Wall Street’s problems are frequently confused with the everyday problems of Main Street. However, it is more likely the case that the small aperture of vision used by masters of finance don’t translate into the lives of average citizens. One might make the case that life goes on in spite of the deviant behavior exhibited by those who populate the concrete canyons of financial epicenters.
As I travel, I am struck that the amount of attention focused upon “the markets” by non-Wall Street’ers is quite small compared to those of us who spend all our waking hours in front of charts, computers, or raw financial data. The concept of “billions of dollars” is lost upon anyone trying to earn a living and provide for a comfortable household. Indeed, Wall Street’s ills resonate as a kind of symptom of what’s wrong rather than a reason for good.
So, for the foreseeable future, the powerful in the financial markets will have a hard time communicating with the public, or performing up to their expectations.
Once the confidence factor is lost, the solutions, themselves, become suspicious. If only we hadn’t allowed institutions to abuse their charters.
As a result, the loss of confidence has caused investing habits to deteriorate. Any altruism, or intrinsic trust, is gone. Therefore stocks, and business, slide laterally rather than with any degree of acceleration. As the markets unwind their leveraged excesses, credit becomes tighter, valuations stagnate, and corporations become commonplace, not unique.
The goal of the financial analyst is to uncover potential from amidst the exogenous “noise.” The bigger picture is brighter than the public perceives presently.
While I do not favor buying depressed stocks, it is impossible not to see value in companies that have been punished along with the crowd, if earnings acceleration patterns still exist.
Most refer to this period of recalibration as a new start. I prefer to see it as a rebalancing of social and moral priorities. The markets are under significant strain. Disease, terrorism, corporate chicanery, psychological reticence and market devaluation give the opportunist little wiggle-room.
The public expects us to act with propriety. Whether they care as much as we about the daily machinations of the financial markets is another thing, altogether. As we seek equilibrium from the chaos of financial malfeasance, let us also try to bridge the gap of indifference that permeates the attitude of our clients and prospects.
Monday, April 27, 2009
Monday, April 20, 2009
Market Commentary for the week of April 20, 2009
Bottom fishing.
Lest the markets stampede forward without them, value hunters and traders seem bound and determined to lay their bets now on equities with poor momentum, but dirt-cheap prices. What does it matter if they surrender current performance for future upside explosiveness?
I have previously suggested that we are in an ideal time to make reassessments about owning equities, but I more often reference upside earnings momentum and current price performance than “undervalued” laggards. After all, they must be languishing for a reason.
Nevertheless, for some stalwarts, these are ideal times. The starting line is equal for all stocks.
I wouldn’t call the market’s recent rally attempts “garage sales,” but the fervor and elbow-flying deal-making looks something akin to a Christian Dior trunk sale on Fifth Avenue. Those companies whose limitations were abundantly clear just months ago now look like diamonds (or gowns, to modify my earlier metaphor) in the rough. Forget the balance sheet, sector, geography, or management. Cheap is cheap, right?
Not so fast.
Timing is more critical.
Perhaps it is our inbred optimism that convinces us the worst is over. “What’s a loss of a few million on the balance sheet,” the value hunters say. Those who “shorted” the market in March are buying today.
Like you, I want to believe that the fiscal stimuli will work. I want to see the impediments to earnings growth diminish. But I also want to experience the redefinition of moral leadership at the corporate level. Until consumer confidence is restored, market machinations are simply a landscape for the game-players. Investing in the long-term is something different, altogether.
To be sure, the absence of any near-term calamity and the cessation of significant downside momentum is a positive for the market. Price signals, however, are not always the same as momentum, or trend, signals, and should not be confused with them, either. The cycle bear is nearing maturation. How soon one wishes to place their bets is determined either by folly and impatience or one’s methodology. I am emboldened that there is a gathering of stocks and sectors near the bottom, but wary about the timing, or magnitude, of any current sustainable rally. Last week’s economic news (unemployment, foreclosures, deflation) leave little to be desired, and offer no indication of an imminent turnaround.
Look, I’m not nitpicking about the demise of the bear. But I am trying to be methodologically prudent about protecting client portfolios from excessively unwarranted speculation or capital losses.
However…
Two factors that have me interested right now are the increasingly rising “relative strength” quotients (RSI), a measure of cycle velocity, and the “higher lows” that some stocks are making during their short-cycle upswings. If these trends persist, we might look back upon Q1 as the “beginning of the beginning.” But, noting that trends are timelines of significant duration, I must see confirmation of the existence of a redirection from bear-to-bull, not simply a trader’s short-term value advance.
Current advances in Technology, Biotech, Utilities (yield), and Basic Materials are positive statements, but indicate that the consumer still is not the engine of the economy’s renaissance. While diversification and momentum are key to portfolio performance, the consumer is the key to the economy turning around and maintaining (and offering) the potential for capital gains.
Lest the markets stampede forward without them, value hunters and traders seem bound and determined to lay their bets now on equities with poor momentum, but dirt-cheap prices. What does it matter if they surrender current performance for future upside explosiveness?
I have previously suggested that we are in an ideal time to make reassessments about owning equities, but I more often reference upside earnings momentum and current price performance than “undervalued” laggards. After all, they must be languishing for a reason.
Nevertheless, for some stalwarts, these are ideal times. The starting line is equal for all stocks.
I wouldn’t call the market’s recent rally attempts “garage sales,” but the fervor and elbow-flying deal-making looks something akin to a Christian Dior trunk sale on Fifth Avenue. Those companies whose limitations were abundantly clear just months ago now look like diamonds (or gowns, to modify my earlier metaphor) in the rough. Forget the balance sheet, sector, geography, or management. Cheap is cheap, right?
Not so fast.
Timing is more critical.
Perhaps it is our inbred optimism that convinces us the worst is over. “What’s a loss of a few million on the balance sheet,” the value hunters say. Those who “shorted” the market in March are buying today.
Like you, I want to believe that the fiscal stimuli will work. I want to see the impediments to earnings growth diminish. But I also want to experience the redefinition of moral leadership at the corporate level. Until consumer confidence is restored, market machinations are simply a landscape for the game-players. Investing in the long-term is something different, altogether.
To be sure, the absence of any near-term calamity and the cessation of significant downside momentum is a positive for the market. Price signals, however, are not always the same as momentum, or trend, signals, and should not be confused with them, either. The cycle bear is nearing maturation. How soon one wishes to place their bets is determined either by folly and impatience or one’s methodology. I am emboldened that there is a gathering of stocks and sectors near the bottom, but wary about the timing, or magnitude, of any current sustainable rally. Last week’s economic news (unemployment, foreclosures, deflation) leave little to be desired, and offer no indication of an imminent turnaround.
Look, I’m not nitpicking about the demise of the bear. But I am trying to be methodologically prudent about protecting client portfolios from excessively unwarranted speculation or capital losses.
However…
Two factors that have me interested right now are the increasingly rising “relative strength” quotients (RSI), a measure of cycle velocity, and the “higher lows” that some stocks are making during their short-cycle upswings. If these trends persist, we might look back upon Q1 as the “beginning of the beginning.” But, noting that trends are timelines of significant duration, I must see confirmation of the existence of a redirection from bear-to-bull, not simply a trader’s short-term value advance.
Current advances in Technology, Biotech, Utilities (yield), and Basic Materials are positive statements, but indicate that the consumer still is not the engine of the economy’s renaissance. While diversification and momentum are key to portfolio performance, the consumer is the key to the economy turning around and maintaining (and offering) the potential for capital gains.
Tuesday, April 14, 2009
Market Commentary for the week of April 14, 2009
All about balance.
Previously unchallenged tenets of investing have been severely challenged during this bear market, and causing cognitive disruptions along the way. How many of us believe, and have always instinctively believed, that “staying the course over the long term” is the most successful way to ride out the tough times and turbulence of the financial markets?
Well, if you subscribed to that axiom from the beginnings of this last bull market (2002) through to the end (2009) you would have zero net return in your equity portfolio and significant losses (due to pricing inefficiencies) in your bond portfolio, today.
Additionally each bull/bear cycle in the market’s history has seen capitulations of almost 50% from that cycle’s high to its termination.
We are taught to stay the course, but in reality we must be more nimble than that.
The premise of my modeling (Arlington Econometrics) is that asset allocation and fluidity of portfolio balancing is the essence of successful investing by quantifying the relative strength of certain macro trends, sectors, and financial instruments within those sectors. Therefore, I can more efficiently generate returns by underweighting lagging momentum and overweighting current momentum.
These assumptions are corroborated by a 30 year track record (and back-testing) in which we outperform traditional equity-only benchmarks by 2 to 1.
The new market uncertainty challenges client’s patience and belief in the old maxims, and makes them cautious about investing. How can they draw certitude from confusion about macro trends, politics, and monetary policy?
I think we need to throw away traditional definitions and boxes that make us identify with certain trends. The tech investors of the 1990’s made money, then lost it, by identifying with one sector. Value investors see potential only in depressed stocks, of which there are now many.
Whether by ideology, sector or region it is difficult to pigeon-hole one’s style and be successful under every market circumstance.
At its core, methodology.
The hallmark of successful investing, in fact, is to modulate risk/return allocations, not just “at the edges” of a portfolio, but from within and at its core. This is not “trading”, but, rather, “balancing” a series of short-term decisions into a cohesive long-term pattern.
My work is currently indicating a strong probability of the current short uptrends expiring during this month, gathering at the bottom, and setting the stage for a broader, stronger push in the next upside bounce.
Before we can effectively deliver portfolio results for clients, we must advise them to recalibrate their expectations from unrealistic double-digit excesses of previous decades back to nominal realities of what unleveraged capital can really accomplish.
There is no question that this market’s decline has been punishing and unprecedented. We are wringing out every excess, every spike, with extreme prejudice. There may be more to come. Adjusting to less leverage, less borrowing, is a psychological as well as fiscal challenge. The disproportionate influence of the financial sector, housing, and leveraged excess went well beyond the market’s ability to process those data.
Additionally, non-financial exogenous factors similarly exert pressure upon the free-flow of capital and/or an orderly flow of commercial services.
The offshoot of these crises is how well we will monitor data and process decision-making in the future. We all must be aware of how our biases influence our interpretations, and learn to position those factors into a more objective methodology.
Previously unchallenged tenets of investing have been severely challenged during this bear market, and causing cognitive disruptions along the way. How many of us believe, and have always instinctively believed, that “staying the course over the long term” is the most successful way to ride out the tough times and turbulence of the financial markets?
Well, if you subscribed to that axiom from the beginnings of this last bull market (2002) through to the end (2009) you would have zero net return in your equity portfolio and significant losses (due to pricing inefficiencies) in your bond portfolio, today.
Additionally each bull/bear cycle in the market’s history has seen capitulations of almost 50% from that cycle’s high to its termination.
We are taught to stay the course, but in reality we must be more nimble than that.
The premise of my modeling (Arlington Econometrics) is that asset allocation and fluidity of portfolio balancing is the essence of successful investing by quantifying the relative strength of certain macro trends, sectors, and financial instruments within those sectors. Therefore, I can more efficiently generate returns by underweighting lagging momentum and overweighting current momentum.
These assumptions are corroborated by a 30 year track record (and back-testing) in which we outperform traditional equity-only benchmarks by 2 to 1.
The new market uncertainty challenges client’s patience and belief in the old maxims, and makes them cautious about investing. How can they draw certitude from confusion about macro trends, politics, and monetary policy?
I think we need to throw away traditional definitions and boxes that make us identify with certain trends. The tech investors of the 1990’s made money, then lost it, by identifying with one sector. Value investors see potential only in depressed stocks, of which there are now many.
Whether by ideology, sector or region it is difficult to pigeon-hole one’s style and be successful under every market circumstance.
At its core, methodology.
The hallmark of successful investing, in fact, is to modulate risk/return allocations, not just “at the edges” of a portfolio, but from within and at its core. This is not “trading”, but, rather, “balancing” a series of short-term decisions into a cohesive long-term pattern.
My work is currently indicating a strong probability of the current short uptrends expiring during this month, gathering at the bottom, and setting the stage for a broader, stronger push in the next upside bounce.
Before we can effectively deliver portfolio results for clients, we must advise them to recalibrate their expectations from unrealistic double-digit excesses of previous decades back to nominal realities of what unleveraged capital can really accomplish.
There is no question that this market’s decline has been punishing and unprecedented. We are wringing out every excess, every spike, with extreme prejudice. There may be more to come. Adjusting to less leverage, less borrowing, is a psychological as well as fiscal challenge. The disproportionate influence of the financial sector, housing, and leveraged excess went well beyond the market’s ability to process those data.
Additionally, non-financial exogenous factors similarly exert pressure upon the free-flow of capital and/or an orderly flow of commercial services.
The offshoot of these crises is how well we will monitor data and process decision-making in the future. We all must be aware of how our biases influence our interpretations, and learn to position those factors into a more objective methodology.
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