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.
Monday, October 27, 2008
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.
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