Market sleight-of-hand.
Watch closely, because what you think you’re seeing might not be as it appears. Euphoria last week about intraday gains in the Dow, Hang Seng, or Tokyo markets mask an unseen coalescence of negative economic statistics already in the public domain during the previous six months. While central banks wrestle with deteriorating economic statistics by lowering interest rates, other data suggests that more enduring negative trends exist that cannot be solved with short-term stimuli.
Thus it is that I caution investors not to link the activities of the economy with the activities of the equities’ markets. In prior writings I have referenced this as a “Parallel Disconnect”, a mirage by which two events, seemingly linked by parallel directional vectors are not really correlated at all.
In today’s terms the disconnect exists when news broadcasts and other media inflate the significance of large intraday upside price momentum in the face of declining or fragile momentum data. While a baseline comparison between stocks and the economy might seem to be moving in concert, they are in fact intersecting at one point while losing vector connectivity. Over time, the difference becomes more pronounced, but by then it is too late to avert portfolio decline.
For example, the mortgage crisis might seem to be a situation ameliorated by bail-outs, write-offs or low interest rates. But in the face of these short term solutions we run the risk of exacerbating lower profit projections in the Financials, layoffs and wage stagnation, inflation creep, deficit spending, inflation, and lower consumer savings rates. Clearly, the intersection at which the solution meets the problem might seem like a parallel connection, but, in truth, the solution’s vector rips apart any benign connection and ultimately creates more problems.
Just the facts.
My market data, in fact, shows that negative momentum permeates the equities market, globally. Rising commodities and energy costs have ripped apart the potential for profit margins to expand in nearly every sector I have reviewed. In fact, intermediate cycle price gains in Basic Materials and Energy stocks leave them vulnerable to profit-taking even as their fundamentals position them for secular long-term profit appreciation.
In other words, global equities baskets are susceptible to a disconnect of their own, even from local or regional good news, because of the duration and magnitude of the bull cycle during the last five years.
Many analysts believe that solutions to an economic disconnect rests in short-term manipulation of the market. From week to week downside risk can be avoided, they believe, by cutting interest rates, incentivizing value-oriented purchases of stock, or by packaging product into synthetic solutions.
Focus on the long term.
However, I believe that the best research is framed by the big picture and more enduring themes. Analysis and transaction should be predicated upon fundamental research and longer term forecasts. Ultimately what is “timely” should also be what is measurable, in order to capitalize upon major thematic moves in both the economy and the market during the short and long-term.
I do believe that despite the pervasive negativity in thought and data, that there is always something to own for the long term. Despite price fluctuation in those sectors, I believe that Basic Materials and Energy offer a strong potential for capital gains in the near and longer-term. Biotech stocks represent cutting edge thought towards solutions in healthcare and disease prevention. Agricultural companies (Consumer Non Cyclicals) have yet to actualize their dominance in world commerce by their penetration into the economic development of emerging markets. Finally, Utilities represent yield and capital gains potential in a world seeking not only new sources of energy, but competent delivery systems, as well.
With a shortened work week on Wall Street, look for the compression of five fun-filled days into four, and perhaps more volatility than normal. I see no cause for alarm, but remain cautious about any short-term projections of capital gains for global bourses.
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