….not a drop to drink.
Just about everyone’s worst case scenario unfolded last year, following on the heels of large-scale deleveraging in the financial and housing markets. Who might have imagined the demise or acquisition of some of Wall Street’s most revered names?
In simple terms, the world got greedy, lazy and superficial about basic financial assumptions, such as the sustainability of heroic capital gains projections for tangible assets and financial securities. The most improbable scenario became highly probable, and unfortunately very costly for investors.
With market data such as employment, savings, corporate earnings, and equity valuations reaching historically dismal levels, the expectation is that economic recovery is further down the road and not immediately likely.
What makes the global conflagration so unique is the congruence with which all global bourses, all global economies, declined. Typically, powerhouse nations might be immune to the “trivialities” of emerging market problems. Perhaps, as well, regional problems could have been mitigated continent to continent by immunity provided from disparate natural resource bases, or population (workforce) disproportions. Not in this case, however. There was simply no place to hide last year, no sector leadership, no country any more likely than any other to work through the tumultuousness of poor credit, low demand, systemic greed and non-transparent financial institutions.
We expected more from those in the know, and we didn’t get it.
Markets
We are, though, sitting on the cusp of the greatest capital gains opportunity in the last 50 years. Resources, and political will, are there to provide a new generation of taxation, monetary, and moral codes that might indeed rescue the bear market’s capitulation from oblivion. Whereas, the “cure” might not be in the first quarter or first half of this year, the essential tools for economic renaissance are still in place. The problems are not new, but the solutions might be.
My forecasts for earnings acceleration rates for 2009 are modest. Quite simply there isn’t enough capital or pent-up demand to resuscitate industrial production or new hiring. If growth is measured by output, revenue and profitability, then the numbers are not there in denominations sufficient to move markets early on.
When positive sentiment returns, a nascent climate of opportunistic commerce will respond.
Standing in the way of immediate response is the enormous debt load the globe is carrying. Savings rates worldwide are at historically low levels. No matter how low interest rates go, you cannot incentivize capital to be spent where it doesn’t already exist. National debt and personal debt are the single largest impediment to sustained economic growth. The coordination and conjunction of global markets make this problem more severe. Whereas we once spoke of “globalization” as the salvation to regional and country malaise, the opposite has become true. If Japan sneezes, the United States catches cold…while China suffers from an ensuing headache.
It seems that a classic age of consumer-led prosperity is another paradigm to have lost its luster as a result of the recent past. Productivity is a misnomer, representing, as my data sees it, higher levels of output on the backs of fewer employees in a declining real wage environment. If you take away such draconian measures, market share isn’t growing at all for most companies. We should be mindful, too, that pricing pressure is abating, taking away another definitional tool of business to maintain profit margins.
Expectations must be shifted from traditional models to a more innovative method of attracting capital. This is where moral persuasion and societal altruism become important. The globe requires an “all for one” concept that enhances the lives of its constituents with better healthcare, cleaner water, more efficient and replenishable energy, abundant agricultural resources, scientific discovery, biotech research, infrastructure development, and long term prospects for peace. Does this sound like a laundry list of market sectors ripe for capital expenditures?
Similarly, there must be a rejuvenation in conversation between nations about the perception of transparency and morals in the financial markets. Without this, jingoism and protectionism might rip apart the common themes identified above and contribute to a “what’s in it for us” mentality similar to the political climate in the middle of the last century. I have difficulty trying to imagine a network of unilateral economies and economic resurgence at the same time.
Strategy
My mantra of asset allocation is going to be tested this year. We are nowhere near a “model portfolio” allocation, choosing instead to be over-weighted in cash and short term fixed income. It is more difficult to position oneself to take advantage of potential capital gains in a climate of fear, mistrust, and disgust. Whereas our goal is to correlate risk/reward probabilities to favor lower-risk scenarios, returns are already paltry and non competitive. Given the need to be “in it” to prosper, timing the inflection point from the bear to a potential bull will be critical in the next few months. Market timing? Not really. Just the realization that we must return to nominal asset allocation levels to meet our client’s expectations for performance.
It also wouldn’t be prudent to place any long-term bets either in bonds or stocks. Owing to the rapid change in sentiment that pervades the markets, I believe that volatility and uncertainty will characterize the early stages of any turnaround. Because of currency volatility and a widening of bid/offer spreads for financial instruments, long term market gambits are too risky. To be sure, we will evolve from this landscape, but knowing its early-stage characteristics is paramount when evaluating risk parameters.
However these systemic “risks’ make the case for casting a wider net and to consider more markets than the United States, only. Some of the emerging markets offer meaningful potential, along with risk, for capital gains in agriculture, technology, energy, and basic material shares. As the global perspective widens, the need for careful discrimination narrows.
Bear in mind that no economic renaissance can be complete without consumer demand. Despite efforts to recapitalize banks and global treasuries, you cannot stimulate spending by adding cash, alone. There must be a psychological will to spend, indeed a need to spend which heretofore has laid dormant. To undo the psychological damage inflicted upon consumers by the market bear, we must enter a world of drastically different norms. Under historically “normal” terms, inexpensive cash would be incentive enough to prime the spending pump. Not today, however. I question the motivation and efficiency of today’s global response, but remain hopeful that we can turn the page on mistrust and suspicion of financial institutions.
Conclusion
Over the long term, we will emerge successfully from this malaise. There isn’t an option not to. The consensus view is that it might take more time, but that selected response to certain stimuli will work. I am emboldened by private sector research in agri-business, biotech and life sciences, alternative energy, water purification and ecology, technology, and infra structure. It makes no sense to look backwards with recrimination or remorse. Indeed it is a “new paradigm”, perhaps the one envisioned by our dot.com friends, but ten years later than imagined.
Portfolio decisions are more global than ever before. After overcoming regional, territorial, or jingoistic postulates, no nation has a monopoly on good ideas. The applications of global solutions are cross-border and multi-dimensional. It is not simply a corporate response which is needed, but a nationwide solution.
Despite the distortions that have occurred in the financial markets, it should be noted that the will is there to support a market/economic renaissance. From rich to poor, it serves no purpose or constituency for the globe to plummet into inertia. As the New Year unfolds, cycle rhythms seem to be “gathering at the bottom” with greater frequency, perhaps indicating that the same commonality of negative investment sentiment that took the market down might be extinguishing, or at least slowing down, towards a confluence whose redirection upwards could be a powerful capital gains opportunity during 2009.
The paradigm, indeed, will shift. Leverage is yesterday’s game. Responsible balance sheets and transparency are the new norms. As a consequence, it is hoped that confidence can be restored in common values. Central banks have little wiggle room right now. The burden falls on consumers. If valuations stabilize, it might represent the first step this year towards establishing an equilibrium from which regeneration might occur.
Who will take the first sip?
Asset Allocation:
Equity 30%/Fixed Income 40%/Cash 30%
Tuesday, December 30, 2008
Monday, December 22, 2008
Market Commentary for the week of December 22, 2008
Holiday jeer.
Does every fiscal crisis come wrapped with a political bow around it? It may be too soon to tell if monetary intervention, like the Federal Reserve offering “free” money, is the right solution for the problem, but my data seems to confirm that the response to these initiatives is tentative and dubious, at best.
Household tensions have certainly not lessened, and the will to spend is simply not there. In fact, despite a flood of liquidity, the velocity of lending is slowing, indicating that financial institutions are more than willing to hoard their newly-found largesse and to limit their losses to bad loans already on the books.
The belief that liquidity will solve an inert economy has proven, in this case, at this time, to be false.
Liquidity is not economic “grease”.
Beyond using traditional tools to invigorate a sagging economy, central banks and politicians need to foster an era of transparency and confidence, variables shattered even greater by the Bernie Madoff mess last week. Our leaders need to rush now to stem the tide of depreciating assets and declining confidence. If not, 2008 might only be prelude to an even more rupturous 2009 economy.
I might suggest that more liquidity could exacerbate the confidence crisis. How? By proving that the “better mousetrap” theory of invention and production is not the engine which drives consumer demand, but rather scarcity, fear of being left out, and desperation. Easing notwithstanding, the trap we face is to fall further into declining asset values, stagnating industrial expenditures, and inertia.
How much longer?
Our best hope is to try to lessen the duration of the current global stalemate. Many believe that budget and monetary transformation might have a cross-border effect of adjusting currency or regional imbalances, providing incentives for commerce to accelerate. From a purely proprietary perspective, the United States needs outlets for its sagging production and growing inventories. The dollar’s decline is offering that outlet.
With or without additional liquidity or spending packages, policymakers must address the confidence crisis. Reaching further than any other obstacle, the public’s perception that they are in peril, that their financial institutions are in peril, immobilizes capital like no stimulus package can assuage. There’s nothing left “in the tank” for many. It is unclear how they are going to dig out from the depths of poorer prospects.
Across the globe central banks are easing money, attempting to unfreeze the corporate and private sectors. The bottom line for market performance, and economic recovery, is not liquidity, but, rather, building profitability in proportion to higher expectations for shareholder value.
As soon as this tectonic shift occurs, the markets will expand.
Does every fiscal crisis come wrapped with a political bow around it? It may be too soon to tell if monetary intervention, like the Federal Reserve offering “free” money, is the right solution for the problem, but my data seems to confirm that the response to these initiatives is tentative and dubious, at best.
Household tensions have certainly not lessened, and the will to spend is simply not there. In fact, despite a flood of liquidity, the velocity of lending is slowing, indicating that financial institutions are more than willing to hoard their newly-found largesse and to limit their losses to bad loans already on the books.
The belief that liquidity will solve an inert economy has proven, in this case, at this time, to be false.
Liquidity is not economic “grease”.
Beyond using traditional tools to invigorate a sagging economy, central banks and politicians need to foster an era of transparency and confidence, variables shattered even greater by the Bernie Madoff mess last week. Our leaders need to rush now to stem the tide of depreciating assets and declining confidence. If not, 2008 might only be prelude to an even more rupturous 2009 economy.
I might suggest that more liquidity could exacerbate the confidence crisis. How? By proving that the “better mousetrap” theory of invention and production is not the engine which drives consumer demand, but rather scarcity, fear of being left out, and desperation. Easing notwithstanding, the trap we face is to fall further into declining asset values, stagnating industrial expenditures, and inertia.
How much longer?
Our best hope is to try to lessen the duration of the current global stalemate. Many believe that budget and monetary transformation might have a cross-border effect of adjusting currency or regional imbalances, providing incentives for commerce to accelerate. From a purely proprietary perspective, the United States needs outlets for its sagging production and growing inventories. The dollar’s decline is offering that outlet.
With or without additional liquidity or spending packages, policymakers must address the confidence crisis. Reaching further than any other obstacle, the public’s perception that they are in peril, that their financial institutions are in peril, immobilizes capital like no stimulus package can assuage. There’s nothing left “in the tank” for many. It is unclear how they are going to dig out from the depths of poorer prospects.
Across the globe central banks are easing money, attempting to unfreeze the corporate and private sectors. The bottom line for market performance, and economic recovery, is not liquidity, but, rather, building profitability in proportion to higher expectations for shareholder value.
As soon as this tectonic shift occurs, the markets will expand.
Monday, December 15, 2008
Market Commentary for the week of December 15, 2008
Darn it!!
One might easily be forgiven for verbalizing displeasure and exasperation with the markets, as every day seems to be a roller coaster ride of higher hopes or dashed expectations. “When will it all end? Where will it all end?”, I am asked.
I must quickly remind readers of my oft-writ admonition that the markets are not the economy, and the economy is not the financial markets.
By this I wish to convey to clients that a parallel disconnect exists sometimes, in which it appears that the two are moving simultaneously and congruently. Often, it is the case that one serves as the predicate for the other. More often, however, economic fundamentals and market performance seem linked but are really moving through entirely different phases. Such is the case today.
Although it looks as if both the economy and financial markets are declining, the performance of financial assets began de-linking from fundamentals well before anyone was generally aware. Similarly, despite the volatility in market performance recently, risk is diminishing in the securities’ markets while fundamentals remain persistently poor.
This hypothesis is not to suggest that “it’s time” or that frustration can easily be explained away by low valuation in stocks and bonds. But it is easier to digest the tumult by acknowledging that cycles take years, perhaps decades, to develop or unravel. Lower valuation and speculation is not a decoupling from forecasts and projections, but rather an opportunity which affords higher probabilities for upside performance.
Time is on your side.
In the meantime, waiting for fundamentals to reverse can be a lengthy and frustrating experience. After all, doesn’t every teenager wish to be an adult? Your response, or experience, with that question probably reflects your frustration level with the catastrophe in the housing markets, healthcare system, financial markets, economy-at-large, and political process. One simply can’t “wish away” all the bad things we confront, or leap frog over a necessary maturation process.
Downbeat forecasts have become investment opportunities, for some, in energy, basic materials, consumer non-cyclicals, and technology shares. In all likelihood these shares might be higher in price within 2 years. The data has many wondering “when is the right time to redeploy resources into the market?”
While some indices are suggesting a cessation in the rate of downside velocity, I still urge caution, if only temporarily, about jumping in with abandon. I am sensitive to the sucker punch “bottom fishing” might present, and am willing to play within acceptable margins of risk (after an uptrend has been confirmed). That requires staying power and confirmation that lows being tested today have held support and are experiencing a turnaround in momentum characteristics.
In or out?
Does that make me late? Perhaps, but our track record of outperforming the averages by wide margin is predicated upon efficient use of methodology which governs our asset allocation balances and purchase/sale decision making.
Besides, while the fault with the economy’s performance might lie elsewhere, you don’t want to be the cause of a radical sympathetic decline in financial markets by contributing good money after bad.
What concerns me the most is that economic data are not yet responding well enough to stimulus packages, bailout funds, or political rhetoric. At the center of the issue is you, the consumer. Quite simply, discretionary purchase decisions are declining, and have been for several months. Economic activity is not yet reflective of a reversal in confidence (upwards). Therefore, the parallel disconnect about which I wrote earlier remains firmly in place.
One might easily be forgiven for verbalizing displeasure and exasperation with the markets, as every day seems to be a roller coaster ride of higher hopes or dashed expectations. “When will it all end? Where will it all end?”, I am asked.
I must quickly remind readers of my oft-writ admonition that the markets are not the economy, and the economy is not the financial markets.
By this I wish to convey to clients that a parallel disconnect exists sometimes, in which it appears that the two are moving simultaneously and congruently. Often, it is the case that one serves as the predicate for the other. More often, however, economic fundamentals and market performance seem linked but are really moving through entirely different phases. Such is the case today.
Although it looks as if both the economy and financial markets are declining, the performance of financial assets began de-linking from fundamentals well before anyone was generally aware. Similarly, despite the volatility in market performance recently, risk is diminishing in the securities’ markets while fundamentals remain persistently poor.
This hypothesis is not to suggest that “it’s time” or that frustration can easily be explained away by low valuation in stocks and bonds. But it is easier to digest the tumult by acknowledging that cycles take years, perhaps decades, to develop or unravel. Lower valuation and speculation is not a decoupling from forecasts and projections, but rather an opportunity which affords higher probabilities for upside performance.
Time is on your side.
In the meantime, waiting for fundamentals to reverse can be a lengthy and frustrating experience. After all, doesn’t every teenager wish to be an adult? Your response, or experience, with that question probably reflects your frustration level with the catastrophe in the housing markets, healthcare system, financial markets, economy-at-large, and political process. One simply can’t “wish away” all the bad things we confront, or leap frog over a necessary maturation process.
Downbeat forecasts have become investment opportunities, for some, in energy, basic materials, consumer non-cyclicals, and technology shares. In all likelihood these shares might be higher in price within 2 years. The data has many wondering “when is the right time to redeploy resources into the market?”
While some indices are suggesting a cessation in the rate of downside velocity, I still urge caution, if only temporarily, about jumping in with abandon. I am sensitive to the sucker punch “bottom fishing” might present, and am willing to play within acceptable margins of risk (after an uptrend has been confirmed). That requires staying power and confirmation that lows being tested today have held support and are experiencing a turnaround in momentum characteristics.
In or out?
Does that make me late? Perhaps, but our track record of outperforming the averages by wide margin is predicated upon efficient use of methodology which governs our asset allocation balances and purchase/sale decision making.
Besides, while the fault with the economy’s performance might lie elsewhere, you don’t want to be the cause of a radical sympathetic decline in financial markets by contributing good money after bad.
What concerns me the most is that economic data are not yet responding well enough to stimulus packages, bailout funds, or political rhetoric. At the center of the issue is you, the consumer. Quite simply, discretionary purchase decisions are declining, and have been for several months. Economic activity is not yet reflective of a reversal in confidence (upwards). Therefore, the parallel disconnect about which I wrote earlier remains firmly in place.
Friday, December 5, 2008
Market Commentary for the week of December 8, 2008
Is it time?
In the absence of any specific fundamental factors, most global exchanges closed mixed-to-lower last week. It was a quiet week in terms of announcements and volume trading. Despite this, there are signs that depressed valuations are providing some incentive for market traders to come in and do some bottom-fishing.
My work is showing a slight deceleration in negative velocities affecting sectors, countries and individual equities. To what extent the market has already factored in profit-taking and low valuation is not yet determinable. But it is incontrovertible, if only anecdotal, that risk-taking is coming back into play.
Whereas my preference is to wait for the froth to dissipate, and the intermediate uptrends to reappear, I am closer to a bullish stance today than any time since the bear began in July 2007.
There’s always a “but”….
Having said that, I am aware of my fiduciary responsibility to my clients not to use my discipline indiscriminately or carelessly. Therefore I am still cautious about the potential stumbling blocks within the economy that might derail even the most compelling of value stories and potential capital gains opportunities. Bear in mind that there is certainly less risk in owning stocks today than there was a year ago, but there are still significant risks for a sustained upside response, nevertheless.
I consider any triple-digit upside intraday activity to be the braking effect upon downside velocity whose response over time is a manifestation of a potential accumulation phase with subsequent upside probabilities. But these upside responses are simply bounces within the existing trend, that trend being down.
Consider that the markets are more safe than before, but perhaps not safe enough just yet.
Sectors, markets not responding yet.
Not helping matters is a coordinated bailout of select industries and accommodative monetary policy which is bringing interest rates to ridiculously low levels. The late Senator Everett Dircksen once said “A billion (dollars) here, a billion there. Pretty soon you’re talking about real money!”
In addition to common global equilibrium, there is also the emergence of sector trends within yield equities, energy, commodities, and consumer non-cyclicals. These data paint a tapestry of risk-averse, current events driven equities being the most attractive magnets for early allocations of cash from the sidelines.
We will know that the markets have turned the corner when they become less reactive to data that otherwise might be construed as “exogenous noise.” When investors stop looking for reasons to panic, and return to solid fundamental and balance sheet analysis, then equities can assume a mark-up period that is warranted by existing data. Indeed, in such a climate, the only surprises might be “stronger than anticipated” news releases.
Another “but”….
At present the consensus climate is not yet conducive to such a fantasy scenario. The parts don’t fully comprise the whole. Stocks are still sliding and finding a difficult time gaining fundamental traction. My assessment is that stocks are a woeful alternative to bond yields, and still frozen by psychological inertia and mistrust.
There are few alternatives in which to invest at present, but I don’t see the status quo as an interminable end-point. Instead, the capitulation was a necessary but unfortunate by-product of an excessive valuation expansion, which now offers the potential for extraordinary capital gains opportunities in the next half-decade.
In the absence of any specific fundamental factors, most global exchanges closed mixed-to-lower last week. It was a quiet week in terms of announcements and volume trading. Despite this, there are signs that depressed valuations are providing some incentive for market traders to come in and do some bottom-fishing.
My work is showing a slight deceleration in negative velocities affecting sectors, countries and individual equities. To what extent the market has already factored in profit-taking and low valuation is not yet determinable. But it is incontrovertible, if only anecdotal, that risk-taking is coming back into play.
Whereas my preference is to wait for the froth to dissipate, and the intermediate uptrends to reappear, I am closer to a bullish stance today than any time since the bear began in July 2007.
There’s always a “but”….
Having said that, I am aware of my fiduciary responsibility to my clients not to use my discipline indiscriminately or carelessly. Therefore I am still cautious about the potential stumbling blocks within the economy that might derail even the most compelling of value stories and potential capital gains opportunities. Bear in mind that there is certainly less risk in owning stocks today than there was a year ago, but there are still significant risks for a sustained upside response, nevertheless.
I consider any triple-digit upside intraday activity to be the braking effect upon downside velocity whose response over time is a manifestation of a potential accumulation phase with subsequent upside probabilities. But these upside responses are simply bounces within the existing trend, that trend being down.
Consider that the markets are more safe than before, but perhaps not safe enough just yet.
Sectors, markets not responding yet.
Not helping matters is a coordinated bailout of select industries and accommodative monetary policy which is bringing interest rates to ridiculously low levels. The late Senator Everett Dircksen once said “A billion (dollars) here, a billion there. Pretty soon you’re talking about real money!”
In addition to common global equilibrium, there is also the emergence of sector trends within yield equities, energy, commodities, and consumer non-cyclicals. These data paint a tapestry of risk-averse, current events driven equities being the most attractive magnets for early allocations of cash from the sidelines.
We will know that the markets have turned the corner when they become less reactive to data that otherwise might be construed as “exogenous noise.” When investors stop looking for reasons to panic, and return to solid fundamental and balance sheet analysis, then equities can assume a mark-up period that is warranted by existing data. Indeed, in such a climate, the only surprises might be “stronger than anticipated” news releases.
Another “but”….
At present the consensus climate is not yet conducive to such a fantasy scenario. The parts don’t fully comprise the whole. Stocks are still sliding and finding a difficult time gaining fundamental traction. My assessment is that stocks are a woeful alternative to bond yields, and still frozen by psychological inertia and mistrust.
There are few alternatives in which to invest at present, but I don’t see the status quo as an interminable end-point. Instead, the capitulation was a necessary but unfortunate by-product of an excessive valuation expansion, which now offers the potential for extraordinary capital gains opportunities in the next half-decade.
Monday, December 1, 2008
Market Commentary for the week of December 1, 2008
Up…down.
The market broke no new ground on the downside last week, stabilizing around important support levels within the prevailing bear trend. It may be too early to declare the bear over, but it is a good sign that buyers came in, if only temporarily.
The economy is giving no indication of a turnaround in disastrous fundamentals, but the markets seem ready to recognize that valuation deterioration might be excessive, and at the very least, poised for upside opportunity. Despite these anecdotal snippets, investor confidence is at historically low levels, akin to the feeling of an economic depression. This morning, already, a selloff of significant proportion is underway following last week’s rise.
As long as the markets measure as they do, I am willing to give the benefit of the doubt to those who wish to “nibble”, but caution that there is still enough downside “fluff” built into support prices here that I would wait until confirmation of an intermediate trend turnaround. Whereas I tend to think of opportunity in terms of very long secular cycles, some valuation declines are too obviously a second chance to own equities at prices heretofore not recently available.
Let’s not forget, too, that bond yields offer no significant opportunity to buttress against equity risk, as is historically their counterpoint alternative. Yields have fallen dramatically in the past six months as money flows into safe haven alternatives, and as credit and pricing risk increases.
Vigilance.
As much as I want to commit cash to potential upside capital gains opportunities, and I might if the story is too compelling, sometimes a “don’t buy at all” strategy is most safe from the vagaries of uncertain trend directions. Besides, I wish to avoid any violent overreactions to economic data, good or bad, which might skew asset allocation potential from logical to excessive.
The reality today is that too many are becoming impatient. Some are concerned about already dwindling net worth and discretionary future opportunity, others are too eager to jump in midstream to confirm their suspicion that the bear is over.
I believe it is always appropriate to play the existing trend. Therefore there is little to dispel the notion that we are in the throes of a bear market and out of the woods.
The global response.
It concerns me as well that Central Banks worldwide are throwing money at this stagnation as if they perceive a clamor for purchasing and high demand. To the contrary, reaching into a satchel full of money and playing “economic Santa Claus” is shortsighted and entirely ineffective.
Instead we need to see a coalition of demand for energy self-sufficiency, demand for affordable health care, demand for infrastructure remediation, demand for agricultural largesse worldwide, and a demand for an end to irrational terrorist carnage. These “industries” alone, might be sufficient to revive economic stagnation and help to define market opportunity for capital gains in the next decade.
The question is not whether the bear persists, but whether there develops a cultural and global consensus towards solving problems through a partnership between government, the private sector, and the consumer.
The market broke no new ground on the downside last week, stabilizing around important support levels within the prevailing bear trend. It may be too early to declare the bear over, but it is a good sign that buyers came in, if only temporarily.
The economy is giving no indication of a turnaround in disastrous fundamentals, but the markets seem ready to recognize that valuation deterioration might be excessive, and at the very least, poised for upside opportunity. Despite these anecdotal snippets, investor confidence is at historically low levels, akin to the feeling of an economic depression. This morning, already, a selloff of significant proportion is underway following last week’s rise.
As long as the markets measure as they do, I am willing to give the benefit of the doubt to those who wish to “nibble”, but caution that there is still enough downside “fluff” built into support prices here that I would wait until confirmation of an intermediate trend turnaround. Whereas I tend to think of opportunity in terms of very long secular cycles, some valuation declines are too obviously a second chance to own equities at prices heretofore not recently available.
Let’s not forget, too, that bond yields offer no significant opportunity to buttress against equity risk, as is historically their counterpoint alternative. Yields have fallen dramatically in the past six months as money flows into safe haven alternatives, and as credit and pricing risk increases.
Vigilance.
As much as I want to commit cash to potential upside capital gains opportunities, and I might if the story is too compelling, sometimes a “don’t buy at all” strategy is most safe from the vagaries of uncertain trend directions. Besides, I wish to avoid any violent overreactions to economic data, good or bad, which might skew asset allocation potential from logical to excessive.
The reality today is that too many are becoming impatient. Some are concerned about already dwindling net worth and discretionary future opportunity, others are too eager to jump in midstream to confirm their suspicion that the bear is over.
I believe it is always appropriate to play the existing trend. Therefore there is little to dispel the notion that we are in the throes of a bear market and out of the woods.
The global response.
It concerns me as well that Central Banks worldwide are throwing money at this stagnation as if they perceive a clamor for purchasing and high demand. To the contrary, reaching into a satchel full of money and playing “economic Santa Claus” is shortsighted and entirely ineffective.
Instead we need to see a coalition of demand for energy self-sufficiency, demand for affordable health care, demand for infrastructure remediation, demand for agricultural largesse worldwide, and a demand for an end to irrational terrorist carnage. These “industries” alone, might be sufficient to revive economic stagnation and help to define market opportunity for capital gains in the next decade.
The question is not whether the bear persists, but whether there develops a cultural and global consensus towards solving problems through a partnership between government, the private sector, and the consumer.
Monday, November 24, 2008
Market Commentary for the week of November 24, 2008
Happy New Year.
New Year’s Day came early this year, nearly 40 days before the calendar turns the page for real. Bear in mind that market cycles don’t adhere to artificial dates on the calendar, or anniversaries of any kind. Instead they move at a pulse and rhythm consistent with changing tides and fundamentals much deeper than our expectations might allow.
This pre-holiday season, and post bailout period, is more significant for the markets in defining thresholds of downside tolerance than any new year, or religious holiday. The magnitude of global decline is extremely powerful. No single financial initiative, or holiday anniversary, is strong enough to right the ship of years of financial, and moral, neglect.
It is with optimism, then, that I evaluate the positive directional changes that have occurred recently. We know that valuation damage is at its most severe today, but began over one year ago. The risk, one might say, was greater then than it is now.
It’s not over.
But without the psychological damage also inflicted, the reverberations might have been less severe. There simply was no place to hide from the selling wave or panic. Nor can we conclude that two positive days in the stock market will eradicate all the negative underlying fundamentals that precipitated the decline.
But it is fruitful to note that we are “safer” from the rush of negative exogenous events today than when these factors were unknown and unanticipated.
Time and patience.
Trends require time to evolve. They are not moments in time, or defined by a snapshot. We know that they ebb and flow, and change course parabolically, not linearly. Therefore might we anticipate an evolution from bear to bull? I believe so.
During the holiday season, be thankful for good health, family, and the values that matter. Markets will endure, and so shall we. The fun of my craft is to balance the risk with the reward, and to keep it all in proper perspective.
Happy Thanksgiving!!
New Year’s Day came early this year, nearly 40 days before the calendar turns the page for real. Bear in mind that market cycles don’t adhere to artificial dates on the calendar, or anniversaries of any kind. Instead they move at a pulse and rhythm consistent with changing tides and fundamentals much deeper than our expectations might allow.
This pre-holiday season, and post bailout period, is more significant for the markets in defining thresholds of downside tolerance than any new year, or religious holiday. The magnitude of global decline is extremely powerful. No single financial initiative, or holiday anniversary, is strong enough to right the ship of years of financial, and moral, neglect.
It is with optimism, then, that I evaluate the positive directional changes that have occurred recently. We know that valuation damage is at its most severe today, but began over one year ago. The risk, one might say, was greater then than it is now.
It’s not over.
But without the psychological damage also inflicted, the reverberations might have been less severe. There simply was no place to hide from the selling wave or panic. Nor can we conclude that two positive days in the stock market will eradicate all the negative underlying fundamentals that precipitated the decline.
But it is fruitful to note that we are “safer” from the rush of negative exogenous events today than when these factors were unknown and unanticipated.
Time and patience.
Trends require time to evolve. They are not moments in time, or defined by a snapshot. We know that they ebb and flow, and change course parabolically, not linearly. Therefore might we anticipate an evolution from bear to bull? I believe so.
During the holiday season, be thankful for good health, family, and the values that matter. Markets will endure, and so shall we. The fun of my craft is to balance the risk with the reward, and to keep it all in proper perspective.
Happy Thanksgiving!!
Monday, November 17, 2008
Market Commentary for the week of November 17, 2008
The wave expands.
Risk aversion expanded last week as a fresh wave of selling swept over the global markets. Inspired by a slowdown in industrial capital expenditures, and a reluctant consumer, investors unloaded shares rather than remain long in the face of more bad news in this grim era. Unlikely as it is, much of that newly-created liquidity went into cash deposits rather than fixed income securities. After all, who can determine which issuers will still be solvent in two years? Forget the bonds, right?
Most global bourses ran away from equities, too. Heading towards the end of the year, we find ourselves at 5 year lows in most global equity averages.
Surveys show sentiment for playing Wall Street’s game to be at historically reticent levels. All eight global equity sectors I follow are within existing, and enduring, bear trends, and nearly all global regions are performing downwards in unison.
One of last year’s biggest gainers, commodities, is this year’s big loser. A slowdown in production and sales is deflating the pricing pressure on tangible assets, although most households are hard-pressed to tell you that inflation isn’t a primary concern around the dinner table, the drug store, and the college campus.
Everyone’s in.
It isn’t for lack of interest that stocks are today’s ugly stepchild. More households participate in equity ownership than at any other time. Pensions, IRA’s, employee stock ownership, 401-k plans and mutual funds make up the lion’s share of individual equity ownership. The latest data shows, however, that more households feel immobilized by the equity market’s fall, and despondent about future recovery of value.
The bailout packages instituted by Central Banks, Congress, and legislatures have done little to assuage the fears of the public, or to rescue the originally designed end-user, you and me. Instead, we see how those funds have gone to shore-up shareholder equity, pay dividends, solidify compensation pacts, acquire the competition, or go into hoarding. Aren’t these the same persons who ran the ship aground in the first place?
I want to reiterate, also, that intervention only delays the “natural” evolution of these cycles. Recall that to fight an upcycle (inflation) we witnessed the manipulation of interest rates to stave-off the inevitable rise in commodities prices. While, indeed, the role of Central Banks is to regulate the money supply, it is imperative that the intervention be the right tool at the time. If not, well intentioned responses might exacerbate the prevailing trend by elongating it.
Let it ride.
Such is the case now. Our deflation cycle does not require more money, but just an evolutionary demise of those who fail to be competitive. All the risk-takers, arbitrageurs, and leveraged speculators, should be flushed out not bailed out.
Where to hide right now? There is no hiding place, not at this late juncture in the capital market’s decline. Patiently, we need to wait out the turmoil, still being prudent with our asset allocation. I do not recommend bottom-fishing. Besides, if you knew this was the bottom, I would be suggesting another tact, altogether.
Rather, I suggest we keep enough money in yield, equity, and cash so as to be opportunistic when the need arises, and secure as the mood dictates.
Risk aversion expanded last week as a fresh wave of selling swept over the global markets. Inspired by a slowdown in industrial capital expenditures, and a reluctant consumer, investors unloaded shares rather than remain long in the face of more bad news in this grim era. Unlikely as it is, much of that newly-created liquidity went into cash deposits rather than fixed income securities. After all, who can determine which issuers will still be solvent in two years? Forget the bonds, right?
Most global bourses ran away from equities, too. Heading towards the end of the year, we find ourselves at 5 year lows in most global equity averages.
Surveys show sentiment for playing Wall Street’s game to be at historically reticent levels. All eight global equity sectors I follow are within existing, and enduring, bear trends, and nearly all global regions are performing downwards in unison.
One of last year’s biggest gainers, commodities, is this year’s big loser. A slowdown in production and sales is deflating the pricing pressure on tangible assets, although most households are hard-pressed to tell you that inflation isn’t a primary concern around the dinner table, the drug store, and the college campus.
Everyone’s in.
It isn’t for lack of interest that stocks are today’s ugly stepchild. More households participate in equity ownership than at any other time. Pensions, IRA’s, employee stock ownership, 401-k plans and mutual funds make up the lion’s share of individual equity ownership. The latest data shows, however, that more households feel immobilized by the equity market’s fall, and despondent about future recovery of value.
The bailout packages instituted by Central Banks, Congress, and legislatures have done little to assuage the fears of the public, or to rescue the originally designed end-user, you and me. Instead, we see how those funds have gone to shore-up shareholder equity, pay dividends, solidify compensation pacts, acquire the competition, or go into hoarding. Aren’t these the same persons who ran the ship aground in the first place?
I want to reiterate, also, that intervention only delays the “natural” evolution of these cycles. Recall that to fight an upcycle (inflation) we witnessed the manipulation of interest rates to stave-off the inevitable rise in commodities prices. While, indeed, the role of Central Banks is to regulate the money supply, it is imperative that the intervention be the right tool at the time. If not, well intentioned responses might exacerbate the prevailing trend by elongating it.
Let it ride.
Such is the case now. Our deflation cycle does not require more money, but just an evolutionary demise of those who fail to be competitive. All the risk-takers, arbitrageurs, and leveraged speculators, should be flushed out not bailed out.
Where to hide right now? There is no hiding place, not at this late juncture in the capital market’s decline. Patiently, we need to wait out the turmoil, still being prudent with our asset allocation. I do not recommend bottom-fishing. Besides, if you knew this was the bottom, I would be suggesting another tact, altogether.
Rather, I suggest we keep enough money in yield, equity, and cash so as to be opportunistic when the need arises, and secure as the mood dictates.
Friday, November 7, 2008
Market Commentary for the week of November 10, 2008
Post election euphoria was short-lived last week as investor’s focus shifted back to reports of slowdowns in global earnings. After rising abruptly earlier in the week, a kind of pre-presidential honeymoon, the market snapped back just as quickly to its bear market bias.
In essence, the markets are worried that underlying cost pressures, weak retail follow through, the ubiquitous credit crisis, and poor sentiment will have a more lingering effect upon profits (and share prices) than will a change in political leadership.
A continental non-divide.
The globe is losing jobs, not creating them and these data are changing the psychological landscape for owning equities, or for investment speculation of any kind. Net last week, global bourses were down.
It is important to realize that near-term euphoria (current events) cannot quell or diminish the negative velocity of longer-term systemic “bear” quantifiers. While there is a glimmer of suspicion that we might soon see a reduction in downside velocity as valuations gather “near the bottom”, we are not at that point just yet. Results (earnings) are simply not justifying any logic for speculators to abandon caution now, and jump in with both feet. Besides, psychology, not fundamentals, will drive the next wave of buying in global equities, and while there certainly is an appetite to get back in, there is no justification for doing so absent any confirmation.
I must hasten to add, though, that at this late juncture in the bear’s evolution and with valuations as inexpensive as they are, my next decision will be “what to buy”, not “what to sell.” Without ascribing blame any longer as to who’s at fault for these crises, the absolute imperative for portfolio managers today is to position their clients so as best to take advantage of any redirection upwards when it does occur, and to reflect accurately the risk/reward tolerances of their clients through prudent asset allocation methodology. I know that ultimately the downside erosion will reverse, and usher in a new bull phase, complemented by a new “tone” and belief about the prudence of “being long” financial instruments.
Negative everywhere.
I believe that global markets are uniform in their current downside response. Higher prices for commodities (oil) caused profits to diminish, and set in motion a chain reaction in capital expenditures, employment, wages, and discretionary retail spending. These data are not local or regional. Their scope is global and magnified, unfortunately, by the age of technological interconnectedness, such that the response is more immediate and more prolific.
The flip-side to this argument is that the response upwards might be more immediate, as well. Today’s “recession” does not look like a global pandemic. Rather, it is a multi lateral association of vectors which unfortunately got off course congruently. The speed and scope of policy responses globally is a good sign and might substantially reduce further downside possibilities.
One last variable.
One cannot predict accurately, however, the psychological response to “the low”, or to any other strategic global initiatives. Fear is so pervasive that I anticipate more redemptions from investment accounts than additions. The impact of these data is to increase market volatility. When I see a reversal in my data’s volatility vectors then I will feel comfortable predicting an accumulation phase which could precede any price mark-up.
Therefore it is important to pre-qualify clients now towards the notion that equities need to be a part of our overall portfolio strategy. With exposures below 20% in equity presently, I expect to begin rebalancing upwards as uncertainty subsides and, if my data indicates the potential for capital gains. It would not be appropriate to try to recoup yesterdays “lost” values, but with prudence and time on our side, history has shown that market bottoms can be staging areas for potential upside opportunities.
In essence, the markets are worried that underlying cost pressures, weak retail follow through, the ubiquitous credit crisis, and poor sentiment will have a more lingering effect upon profits (and share prices) than will a change in political leadership.
A continental non-divide.
The globe is losing jobs, not creating them and these data are changing the psychological landscape for owning equities, or for investment speculation of any kind. Net last week, global bourses were down.
It is important to realize that near-term euphoria (current events) cannot quell or diminish the negative velocity of longer-term systemic “bear” quantifiers. While there is a glimmer of suspicion that we might soon see a reduction in downside velocity as valuations gather “near the bottom”, we are not at that point just yet. Results (earnings) are simply not justifying any logic for speculators to abandon caution now, and jump in with both feet. Besides, psychology, not fundamentals, will drive the next wave of buying in global equities, and while there certainly is an appetite to get back in, there is no justification for doing so absent any confirmation.
I must hasten to add, though, that at this late juncture in the bear’s evolution and with valuations as inexpensive as they are, my next decision will be “what to buy”, not “what to sell.” Without ascribing blame any longer as to who’s at fault for these crises, the absolute imperative for portfolio managers today is to position their clients so as best to take advantage of any redirection upwards when it does occur, and to reflect accurately the risk/reward tolerances of their clients through prudent asset allocation methodology. I know that ultimately the downside erosion will reverse, and usher in a new bull phase, complemented by a new “tone” and belief about the prudence of “being long” financial instruments.
Negative everywhere.
I believe that global markets are uniform in their current downside response. Higher prices for commodities (oil) caused profits to diminish, and set in motion a chain reaction in capital expenditures, employment, wages, and discretionary retail spending. These data are not local or regional. Their scope is global and magnified, unfortunately, by the age of technological interconnectedness, such that the response is more immediate and more prolific.
The flip-side to this argument is that the response upwards might be more immediate, as well. Today’s “recession” does not look like a global pandemic. Rather, it is a multi lateral association of vectors which unfortunately got off course congruently. The speed and scope of policy responses globally is a good sign and might substantially reduce further downside possibilities.
One last variable.
One cannot predict accurately, however, the psychological response to “the low”, or to any other strategic global initiatives. Fear is so pervasive that I anticipate more redemptions from investment accounts than additions. The impact of these data is to increase market volatility. When I see a reversal in my data’s volatility vectors then I will feel comfortable predicting an accumulation phase which could precede any price mark-up.
Therefore it is important to pre-qualify clients now towards the notion that equities need to be a part of our overall portfolio strategy. With exposures below 20% in equity presently, I expect to begin rebalancing upwards as uncertainty subsides and, if my data indicates the potential for capital gains. It would not be appropriate to try to recoup yesterdays “lost” values, but with prudence and time on our side, history has shown that market bottoms can be staging areas for potential upside opportunities.
Monday, November 3, 2008
Market Commentary for the week of November 3, 2008
The capital markets deflected bad news about the credit crisis last week by focusing, instead, upon valuations, P/E ratios and interest rates. As if waving a handkerchief to distract you from last week’s current events, the markets simply shifted focus without specifically fixing what ails us. To be sure, the Fed’s anemic attempt to resuscitate the economy looked more like them firing their last bullet as the town became surrounded. Remember the old cartoon of the painter painting himself into the corner?
Fool me once shame on you. Fool me twice ….
Too little too late.
Everyday, conventional media tries to offer reasons why events might/might not occur. Fed funds, labor statistics, the price of copper, or housing starts taken individually mean very little. However when analyzed in sum they create an enduring secular theme that is undeniable: resources are becoming scarcer and more expensive.
Short term fixes to recapitalize the credit markets are having the opposite effect in the near-term. Aware that consumers have no current appetite for discretionary spending or speculation, financial institutions are using “excess” liquidity from the bailout package to buy back shares in the open market or to acquire competitors for strategic advantage, in lieu of putting that money to work in the public domain. The policy of interventionism by global central banks has unrealistically elongated the cycle duration of the economic downturn, whose causes were excess, leverage, and speculation.
As a scientist, I am loathe to deal in observation or anecdotes. But look at your kitchen table this evening. Grains (bread) cost more, milk costs more, cable TV costs more, your children’s tuition costs more. And your reward for these data? Your home is worth less, your portfolio is down 30 percent, your healthcare coverage is woefully deficient, and you might have to work longer to offset losses in pension benefits.
The near future is predictably uncertain because the economic landscape is not settled or peaceful. Diminishing profits affect market momentum, capital gains probabilities, and your sense of psychological well-being. I think the media’s fixation on 24 hour problem-solving is harmful and deceitful.
However….
Interestingly, as the market gets “cheaper”, the landscape of potential opportunity expands. It is unwise to jump in now to try to capture a downhill snowball, but there will be a point at which these downside vectors coalesce, rest, and rebound upwards.
Secular bear markets are natural events and don’t need to be thought of as perpetual or enduring. They are an economic outcome which results from periods of sustained growth, then excess speculation. We’ve been here before.
Besides, after the markets adopt a “it can’t get much worse” philosophy, expectations are sufficiently low to lower the bar, from which it might only “get better”. Without getting ahead of ourselves, the only salve for these economic wounds is time and prudent heads.
So?
All evidence points to a bit longer volatility before any upside response. The bigger question is how to measure the magnitude of this continuing bear cycle. Last week’s triple-digit upside surprises had been preceded by weeks of triple-digit downside carnage, or had you forgotten?
A true global economic recovery will, and must, be steady and multidimensional, not just value hunting by speculators and traders. I believe a psychological catalyst is necessary, as well. This is a volatile situation, one which requires fundamental due diligence, patience, and moral stewardship.
Fool me once shame on you. Fool me twice ….
Too little too late.
Everyday, conventional media tries to offer reasons why events might/might not occur. Fed funds, labor statistics, the price of copper, or housing starts taken individually mean very little. However when analyzed in sum they create an enduring secular theme that is undeniable: resources are becoming scarcer and more expensive.
Short term fixes to recapitalize the credit markets are having the opposite effect in the near-term. Aware that consumers have no current appetite for discretionary spending or speculation, financial institutions are using “excess” liquidity from the bailout package to buy back shares in the open market or to acquire competitors for strategic advantage, in lieu of putting that money to work in the public domain. The policy of interventionism by global central banks has unrealistically elongated the cycle duration of the economic downturn, whose causes were excess, leverage, and speculation.
As a scientist, I am loathe to deal in observation or anecdotes. But look at your kitchen table this evening. Grains (bread) cost more, milk costs more, cable TV costs more, your children’s tuition costs more. And your reward for these data? Your home is worth less, your portfolio is down 30 percent, your healthcare coverage is woefully deficient, and you might have to work longer to offset losses in pension benefits.
The near future is predictably uncertain because the economic landscape is not settled or peaceful. Diminishing profits affect market momentum, capital gains probabilities, and your sense of psychological well-being. I think the media’s fixation on 24 hour problem-solving is harmful and deceitful.
However….
Interestingly, as the market gets “cheaper”, the landscape of potential opportunity expands. It is unwise to jump in now to try to capture a downhill snowball, but there will be a point at which these downside vectors coalesce, rest, and rebound upwards.
Secular bear markets are natural events and don’t need to be thought of as perpetual or enduring. They are an economic outcome which results from periods of sustained growth, then excess speculation. We’ve been here before.
Besides, after the markets adopt a “it can’t get much worse” philosophy, expectations are sufficiently low to lower the bar, from which it might only “get better”. Without getting ahead of ourselves, the only salve for these economic wounds is time and prudent heads.
So?
All evidence points to a bit longer volatility before any upside response. The bigger question is how to measure the magnitude of this continuing bear cycle. Last week’s triple-digit upside surprises had been preceded by weeks of triple-digit downside carnage, or had you forgotten?
A true global economic recovery will, and must, be steady and multidimensional, not just value hunting by speculators and traders. I believe a psychological catalyst is necessary, as well. This is a volatile situation, one which requires fundamental due diligence, patience, and moral stewardship.
Monday, October 27, 2008
Market Commentary for the week of October 27, 2008
World markets fell last week, ostensibly because focus shifted from credit crises to fundamentals. And when viewed in its totality, fundamentals, especially current and future earnings, looked quite bleak. It may be time to forget who caused the crisis, and move towards finding a direction that fixes the problem.
Fundamentals decoupled.
Global baskets, moving in near-unison downwards, stand in marked contrast to political commentary saying “everything is fine, crisis averted.” Fears about economic stagnation and earnings slowdowns are draining huge amounts of net-worth from the markets, and further deteriorate the psyche of potential investors.
Although central banks sought to recapitalize their national banks, there is precious little evidence that banks are lending to anyone but each other. The spigot that needs opening would be capital into the industrial community, but concerns about commodity cost overhead and employment are dampening projections about any capital expenditures in the near future.
Today a strong bias against speculation is developing. How quickly we have come from a few months ago when conservatism and deleveraging were the furthest things from most minds. I believe that the “thirty-second investment time frame” is a thing of the past.
How interesting, too, that our ubiquitous business news networks are renaming their programming from “fast”…. to “conservative”…., as if to exonerate themselves from being part of the folly. Isn’t it the same “talking heads” now trying to tell us how to “preserve our retirement funds” who earlier urged us to “speculate our way to success”?
This whole scenario reminds me that many investors tried to deviate from proven methodology, towards greedy, “quicker” strategies for acquiring net-worth.
Reality check.
During the past weeks I have had to remind clients that we have consistently outperformed benchmarks for several years, that we avoided the dot.com collapse because of our aversion to non-earnings equities, that we are minimally exposed to risk, and that bond prices reflect a liquidity (pricing) inefficiency not a credit risk.
Nevertheless, I must remind them that markets are cyclical not linear, and that any assumptions about timelines or enduring upside potential (without capitulation) are unrealistic. There is always a price to pay for capital investments. Today that price is “time”.
I see no significant actionable themes right now. That doesn’t mean that I am filled with pessimism. Quite the contrary. As I have said, I was more concerned about the financial markets at their greatest level of excess than I am now. Going forward, the next upcycle will represent the highest probability of capital gains we have had in the last 15 years.
While I would be cautious about being drawn-in during a bear slide, the valuations in biotech, ecology, industrials, and agricultural equities are becoming quite attractive for the long term.
When the synchronicity of downside momentum is broken worldwide, I look for those opportunities to become clear and profitable once again.
Fundamentals decoupled.
Global baskets, moving in near-unison downwards, stand in marked contrast to political commentary saying “everything is fine, crisis averted.” Fears about economic stagnation and earnings slowdowns are draining huge amounts of net-worth from the markets, and further deteriorate the psyche of potential investors.
Although central banks sought to recapitalize their national banks, there is precious little evidence that banks are lending to anyone but each other. The spigot that needs opening would be capital into the industrial community, but concerns about commodity cost overhead and employment are dampening projections about any capital expenditures in the near future.
Today a strong bias against speculation is developing. How quickly we have come from a few months ago when conservatism and deleveraging were the furthest things from most minds. I believe that the “thirty-second investment time frame” is a thing of the past.
How interesting, too, that our ubiquitous business news networks are renaming their programming from “fast”…. to “conservative”…., as if to exonerate themselves from being part of the folly. Isn’t it the same “talking heads” now trying to tell us how to “preserve our retirement funds” who earlier urged us to “speculate our way to success”?
This whole scenario reminds me that many investors tried to deviate from proven methodology, towards greedy, “quicker” strategies for acquiring net-worth.
Reality check.
During the past weeks I have had to remind clients that we have consistently outperformed benchmarks for several years, that we avoided the dot.com collapse because of our aversion to non-earnings equities, that we are minimally exposed to risk, and that bond prices reflect a liquidity (pricing) inefficiency not a credit risk.
Nevertheless, I must remind them that markets are cyclical not linear, and that any assumptions about timelines or enduring upside potential (without capitulation) are unrealistic. There is always a price to pay for capital investments. Today that price is “time”.
I see no significant actionable themes right now. That doesn’t mean that I am filled with pessimism. Quite the contrary. As I have said, I was more concerned about the financial markets at their greatest level of excess than I am now. Going forward, the next upcycle will represent the highest probability of capital gains we have had in the last 15 years.
While I would be cautious about being drawn-in during a bear slide, the valuations in biotech, ecology, industrials, and agricultural equities are becoming quite attractive for the long term.
When the synchronicity of downside momentum is broken worldwide, I look for those opportunities to become clear and profitable once again.
Monday, October 20, 2008
Market Commentary for the week of October 20, 2008
Willie Sutton, America’s most infamous bank robber, was once asked why he robbed banks. He replied, “Because that’s where the money is.” How ironic, then, that you and I are being asked to recapitalize his treasure trove, now that we hear there is “no more” money in the banking system. Poor Willie, poor us!!
The market’s quite tepid response to yet another global banking bailout tells me that the crisis is not uniquely financial, it’s psychological. Many have read my oft-coined refrain “You can lead a horse to water but you can’t make him spend.” Now add “You can reconstitute the vault, but you can’t fake the spigot.” The problem with money-flow and credit illiquidity is not only the consumer’s insecurity about borrowing, but also the lender’s unwillingness to get caught short, yet again.
In this climate, you might as well throw traditional balance-sheet analysis out the window and go with instinct, instead. Besides, who has a profit, a capital gain, or earnings?
The real paradigm.
Into this vacuum flows uncertainty and fear. People are worried that their job might disappear. They hold back from saving, spending, or investing. Their inertia slams the financial market and, thus, the economy. Unemployment becomes a self-fulfilling prophesy.
You can forget sector analysis because all groups are pulling back uniformly. The only advantage to this avalanche of bad news is that from the rubble will emerge a new equilibrium out of which fundamentals will play a part. It is more important than ever to have a macro, top-down orientation about the world in order to capitalize upon themes, values, and opportunities that might become our next capital gains playing-ground. Stocks are looking inexpensive and may be nearing a “buy” inflection.
In the meantime, a slow motion cataclysm is unfolding that threatens real estate valuations, economic/industrial development, capital expenditures, and psychological peace-of-mind.
Children with toys.
The solutions being offered seem stop-gap at best. Like throwing money away on one-night “liaisons”, the cure seems insufficient for the underlying market psychosis. The next morning we’re waking up asking “now what” and “what have we done.”
Throwing money at the problem with a scorched-earth approach does not address the subtleties of regional or local problems. Giving money to risk-takers will not make them more risk averse, just frightened that they won’t fail again. Frankly, we might see a decline in business lending that is unanticipated, and, certainly, not the intended effect of the reconstitution.
We might see what looks more like a high school dance, boys on one side of the gymnasium, girls on the other. With no coercion, bravery, or reason to break ranks, neither side will budge. Thus you have a “party” that nobody really attends, although all are present in the same venue.
In order to overcome the fear factor, we need a catalyst. Massive upswings in the Dow are not the catalyst we need; those upheavals only reinforce the notion that financial markets are somewhere else, not connected to the average citizen, but rather the domain of professional “players” and speculators.
So not only are we dealing with a bond market that is devoid of “bidders”, but we have a stock market that whipsaws violently throughout the day, not allowing for cogitation or fundamentals.
These historic confluences are the brainchildren of those whom we now expect to solve the problem. Good luck. I would argue they might do more harm, in the near term, than good.
The market’s quite tepid response to yet another global banking bailout tells me that the crisis is not uniquely financial, it’s psychological. Many have read my oft-coined refrain “You can lead a horse to water but you can’t make him spend.” Now add “You can reconstitute the vault, but you can’t fake the spigot.” The problem with money-flow and credit illiquidity is not only the consumer’s insecurity about borrowing, but also the lender’s unwillingness to get caught short, yet again.
In this climate, you might as well throw traditional balance-sheet analysis out the window and go with instinct, instead. Besides, who has a profit, a capital gain, or earnings?
The real paradigm.
Into this vacuum flows uncertainty and fear. People are worried that their job might disappear. They hold back from saving, spending, or investing. Their inertia slams the financial market and, thus, the economy. Unemployment becomes a self-fulfilling prophesy.
You can forget sector analysis because all groups are pulling back uniformly. The only advantage to this avalanche of bad news is that from the rubble will emerge a new equilibrium out of which fundamentals will play a part. It is more important than ever to have a macro, top-down orientation about the world in order to capitalize upon themes, values, and opportunities that might become our next capital gains playing-ground. Stocks are looking inexpensive and may be nearing a “buy” inflection.
In the meantime, a slow motion cataclysm is unfolding that threatens real estate valuations, economic/industrial development, capital expenditures, and psychological peace-of-mind.
Children with toys.
The solutions being offered seem stop-gap at best. Like throwing money away on one-night “liaisons”, the cure seems insufficient for the underlying market psychosis. The next morning we’re waking up asking “now what” and “what have we done.”
Throwing money at the problem with a scorched-earth approach does not address the subtleties of regional or local problems. Giving money to risk-takers will not make them more risk averse, just frightened that they won’t fail again. Frankly, we might see a decline in business lending that is unanticipated, and, certainly, not the intended effect of the reconstitution.
We might see what looks more like a high school dance, boys on one side of the gymnasium, girls on the other. With no coercion, bravery, or reason to break ranks, neither side will budge. Thus you have a “party” that nobody really attends, although all are present in the same venue.
In order to overcome the fear factor, we need a catalyst. Massive upswings in the Dow are not the catalyst we need; those upheavals only reinforce the notion that financial markets are somewhere else, not connected to the average citizen, but rather the domain of professional “players” and speculators.
So not only are we dealing with a bond market that is devoid of “bidders”, but we have a stock market that whipsaws violently throughout the day, not allowing for cogitation or fundamentals.
These historic confluences are the brainchildren of those whom we now expect to solve the problem. Good luck. I would argue they might do more harm, in the near term, than good.
Monday, October 13, 2008
Market Commentary for the week of October 13, 2008
Perfect performance?
At a time when the markets are searching for perfect solutions to what ails the global economy, it might be prudent to scale back and look for small, “imperfect” responses in order to quell the magnitude of the destruction. As with any problem-solving, looking at the enormity of the task creates immobilization, whereas one small step at a time might not be a solution, but a start nonetheless.
Part of the “perfection analysis” inertia begins with making unfair, and useless, comparisons to where we were, one year ago, five years ago, even last April. The fact is we are here now, markets are cyclical, and the crisis was not unforeseen. Seeking unattainable standards of upside momentum is destructive to the psyche, and part of the justification given for why financial gurus saw fit to leverage away their prior gains.
Besides that, playing the blame game is a circuitous route that attempts to vilify the victims of the crisis, and brings us right back to ourselves, without creating a framework for positive results.
In effect, the failure to recognize that markets gyrate through cyclical changes ruins the result before the first dollar is invested.
We cannot falsify the task to set up an unattainable standard.
Trust.
Our current debate focuses upon the deterioration in credit markets. Consecutively, solid borrowers are falling by the wayside in part because of credit worries, but also because buyers on the other side of the trade have no will to step up and commit capital during this slide. All capital gains potential, and most lending, has evaporated in a psychological tsunami that paralyzes the global economic landscape.
Bailout packages or political referendums actually accelerate mistrust because those doing the proposing are the same bunch that got us into the crisis. When investors are loathe to trust, the markets calcify as a result.
Driven by a sense of self preservation, many are bailing-out on the whole process. I believe that is an unwise decision. My science, and my gut, tells me not to jump ship in the middle of the chaos, but to evaluate after the worst of the crisis has abated.
It is not inconsistent to believe that rebalancing after the shock might net a higher return as a result. Markets will not go to zero, and in perspective, we are simply giving back some of the accelerated gains that led many to think that upside momentum was immutable law.
Stick with a plan.
It won’t assuage many to talk science or theory, but I can’t stress more strongly that without a methodology, a road map, it would be even more difficult to assess where we are or where we are going with our investment portfolios. Secular, or intermediate, downtrends don’t endure indefinitely, any more than uptrends do. We may have it backwards when measuring risk, as I believe that market peaks (and excess bubbles) are more dangerous than the condition we are in today.
While my data shows no current pent-up demand for financial instruments, I do believe the next decision is “what to buy?”, not “what to sell?”
From amidst the wreckage will come a new equilibrium in valuations, and certainly a new opportunity for recovery. This capitulation is excruciatingly painful, but filled with enormous potential to marginalize the damage in the long-run.
At a time when the markets are searching for perfect solutions to what ails the global economy, it might be prudent to scale back and look for small, “imperfect” responses in order to quell the magnitude of the destruction. As with any problem-solving, looking at the enormity of the task creates immobilization, whereas one small step at a time might not be a solution, but a start nonetheless.
Part of the “perfection analysis” inertia begins with making unfair, and useless, comparisons to where we were, one year ago, five years ago, even last April. The fact is we are here now, markets are cyclical, and the crisis was not unforeseen. Seeking unattainable standards of upside momentum is destructive to the psyche, and part of the justification given for why financial gurus saw fit to leverage away their prior gains.
Besides that, playing the blame game is a circuitous route that attempts to vilify the victims of the crisis, and brings us right back to ourselves, without creating a framework for positive results.
In effect, the failure to recognize that markets gyrate through cyclical changes ruins the result before the first dollar is invested.
We cannot falsify the task to set up an unattainable standard.
Trust.
Our current debate focuses upon the deterioration in credit markets. Consecutively, solid borrowers are falling by the wayside in part because of credit worries, but also because buyers on the other side of the trade have no will to step up and commit capital during this slide. All capital gains potential, and most lending, has evaporated in a psychological tsunami that paralyzes the global economic landscape.
Bailout packages or political referendums actually accelerate mistrust because those doing the proposing are the same bunch that got us into the crisis. When investors are loathe to trust, the markets calcify as a result.
Driven by a sense of self preservation, many are bailing-out on the whole process. I believe that is an unwise decision. My science, and my gut, tells me not to jump ship in the middle of the chaos, but to evaluate after the worst of the crisis has abated.
It is not inconsistent to believe that rebalancing after the shock might net a higher return as a result. Markets will not go to zero, and in perspective, we are simply giving back some of the accelerated gains that led many to think that upside momentum was immutable law.
Stick with a plan.
It won’t assuage many to talk science or theory, but I can’t stress more strongly that without a methodology, a road map, it would be even more difficult to assess where we are or where we are going with our investment portfolios. Secular, or intermediate, downtrends don’t endure indefinitely, any more than uptrends do. We may have it backwards when measuring risk, as I believe that market peaks (and excess bubbles) are more dangerous than the condition we are in today.
While my data shows no current pent-up demand for financial instruments, I do believe the next decision is “what to buy?”, not “what to sell?”
From amidst the wreckage will come a new equilibrium in valuations, and certainly a new opportunity for recovery. This capitulation is excruciatingly painful, but filled with enormous potential to marginalize the damage in the long-run.
Monday, October 6, 2008
Market Commentary for the week of October 6, 2008
As global credit crises pile up, our focus upon the U.S. Congressional bailout package becomes more of a distraction from the issues, than anything else. At issue is whether we delay the depth of recessionary trends or allow them to play out naturally. Despite our focus upon quarterly earnings, quarterly output, or quarterly market performance, indicators are showing that cyclical/secular downtrends cannot be averted.
The markets are already factoring-in the negative secular condition, despite gyrating, daily, to exogenous current events.
Irrespective of any plan that emerges from Congress, credit will remain tight until the borrower perceives the conditions are right to take on more debt. That means that intrinsic inflation factors, demand/supply paradigms, industrial production and job security must be factored into any market response which, might, in turn, translate into an economic policy response.
Look at the Macro.
Inflation is inextricably tied to energy production. What drives the market, besides inordinate amounts of greed, is the supply of inexhaustible energy sources. Prospects for global economic growth based solely upon fossil fuels is virtually nil. In the meantime, “he who controls the source of energy is in position to dictate the price for that commodity”.
When we are told that relieving the credit mess depends upon the largesse of financial institutions flush with cash, the argument misses the point. Those institutions created the problem in the first place, by placing profit ahead of prudence. Their practices enabled others to extend their credit line until the collapse occurred. Our markets are not a casino, nor should they be operated like a baccarat table.
One thing is certain: the landscape for capital gains opportunity in growth equities is receding, while value investors are licking their chops over exacting their pound of flesh from the littered carcasses of other’s bleeding fortunes.
Fix the causes.
Most of the solutions to the global crisis focus upon symptoms rather than causes.
Many have argued that to focus upon the causes would delay a package of immediate responses that are necessary to avert a deeper crisis. Regardless of the debate, the “solution” is not going to make the situation better. This is one of those scenarios which would have played out regardless, because greed and excess are part of the (irrational) human condition, and primary factors that got us here. Making us “whole”, averting foreclosure, or liquifying the credit markets will not open the spigot unless consumers feel safe. How do you quantify safety? Is the package enough? Too little? Too late?
The trouble with the whole debate is that we are closing the barn door after the horses have left the stable.
Be real.
Whether or not we debate the numbers, a systemic overhaul is required, beginning with a political and philosophical discussion about goals, norms, and objectives for community commerce that provides the necessary benefit to the economy’s end-user, the consumer.
Clients who will be opening their monthly statements next week don’t care too much for my professorial discussion; I understand that their savings and retirement objectives are on the line. But it is critical to establish a common good and to understand that investing involves cycles, ups-and-downs, risk tolerance, and, above all, transparency and trust emanating from the capital markets.
The markets are already factoring-in the negative secular condition, despite gyrating, daily, to exogenous current events.
Irrespective of any plan that emerges from Congress, credit will remain tight until the borrower perceives the conditions are right to take on more debt. That means that intrinsic inflation factors, demand/supply paradigms, industrial production and job security must be factored into any market response which, might, in turn, translate into an economic policy response.
Look at the Macro.
Inflation is inextricably tied to energy production. What drives the market, besides inordinate amounts of greed, is the supply of inexhaustible energy sources. Prospects for global economic growth based solely upon fossil fuels is virtually nil. In the meantime, “he who controls the source of energy is in position to dictate the price for that commodity”.
When we are told that relieving the credit mess depends upon the largesse of financial institutions flush with cash, the argument misses the point. Those institutions created the problem in the first place, by placing profit ahead of prudence. Their practices enabled others to extend their credit line until the collapse occurred. Our markets are not a casino, nor should they be operated like a baccarat table.
One thing is certain: the landscape for capital gains opportunity in growth equities is receding, while value investors are licking their chops over exacting their pound of flesh from the littered carcasses of other’s bleeding fortunes.
Fix the causes.
Most of the solutions to the global crisis focus upon symptoms rather than causes.
Many have argued that to focus upon the causes would delay a package of immediate responses that are necessary to avert a deeper crisis. Regardless of the debate, the “solution” is not going to make the situation better. This is one of those scenarios which would have played out regardless, because greed and excess are part of the (irrational) human condition, and primary factors that got us here. Making us “whole”, averting foreclosure, or liquifying the credit markets will not open the spigot unless consumers feel safe. How do you quantify safety? Is the package enough? Too little? Too late?
The trouble with the whole debate is that we are closing the barn door after the horses have left the stable.
Be real.
Whether or not we debate the numbers, a systemic overhaul is required, beginning with a political and philosophical discussion about goals, norms, and objectives for community commerce that provides the necessary benefit to the economy’s end-user, the consumer.
Clients who will be opening their monthly statements next week don’t care too much for my professorial discussion; I understand that their savings and retirement objectives are on the line. But it is critical to establish a common good and to understand that investing involves cycles, ups-and-downs, risk tolerance, and, above all, transparency and trust emanating from the capital markets.
Monday, September 29, 2008
Arlington Econometrics Fourth Quarter Commentary
Rumpelstiltskin Economics
Some of the finest alchemy in the world is currently being transacted on Wall Street and in Congress, the Federal Reserve, and the banking system. Some of us thought that turning straw into gold was simply the stuff of fairy tales. Not any longer.
In distant times economists, politicians and capitalists argued that maintaining the purity of the capital markets was an empirical given, especially if trust and transparency were to be respected hallmarks of a free market.
The challenges within the credit markets today are the last gasp of that worthy goal. Today’s failures are the result of a breakdown in trust and transparency. And, evidently, professionalism, morals and competency. It goes beyond the pale to envision nationalizing our capital markets and making the taxpayer responsible (twice) for the poor judgment of speculators and collaborators who brought down the system’s psyche by their wanton greed and disrespect.
I am truly alarmed, in particular, that the bond market (once viewed as a bastion of safety) has turned its IOU’s (promises of repayment) into near-worthless pieces of paper and left you holding the bag. After all, weren’t bonds supposed to be a surrogate/alternative for the high risk equity markets?
When the Fed, or any government, injects itself into the bailout of risk markets they destroy a sense of equilibrium naturally found in uninterrupted markets. Distortions occur in valuing securities (like mortgages or stocks) which leads to longer recovery time and potential negative fallout in the future. This is not the first time an argument has been made for intervention. And yet I would argue, each capital infusion heightens the level of uncertainty in the market, not quell it. In addition, the agencies and officers responsible for the problem are deemed “blameless” because their money is not used to ameliorate the situation. Setting up a model in which business can “tap into” the treasury is deceitful and probably illegal, if not certainly morally bereft.
Shareholders should seek redress from the agents of their disaffection, not from you and me. And, indeed, they are “owed”, but perhaps only an explanation, not a full return of capital, for taking the risk in the first place.
Markets
Hybrid investments, synthetic alternatives, hedge funds and the like are concoctions designed to enrich their originators while promising to deliver returns to their investors. But make no mistake, Wall Street is in the money-making business and the public is their vehicle.
I would argue, as well, that the influence of technology and 24 hour media contributes to a sense that markets cannot be destructive because “we know all there is to know”. This sense of invulnerability permeates the investing public and makes them think that “it can’t happen to me”. Unfortunately, when the market declines, or home values recede, or unemployment happens it’s only representative of the natural evolution of parabolic economic cycles.
I believe, for example, that technology, today, can be a double-edged sword in the financial world because while we now have access to methodologies and alternative strategies that expand the scope of capital gains potential beyond traditional investing, those options also deteriorate the fundamentals of valuation that govern the underpinnings of asset classes. Additionally, the quality of humanism and morality cannot be replicated by black-box methodology or complex financial algorithms.
Finally, the problem with one-size-fits-all solutions is that they do not allow for regional or cultural nuance, or individual preference for risk/reward tolerance.
Wall Street has inflicted real losses in the last 6 months, some of which are financial, others are psychic and very painful.
The risk in financial markets is obviously not restricted to the United States. Bankruptcies are pervasive in many global arenas. The implication of further reverberation inhibits markets from raising capital or expanding their capital gains potential.
Balance sheets are suffering from lack of consumer demand and increased costs of raw materials, including energy. No one believes that the ripple-effect of one depreciating economy can be held at the border, and not felt within.
Borrowers are cash-strapped and the crisis endures. Regulators are either part of the problem or unsure about how to effect a solution.
Strategy
The difficulty of this whole mess is that it erodes investor confidence, the bulwark of any capital market. With portfolio values declining, home values diminishing and earning power falling behind, many investors are overcome by hopelessness and distrust. Goals and aspirations are becoming wiped out just like portfolios.
People have a right to be angry. But let’s realize that cycles are natural. Prudent portfolio methodology might have mitigated the impact of risk-taking by balancing aggression with conservative asset allocation strategies.
No one was complaining when the markets were expanding. Regulators looked the other way as long as the machine was functioning profitably. We all know, however, even from most recent experiences with technology and dot.com equities, that no trend endures indefinitely.
Portfolio returns have a built-in relevant range, I believe. No portfolio can exceed “maximum valuation’ or fall below “negative valuation”. This means that historical norms are guidelines for understanding the realm of portfolio probability potential. When tech stocks rose, then fell in the 1990’s, it was not the demise of technology as a fundamental tenet of secular growth. Rather it was a reversion to mean valuation and an expression of the excesses of speculation which preceded. In the 1980’s home values did the same thing, rising then falling, but eventually returned to a bull market status in subsequent decades.
Every asset class has a time, place, and quantifiable limit to its expansion. How do we know when and how much? I have tried, for example, by creating a proprietary tool to help answer these questions quantitatively, equating relationships between stocks sectors, regions, and macro events.
Conclusion
History helps determine the magnitude and amplitude of investment cycles, such that we might explain performance in terms of quotients and relative strength within these cycles. Whereas cycles are not limited by psychology or methodology, we can quantify their movements to determine optimal entry or exit strategies. Without attaching a value judgment to a stock or sector, we can measure the location of a financial security and its duration within its cycle. One never wants to stay too long at the party, so we use excess valuation as a trigger to sell securities or to rebalance the portfolio.
Simply knowing the course you are on and its location is better than not knowing at all, and wishing you had known. Reducing risk is sometimes a matter of having a science (methodology) and sticking to it.
As investors, we can choose either to be aggressive or risk averse. Those who understand the volatility involved with high risk investing accept those parameters. Those who choose a more conservative approach are less willing to be subject to the whims of market contingencies. In either case, though, returns are directly related to the type of risk one might be willing to take. And since “return” is generally what most investors are about, it is necessary to accept some risk in order to achieve the desired performance.
We can, however, modify risk, and enhance returns, through prudent asset allocation methodology, diversification, and statistical quotients that allow us to balance internal portfolio relationships to the overall market’s probabilities. In other words, we try to do more with less overall exposure to volatility.
In the context of today’s market, the lowering tide has taken down all boats in the harbor. But the equilibrium point is not “equal” for all asset classes. Out of the current mess, I believe a new secular bull in alternative energy, biopharmaceuticals, agriculture, environmental pollution control, infrastructure and technology (including telecommunications) will be the next areas of global opportunity, without borders and irrespective of market capitalization.
But I do caution that changing the discussion, the mindset of greed, and the culture will not be easy. A generation of techno-savvy investors hold strongly to the belief of a “new paradigm”. Consulting computers for solutions, and 24 hour business media for direction, they have lost a certain ability to authenticate their ideas with street-wise common sense.
I would argue, however, that machines infect the investment process by relying sometimes too much upon alchemy and synthetic solutions. The process is corrupt, not the objectives. Thus far, no one has sought to slow down the speeding train, or be the hero standing in front of it.
Market dysfunction sometimes creates a self-fulfilling prophecy. As we all might agree, no other system can replace what we have, but the one we have needs fixing and a better moral compass. I am confident that infusing our science with humanism is the correct first step towards dispelling the fairy tale whim of 2008.
Asset Allocation:
Equity 30%/Fixed Income 45%/Cash 25%
Some of the finest alchemy in the world is currently being transacted on Wall Street and in Congress, the Federal Reserve, and the banking system. Some of us thought that turning straw into gold was simply the stuff of fairy tales. Not any longer.
In distant times economists, politicians and capitalists argued that maintaining the purity of the capital markets was an empirical given, especially if trust and transparency were to be respected hallmarks of a free market.
The challenges within the credit markets today are the last gasp of that worthy goal. Today’s failures are the result of a breakdown in trust and transparency. And, evidently, professionalism, morals and competency. It goes beyond the pale to envision nationalizing our capital markets and making the taxpayer responsible (twice) for the poor judgment of speculators and collaborators who brought down the system’s psyche by their wanton greed and disrespect.
I am truly alarmed, in particular, that the bond market (once viewed as a bastion of safety) has turned its IOU’s (promises of repayment) into near-worthless pieces of paper and left you holding the bag. After all, weren’t bonds supposed to be a surrogate/alternative for the high risk equity markets?
When the Fed, or any government, injects itself into the bailout of risk markets they destroy a sense of equilibrium naturally found in uninterrupted markets. Distortions occur in valuing securities (like mortgages or stocks) which leads to longer recovery time and potential negative fallout in the future. This is not the first time an argument has been made for intervention. And yet I would argue, each capital infusion heightens the level of uncertainty in the market, not quell it. In addition, the agencies and officers responsible for the problem are deemed “blameless” because their money is not used to ameliorate the situation. Setting up a model in which business can “tap into” the treasury is deceitful and probably illegal, if not certainly morally bereft.
Shareholders should seek redress from the agents of their disaffection, not from you and me. And, indeed, they are “owed”, but perhaps only an explanation, not a full return of capital, for taking the risk in the first place.
Markets
Hybrid investments, synthetic alternatives, hedge funds and the like are concoctions designed to enrich their originators while promising to deliver returns to their investors. But make no mistake, Wall Street is in the money-making business and the public is their vehicle.
I would argue, as well, that the influence of technology and 24 hour media contributes to a sense that markets cannot be destructive because “we know all there is to know”. This sense of invulnerability permeates the investing public and makes them think that “it can’t happen to me”. Unfortunately, when the market declines, or home values recede, or unemployment happens it’s only representative of the natural evolution of parabolic economic cycles.
I believe, for example, that technology, today, can be a double-edged sword in the financial world because while we now have access to methodologies and alternative strategies that expand the scope of capital gains potential beyond traditional investing, those options also deteriorate the fundamentals of valuation that govern the underpinnings of asset classes. Additionally, the quality of humanism and morality cannot be replicated by black-box methodology or complex financial algorithms.
Finally, the problem with one-size-fits-all solutions is that they do not allow for regional or cultural nuance, or individual preference for risk/reward tolerance.
Wall Street has inflicted real losses in the last 6 months, some of which are financial, others are psychic and very painful.
The risk in financial markets is obviously not restricted to the United States. Bankruptcies are pervasive in many global arenas. The implication of further reverberation inhibits markets from raising capital or expanding their capital gains potential.
Balance sheets are suffering from lack of consumer demand and increased costs of raw materials, including energy. No one believes that the ripple-effect of one depreciating economy can be held at the border, and not felt within.
Borrowers are cash-strapped and the crisis endures. Regulators are either part of the problem or unsure about how to effect a solution.
Strategy
The difficulty of this whole mess is that it erodes investor confidence, the bulwark of any capital market. With portfolio values declining, home values diminishing and earning power falling behind, many investors are overcome by hopelessness and distrust. Goals and aspirations are becoming wiped out just like portfolios.
People have a right to be angry. But let’s realize that cycles are natural. Prudent portfolio methodology might have mitigated the impact of risk-taking by balancing aggression with conservative asset allocation strategies.
No one was complaining when the markets were expanding. Regulators looked the other way as long as the machine was functioning profitably. We all know, however, even from most recent experiences with technology and dot.com equities, that no trend endures indefinitely.
Portfolio returns have a built-in relevant range, I believe. No portfolio can exceed “maximum valuation’ or fall below “negative valuation”. This means that historical norms are guidelines for understanding the realm of portfolio probability potential. When tech stocks rose, then fell in the 1990’s, it was not the demise of technology as a fundamental tenet of secular growth. Rather it was a reversion to mean valuation and an expression of the excesses of speculation which preceded. In the 1980’s home values did the same thing, rising then falling, but eventually returned to a bull market status in subsequent decades.
Every asset class has a time, place, and quantifiable limit to its expansion. How do we know when and how much? I have tried, for example, by creating a proprietary tool to help answer these questions quantitatively, equating relationships between stocks sectors, regions, and macro events.
Conclusion
History helps determine the magnitude and amplitude of investment cycles, such that we might explain performance in terms of quotients and relative strength within these cycles. Whereas cycles are not limited by psychology or methodology, we can quantify their movements to determine optimal entry or exit strategies. Without attaching a value judgment to a stock or sector, we can measure the location of a financial security and its duration within its cycle. One never wants to stay too long at the party, so we use excess valuation as a trigger to sell securities or to rebalance the portfolio.
Simply knowing the course you are on and its location is better than not knowing at all, and wishing you had known. Reducing risk is sometimes a matter of having a science (methodology) and sticking to it.
As investors, we can choose either to be aggressive or risk averse. Those who understand the volatility involved with high risk investing accept those parameters. Those who choose a more conservative approach are less willing to be subject to the whims of market contingencies. In either case, though, returns are directly related to the type of risk one might be willing to take. And since “return” is generally what most investors are about, it is necessary to accept some risk in order to achieve the desired performance.
We can, however, modify risk, and enhance returns, through prudent asset allocation methodology, diversification, and statistical quotients that allow us to balance internal portfolio relationships to the overall market’s probabilities. In other words, we try to do more with less overall exposure to volatility.
In the context of today’s market, the lowering tide has taken down all boats in the harbor. But the equilibrium point is not “equal” for all asset classes. Out of the current mess, I believe a new secular bull in alternative energy, biopharmaceuticals, agriculture, environmental pollution control, infrastructure and technology (including telecommunications) will be the next areas of global opportunity, without borders and irrespective of market capitalization.
But I do caution that changing the discussion, the mindset of greed, and the culture will not be easy. A generation of techno-savvy investors hold strongly to the belief of a “new paradigm”. Consulting computers for solutions, and 24 hour business media for direction, they have lost a certain ability to authenticate their ideas with street-wise common sense.
I would argue, however, that machines infect the investment process by relying sometimes too much upon alchemy and synthetic solutions. The process is corrupt, not the objectives. Thus far, no one has sought to slow down the speeding train, or be the hero standing in front of it.
Market dysfunction sometimes creates a self-fulfilling prophecy. As we all might agree, no other system can replace what we have, but the one we have needs fixing and a better moral compass. I am confident that infusing our science with humanism is the correct first step towards dispelling the fairy tale whim of 2008.
Asset Allocation:
Equity 30%/Fixed Income 45%/Cash 25%
Friday, September 12, 2008
Market Commentary for the week of September 15, 2008
An Editorial:
I worry, sometimes, about the influence, or lack thereof, of morality in the drama of equity investment and speculation. It seems that in the thirty years I’ve been involved in the securities markets there has evolved a “new way” of analyzing credit, balance sheets, and fundamentals.
Each generation brings its own biases and experience to bear upon its collective professional ethos, but somehow we’ve deviated so far afield that speculation and aggressiveness have become this decade’s norm, while patience has been shunned aside.
New powers and statistics have been synthesized to justify a new alchemy of synthetic derivatives whose primary purpose, it seems to me, is to generate revenue for the issuing body first and returns for the client second. I am wary of the reputation this new “science” brings to my profession and the aftershock of cross-currents it creates in its wake. During a crisis in the markets like the kind we are now experiencing there is no historical paradigm for evaluating the valuations of these instruments, nor the depth of the carnage, should it occur.
Clearly, we are walking through new territory, which is what makes these crises so scary to the first-time, and long-time, investor.
I don’t have a direct solution for these afflictions, nor do I have enough space in this column to vet the details. But I do know that the unprecedented nature of these catastrophes (dot.com, real estate, commodities, etc.) is self imposed and not the effect of natural market continuums. They are brought about by generational shifts in morality that dictate speed versus carefulness, action versus inaction, greed versus compassion.
The unconventional nature of what is today called “alternative investments” is, by itself, unsettling because I don’t see the problem with traditional equity investments or non-leveraged debt. As much as we might try to reinvent the wheel, the challenge should be to perfect the wheel we already have.
I believe the criticism for these problems should be directed at the elders of our financial systems, not the young or inexperienced. Those who are charged with the oversight of rules, regulations, and policy should know better, particularly those who have the benefit of time and wisdom from prior experience.
Failing to act when you know that the consequences of that inaction might be harmful to the capital markets, or, even worse, participating in questionable transactions without fully understanding the ramifications is simply unjustifiable behavior, in my view.
As custodians of the public’s money, and trust, we must do a better job of balancing risk and maintaining a high level of consistency to our science.
Respectfully,
Scotty C. George
I worry, sometimes, about the influence, or lack thereof, of morality in the drama of equity investment and speculation. It seems that in the thirty years I’ve been involved in the securities markets there has evolved a “new way” of analyzing credit, balance sheets, and fundamentals.
Each generation brings its own biases and experience to bear upon its collective professional ethos, but somehow we’ve deviated so far afield that speculation and aggressiveness have become this decade’s norm, while patience has been shunned aside.
New powers and statistics have been synthesized to justify a new alchemy of synthetic derivatives whose primary purpose, it seems to me, is to generate revenue for the issuing body first and returns for the client second. I am wary of the reputation this new “science” brings to my profession and the aftershock of cross-currents it creates in its wake. During a crisis in the markets like the kind we are now experiencing there is no historical paradigm for evaluating the valuations of these instruments, nor the depth of the carnage, should it occur.
Clearly, we are walking through new territory, which is what makes these crises so scary to the first-time, and long-time, investor.
I don’t have a direct solution for these afflictions, nor do I have enough space in this column to vet the details. But I do know that the unprecedented nature of these catastrophes (dot.com, real estate, commodities, etc.) is self imposed and not the effect of natural market continuums. They are brought about by generational shifts in morality that dictate speed versus carefulness, action versus inaction, greed versus compassion.
The unconventional nature of what is today called “alternative investments” is, by itself, unsettling because I don’t see the problem with traditional equity investments or non-leveraged debt. As much as we might try to reinvent the wheel, the challenge should be to perfect the wheel we already have.
I believe the criticism for these problems should be directed at the elders of our financial systems, not the young or inexperienced. Those who are charged with the oversight of rules, regulations, and policy should know better, particularly those who have the benefit of time and wisdom from prior experience.
Failing to act when you know that the consequences of that inaction might be harmful to the capital markets, or, even worse, participating in questionable transactions without fully understanding the ramifications is simply unjustifiable behavior, in my view.
As custodians of the public’s money, and trust, we must do a better job of balancing risk and maintaining a high level of consistency to our science.
Respectfully,
Scotty C. George
Monday, September 8, 2008
Market Commentary for the week of September 8, 2008
Sometimes, euphemisms can be a clever way of delivering bad news if done with such gravitas that the listener thinks he’s hearing something important. Last week the market sunk dramatically, not fooled by reports that global productivity kicked up a notch. In my book, productivity is a catch-phrase for “you’re fired”. To be sure, unemployment spiked to a 5 year high last week.
I may catch flack from other economists and political scientists, some younger than me, who buy into the technological revolution and the advances made in manufacturing and business services by computers, structured work forces, and human resources management.
But let’s face facts. Getting people to produce more (output) while their contemporaries are being laid-off or while cost-cutting (wages) reduces overhead is the most inefficient way of boosting inventories, or profits, without having the company succumb to pressures later on to ameliorate its inefficiencies.
When is “profit” a dirty word?
Wall Street analysts know this. If, in fact, earnings are the barometer of a company’s health, then creating earnings off the backs of fewer laborers without increasing sales volume or piquing demand is a recipe for disaster in the capital markets.
Can fewer workers and cost controls produce greater efficiency? Absolutely. But the current data doesn’t support the enthusiasm about productivity increases as it should, definitionally. Labor rolls and wages are decreasing, and have been for at least half a decade.
Unit labor costs, while declining, have not shown a commensurate decline in inflation or prices. Therefore, fewer workers are working, but paying more for the goods they produce, in real currency terms.
Thus, the markets fell dramatically last week because earnings projections weakened in the face of rising costs. Broad indices worldwide contracted because in spite of all the “gains” in output, the economic data is moving in the opposite direction.
Consumer demand is stagnating significantly. Industrial producers, as well as consumer cyclicals, basic materials and technology companies are finding shallower markets to sell into.
Hold on a little longer.
The decline in global demand/consumption is taking its toll on the equities markets. Most strategists just simply chose to take money off the table last week, rather than to sit with depreciating assets. Declining issues outnumbered advances significantly.
Investors are paying the toll for this uncertainty. The bear persists and is dragging all sectors in its wake. The prevailing attitude amongst clients is to hunker down against the headwind and not to play the risk game for the time being.
Because the decline transcends regional/national boundaries, the concept of global bailout through commercial exchange has also been put to rest. Exports are limited by low demand and the vectors are not strong enough to support one region pulling all the others along for the ride.
I have said that we must weather through weeks like the one we just had. I hope that impatience doesn’t grow as quickly as, say, inflation.
I may catch flack from other economists and political scientists, some younger than me, who buy into the technological revolution and the advances made in manufacturing and business services by computers, structured work forces, and human resources management.
But let’s face facts. Getting people to produce more (output) while their contemporaries are being laid-off or while cost-cutting (wages) reduces overhead is the most inefficient way of boosting inventories, or profits, without having the company succumb to pressures later on to ameliorate its inefficiencies.
When is “profit” a dirty word?
Wall Street analysts know this. If, in fact, earnings are the barometer of a company’s health, then creating earnings off the backs of fewer laborers without increasing sales volume or piquing demand is a recipe for disaster in the capital markets.
Can fewer workers and cost controls produce greater efficiency? Absolutely. But the current data doesn’t support the enthusiasm about productivity increases as it should, definitionally. Labor rolls and wages are decreasing, and have been for at least half a decade.
Unit labor costs, while declining, have not shown a commensurate decline in inflation or prices. Therefore, fewer workers are working, but paying more for the goods they produce, in real currency terms.
Thus, the markets fell dramatically last week because earnings projections weakened in the face of rising costs. Broad indices worldwide contracted because in spite of all the “gains” in output, the economic data is moving in the opposite direction.
Consumer demand is stagnating significantly. Industrial producers, as well as consumer cyclicals, basic materials and technology companies are finding shallower markets to sell into.
Hold on a little longer.
The decline in global demand/consumption is taking its toll on the equities markets. Most strategists just simply chose to take money off the table last week, rather than to sit with depreciating assets. Declining issues outnumbered advances significantly.
Investors are paying the toll for this uncertainty. The bear persists and is dragging all sectors in its wake. The prevailing attitude amongst clients is to hunker down against the headwind and not to play the risk game for the time being.
Because the decline transcends regional/national boundaries, the concept of global bailout through commercial exchange has also been put to rest. Exports are limited by low demand and the vectors are not strong enough to support one region pulling all the others along for the ride.
I have said that we must weather through weeks like the one we just had. I hope that impatience doesn’t grow as quickly as, say, inflation.
Tuesday, September 2, 2008
Market Commentary for the week of September 2, 2008
October (?)
Although not the official end of the quarter, the Labor Day holiday in America is nevertheless a psychological hurdle, as if the end of Summer has come to pass, irrespective of the calendar. To that end, the markets seemed to be positioning themselves last week as if to rearrange like the end of a quarter. Indeed, three day holidays in a bear market are not a comfortable time to be “long”.
I find it always helpful to step back and look at the big picture rather than the “rearranging” for psychological comfort.
It looks, still, as if a global bear market is firmly established, even though some sectors show indications of intermediate bottoming and upwards acceleration (Financials, Telecoms). For the bear to end, we need closure on the root causes of price creep and inflation, and a longer period of downside deceleration within the bear. In other words, too few equities are showing signs of stabilizing and too few global baskets are in a condition of upside momentum.
Rather, nearly three-quarters of measurable financial instruments within my database are in a bear phase that initiated in 2007, and show no signs currently of having reached their nadir.
This is not to suggest that the end might be elusive or far away. I would argue that the magnitude and amplitude of the current bear indicate that we are closer to the end than the beginning of the contraction. Think about it. If the origin of the bear was immediately after the zenith in stock relative strength quotients in July of 2007, then today we find ourselves in the midst of a mess, to be sure, but farther from its original starting point and maximum potential for negative direction.
Calm down.
Is this comforting? Not really. Because like the long car-journey with kids in the backseat asking “are we there yet?”, it’s not going to be comfortable until we reach the end of the journey. And unfortunately, quantitative science can only identify the inflection point of a turnaround after it has been achieved. Whereas we can predict a range of time and values around which the reversal might occur (when relative strength empties to its maximum), the actual values are expressed only as a range of possible quotients. The caution therefore is that one should never play at the margins when stocks are at their greatest strength (“it’ll never end”) or when despair seems its greatest (“I won’t buy any stocks here”).
One must follow the prevailing trend and play within it to maximize profit potential.
You know the score.
So much of this boils down to common sense, anyway. Computer models and scientific methodology are only as good as the information given them, and the efficiency of their ability to produce results.
Sometimes, capital gains is not the only result sought, because later on imbalances might occur. That is why different methodologies or mutual funds appear “hot” for certain time frames.
But ultimately, I believe the key to market analysis is consistency through all phases of economic travails. Nobody can forecast the exact entry or exit inflection points of ownership of financial securities (real estate, gold, equities, bonds, etc.). Therefore, intuition and balance should be considered desirable objectives.
There are enough negative influences today to dissuade anyone from taking a chance on the market. I, instead, prefer to focus upon the search for potential positive outcomes.
The final quarter might be scary, if you let it be, or fertile soil for the next leg upwards.
Although not the official end of the quarter, the Labor Day holiday in America is nevertheless a psychological hurdle, as if the end of Summer has come to pass, irrespective of the calendar. To that end, the markets seemed to be positioning themselves last week as if to rearrange like the end of a quarter. Indeed, three day holidays in a bear market are not a comfortable time to be “long”.
I find it always helpful to step back and look at the big picture rather than the “rearranging” for psychological comfort.
It looks, still, as if a global bear market is firmly established, even though some sectors show indications of intermediate bottoming and upwards acceleration (Financials, Telecoms). For the bear to end, we need closure on the root causes of price creep and inflation, and a longer period of downside deceleration within the bear. In other words, too few equities are showing signs of stabilizing and too few global baskets are in a condition of upside momentum.
Rather, nearly three-quarters of measurable financial instruments within my database are in a bear phase that initiated in 2007, and show no signs currently of having reached their nadir.
This is not to suggest that the end might be elusive or far away. I would argue that the magnitude and amplitude of the current bear indicate that we are closer to the end than the beginning of the contraction. Think about it. If the origin of the bear was immediately after the zenith in stock relative strength quotients in July of 2007, then today we find ourselves in the midst of a mess, to be sure, but farther from its original starting point and maximum potential for negative direction.
Calm down.
Is this comforting? Not really. Because like the long car-journey with kids in the backseat asking “are we there yet?”, it’s not going to be comfortable until we reach the end of the journey. And unfortunately, quantitative science can only identify the inflection point of a turnaround after it has been achieved. Whereas we can predict a range of time and values around which the reversal might occur (when relative strength empties to its maximum), the actual values are expressed only as a range of possible quotients. The caution therefore is that one should never play at the margins when stocks are at their greatest strength (“it’ll never end”) or when despair seems its greatest (“I won’t buy any stocks here”).
One must follow the prevailing trend and play within it to maximize profit potential.
You know the score.
So much of this boils down to common sense, anyway. Computer models and scientific methodology are only as good as the information given them, and the efficiency of their ability to produce results.
Sometimes, capital gains is not the only result sought, because later on imbalances might occur. That is why different methodologies or mutual funds appear “hot” for certain time frames.
But ultimately, I believe the key to market analysis is consistency through all phases of economic travails. Nobody can forecast the exact entry or exit inflection points of ownership of financial securities (real estate, gold, equities, bonds, etc.). Therefore, intuition and balance should be considered desirable objectives.
There are enough negative influences today to dissuade anyone from taking a chance on the market. I, instead, prefer to focus upon the search for potential positive outcomes.
The final quarter might be scary, if you let it be, or fertile soil for the next leg upwards.
Monday, August 18, 2008
Market Commentary for the week of August 18, 2008
The value of owning financial securities remains exposed to risk, as last week’s economic announcements clearly reinforced the notion that price creep/inflation exert significant influence upon profitability worldwide. In the past, one might allow for geographical inconsistencies in these data, but we now know that nations West and East are seeing producer prices increase, raw materials deplete, and consumption decrease.
The average global inflation rate today has far outpaced any historical comparisons or previous benchmarks.
Where’s the blame?
We owe this phenomenon to the stewards of our money: central banks, politicians, and corporate boards. Through their actions, worldwide lending and speculation exploded during the last decade like no other time in history. Exacerbated by greed and synthetic calculations the world’s economy sat perched atop a mountain of debt and leverage. Its unwinding is merely the net effect of the excesses which preceded it.
Likewise, the consumer was either duped into, or followed willingly, a pattern of credit-card largesse which now results in the lowest savings rate per capita ever recorded. A growing number of bankruptcies and foreclosures harkens a period when “depression” was used to describe both the economic condition as well as the mental state of the investment community. This at a time when the eco-system is ageing and the population grows older.
Market disconnect.
With most sectors unresponsive to short-term stimuli, it is tougher to seek portfolio solutions with any traction. Unfortunately, most sectors’ prevailing trend is negative for the immediate future.
However, we do know that bear markets do end, and this one is no different. The emphasis upon immediate gratification has sullied the mindset of investors to such an extent that historical norms and rates of return have become irrelevant to clients who expect their monthly statements to reflect ever-growing portfolio valuations, rather than the real exercise of properly diversifying risk so as to diminish the magnitude of risks associated with any type of investment. The shorter the client’s attention span and investment horizon, the more volatile the portfolio appears. Obviously, those with an appreciation for risk/reward tolerance and a sense of history understand, and tolerate, the ravages of short-term economics.
The bottom line: stocks will always produce an outstanding return if given the horizon of long-term expectations.
Getting real.
I find that those so infatuated with leverage, hedge funds, alternative investments, and day-trading fail to grasp the significance of the exercise itself, and bring very little moral philosophy to the ownership of public (or private) equity.
Thus, many of these short-term strategies have run into trouble by being unidimensional and hermit-like in their approach to diversification and social conscience. No one knows if a single strategy might endure forever, so many have seen their halcyon days come crashing down without prudent methodological science to protect them.
Short-term investing requires a subjective judgment about what to buy and what to avoid. Sometimes, the influence of such a risky strategy can be corrupted by things outside of its control and lead to results and expectations that are less than ideal.
The stakes are high. Remain committed to a discipline that works over the longer-term.
Please note: There will be no Market Outlook published next week. The next publication will be Tuesday September 2nd.
The average global inflation rate today has far outpaced any historical comparisons or previous benchmarks.
Where’s the blame?
We owe this phenomenon to the stewards of our money: central banks, politicians, and corporate boards. Through their actions, worldwide lending and speculation exploded during the last decade like no other time in history. Exacerbated by greed and synthetic calculations the world’s economy sat perched atop a mountain of debt and leverage. Its unwinding is merely the net effect of the excesses which preceded it.
Likewise, the consumer was either duped into, or followed willingly, a pattern of credit-card largesse which now results in the lowest savings rate per capita ever recorded. A growing number of bankruptcies and foreclosures harkens a period when “depression” was used to describe both the economic condition as well as the mental state of the investment community. This at a time when the eco-system is ageing and the population grows older.
Market disconnect.
With most sectors unresponsive to short-term stimuli, it is tougher to seek portfolio solutions with any traction. Unfortunately, most sectors’ prevailing trend is negative for the immediate future.
However, we do know that bear markets do end, and this one is no different. The emphasis upon immediate gratification has sullied the mindset of investors to such an extent that historical norms and rates of return have become irrelevant to clients who expect their monthly statements to reflect ever-growing portfolio valuations, rather than the real exercise of properly diversifying risk so as to diminish the magnitude of risks associated with any type of investment. The shorter the client’s attention span and investment horizon, the more volatile the portfolio appears. Obviously, those with an appreciation for risk/reward tolerance and a sense of history understand, and tolerate, the ravages of short-term economics.
The bottom line: stocks will always produce an outstanding return if given the horizon of long-term expectations.
Getting real.
I find that those so infatuated with leverage, hedge funds, alternative investments, and day-trading fail to grasp the significance of the exercise itself, and bring very little moral philosophy to the ownership of public (or private) equity.
Thus, many of these short-term strategies have run into trouble by being unidimensional and hermit-like in their approach to diversification and social conscience. No one knows if a single strategy might endure forever, so many have seen their halcyon days come crashing down without prudent methodological science to protect them.
Short-term investing requires a subjective judgment about what to buy and what to avoid. Sometimes, the influence of such a risky strategy can be corrupted by things outside of its control and lead to results and expectations that are less than ideal.
The stakes are high. Remain committed to a discipline that works over the longer-term.
Please note: There will be no Market Outlook published next week. The next publication will be Tuesday September 2nd.
Monday, August 11, 2008
Market Commentary for the week of August 11, 2008
Presto!!
If you can’t believe your eyes, and ears, then what are you to believe? Unlike conventional magic, whose aim is to misdirect and deceive, the markets are right there in front of you, chock full of fundamentals and information that can serve as productive backdrop for any type of analysis you wish to employ.
Really, could you not have imagined a housing bubble, or its subsequent deflating impact upon the economy-at-large? Did you not see the demise of consumerism in the face of rising inflation in commodities (energy)? Were you the last holdout in failing to predict the dollar’s decline or rising unemployment? If not, then you weren’t looking, or you weren’t reading my column.
Trends, as I’ve stated before, are not one-off occurrences but, rather, a sequence of vectors which taken in sum and over time, can be observed, predicted, quantified and played. Overweight one, you underweight another.
For the un-observant, gas prices began their rise almost a decade ago. Although the rate of acceleration has magnified significantly in the last three years, the cycle rotation into tangible assets began at the height (and demise) of the technology spike in 1998. Evidence was available then that changes were occurring in the flow of capital and the level of speculation towards “value” equities, of which Energy and Basic Materials were a part.
Further, the banking system began a trend to capitalize upon the real estate boom by leveraging their product valuations, in some cases by a multiple of 20 to 1. Inflation didn’t start with Energy; it started with the trustees, in government and the private sector, of our financial system.
Alas, it’s not a magic trick.
Although the evidence is decisive that this bubble, too, has imploded, the numbers don’t tell the whole story. To be sure, portfolio declines are all over the map. But how do you measure the psychological impact of a breach in trust or confidence? I expect that measurement to permeate the levels and vectors we observe from here on to the bottom, and back up again.
Further exacerbating the obvious, job cuts and wage stagnation have increased at their highest rate in the last decade, dissipating the potential for discretionary equity purchases. Anything that increases at a 30 percent rate is large. So have Energy prices, job cuts, and real estate devaluation. These data increase the likelihood of a more enduring capitulation towards the bottom than, say, a more definitional bear market contraction of short duration because the psychological effects are more long-lasting and debilitating.
It’s not magic; it’s in front of you.
I am often accused of being too bearish. I disagree. Our portfolios more than doubled the rate of appreciation in the S&P for the last 8 years. But I am a quantitative scientist, and unlike the magician, I am not trying to deceive or manipulate what’s in plain sight.
In fact, I see capital gains potential in a variety of sources in the near term, including biopharmaceuticals, alternative energy, infrastructure and technology, telecommunications, and ecological science. Keep your eye on water purification as the next “black gold” of world consumption.
If it were as easy as waving a wand like the magician to produce amazing results everyone would do it. The fact that we can’t is what has everyone frustrated.
If you can’t believe your eyes, and ears, then what are you to believe? Unlike conventional magic, whose aim is to misdirect and deceive, the markets are right there in front of you, chock full of fundamentals and information that can serve as productive backdrop for any type of analysis you wish to employ.
Really, could you not have imagined a housing bubble, or its subsequent deflating impact upon the economy-at-large? Did you not see the demise of consumerism in the face of rising inflation in commodities (energy)? Were you the last holdout in failing to predict the dollar’s decline or rising unemployment? If not, then you weren’t looking, or you weren’t reading my column.
Trends, as I’ve stated before, are not one-off occurrences but, rather, a sequence of vectors which taken in sum and over time, can be observed, predicted, quantified and played. Overweight one, you underweight another.
For the un-observant, gas prices began their rise almost a decade ago. Although the rate of acceleration has magnified significantly in the last three years, the cycle rotation into tangible assets began at the height (and demise) of the technology spike in 1998. Evidence was available then that changes were occurring in the flow of capital and the level of speculation towards “value” equities, of which Energy and Basic Materials were a part.
Further, the banking system began a trend to capitalize upon the real estate boom by leveraging their product valuations, in some cases by a multiple of 20 to 1. Inflation didn’t start with Energy; it started with the trustees, in government and the private sector, of our financial system.
Alas, it’s not a magic trick.
Although the evidence is decisive that this bubble, too, has imploded, the numbers don’t tell the whole story. To be sure, portfolio declines are all over the map. But how do you measure the psychological impact of a breach in trust or confidence? I expect that measurement to permeate the levels and vectors we observe from here on to the bottom, and back up again.
Further exacerbating the obvious, job cuts and wage stagnation have increased at their highest rate in the last decade, dissipating the potential for discretionary equity purchases. Anything that increases at a 30 percent rate is large. So have Energy prices, job cuts, and real estate devaluation. These data increase the likelihood of a more enduring capitulation towards the bottom than, say, a more definitional bear market contraction of short duration because the psychological effects are more long-lasting and debilitating.
It’s not magic; it’s in front of you.
I am often accused of being too bearish. I disagree. Our portfolios more than doubled the rate of appreciation in the S&P for the last 8 years. But I am a quantitative scientist, and unlike the magician, I am not trying to deceive or manipulate what’s in plain sight.
In fact, I see capital gains potential in a variety of sources in the near term, including biopharmaceuticals, alternative energy, infrastructure and technology, telecommunications, and ecological science. Keep your eye on water purification as the next “black gold” of world consumption.
If it were as easy as waving a wand like the magician to produce amazing results everyone would do it. The fact that we can’t is what has everyone frustrated.
Monday, August 4, 2008
Market Commentary for the week of August 4, 2008
No news is…no news!!
The number of persons claiming they would buy stocks if properly motivated declined last week, as sentiment and surveys concluded that earnings meltdowns, portfolio devaluation, and depleted savings made equities purchases superfluous or, at best, discretionary. The markets need to launch a full-blown public relations campaign to locate eligible buyers other than professional traders.
Volume, breadth, and volatility were clearly negative last week. A search for the bottom became as onerous as looking for the lost city of Atlantis.
Despite the gloom, mini-bounces within the existing secular bear emboldened some to go “value hunting” and to pick up some Financials and Industrials midweek. There exists no special factor, however, that might reverse earnings erosion and thereby provide a genuine foundation from which the markets might rebound.
Overall, relative strength (RSI) indices continue to traverse negative territory.
Not in your house.
The economy is not faring any better than the markets. Jobless claims went up, layoffs accelerated, and the dollar still weakens against most global currencies. On balance, weakness in manufacturing coupled with an intractable energy price dictate that economic activity has a way (down) to go before stabilizing. The nation’s output is much weaker than the dollar’s level would otherwise indicate, reflecting a slowdown, globally, in discretionary spending.
Investors are sifting through filings, reports and anecdotal news releases to find any reason to find hope and, yet, the news is just not strong enough to bolster the negative psychology which permeates the landscape. After a surprisingly strong January (2008), we seem to have hit the wall hard.
Define your methodology.
The basis for sound portfolio theory has always been diversification and asset allocation. In fact, I subscribe to the much delivered mantra that “asset allocation plays a greater role in the probability of portfolio capital gains than does any individual security within that portfolio”. Thus, to stay ahead of the curve I have avoided Cyclicals and Financials. And yet, even with leading categories providing most of the impetus this year, even those momentum plays are weakening.
Indeed, the prudent thing to do now is to look for short term yield, hold cash, and not to panic. Irrespective of sector, geography, or net-worth the next few months might be painful to endure.
My long-term track record remains ahead of the averages and I intend to stay there.
The number of persons claiming they would buy stocks if properly motivated declined last week, as sentiment and surveys concluded that earnings meltdowns, portfolio devaluation, and depleted savings made equities purchases superfluous or, at best, discretionary. The markets need to launch a full-blown public relations campaign to locate eligible buyers other than professional traders.
Volume, breadth, and volatility were clearly negative last week. A search for the bottom became as onerous as looking for the lost city of Atlantis.
Despite the gloom, mini-bounces within the existing secular bear emboldened some to go “value hunting” and to pick up some Financials and Industrials midweek. There exists no special factor, however, that might reverse earnings erosion and thereby provide a genuine foundation from which the markets might rebound.
Overall, relative strength (RSI) indices continue to traverse negative territory.
Not in your house.
The economy is not faring any better than the markets. Jobless claims went up, layoffs accelerated, and the dollar still weakens against most global currencies. On balance, weakness in manufacturing coupled with an intractable energy price dictate that economic activity has a way (down) to go before stabilizing. The nation’s output is much weaker than the dollar’s level would otherwise indicate, reflecting a slowdown, globally, in discretionary spending.
Investors are sifting through filings, reports and anecdotal news releases to find any reason to find hope and, yet, the news is just not strong enough to bolster the negative psychology which permeates the landscape. After a surprisingly strong January (2008), we seem to have hit the wall hard.
Define your methodology.
The basis for sound portfolio theory has always been diversification and asset allocation. In fact, I subscribe to the much delivered mantra that “asset allocation plays a greater role in the probability of portfolio capital gains than does any individual security within that portfolio”. Thus, to stay ahead of the curve I have avoided Cyclicals and Financials. And yet, even with leading categories providing most of the impetus this year, even those momentum plays are weakening.
Indeed, the prudent thing to do now is to look for short term yield, hold cash, and not to panic. Irrespective of sector, geography, or net-worth the next few months might be painful to endure.
My long-term track record remains ahead of the averages and I intend to stay there.
Monday, July 28, 2008
Market Commentary for the week of July 28, 2008
Headlines
In a rather “Alice in Wonderland” kind of week, in which down-was-up and up-was-down, the markets last week stumbled into a paradoxical response rising on bad earnings in Financials but faltering later as energy prices jostled somewhat.
For whatever the reason, the market was ready to halt its week’s-long slide to find justification for going up, but faltered nonetheless.
While turmoil in the Middle East was temporarily put on hold during Democratic Presidential-nominee Obama’s foreign fact-finding trip, energy prices started dropping as worries about supplies diminished. Rising stockpiles didn’t change many traders’ opinion, however, about the long-term impact of diminishing reserves and limited refining capacity. The sell-off was simply an indication in the short-run that money chases opportunity, not morality. In last week’s case it was the much maligned financial sector.
Sometimes, the absence of a long term perspective can be a fateful reminder that Wall Street is certainly not Main Street nor, in most cases, a surrogate for the economy at large.
Markets
The reduction in fear temporarily put a halt to investor’s aversion to buying stocks. Many equities trading at or near critical support levels picked up some buying support. However, there exists just as many reasons as equities for reducing exposure to a vapid earnings landscape. Net for the week, I took money off the table and raised some cash.
It is likely that the reflex “bounce” we saw in the markets last week will be contained and understated. I see no tremendous appetite for stocks, worldwide, except for a clarion call to “get out whole” on any upswings. The crisis of confidence lingers even still, and until we see a turnaround in the earnings picture (unlikely) the markets will remain negatively range-bound for the foreseeable future.
Technicals
The predominant current secular trend is negative. Upside bounces and rally efforts are knee-jerk responses to valuation depreciation and should be seen as false starts within a deepening “top left to bottom right” configuration.
Too many sectors are unaffected by these rally attempts, so much so that the quantifiable validity of these efforts is negligible, at best.
I believe that most upcoming earnings momentum advisories are negative, and likely to dissuade investors from loosening their purse strings to indulge in a flight of fancy in stocks, particularly when the intermediate capitulation is not complete.
As I have said in earlier missives, however, we are closer to the bottom than when the bear began almost one year ago. Although this might seem self-evident, the facts are that as valuation decline worsens, the market’s RSI readings come closer to emptying out the pain, and gaining an equilibrium from which it will be possible to buy inexpensively and profitably. But not just quite yet.
No portfolios are bulletproof in this environment. While the bottom is not yet at hand, the early signs of a bottom juncture are perceptibly more likely than they were five months ago. Led by equal parts fundamentals and inspiration we will know when the trend reversal is upon us by utilizing inflection point methodology to quantify the position of cyclical events and their probability of reversing course upwards.
In a rather “Alice in Wonderland” kind of week, in which down-was-up and up-was-down, the markets last week stumbled into a paradoxical response rising on bad earnings in Financials but faltering later as energy prices jostled somewhat.
For whatever the reason, the market was ready to halt its week’s-long slide to find justification for going up, but faltered nonetheless.
While turmoil in the Middle East was temporarily put on hold during Democratic Presidential-nominee Obama’s foreign fact-finding trip, energy prices started dropping as worries about supplies diminished. Rising stockpiles didn’t change many traders’ opinion, however, about the long-term impact of diminishing reserves and limited refining capacity. The sell-off was simply an indication in the short-run that money chases opportunity, not morality. In last week’s case it was the much maligned financial sector.
Sometimes, the absence of a long term perspective can be a fateful reminder that Wall Street is certainly not Main Street nor, in most cases, a surrogate for the economy at large.
Markets
The reduction in fear temporarily put a halt to investor’s aversion to buying stocks. Many equities trading at or near critical support levels picked up some buying support. However, there exists just as many reasons as equities for reducing exposure to a vapid earnings landscape. Net for the week, I took money off the table and raised some cash.
It is likely that the reflex “bounce” we saw in the markets last week will be contained and understated. I see no tremendous appetite for stocks, worldwide, except for a clarion call to “get out whole” on any upswings. The crisis of confidence lingers even still, and until we see a turnaround in the earnings picture (unlikely) the markets will remain negatively range-bound for the foreseeable future.
Technicals
The predominant current secular trend is negative. Upside bounces and rally efforts are knee-jerk responses to valuation depreciation and should be seen as false starts within a deepening “top left to bottom right” configuration.
Too many sectors are unaffected by these rally attempts, so much so that the quantifiable validity of these efforts is negligible, at best.
I believe that most upcoming earnings momentum advisories are negative, and likely to dissuade investors from loosening their purse strings to indulge in a flight of fancy in stocks, particularly when the intermediate capitulation is not complete.
As I have said in earlier missives, however, we are closer to the bottom than when the bear began almost one year ago. Although this might seem self-evident, the facts are that as valuation decline worsens, the market’s RSI readings come closer to emptying out the pain, and gaining an equilibrium from which it will be possible to buy inexpensively and profitably. But not just quite yet.
No portfolios are bulletproof in this environment. While the bottom is not yet at hand, the early signs of a bottom juncture are perceptibly more likely than they were five months ago. Led by equal parts fundamentals and inspiration we will know when the trend reversal is upon us by utilizing inflection point methodology to quantify the position of cyclical events and their probability of reversing course upwards.
Monday, July 21, 2008
Market Commentary for the week of July 21, 2008
This is getting interesting. Do you believe the numbers….or the numbers?
Despite going from recent historically low levels to just plain poor, stocks showed little initiative last week in breaking out of the bear slide. In fact, the up-down-up paradigm was predictable, if nothing else.
Knock, knock…
What we saw last week was a series of reflexive reactions to inflation, jobs growth (or lack thereof), the banking crisis, and poor earnings reports. With many traders on summer hiatus and retail investors avoiding this mousetrap like the plague, there was little cash, and therefore little breadth, in volume or trading activity. By their own neutrality investors are exacerbating the magnitude of daily swings.
My models continue to show diminishing earnings acceleration patterns.
Even in high-demand industries, like Energy, valuations and price push are eating into profit margins. The risk of these secular trends expiring is low, but since nothing performs in linear (straight-up) fashion, even the most successful sectors (Energy, Basic Materials, Technology) might capitulate downwards into a semi-parabolic response.
There are few signs indicating that psychology will turn the market around, so we just have to wait for alternative responses or better earnings to recapture the imagination and pulse of the public.
But wait!!
Acknowledging that all things are cyclical and quantifiable, I am confident that even these negative market responses will abate, too. But it is noteworthy to reflect that because earnings erosion is so closely linked to global inflation trends, the commodities and natural resource cycle must “break” before earnings can possibly respond more positively.
No longer does the dot.com paradigm of “grab and go” function in today’s market. Instead we see the vulnerably exposed underbelly of greed and traditional business as usual. Indeed, the requisite “new paradigm” that we need today is a moral compass that shares the risk/shares the reward. Momentum is being lost because wealth and profits are isolated in too few industries and social strata.
The longer term actually looks better to me as the bear market progression unfolds. In fact, we are closer to the end of portfolio pain than we were before the bear commenced last year. That is not to suggest that the burden falls from traditional fundamental analysis, but rather to identify that parabolic phases in the market are to be expected and are usually finite. Unfortunately it’s only after the phase reverses that most claim to be prescient in having predicted its change of course.
The pain in portfolios is real, and not to be scoffed at. But the burden is not upon investors to change the morality of greed but upon the corporate stewards into whose companies we put our money.
Despite going from recent historically low levels to just plain poor, stocks showed little initiative last week in breaking out of the bear slide. In fact, the up-down-up paradigm was predictable, if nothing else.
Knock, knock…
What we saw last week was a series of reflexive reactions to inflation, jobs growth (or lack thereof), the banking crisis, and poor earnings reports. With many traders on summer hiatus and retail investors avoiding this mousetrap like the plague, there was little cash, and therefore little breadth, in volume or trading activity. By their own neutrality investors are exacerbating the magnitude of daily swings.
My models continue to show diminishing earnings acceleration patterns.
Even in high-demand industries, like Energy, valuations and price push are eating into profit margins. The risk of these secular trends expiring is low, but since nothing performs in linear (straight-up) fashion, even the most successful sectors (Energy, Basic Materials, Technology) might capitulate downwards into a semi-parabolic response.
There are few signs indicating that psychology will turn the market around, so we just have to wait for alternative responses or better earnings to recapture the imagination and pulse of the public.
But wait!!
Acknowledging that all things are cyclical and quantifiable, I am confident that even these negative market responses will abate, too. But it is noteworthy to reflect that because earnings erosion is so closely linked to global inflation trends, the commodities and natural resource cycle must “break” before earnings can possibly respond more positively.
No longer does the dot.com paradigm of “grab and go” function in today’s market. Instead we see the vulnerably exposed underbelly of greed and traditional business as usual. Indeed, the requisite “new paradigm” that we need today is a moral compass that shares the risk/shares the reward. Momentum is being lost because wealth and profits are isolated in too few industries and social strata.
The longer term actually looks better to me as the bear market progression unfolds. In fact, we are closer to the end of portfolio pain than we were before the bear commenced last year. That is not to suggest that the burden falls from traditional fundamental analysis, but rather to identify that parabolic phases in the market are to be expected and are usually finite. Unfortunately it’s only after the phase reverses that most claim to be prescient in having predicted its change of course.
The pain in portfolios is real, and not to be scoffed at. But the burden is not upon investors to change the morality of greed but upon the corporate stewards into whose companies we put our money.
Monday, July 14, 2008
Market Commentary for the week of July 14, 2008
The markets gyrated yet again last week, this time doing so in waltz-like “three-quarter” time: One step forward, one step back, one to the side.
It’s very mechanical.
An argument can be made that we have lost buying protection, and therefore the backslide gets even more severe. Such is always the case in a bear market. Get used to it.
In stark contrast to the previous bull during which dart-throwing was equally as effective as fundamental analysis for picking stocks, solid methodology and prudent asset allocation are requirements in any equity player’s portfolio today. Governmental and monetary stewardship of the markets is non-existent. You are truly on your own.
As a result, the transition from bull to bear has been difficult, to be sure. Inflation in health care, energy, foodstuffs, and retail goods has threatened the economic solvency of businesses and households, and changed the psychological dynamic in the process. I am seeing the starkest contrast between wanting to own financial instruments and needing to own them in over twenty years of researching the topic.
In terms of portfolio performance, one should expect major divergences between sectors and equities, performance and hyperbole. The next bear leg has not yet happened. Keep your powder dry and don’t make big bets that the bear has expired just yet.
The overall level of stress in the markets is literal and figurative. Literally everyone seems on edge about making the right gambit, while figuratively we are working “at the margins” of equity valuations worldwide by expanding the width of stochastic “standard deviations” from nominal valuations. That being said, you still need to be “in it” and not abandon all hope entirely.
Is there any hope?
Firstly, with bond yields having fallen so far, there really is no other safe haven to counterweight capital gains potential other than equities. Despite downside biases in equities, you couldn’t be worse than languishing at a paltry 2-3% for 10 years hence in bonds.
Besides, bear markets do expire and reverse course. Such might be the case by year-end. Additionally, certain sectors (and individual stocks) run counter-cyclically to bear phases and do quite well. Such is the ethos of Arlington Econometrics’ overweight/underweight/neutral-weight philosophy of measuring asset allocation and capital gains probability.
Finally, as is usually the case, just when everyone agrees ‘it might never get better”, it usually does. The global economy will recover and long term fundamentals will supplant hopelessness as the prudent method of choice for harassed investors.
Turning from a bottom to a top is the genius of opportunity when struggling within a downward spiral.
It’s very mechanical.
An argument can be made that we have lost buying protection, and therefore the backslide gets even more severe. Such is always the case in a bear market. Get used to it.
In stark contrast to the previous bull during which dart-throwing was equally as effective as fundamental analysis for picking stocks, solid methodology and prudent asset allocation are requirements in any equity player’s portfolio today. Governmental and monetary stewardship of the markets is non-existent. You are truly on your own.
As a result, the transition from bull to bear has been difficult, to be sure. Inflation in health care, energy, foodstuffs, and retail goods has threatened the economic solvency of businesses and households, and changed the psychological dynamic in the process. I am seeing the starkest contrast between wanting to own financial instruments and needing to own them in over twenty years of researching the topic.
In terms of portfolio performance, one should expect major divergences between sectors and equities, performance and hyperbole. The next bear leg has not yet happened. Keep your powder dry and don’t make big bets that the bear has expired just yet.
The overall level of stress in the markets is literal and figurative. Literally everyone seems on edge about making the right gambit, while figuratively we are working “at the margins” of equity valuations worldwide by expanding the width of stochastic “standard deviations” from nominal valuations. That being said, you still need to be “in it” and not abandon all hope entirely.
Is there any hope?
Firstly, with bond yields having fallen so far, there really is no other safe haven to counterweight capital gains potential other than equities. Despite downside biases in equities, you couldn’t be worse than languishing at a paltry 2-3% for 10 years hence in bonds.
Besides, bear markets do expire and reverse course. Such might be the case by year-end. Additionally, certain sectors (and individual stocks) run counter-cyclically to bear phases and do quite well. Such is the ethos of Arlington Econometrics’ overweight/underweight/neutral-weight philosophy of measuring asset allocation and capital gains probability.
Finally, as is usually the case, just when everyone agrees ‘it might never get better”, it usually does. The global economy will recover and long term fundamentals will supplant hopelessness as the prudent method of choice for harassed investors.
Turning from a bottom to a top is the genius of opportunity when struggling within a downward spiral.
Monday, July 7, 2008
Market Commentary for the week of July 7, 2008
For many, the Memorial Day weekend is the unofficial beginning to the summer season. Of course, the summer solstice (June) marks the calendar’s initiation to the “second season”. Not to be outdone, the great “Fourth of July” in
Last week’s lethargy originated from anemic growth in jobs creation, high gasoline prices creating earnings meltdowns, and overall pre-holiday boredom.
I suspect that an overload of information is just too confusing for most investors who seem not to care, or wanting to bother with the whole mess right now.
Internals.
Trade volume, and values, evaporated in the face of a short work week, which only strengthened confirmation of many cyclical lows. The short week heightened the probability of continuing the existing downtrends in sectors that need cash badly to infuse life into their moribund condition, like Cyclicals and Financials.
Given the lower volume, mood swings become exacerbated and more violent because there is little buying protection from the downside.
However, the direct beneficiaries of these trading extremes are the sectors in secular uptrends that have little overhead resistance, like Energy, Basic Materials and Technology.
We are witnessing a period of slow growth and high inflation that is likely to persist for years.
Externals.
A major concern from my reading of the Arlington Econometrics data is that any spillover from economic downturns in one region might have a negative impact upon earnings acceleration patterns in another global region. Rather than looking at the world’s bourses as a disconnected paradigm, the integration of capital flow amongst economies almost creates a synergy that makes vulnerabilities regional rather than local.
Inflation issues are no longer isolated to producing nations or their direct consumers. Instead, peripheral market baskets suffer collateral damage from locations far away and not directly linked to their economy.
We see glimpses of this parallel connection in agricultural and energy matters. So, too, might health and medicine transcend direct, or neighboring, borders.
We are early in the cycle of price escalations. A slowdown might take on pandemic consequences and prolong the current bear market.
Unfortunately, we are suffering the after-effects of a massive growth cycle which preceded today’s bear. Overall, if prices continue to slide I would stay out of the way of the secular capitulation, and bide my time by rebalancing risk in my portfolios.
Tuesday, July 1, 2008
Arlington Econometrics Third Quarter Commentary
Not Just Yet
It’s normal to question one’s whereabouts when in uncharted territory or halfway between “here and there”. “Are we there yet?” isn’t only a refrain heard from young children from the back seat of the car.
The financial markets are shockingly unnerved by anxiety caused by inflation fears and capital losses. Monetary policy is increasingly less relevant, while consumer confidence diminishes in concert with housing values. There is no “safe” place to hide. Bond yields are anemic and cash totals are dwindling. The only trend I qualify as an uptrend is inflation.
In addition, despite losses during the first quarter, equities are categorically mispriced and out of sync with their prevailing fundamentals.
It’s no wonder the markets lost steam during the first half of this year.
Markets
While most of the blame for inflation has been placed on energy prices, parallel influences exist in agriculture (food), pharmaceuticals, transportation, and non-discretionary purchases. The only correlation between fuel costs and stock prices is that all these factors in sum influence profit margins negatively, and diminish earnings potential.
What has been most surprising is the muted response from legislators and monetarists who seem to have bungled the responsibility they have to level the playing field. Prior and current Federal Reserve chairmen have lowered interest rates so much so that they encouraged speculative bubbles with “cheap” money. Tax and incentive programs have unduly influenced spending to the point that savings are depleted and deficits are the norm. I expect deficits to follow us for at least the next half-decade. Underlying economic fundamentals become irrelevant in such a scenario. Price-push permeates all strata of research, adjusting all the numbers upwards. The net effect is that results will be muted and therefore so too should expectations.
The most recent data supports the notion that consumers are experiencing the sharpest effects of inflation. Relative price trends confirm a macro trend leading to a reduction in personal wealth. Likewise, demand is decreasing and negatively influencing capital expenditures, hiring, inventory, and profits in the corporate sector. On the margins, only a few businesses are able to sustain any long-term planning.
These data affect my portfolio strategies by forcing me to hold more cash, limit the scope of equity allocation, find “less-liquid” equities in which to invest, and to downsize my expectations for performance against negative benchmarks.
To be sure, the market has given back any early-season gains and finds itself down by more than ten percent year-to-date. By comparison, our portfolios show relative and absolute performance, finishing the first half with low single digit advances. It brings to mind that a lowering tide brings down all ships in the harbor. Therefore, simply to advance is a testament to our asset allocation modeling, vigilance to finding earnings accelerators, and unwillingness to hold losers.
Strategy
The landscape is fragile owing to an inordinately high level of debt and leverage. Growth will be sluggish until the credit crisis is resolved and an equilibrium point is reestablished. For the short-term, however, I expect the markets to remain volatile and unstable. No doubt this might have an adverse effect upon client expectations for “absolute” return. Whereas I am more comfortable looking out over a macro longer-term horizon, the next quarter might probably be as unfulfilling as the last two.
The outcome of these diverse vectors’ unpredictability is to reduce global commerce below historical acceleration rates. When someone sneezes in China, the rest of the globe catches cold. The rising economic, political, and military pressures in the world mute the strategy of globalism without quelling it, altogether.
There is no doubt that we are in a “bear market” for equities, because earnings are dissipating and valuations had been so high that they became unsustainable. I conclude that this bear is normal, definitional and like all others which preceded it, quantifiable and cyclical. I’m not suggesting it isn’t a big deal, but, rather, not the beginning of a calamity or global meltdown.
The globe, and the U.S. in particular, can weather this crisis. Perhaps, too, it might create an opportunity to level the playing field and give stocks and financial markets a starting point from which to accelerate much higher.
This is not the first global slowdown, it is simply our time for a slowdown. One’s focal point is always personal and local. When it’s your neighbor it’s an oddity; when it’s you it’s a disaster. The triggers might be the same but when and where the crisis hits determines its impact upon one’s behavior. Natural disasters in far away places are “curiosities” to some. When they hit your home, your family, its cause for alarm.
Conclusion
I believe this, too, will dissipate. Depending upon the response in the next few months, we will either dig out of a morass, or sink deeper into a downtrend. On the whole, the environment exists for the negativity to abate, for the markets to get stronger.
The markets and the economy have definitely been “out of sync” during the past nine months. Fundamentals have actually hindered any expectations for growth. I believe that the excessive speculation in real estate and commodities (typically two “safe-haven” investments) has exacerbated the problem, making its unwinding that much more problematic. I expect interest rates to reverse their 18 year disinflationary cycle and to turn around (upwards) dramatically in response.
Although higher interest rates are not an optimal environment for equities, they will, however, punctuate a higher savings potential and mitigate the effect of inflation. In that sense, equities just might take their cue to perform as a leading indicator of economic growth. A stronger market might definitely send a signal to investors to come back.
I am always aware of asset allocation models that offer me the best probability of absolute return with limited downside risk. Therefore I continue to overweight tangible assets (Basic Materials, Energy) while looking for opportunities in Biotech, Utilities and Financials.
While there is no way to predict the impact of global fundamentals upon equity bourses, we can use history as a guide to our response. Presently we are responding cautiously, raising cash and reducing exposure to risk. This is a short-term response because I remain quite upbeat about the longer term. During a bottoming phase, one should stay out of the way of the wave, but look for opportunity to accumulate value. The overriding theme is to reduce risk. Market cycles are always quantifiable. That is the origin of Arlington Econometrics’ research. Despite the short cycle naysayers, I believe that the maximum fallout from this current capitulation is limited by valuation and sentiment. Therefore my adjustments are oriented around looking for opportunities without blindly standing in the way of a bear phase.
Despite a slowdown in acceleration, the market is still always upwardly biased. Have we hit the bottom? Not just yet.
Will opportunity return? Absolutely.
Asset Allocation:
Equity 48%/Fixed Income 30%/Cash 22%
It’s normal to question one’s whereabouts when in uncharted territory or halfway between “here and there”. “Are we there yet?” isn’t only a refrain heard from young children from the back seat of the car.
The financial markets are shockingly unnerved by anxiety caused by inflation fears and capital losses. Monetary policy is increasingly less relevant, while consumer confidence diminishes in concert with housing values. There is no “safe” place to hide. Bond yields are anemic and cash totals are dwindling. The only trend I qualify as an uptrend is inflation.
In addition, despite losses during the first quarter, equities are categorically mispriced and out of sync with their prevailing fundamentals.
It’s no wonder the markets lost steam during the first half of this year.
Markets
While most of the blame for inflation has been placed on energy prices, parallel influences exist in agriculture (food), pharmaceuticals, transportation, and non-discretionary purchases. The only correlation between fuel costs and stock prices is that all these factors in sum influence profit margins negatively, and diminish earnings potential.
What has been most surprising is the muted response from legislators and monetarists who seem to have bungled the responsibility they have to level the playing field. Prior and current Federal Reserve chairmen have lowered interest rates so much so that they encouraged speculative bubbles with “cheap” money. Tax and incentive programs have unduly influenced spending to the point that savings are depleted and deficits are the norm. I expect deficits to follow us for at least the next half-decade. Underlying economic fundamentals become irrelevant in such a scenario. Price-push permeates all strata of research, adjusting all the numbers upwards. The net effect is that results will be muted and therefore so too should expectations.
The most recent data supports the notion that consumers are experiencing the sharpest effects of inflation. Relative price trends confirm a macro trend leading to a reduction in personal wealth. Likewise, demand is decreasing and negatively influencing capital expenditures, hiring, inventory, and profits in the corporate sector. On the margins, only a few businesses are able to sustain any long-term planning.
These data affect my portfolio strategies by forcing me to hold more cash, limit the scope of equity allocation, find “less-liquid” equities in which to invest, and to downsize my expectations for performance against negative benchmarks.
To be sure, the market has given back any early-season gains and finds itself down by more than ten percent year-to-date. By comparison, our portfolios show relative and absolute performance, finishing the first half with low single digit advances. It brings to mind that a lowering tide brings down all ships in the harbor. Therefore, simply to advance is a testament to our asset allocation modeling, vigilance to finding earnings accelerators, and unwillingness to hold losers.
Strategy
The landscape is fragile owing to an inordinately high level of debt and leverage. Growth will be sluggish until the credit crisis is resolved and an equilibrium point is reestablished. For the short-term, however, I expect the markets to remain volatile and unstable. No doubt this might have an adverse effect upon client expectations for “absolute” return. Whereas I am more comfortable looking out over a macro longer-term horizon, the next quarter might probably be as unfulfilling as the last two.
The outcome of these diverse vectors’ unpredictability is to reduce global commerce below historical acceleration rates. When someone sneezes in China, the rest of the globe catches cold. The rising economic, political, and military pressures in the world mute the strategy of globalism without quelling it, altogether.
There is no doubt that we are in a “bear market” for equities, because earnings are dissipating and valuations had been so high that they became unsustainable. I conclude that this bear is normal, definitional and like all others which preceded it, quantifiable and cyclical. I’m not suggesting it isn’t a big deal, but, rather, not the beginning of a calamity or global meltdown.
The globe, and the U.S. in particular, can weather this crisis. Perhaps, too, it might create an opportunity to level the playing field and give stocks and financial markets a starting point from which to accelerate much higher.
This is not the first global slowdown, it is simply our time for a slowdown. One’s focal point is always personal and local. When it’s your neighbor it’s an oddity; when it’s you it’s a disaster. The triggers might be the same but when and where the crisis hits determines its impact upon one’s behavior. Natural disasters in far away places are “curiosities” to some. When they hit your home, your family, its cause for alarm.
Conclusion
I believe this, too, will dissipate. Depending upon the response in the next few months, we will either dig out of a morass, or sink deeper into a downtrend. On the whole, the environment exists for the negativity to abate, for the markets to get stronger.
The markets and the economy have definitely been “out of sync” during the past nine months. Fundamentals have actually hindered any expectations for growth. I believe that the excessive speculation in real estate and commodities (typically two “safe-haven” investments) has exacerbated the problem, making its unwinding that much more problematic. I expect interest rates to reverse their 18 year disinflationary cycle and to turn around (upwards) dramatically in response.
Although higher interest rates are not an optimal environment for equities, they will, however, punctuate a higher savings potential and mitigate the effect of inflation. In that sense, equities just might take their cue to perform as a leading indicator of economic growth. A stronger market might definitely send a signal to investors to come back.
I am always aware of asset allocation models that offer me the best probability of absolute return with limited downside risk. Therefore I continue to overweight tangible assets (Basic Materials, Energy) while looking for opportunities in Biotech, Utilities and Financials.
While there is no way to predict the impact of global fundamentals upon equity bourses, we can use history as a guide to our response. Presently we are responding cautiously, raising cash and reducing exposure to risk. This is a short-term response because I remain quite upbeat about the longer term. During a bottoming phase, one should stay out of the way of the wave, but look for opportunity to accumulate value. The overriding theme is to reduce risk. Market cycles are always quantifiable. That is the origin of Arlington Econometrics’ research. Despite the short cycle naysayers, I believe that the maximum fallout from this current capitulation is limited by valuation and sentiment. Therefore my adjustments are oriented around looking for opportunities without blindly standing in the way of a bear phase.
Despite a slowdown in acceleration, the market is still always upwardly biased. Have we hit the bottom? Not just yet.
Will opportunity return? Absolutely.
Asset Allocation:
Equity 48%/Fixed Income 30%/Cash 22%
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