Next week/next year.
A majority of global markets are witnessing a slowdown in cyclical upside momentum, as this “second-leg” of the intermediate recovery rally starts to lose steam. Although a major new bear phase is unlikely from here, the deceleration of relative strength indices is still problematic, nonetheless. Did you think you could sustain an overbought rally without any capitulation or consequence? (Editors note: If you answered “yes”, then you still haven’t learned anything, have you?)
I believe that longer term risks are abating. Elected officials are getting a grip on economic fundamentals and trying to right the ship. Although most of the damage had been severe, the markets are now more concerned about where we go from here than whom to blame. For this reason, I see the market’s valuation declines as an opportunity, not a liability.
It is interesting to try and identify the sectors of least distress. I am focusing upon demographic and secular opportunity in Energy, Technology, Agriculture (Consumer Non-Cyclicals), Biopharmaceuticals, and Utilities. These sectors are showing strong indication of resilience, recovery and capital gains potential, as well as inventiveness and ingenuity for lesser-known names within those groupings.
Interest rates.
I am concerned, however, about the durability of bond portfolios in a rising interest rate market. So far this year I have pared down our allocation in fixed income by capitalizing upon a price recovery in bonds from last year’s low-water mark, and by locking in any capital gains which I now fear are vulnerable if rates rise in the next 2-3 years. I still remain committed to a “balanced” allocation in our portfolios in order to diversify risk and income potential, but I am mindful, too, that bonds are not immune to price swings which might adversely affect portfolio performance. In fact, given the severity of the equity market’s collapse, I see greater potential for portfolio protection and capital gains within a prudently diversified equity portfolio than through a predominately “risk averse” strategy of owning bonds, exclusively.
I don’t think the selloff, or depreciation potential, in bonds is overdone, or yet finished.
That doesn’t mean that I don’t see value in owning bonds. But any additions I might make at this time would be of relatively short duration. We are in no danger of missing out on the “buy of a lifetime” in bonds. Those opportunities passed us by 5 years ago.
The economy: who’s “right?”
A popular concern is about a protracted stagflation brought upon by ever-increasing deficits and by an ever-diminishing supply of natural resources. These worries run the spectrum from “growth declining” to “major calamity.” Actually, I currently subscribe to neither of those scenarios. While fully aware of an increase in liquidity in the marketplace, I am hopeful, at present, that this liquidity represents the seed money to quell market declines in the future, and to provide investment capital that yields a “return on investment.”
Notably, doomsday concerns are typical from those who believe we have peaked our productivity potential. But these times might be different because the pace of stimulus required to regenerate the global economy will be quickened by an innate demand for solutions to our systemic problems. Any worries about an escalation in negative effects are premature, in my opinion. We are already in a financial mess. The immediate months ahead require remediation, not fear.
Overall, concerns about economic stagnation should be discounted by the depths from which the crisis placed us. It is unlikely for prices, productivity, valuations or ethics to sink much lower than they already have.
I remain positive about the secular potential in global equity markets. While the near-term might be punctuated by a necessary capitulation, (June-November, perhaps), I am a net-buyer of shares that most typify my cycle phase methodology, and which are at sufficient inflection points to merit a long-term commitment.
Monday, June 22, 2009
Monday, June 15, 2009
Market Commentary for the week of June 15, 2009
One step back.
Last week, global markets danced to an unsyncopated rhythm, as data about production, earnings, interest rates and equity valuations were digested as we near the end of this quarter. The lurches and turns we took were unsettling if not un-magnificent.
Investors are getting wary of this rally because nascent inflation probabilities appear on the horizon. The market wants recovery, it wants growth, but not at the expense of cutting off access to products if manufacturers and suppliers pass along any additional core costs. These type of projections ground the market to a halt last week.
Some see inflation as representative of a growth cycle, others see it as an exacerbation of negative influences.
In the wake of these discussions, the markets found no equilibrium and simply drifted in and out of positive territory. Maybe all the rain we’ve had lately has just soured everyone’s mood.
A new dynamic.
Inflation is not the enemy. Economic renaissance must be accompanied by some type of price pressure, or else manufacturing sees no justification for growing inventory. The influence of low interest rates upon economic growth in prior decades created a wild-west, “anything goes” ideology whose excesses derailed a generational expansion. As the tide turns, in the near future we’re going to have to live within a new paradigm of price pressure, slower earnings growth, and necessary (not discretionary) purchasing.
During the last decade, a “wealth effect” on tangible assets created a framework of irresponsible spending, lending, and investing, that characterized a climate of excessive expectations. Difficult to perceive at its inception, it became the hallmark of capital gains statistics for a generation of investors.
The market’s newly-found religion will be a marked difference from those years of greed. It was mind-boggling to comprehend decades of neglect of social issues (such as healthcare, infrastructure, crime, national defense, etc.) to satisfy personal gain and self-interest. A demographic re-thinking of priorities is required to sustain a next secular bull in stocks. Bond yields will be increasing. The last, best, buy in bonds occurred in the mid-1990’s. Higher rates, higher prices and inflation will become the three pillars of economics for the next generation of capital gains equities.
Open wide.
Analysts, similarly, must widen their focus from “bottom-up, self interest” to “macro, top-down altruism.” From that perspective it might become easier to quantify winners and losers, leaders and laggards.
This is not a “stock-du-jour” approach by any means. We must work a little harder to build asset allocation and securities’ selection that works not just for today, but for the longer term. In a climate of heightened suspicion and uncertainty it would be wise to consider the broader topography of our demographic themes, than merely what works over the next week, or month.
Last week, global markets danced to an unsyncopated rhythm, as data about production, earnings, interest rates and equity valuations were digested as we near the end of this quarter. The lurches and turns we took were unsettling if not un-magnificent.
Investors are getting wary of this rally because nascent inflation probabilities appear on the horizon. The market wants recovery, it wants growth, but not at the expense of cutting off access to products if manufacturers and suppliers pass along any additional core costs. These type of projections ground the market to a halt last week.
Some see inflation as representative of a growth cycle, others see it as an exacerbation of negative influences.
In the wake of these discussions, the markets found no equilibrium and simply drifted in and out of positive territory. Maybe all the rain we’ve had lately has just soured everyone’s mood.
A new dynamic.
Inflation is not the enemy. Economic renaissance must be accompanied by some type of price pressure, or else manufacturing sees no justification for growing inventory. The influence of low interest rates upon economic growth in prior decades created a wild-west, “anything goes” ideology whose excesses derailed a generational expansion. As the tide turns, in the near future we’re going to have to live within a new paradigm of price pressure, slower earnings growth, and necessary (not discretionary) purchasing.
During the last decade, a “wealth effect” on tangible assets created a framework of irresponsible spending, lending, and investing, that characterized a climate of excessive expectations. Difficult to perceive at its inception, it became the hallmark of capital gains statistics for a generation of investors.
The market’s newly-found religion will be a marked difference from those years of greed. It was mind-boggling to comprehend decades of neglect of social issues (such as healthcare, infrastructure, crime, national defense, etc.) to satisfy personal gain and self-interest. A demographic re-thinking of priorities is required to sustain a next secular bull in stocks. Bond yields will be increasing. The last, best, buy in bonds occurred in the mid-1990’s. Higher rates, higher prices and inflation will become the three pillars of economics for the next generation of capital gains equities.
Open wide.
Analysts, similarly, must widen their focus from “bottom-up, self interest” to “macro, top-down altruism.” From that perspective it might become easier to quantify winners and losers, leaders and laggards.
This is not a “stock-du-jour” approach by any means. We must work a little harder to build asset allocation and securities’ selection that works not just for today, but for the longer term. In a climate of heightened suspicion and uncertainty it would be wise to consider the broader topography of our demographic themes, than merely what works over the next week, or month.
Monday, June 8, 2009
Market Commentary for the week of June 8, 2009
Half-way there.
Our response to the market’s first half of the year volatility has been to position our portfolios into a risk-averse mode. Relying on our exposure to fixed income for the latter part of 2008, our portfolios took significant hits because of the banking and credit crisis. As the credit markets improved earlier this year, we recovered most if not all of the pricing inefficiency that caused a late-year swoon, allowing us to use excess cash for equity purchases.
Certainly, if the global economy shows growth this year, our bet on stocks will pay off. Concurrently, I would expect interest rates to rise, making bonds more risky than equities.
Further, if our “growth” scenario ensues, a rise in the cost of money might have an anecdotal impact upon inflation and higher prices, thus limiting any acceleration in the rate of profitability from corporations.
Of course, predicting these cycles is a balancing act, and not an “event” that might be recognized, except in hindsight. The best we can do is stay true to our methodological tenet that top-down, macro trends guide our asset allocation decisions.
Today’s landscape.
Presently, the rate of change in market cyclicality is accelerating. This poses a risk to the “buy and hold” investors because a rapidly changing price continuum means holding stocks might create extreme volatility in one’s portfolio. Obviously, risk is part of investing, but we are lucky that our methodology allows us to calibrate cycle measure values, thus, hopefully, we can eliminate buying at an inefficient inflection point.
Despite these data, I am becoming more comfortable with equity ownership, as valuations “bottom and accumulate” following last year’s shakeout. On the strength of such indications, I will look to add percentage allocations to equities in sectors with strong price, earnings and relative strength (RSI) rebounds.
These upside indications are also showing for global stocks. The world has long sought a globalized synchronized economy. It appears the global recession has provided us with an equilibrium starting point. World currencies and equities are also bottoming and accumulating. It is no accident that last quarter’s recommended list had its largest number of non-U.S. equities in years. A powerful surge for industrial development is overtaking our economic landscape, and might certainly be a harbinger of successful equity markets in the next decade.
If these trends emerge as anticipated, I would expect to see sector leadership in Energy, Basic Materials, Industrials, Technology and Utilities. As noted, I would expect a depreciation in bonds as interest rates rise. A secular schematic on interest rates tells us that the generation of disinflation and cheaper money is reversing. The 1980’s and 90’s were a wonderful time. Get ready, however, for a new paradigm.
Our response to the market’s first half of the year volatility has been to position our portfolios into a risk-averse mode. Relying on our exposure to fixed income for the latter part of 2008, our portfolios took significant hits because of the banking and credit crisis. As the credit markets improved earlier this year, we recovered most if not all of the pricing inefficiency that caused a late-year swoon, allowing us to use excess cash for equity purchases.
Certainly, if the global economy shows growth this year, our bet on stocks will pay off. Concurrently, I would expect interest rates to rise, making bonds more risky than equities.
Further, if our “growth” scenario ensues, a rise in the cost of money might have an anecdotal impact upon inflation and higher prices, thus limiting any acceleration in the rate of profitability from corporations.
Of course, predicting these cycles is a balancing act, and not an “event” that might be recognized, except in hindsight. The best we can do is stay true to our methodological tenet that top-down, macro trends guide our asset allocation decisions.
Today’s landscape.
Presently, the rate of change in market cyclicality is accelerating. This poses a risk to the “buy and hold” investors because a rapidly changing price continuum means holding stocks might create extreme volatility in one’s portfolio. Obviously, risk is part of investing, but we are lucky that our methodology allows us to calibrate cycle measure values, thus, hopefully, we can eliminate buying at an inefficient inflection point.
Despite these data, I am becoming more comfortable with equity ownership, as valuations “bottom and accumulate” following last year’s shakeout. On the strength of such indications, I will look to add percentage allocations to equities in sectors with strong price, earnings and relative strength (RSI) rebounds.
These upside indications are also showing for global stocks. The world has long sought a globalized synchronized economy. It appears the global recession has provided us with an equilibrium starting point. World currencies and equities are also bottoming and accumulating. It is no accident that last quarter’s recommended list had its largest number of non-U.S. equities in years. A powerful surge for industrial development is overtaking our economic landscape, and might certainly be a harbinger of successful equity markets in the next decade.
If these trends emerge as anticipated, I would expect to see sector leadership in Energy, Basic Materials, Industrials, Technology and Utilities. As noted, I would expect a depreciation in bonds as interest rates rise. A secular schematic on interest rates tells us that the generation of disinflation and cheaper money is reversing. The 1980’s and 90’s were a wonderful time. Get ready, however, for a new paradigm.
Monday, June 1, 2009
Market Commentary for the week of June 1, 2009
Sometimes, portfolio performance is ruined before the first dollar is allocated. That’s because, although the task of portfolio allocation is difficult enough, false objectives and unrealistic expectations sully the endeavor.
The market this year is “flat,” having recovered from a first quarter downward swoon with an incredible surge since March. Are you flat for the year? Or up? Or down, possibly?
A fairer test of portfolio performance is whether one’s methodology accurately portrays a possibility of performance through prudent quantifying of any success probabilities. Rather than being fixated upon an integer that represents performance, one should focus upon objective themes that resonate the characteristics of portfolio identity.
In life, as in investing, there are no norms nor strategies for perfection. One wouldn’t raise children expecting their life performance to adhere to an index or benchmark. Instead, we expect certain tenets and codes of behavior which we expect will lead to the “right path.” We don’t quantify norms by integers, nor should we expect to reproduce with exact certitude any other benchmark, in life or investing.
In addition, the best investment strategies are not impeded by unnecessary emotion. Obviously, subjective review and analysis are part of our makeup. But we don’t label things as success or failure simply because they don’t measure up to some fantasy or ideal.
My work revolves around the search for leadership and momentum, ideally earnings-driven quotients. One might wish otherwise when evaluating equities, but prices tend to anticipate, or respond to, good management and solid balance sheets. Here again, while all data is subject to interpretation, those factors create relative value amongst their peers.
Currently, there exists broader, but shallower, pockets of opportunity for capital gains. The best opportunities may not yet have been invented, secular long-term equities that might trigger market demand and fundamental value. It is no accident that markets ebb and flow based upon psychological evaluation of the opportunity landscape.
Today’s advance/decline data and volatility numbers are showing a redistribution of portfolio potential from bonds to equities. However, the short term push into stocks since March makes them very expensive right now. Of the 100 or so proprietary relative strength quotients I review, most are indicating a pause in their rate of acceleration.
For the time being, I’m focusing my attention on secular earning’s acceleration in Energy, Biotech, Basic Materials, Utilities, and Non-Cyclicals.
The market this year is “flat,” having recovered from a first quarter downward swoon with an incredible surge since March. Are you flat for the year? Or up? Or down, possibly?
A fairer test of portfolio performance is whether one’s methodology accurately portrays a possibility of performance through prudent quantifying of any success probabilities. Rather than being fixated upon an integer that represents performance, one should focus upon objective themes that resonate the characteristics of portfolio identity.
In life, as in investing, there are no norms nor strategies for perfection. One wouldn’t raise children expecting their life performance to adhere to an index or benchmark. Instead, we expect certain tenets and codes of behavior which we expect will lead to the “right path.” We don’t quantify norms by integers, nor should we expect to reproduce with exact certitude any other benchmark, in life or investing.
In addition, the best investment strategies are not impeded by unnecessary emotion. Obviously, subjective review and analysis are part of our makeup. But we don’t label things as success or failure simply because they don’t measure up to some fantasy or ideal.
My work revolves around the search for leadership and momentum, ideally earnings-driven quotients. One might wish otherwise when evaluating equities, but prices tend to anticipate, or respond to, good management and solid balance sheets. Here again, while all data is subject to interpretation, those factors create relative value amongst their peers.
Currently, there exists broader, but shallower, pockets of opportunity for capital gains. The best opportunities may not yet have been invented, secular long-term equities that might trigger market demand and fundamental value. It is no accident that markets ebb and flow based upon psychological evaluation of the opportunity landscape.
Today’s advance/decline data and volatility numbers are showing a redistribution of portfolio potential from bonds to equities. However, the short term push into stocks since March makes them very expensive right now. Of the 100 or so proprietary relative strength quotients I review, most are indicating a pause in their rate of acceleration.
For the time being, I’m focusing my attention on secular earning’s acceleration in Energy, Biotech, Basic Materials, Utilities, and Non-Cyclicals.
Market Commentary for the week of May 26, 2009
Investing can be fashionable, so what’s your portfolio currently “wearing?”
Are you dressed in silks, crepes and organza? Or are you wearing last year’s plaids combined with some kind of cotton stripes?
Yes, I know the analogy is frivolous and extreme, but if you spend any time at all on things that matter, having your money work for you efficiently and artistically will require some customizing and care. Portfolios don’t “build themselves.” They require architecture and skill, just like anything else.
They also require a sense of forward thinking, and an ability to predict trends, so as not to be left in last year’s duds.
Designer clothes.
My data indicates that today’s “best dressed” portfolios are allocated into Basic Materials, Utilities, Technology, Energy, and Non Cyclicals (pharmaceuticals). They reflect a skepticism about earnings growth, but a respect for industrial development, infrastructure, and social demographics that link the globe and bring populations together. The market today gets caught up in short term observations, whereas I prefer thematic trends. Irrespective of market capitalization, there are global equities that have the power to fulfill our capital gains objective while maintaining a social imperative.
Every country is different, but the characteristics of good commerce are universal.
Oftentimes, the markets become fixated upon one sector, one strategy. Arlington Econometrics’ value is to sift through subjective analysis to create objective market momentum indices. By this process we can avoid the collateral damage done to portfolios that take on a one-dimensional framework, particularly when the market moves against that discipline.
The most important value to good “dressing” is the timelessness and enduring nature of portfolio returns. While every historical period is different, we can control our bias towards conservative, longer-term allocation to get a better competitive advantage over traditional benchmark indices.
Versus ready-to-wear.
Currently, short term indicators are getting overbought. To be sure, I am still looking for additional equity exposure, even for conservative accounts. Our equity exposure had fallen to below 18%, by design, within the past year. I would like to elevate that by double during the next two quarters, at least.
But I will not chase stocks. I will wait for the next downside inflection point, after some profit-taking occurs during this cycle. Additionally, since “losing” money is out of favor, I will try to be more strict in my trading patterns, trading out of large capital gains, or discarding equities that can’t accelerate immediately after purchase.
This might create a more “staccato” look to our portfolios, but it might also hasten the capital gains I seek. “Buy and hold” is appropriate, but less so today, in a market that, itself, responds precipitously and short-term to data and psychology.
Put-together.
The point, ultimately, is to balance risk amongst sectors, regions, financial instruments, and trends so as to mitigate downside potential while optimizing capital gains probabilities.
Within the context of these objectives, I see some short-term risk to the equities markets after their second short cycle advance from the bear-lows last November. I am, however (as stated last week), more optimistic about the pattern of advance off of those lows, and will use caution to add opportunity to portfolios in those sectors and themes I named above.
Realize that it took time for the bear to evolve. It will take time for it to expire and to be replaced by the bull market we all hope to see.
Are you dressed in silks, crepes and organza? Or are you wearing last year’s plaids combined with some kind of cotton stripes?
Yes, I know the analogy is frivolous and extreme, but if you spend any time at all on things that matter, having your money work for you efficiently and artistically will require some customizing and care. Portfolios don’t “build themselves.” They require architecture and skill, just like anything else.
They also require a sense of forward thinking, and an ability to predict trends, so as not to be left in last year’s duds.
Designer clothes.
My data indicates that today’s “best dressed” portfolios are allocated into Basic Materials, Utilities, Technology, Energy, and Non Cyclicals (pharmaceuticals). They reflect a skepticism about earnings growth, but a respect for industrial development, infrastructure, and social demographics that link the globe and bring populations together. The market today gets caught up in short term observations, whereas I prefer thematic trends. Irrespective of market capitalization, there are global equities that have the power to fulfill our capital gains objective while maintaining a social imperative.
Every country is different, but the characteristics of good commerce are universal.
Oftentimes, the markets become fixated upon one sector, one strategy. Arlington Econometrics’ value is to sift through subjective analysis to create objective market momentum indices. By this process we can avoid the collateral damage done to portfolios that take on a one-dimensional framework, particularly when the market moves against that discipline.
The most important value to good “dressing” is the timelessness and enduring nature of portfolio returns. While every historical period is different, we can control our bias towards conservative, longer-term allocation to get a better competitive advantage over traditional benchmark indices.
Versus ready-to-wear.
Currently, short term indicators are getting overbought. To be sure, I am still looking for additional equity exposure, even for conservative accounts. Our equity exposure had fallen to below 18%, by design, within the past year. I would like to elevate that by double during the next two quarters, at least.
But I will not chase stocks. I will wait for the next downside inflection point, after some profit-taking occurs during this cycle. Additionally, since “losing” money is out of favor, I will try to be more strict in my trading patterns, trading out of large capital gains, or discarding equities that can’t accelerate immediately after purchase.
This might create a more “staccato” look to our portfolios, but it might also hasten the capital gains I seek. “Buy and hold” is appropriate, but less so today, in a market that, itself, responds precipitously and short-term to data and psychology.
Put-together.
The point, ultimately, is to balance risk amongst sectors, regions, financial instruments, and trends so as to mitigate downside potential while optimizing capital gains probabilities.
Within the context of these objectives, I see some short-term risk to the equities markets after their second short cycle advance from the bear-lows last November. I am, however (as stated last week), more optimistic about the pattern of advance off of those lows, and will use caution to add opportunity to portfolios in those sectors and themes I named above.
Realize that it took time for the bear to evolve. It will take time for it to expire and to be replaced by the bull market we all hope to see.
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