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.
Monday, July 28, 2008
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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