my choice is only to follow the methodological purity of my data. Fighting the trend is not an option for a quantitative market scientist.
The shift from U.S. to global is fluid, not static. As with all trends, it will be possible to maximize these trends over time rather than by erroneously jumping into one market basket or another. For example, quantitative metrics allow us to measure and define the relationship shifts over time between two disparate continents. By triangulating the correlation between earnings and price performance data to the markets themselves and to each other we can measure the shifting value of the opportunity and its cost over time.
In this way we determine a gradual shift in asset allocation that would be expected to yield portfolio performance and diversification of risk at the same time.
My data is incontrovertible today that earnings acceleration is shifting to many shores and that a jingoistic approach to portfolio building is past tense. Foreign (non U.S.) markets offer greater diversification and opportunity by combining emerging market potential with mature industry problem solving. Additionally, the timeliness and transparency of data makes the analytics more “contemporary” and not seem so much as it did two decades ago, namely unsafe and adventurous.
Contemporary investing is all about old-fashioned analytics. The most obvious form of corporate analysis is still the balance sheet. What a company makes, how successfully they market and sell it, and whether they create equity for their shareholders is not unique to the United States. If you were to ask many international analysts today, they would conclude that standards and reporting practices have leveled the playing field. Additionally, industrial development of the global infrastructure is the halcyon call of government and its citizenry, alike. To complete the mission our tech friends and dot.com advocates suggested a decade ago, we need to complete a universal overhaul of brick and mortar institutions as well as non-tangible “ether-net” applications worldwide.
This, then, is the promise of our “New Paradigm” advocates, although not as ethereal as they might have thought a decade ago.
Lumber, cement, steel, coal, gas, water, food are the fuel sources for global industrial development as much as semiconductors and microchips.
As complete as one might think the review, the very nature of investing is about taking risk. Admittedly, the goal is to assess risk and to identify pitfalls, but all investing is about risk. Prudent analytics (methodology) and good data are an investor’s best ally in the fight for risk reduction. It is not sufficient merely to say “this company looks less/more expensive than that one”.
It is important to have a universe large enough from which to make studied judgments. Arlington Econometrics employs key techniques that extend beyond price comparisons. Our data correlates based upon a proprietary relative strength quotient which ranks all stocks global and domestic based upon location and opportunity within its sector, country of origin, and globally, to achieve a universal dynamic that pinpoints financial risk/reward potential. Allowing for exogenous noise and data variations, our results convey the results which prioritize opportunity and potential according to our proprietary ranking system and asset modeling.
However, without a top-down landscape, not even good data can be properly analyzed or positioned.
Strategy
Whereas the United States had been the engine of global commerce for most of the last century, the millennium has seen a gradual shift in locomotion towards the Pacific Rim and Latin America. At best, that means that the U.S. is trying to keep up with itself formerly, and to maintain market share in a highly competitive, and less costly, world sphere.
Our competition comes not only from exogenous influences but also from within. Significant budget deficits do little to quell the inertia that constrains corporate expenditures. The nation’s GDP is choking on nascent inflation, a declining savings rate, falling wages, and a psychologically damaged consumer base. Rising interest rates, with or without the Fed, will squash any potential for discretionary debt in the foreseeable future.
The U.S. savings rate is at its lowest level in decades. As baby boomers reconnaissance the landscape as they near retirement, they see stagnating wage growth and falling real rates of return. Of course this scenario does not apply to the multimillionaires of Wall Street’s most prestigious investment banks but, then again, very little of Wall Street’s exclusive boardrooms really does apply to the average citizen.
Furthermore, concomitant with the declines at home, the U.S. trade deficit continues to expand. With the dollar in decline and Federal monies currently financing war, not domestic infrastructure, I forecast the deficit to expand next year as a percentage of the country’s national output. The primary impediment to this circumstance reversing is unwillingness of foreign partners and adversaries to finance the expense of producing our products. Gasoline, computers, steel, food and a host of other “staples” can be produced more cheaply overseas than here in the United States. Our consumption of alternatively priced products is outpacing our ability to sell them overseas.
Exacerbating the negative profit potential of U.S. markets is the broadening of competition around the globe. Greece, Russia, Sri Lanka, are examples of “furthermost” destinations and sources for commerce, adding to the regular litany of India, China, Japan and Germany.
Many of these countries are learning not only how to produce but how to prosper. The “trickle-down effect” is less a political slogan than it is a capitalist reality in developing countries. Although many of these emerging markets may suffer from a governmental comparison to the United States, many are nonetheless learning how to cultivate their natural resources and labor pool for a sustainable economy. Can these countries flourish without economic support from the globe’s superpowers? Perhaps not exclusively, but the effort is there and the “flea in the fur” analogy is nonetheless pesky for the middle class U.S. citizenry.
So, with growth being shared by a multitude of competitors, what will emerge as the major trend(s) for 2007?
Firstly, the breadth of opportunity globally is my main focus. In order to compete, countries and companies need a growing working class base and a consumer-led economy. When the labor force grows, unemployment declines, savings increases, and pressure subsides. Additionally, an expanding workforce “regulates” interest rates in a manner more effective than the machinations of government. Higher rates during an expansion, for example, are less punitive than a secular reversal (upwards) of rates when the economy is in a deficit.
Natural resources, particularly food and agricultural products, will develop as the next inflationary sensitive item to rule the economy. Whomever controls grain production and harvesting, water resources, meat production, and corn and soybeans will be profit beneficiary of the investment markets.
While this could be a plus for vast United States resources, we also need to change the way we finance agricultural harvesting, particularly the way the government pays to decrease production or destroy harvest in order to maintain “equilibrium”. No global citizen should go to bed hungry. It is lack of distribution, not production, that is creating this policy of government.
Energy resources will be the focus of my work, as well. The greatest influence upon economic and social policy is Energy. Declining resources and ineffective fiscal policy to develop alternatives is not a U.S. problem, it is a global problem. Maintaining and expanding sources of energy is a governmental and economic necessity. The situation requires sophistication and the help of technology to find solutions to this diminishing natural resource problem.
Many emerging market nations are decades behind the West in addressing these and other infrastructure issues. To that extent, there exists an opportunity for Western business to influence and exert a new spirit of renaissance at the opportunity to recreate their past successes. After all, we have faced-down and overcome many of the technological and industrial crises that now envelop the developing nations. Brain power and problem solving could become our best export.
The next year will be a rebuilding year: rebuilding alliances, infrastructure, attitudes and opportunity. Instead of squandering the potential, nations should convene an “Opportunity Conference” to define ways of looking around the corner for new themes and to atone for breakdowns in lost opportunity. Successful reforms would address debt, trade, healthcare, education, infrastructure, and energy.
Conclusion
Let me reaffirm that I am always looking to buy, not sell. Market patterns are not necessarily random. There are discernable, measurable statistics that can be quantified. Technology is important to the expansion of capitalism: biotech, energy technology, communication technology. This is the decade when Tech stocks mature from hype to reality. Who delivers and who fails is measured in profit and demand, not fluff any longer.
Who will be around the corner?
Asset Allocation:
Equity 51%/Fixed Income 34%/Cash 15%
· Going global means expanding the capital gains horizon.
· Focus upon enduring, secular trends, not themes or fads.
· Asset allocation opportunity is shifting from consumer-led to tangible assets, from unit volume to pricing power.
Information, and access to it, is shrinking the perspective investors have about how and where to allocate their resources. It is now possible to see real time geopolitical and economic events unfold at our desktop. Events in Tokyo, Basel, New York, Caracas, Miami, and Moscow are available and digested instantaneously, and their effects are immediate, as well. Ubiquitous information is changing the meaning of the word “neighbor”.
This means that risks and rewards are more easily analyzed and that global strategies are domestic strategies, too. No longer does the professional or part time investor feel disassociated from the events which interconnect to form his landscape or methodology.
Many companies are “world-class” even though they may be local, because the end use of their product might have far-reaching consequences in the scheme of global commerce. It is possible for your neighborhood baker to be as well known in London as he is down the street. In the next decade, the definition of global investing will change and we need to adapt to those changes.
Arlington Econometrics, my proprietary quantification and analytical product, has proven to be an excellent resource for market timing and distribution of assets. All signals seem to be pointing towards a shift in commerce from unit volume increases to pricing power, from neighborhood/regional to continental/global. The value of my tools and models is that they can distill markets from their regional barriers by focusing on earnings acceleration patterns and sector momentum irrespective of location or capitalization.
To whit, it can help us focus upon companies that are participating in the kind of capital gains momentum which positions investors away from high risk speculation and towards themes which have been vetted for their intrinsic and potential value.
By asking the model the key question about perpetuating earnings and price acceleration patterns, one can eliminate at least one element of “hope and pray” investing that can ruin portfolios.
Without prejudice going in, Arlington Econometrics can find opportunity that represents better-than-average potential for achieving desired portfolio performance. That is why I believe the data to be correct that earnings potential and capital gains opportunity is more global than at any time in our professional lifetime.
Markets
What seems to permeate the landscape right now is a sense that if you’re not in the market you might miss the opportunity, altogether. I believe differently. Since markets are cyclical, not linear, in their development, they always offer reflexive entry and exit points, which I refer to as “inflection points”. These are periods, not points, during which one can calibrate the level of accumulation going in, or distribution coming out.
Therefore, trends are not points but generational opportunities which endure. For example, if one looks at the current Energy sector performance, one might focus solely upon the price-at-the-pump surge in equity prices from July through the end of December. But behind the diminished aperture of that perspective is the notion that as far back as 1998, just prior to the Tech stock run-up and subsequent disastrous fall, Energy stocks (in fact, commodities of all type) were gestating and reversing a negative secular trend which had lasted nearly 15 years prior.
Whether one focuses upon the 13% price performance increase of the sector in 2006 or the nearly 1000% performance of the group during its nascent 2002-2006 bull cycle is reflective of the perspective one brings to solving difficult portfolio allocation questions. As my metrics have shown, our performance and ability to adapt to the changing climate of earnings derivation makes the issue moot in the long term.
Obviously, there are no guarantees about the future. However, cyclical phase methodology and sector momentum analysis trumps bottom-up, or wishful thinking, analytics.
The dollar’s continued decline diminishes the U.S. market’s value both financially and psychologically. When the U.S. fails to compete successfully, it impacts upon our share of market capitalization as well as upon the psychological influence our markets and product wield.
It is quite clear that world market shares are shifting. Whether influenced by finances or psychology is a question for others to ponder. As an analyst, my choice is only to follow the methodological purity of my data. Fighting the trend is not an option for a quantitative market scientist.
The shift from U.S. to global is fluid, not static. As with all trends, it will be possible to maximize these trends over time rather than by erroneously jumping into one market basket or another. For example, quantitative metrics allow us to measure and define the relationship shifts over time between two disparate continents. By triangulating the correlation between earnings and price performance data to the markets themselves and to each other we can measure the shifting value of the opportunity and its cost over time.
In this way we determine a gradual shift in asset allocation that would be expected to yield portfolio performance and diversification of risk at the same time.
My data is incontrovertible today that earnings acceleration is shifting to many shores and that a jingoistic approach to portfolio building is past tense. Foreign (non U.S.) markets offer greater diversification and opportunity by combining emerging market potential with mature industry problem solving. Additionally, the timeliness and transparency of data makes the analytics more “contemporary” and not seem so much as it did two decades ago, namely unsafe and adventurous.
Contemporary investing is all about old-fashioned analytics. The most obvious form of corporate analysis is still the balance sheet. What a company makes, how successfully they market and sell it, and whether they create equity for their shareholders is not unique to the United States. If you were to ask many international analysts today, they would conclude that standards and reporting practices have leveled the playing field. Additionally, industrial development of the global infrastructure is the halcyon call of government and its citizenry, alike. To complete the mission our tech friends and dot.com advocates suggested a decade ago, we need to complete a universal overhaul of brick and mortar institutions as well as non-tangible “ether-net” applications worldwide.
This, then, is the promise of our “New Paradigm” advocates, although not as ethereal as they might have thought a decade ago.
Lumber, cement, steel, coal, gas, water, food are the fuel sources for global industrial development as much as semiconductors and microchips.
As complete as one might think the review, the very nature of investing is about taking risk. Admittedly, the goal is to assess risk and to identify pitfalls, but all investing is about risk. Prudent analytics (methodology) and good data are an investor’s best ally in the fight for risk reduction. It is not sufficient merely to say “this company looks less/more expensive than that one”.
It is important to have a universe large enough from which to make studied judgments. Arlington Econometrics employs key techniques that extend beyond price comparisons. Our data correlates based upon a proprietary relative strength quotient which ranks all stocks global and domestic based upon location and opportunity within its sector, country of origin, and globally, to achieve a universal dynamic that pinpoints financial risk/reward potential. Allowing for exogenous noise and data variations, our results convey the results which prioritize opportunity and potential according to our proprietary ranking system and asset modeling.
However, without a top-down landscape, not even good data can be properly analyzed or positioned.
Strategy
Whereas the United States had been the engine of global commerce for most of the last century, the millennium has seen a gradual shift in locomotion towards the Pacific Rim and Latin America. At best, that means that the U.S. is trying to keep up with itself formerly, and to maintain market share in a highly competitive, and less costly, world sphere.
Our competition comes not only from exogenous influences but also from within. Significant budget deficits do little to quell the inertia that constrains corporate expenditures. The nation’s GDP is choking on nascent inflation, a declining savings rate, falling wages, and a psychologically damaged consumer base. Rising interest rates, with or without the Fed, will squash any potential for discretionary debt in the foreseeable future.
The U.S. savings rate is at its lowest level in decades. As baby boomers reconnaissance the landscape as they near retirement, they see stagnating wage growth and falling real rates of return. Of course this scenario does not apply to the multimillionaires of Wall Street’s most prestigious investment banks but, then again, very little of Wall Street’s exclusive boardrooms really does apply to the average citizen.
Furthermore, concomitant with the declines at home, the U.S. trade deficit continues to expand. With the dollar in decline and Federal monies currently financing war, not domestic infrastructure, I forecast the deficit to expand next year as a percentage of the country’s national output. The primary impediment to this circumstance reversing is unwillingness of foreign partners and adversaries to finance the expense of producing our products. Gasoline, computers, steel, food and a host of other “staples” can be produced more cheaply overseas than here in the United States. Our consumption of alternatively priced products is outpacing our ability to sell them overseas.
Exacerbating the negative profit potential of U.S. markets is the broadening of competition around the globe. Greece, Russia, Sri Lanka, are examples of “furthermost” destinations and sources for commerce, adding to the regular litany of India, China, Japan and Germany.
Many of these countries are learning not only how to produce but how to prosper. The “trickle-down effect” is less a political slogan than it is a capitalist reality in developing countries. Although many of these emerging markets may suffer from a governmental comparison to the United States, many are nonetheless learning how to cultivate their natural resources and labor pool for a sustainable economy. Can these countries flourish without economic support from the globe’s superpowers? Perhaps not exclusively, but the effort is there and the “flea in the fur” analogy is nonetheless pesky for the middle class U.S. citizenry.
So, with growth being shared by a multitude of competitors, what will emerge as the major trend(s) for 2007?
Firstly, the breadth of opportunity globally is my main focus. In order to compete, countries and companies need a growing working class base and a consumer-led economy. When the labor force grows, unemployment declines, savings increases, and pressure subsides. Additionally, an expanding workforce “regulates” interest rates in a manner more effective than the machinations of government. Higher rates during an expansion, for example, are less punitive than a secular reversal (upwards) of rates when the economy is in a deficit.
Natural resources, particularly food and agricultural products, will develop as the next inflationary sensitive item to rule the economy. Whomever controls grain production and harvesting, water resources, meat production, and corn and soybeans will be profit beneficiary of the investment markets.
While this could be a plus for vast United States resources, we also need to change the way we finance agricultural harvesting, particularly the way the government pays to decrease production or destroy harvest in order to maintain “equilibrium”. No global citizen should go to bed hungry. It is lack of distribution, not production, that is creating this policy of government.
Energy resources will be the focus of my work, as well. The greatest influence upon economic and social policy is Energy. Declining resources and ineffective fiscal policy to develop alternatives is not a U.S. problem, it is a global problem. Maintaining and expanding sources of energy is a governmental and economic necessity. The situation requires sophistication and the help of technology to find solutions to this diminishing natural resource problem.
Many emerging market nations are decades behind the West in addressing these and other infrastructure issues. To that extent, there exists an opportunity for Western business to influence and exert a new spirit of renaissance at the opportunity to recreate their past successes. After all, we have faced-down and overcome many of the technological and industrial crises that now envelop the developing nations. Brain power and problem solving could become our best export.
The next year will be a rebuilding year: rebuilding alliances, infrastructure, attitudes and opportunity. Instead of squandering the potential, nations should convene an “Opportunity Conference” to define ways of looking around the corner for new themes and to atone for breakdowns in lost opportunity. Successful reforms would address debt, trade, healthcare, education, infrastructure, and energy.
Conclusion
Let me reaffirm that I am always looking to buy, not sell. Market patterns are not necessarily random. There are discernable, measurable statistics that can be quantified. Technology is important to the expansion of capitalism: biotech, energy technology, communication technology. This is the decade when Tech stocks mature from hype to reality. Who delivers and who fails is measured in profit and demand, not fluff any longer.
Who will be around the corner?
Asset Allocation:
Equity 51%/Fixed Income 34%/Cash 15%
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