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.
Monday, August 18, 2008
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.
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