· For those who follow the news nightly, one might conclude that when interest rates move on Monday, the market responds; when unemployment rises on Tuesday, the market responds; when oil goes up a penny a barrel, the market responds on Wednesday; when the Fed speaks on Thursday, the market responds. When Friday’s trade data is announced, the market responds.
And while it may appear as if there is a lock-step response to all news events, it just is not so.
I have earlier referred to this as a “parallel disconnect”. But more importantly, while the market does gyrate (wildly, sometimes) on a daily basis, the true course of the economy and the markets is derived from longer term secular themes. It is from these themes that investors should draw their inspiration.
For instance, the recent collapse in housing and mortgage backed securities did not occur in one day, or one month, as the media portrays. Instead, the secular low in interest rates produced an era of leveraged buying in all asset classes. And those who loaned the money under those conditions failed to widen their aperture of evaluation, focusing solely upon their short term fee structure at the expense of longer term trends
The secular reversal upwards in interest rates took hold in 1998, well before the culmination of today’s mess. So in between and in hindsight there was a decade-long period in which to speculate and wait for what is transpiring today.
Across the board, savings rates are low, borrowing is up, prices are rising, financial stocks are lagging, and the confluence of greed and free money is avalanching towards the bottom of the hill.
For those who like to gamble, fine. The hedge funds have ridden the wave of leverage for a long time. For others, I say step aside and avoid the carnage.
In the market’s current phase, I am expecting a bit of a shake-out, during which sectors rebalance and new, more efficient trends take hold. For example, while I am keen on tangible assets and inflation as a long term secular play, many equities in those related sectors have come a long way since their intermediate buying opportunity in 2006. As we are witnessing, some of the Consumer Non-Cyclical names are beginning to look attractive. Stay tuned for my quarterly list of earnings accelerative equities sometime in July.
· I am sometimes told that my weekly commentary is “too difficult” to understand, or that it is written in an “intellectual” manner that doesn’t connect with my audience. That might be fair, although I don’t necessarily agree.
But let me clarify two things. Firstly, any one of my readers is free to call me directly for clarification or conversation. I will always try to make my point of view understandable. So, call if you feel so inclined.
Secondly, the message of my Arlington Econometrics product is to simplify and augment the decision-making process for investors based upon the methodology’s ability to sift data and draw quick and efficient conclusions. The tool is a very expansive database of correlated facts and statistics which is designed to enhance traditional fundamental economic market analysis.
So, whether it is tailored for institutions or individuals, it works. And its efficient analyses have kept a lot of trouble away from those who wish to avoid it.
As I said, let’s chat.
Monday, June 25, 2007
Monday, June 18, 2007
Market Commentary for the week of June 18, 2007
· As market valuation falls, precipitating a new intermediate downleg cycle, other sectors and phenomena gain strength. In fact, the value of any cyclic phase methodology is to quantify the prevailing trends and counter-trends so as best to position one’s money to benefit from low-risk investment strategies.
As “selling into strength” gives way to the search for value, let it suffice to say that new leadership will emerge from amongst the wounded. One nagging reminder, however, of the pervasiveness of negative earnings is that Consumer Cyclicals and Financials remain stuck in a cycle of underperformance.
Emerging from the ashes could be the long-dormant Non-Cyclicals and Basic Materials, particularly gold stocks.
It is also interesting to note that in a rush to get ahead of the rise in interest rates, there is a flurry of merger and acquisition activity. I have noted this phenomenon previously, and continue to decry the use of share buybacks and M&A activity to inflate artificially the nominal value of some stocks whose earnings performance does not comport with their true valuation. I am especially concerned that the low U.S. dollar inflates sales and earnings projections and ignores that, besides cost, our products are not moving well in the global arena.
To counter the negative influence of rising rates some investors are shifting to cash or buying short term time deposits that roll over on a 3 month cycle. I would also urge clients/prospects to look at using Utility shares as a surrogate for price pressure in communities where public service commissions “pass along” the ever increasing cost of creating and delivering electric or water services.
In addition, the emergence of global telecommunications equities is another example of success from amongst the degradation of other economic statistics, as well as a way to play a “utility” share along with technology.
To those with a penchant for bottom-up investing, I am afraid that “waiting for” your favorite stock or sector to rebound is just not the right strategy at this time. My clients know that asset and sector allocation plays a greater role in the probability of portfolio performance than does any single security within that portfolio. Therefore, it is usually unwise to fixate on when and how to get back into a favorite stock or to wait for the “right time” to jump in. Instead I always urge sector weightings based upon the current uptrend and consistent with the prevailing pattern of earnings acceleration within that industry or sector.
It is also useful to overweight the predominant theme and to underweight any negative influences. Therefore given the climate of rising rates and market instability, I am probably a little heavier in cash than usual, but nevertheless consistent with a low-risk asset allocation methodology.
With the market having given back a significant portion of its mid-year gains, I am pleased that a steadier hand is guiding our philosophy and that we are competing successfully with actual and relative gains that place us where we want to be…out of harm’s way.
· I don’t find it at all curious that as the markets slide, there is an increase in Wall Street related advertising proliferating the media. They’re scared that you will be mad at them for not foretelling the pullback and the related damage it has done to your account. As they like to tell you, they are your “partner”.
So expect more retirement commercials, more pictures of beach houses, grandchildren and dogs. “Warm and fuzzy” covers a lot of ills that gambling in the global stock markets might induce.
As “selling into strength” gives way to the search for value, let it suffice to say that new leadership will emerge from amongst the wounded. One nagging reminder, however, of the pervasiveness of negative earnings is that Consumer Cyclicals and Financials remain stuck in a cycle of underperformance.
Emerging from the ashes could be the long-dormant Non-Cyclicals and Basic Materials, particularly gold stocks.
It is also interesting to note that in a rush to get ahead of the rise in interest rates, there is a flurry of merger and acquisition activity. I have noted this phenomenon previously, and continue to decry the use of share buybacks and M&A activity to inflate artificially the nominal value of some stocks whose earnings performance does not comport with their true valuation. I am especially concerned that the low U.S. dollar inflates sales and earnings projections and ignores that, besides cost, our products are not moving well in the global arena.
To counter the negative influence of rising rates some investors are shifting to cash or buying short term time deposits that roll over on a 3 month cycle. I would also urge clients/prospects to look at using Utility shares as a surrogate for price pressure in communities where public service commissions “pass along” the ever increasing cost of creating and delivering electric or water services.
In addition, the emergence of global telecommunications equities is another example of success from amongst the degradation of other economic statistics, as well as a way to play a “utility” share along with technology.
To those with a penchant for bottom-up investing, I am afraid that “waiting for” your favorite stock or sector to rebound is just not the right strategy at this time. My clients know that asset and sector allocation plays a greater role in the probability of portfolio performance than does any single security within that portfolio. Therefore, it is usually unwise to fixate on when and how to get back into a favorite stock or to wait for the “right time” to jump in. Instead I always urge sector weightings based upon the current uptrend and consistent with the prevailing pattern of earnings acceleration within that industry or sector.
It is also useful to overweight the predominant theme and to underweight any negative influences. Therefore given the climate of rising rates and market instability, I am probably a little heavier in cash than usual, but nevertheless consistent with a low-risk asset allocation methodology.
With the market having given back a significant portion of its mid-year gains, I am pleased that a steadier hand is guiding our philosophy and that we are competing successfully with actual and relative gains that place us where we want to be…out of harm’s way.
· I don’t find it at all curious that as the markets slide, there is an increase in Wall Street related advertising proliferating the media. They’re scared that you will be mad at them for not foretelling the pullback and the related damage it has done to your account. As they like to tell you, they are your “partner”.
So expect more retirement commercials, more pictures of beach houses, grandchildren and dogs. “Warm and fuzzy” covers a lot of ills that gambling in the global stock markets might induce.
Monday, June 11, 2007
Market Commentary for the week of June 11, 2007
It’s about time.
It now seems as if the markets are catching up, negatively, to the economic disconnect about which I have been writing for the last few weeks. Perversely, the more the Fed plays down economic and inflationary momentum, the more dire becomes the psyche of banged-up investors. To wit, this past week was the largest percentage sell-off in months.
While the street remains on a stampede downwards, inflation is doing more than just “creeping in” to the economy. The rise in wholesale prices has caused interest rates to swell. The bond market is getting jumpy as rates cross the 5% threshold.
The tone of the market has taken a decidedly dour turn as activity looks less like trading, but more like trends.
Bear in mind that the essence of Arlington Econometrics’ quantitative philosophy is that trends can be located and quantified as to characteristics and performance probabilities. One day, or two, does not make a trend. But the preponderance of negative influences within the economy and global financial markets are just too compelling to ignore.
The answer is asset allocation.
If trends are analogous to waves, then the constant drumbeat of new highs, excess liquidity, mergers and acquisitions, low savings rates and maniacal thinking have created a negative surge in the market which, quite frankly, was not unexpected if you are a regular reader of my commentary.
Many have tried to find blame for the turnaround. In fact, trends evolve. The root cause of last week’s activity is not limited to one thing nor can it be surgically repaired or micromanaged.
The problem lies, oftentimes, in the obfuscation of facts.
For many months, inflation and price pressure have changed the corporate earnings landscape. The rise in tangible assets (gold, paper, steel) has replaced the front end leadership traditionally reserved for consumer products and industrial companies. Our sector rotation took place years ago as we noticed the subtle shift in earnings acceleration patterns, from high demand to higher prices.
Greed breeds greed.
Most investors ignored the data and bid stocks up as an alternative to lower-rate fixed income securities. In fact, many used the interest rate argument as justification for borrowing money to buy stocks. And thus, the infection began.
Now, economists are catching up to Arlington’s efficient data processing and pointing themselves to global price creep and high energy costs as endemic negatives to equity performance.
We could all do well to take a deep breath, and not to respond in a knee jerk fashion to a trend which has more months to play out.
Monday, June 4, 2007
Market Commentary for the week of June 4, 2007
The U.S. equity markets certainly do not need another new high. After all, sequential new highs are, or should be, emblematic of a wave of good cheer, euphoria and high expectations. Today’s new high climate, however, looks more like a fisherman treading on thin ice.
There aren’t too many facts that dispute the numerical new high. There is too much momentum to dispute the market’s direction. But there are fundamental underlying data which might refute the integers.
Hope and trepidation are not market fundamentals upon which to draw any long-term economic conclusions. By following an emotional trail up the line, investors are setting the stage for the same factors to reverse their course. And this is just about the only influence that drives current strategy.
In the world of Wall Street any gain is good. However, do you know of any neighbor of friend who is as preoccupied with stocks as the business news channels? Do you or your friends pay less for gasoline, food, prescription medicine, tuition or rent? Are your salaries increasing at the rate of appreciation shown by stocks recently?
In fact, the underlying economic data are quite dissimilar from the Wall Street portrayal. Record profits in Energy are not shared by shareholders. The companies themselves say that theirs is a cyclical business and that record profits today are their reward for lean years previously and the enormous expense of capturing, refining, and delivering raw product to the marketplace. So, too, say the pharmaceutical companies, and now the food and agriculture manufacturers.
In a kind-of never ending spiral of greed, every manufacturer and producer lays claim to the capitalist demand/supply cycle as justification for raising profit margins.
This writer does not begrudge profits or capitalism. In fact earnings acceleration patterns are one of the benchmarks of my methodology.
What I caution against, however, is the dichotomy between market reality and Wall Street reality. At the end of the day, other than cheap money and plentiful egos, there is no solid fundamental case to be made for bidding up stock prices in anticipation of an earnings cycle that isn’t justifiably reliable. Decision making based upon emotion does not compute in a quantitative methodology.
I disagree strongly with the market’s current trend, absent any earnings or demand-cycle substantiation. The intrinsic value of stocks is several “standard deviations” from nominal valuation and unlikely to be maintained.
I disagree also with the policy of bidding stock prices higher through merger/acquisitions, share repurchasing, and low interest margin.
Everybody would like the emotional tide to continue. Few think about the damage done to them by the same emotional phenomenon that bid up Tech stocks in the late 1990’s. But boasting at cocktail parties about portfolio successes is not the same as structurally sound methodology. Therefore, I stand only as the voice of one such methodology.
There aren’t too many facts that dispute the numerical new high. There is too much momentum to dispute the market’s direction. But there are fundamental underlying data which might refute the integers.
Hope and trepidation are not market fundamentals upon which to draw any long-term economic conclusions. By following an emotional trail up the line, investors are setting the stage for the same factors to reverse their course. And this is just about the only influence that drives current strategy.
In the world of Wall Street any gain is good. However, do you know of any neighbor of friend who is as preoccupied with stocks as the business news channels? Do you or your friends pay less for gasoline, food, prescription medicine, tuition or rent? Are your salaries increasing at the rate of appreciation shown by stocks recently?
In fact, the underlying economic data are quite dissimilar from the Wall Street portrayal. Record profits in Energy are not shared by shareholders. The companies themselves say that theirs is a cyclical business and that record profits today are their reward for lean years previously and the enormous expense of capturing, refining, and delivering raw product to the marketplace. So, too, say the pharmaceutical companies, and now the food and agriculture manufacturers.
In a kind-of never ending spiral of greed, every manufacturer and producer lays claim to the capitalist demand/supply cycle as justification for raising profit margins.
This writer does not begrudge profits or capitalism. In fact earnings acceleration patterns are one of the benchmarks of my methodology.
What I caution against, however, is the dichotomy between market reality and Wall Street reality. At the end of the day, other than cheap money and plentiful egos, there is no solid fundamental case to be made for bidding up stock prices in anticipation of an earnings cycle that isn’t justifiably reliable. Decision making based upon emotion does not compute in a quantitative methodology.
I disagree strongly with the market’s current trend, absent any earnings or demand-cycle substantiation. The intrinsic value of stocks is several “standard deviations” from nominal valuation and unlikely to be maintained.
I disagree also with the policy of bidding stock prices higher through merger/acquisitions, share repurchasing, and low interest margin.
Everybody would like the emotional tide to continue. Few think about the damage done to them by the same emotional phenomenon that bid up Tech stocks in the late 1990’s. But boasting at cocktail parties about portfolio successes is not the same as structurally sound methodology. Therefore, I stand only as the voice of one such methodology.
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