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!!
Monday, November 24, 2008
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.
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