In your head.
What do you think of when you think about investing? Do you dwell upon the vagaries of global economics? Perhaps you conjure a scene from your retirement, beach house and all. Or is “investing” merely a state of mind, panic or serenity?
Typically, this is the first issue I address with any new client, because the subjective processing of objective data is the most unique thing about investing, or any endeavor for that matter.
That is why we have debate, differences of opinion, marriages, divorces, elections, and Wall Street, the original “what’s in it for me” gambit amongst American traders.
I don’t want to spend too much time writing about philosophy this morning. But we do find ourselves at a unique confluence of data from which the direction of the global economy, and the markets, might be determined.
For example, some believe that deflation is working its way into the system, sparked by a decline in consumer demand and an abundance of Federal debt.
But are these price declines driven by poor consumption or a glut of inventory brought on by a decade (or more) of wasteful production excesses? Or might it simply be a case of “incentive pricing,” designed to bring purchasing back into the market and to right the wrongs of overzealous manufacturing?
Well, if it’s your house, for example, and you are the seller, it’s less about any of those data and more about you not getting that dream cottage on the beach.
See what I mean? It’s all in the perception.
So what, then, to make of the financial markets?
In the facts.
For one, the objective data indicates a snap-back in equities, and the potential for further capital gains.
Here is where it gets tricky, though. The key to capitalizing upon these “data,” or trends, is to know what type of an investor you are and, more specifically, what discipline (science) you use to achieve your specific objectives.
The worst signs of the global depression appear to be mitigating, for example. Production is rising, albeit modestly, and month-over-month data suggests that enough momentum is in the global pipeline to make an upturn more permanent.
But the psychological debate continues. The sheer magnitude of rupture transformed everyone’s thinking and made commitment to the markets very difficult. After all, wasn’t it just a decade ago that the “Tech-wreck” nearly wiped out all the speculators?
One’s time frame certainly plays a major role in determining the acceptability of risk. But I contend that statistical jargon and strict data analysis is not what will bring people back, nor make for successful portfolio allocation modeling. Nor will any “urgency” that is artificially imposed upon you by hype, television commercials, or government mandate.
Right now, the markets are performing in spite of a general feeling that it’s not time to get back in. Benign ambivalence is pervasive and now stronger than any earnings report, analyst’s suggestion, or brother-in-law’s stock tips.
How to play it? Dip one toe in at a time; define your methodology; and widen your aperture of “apparent perception” to include valuations, ethics, and merit when making your investment decisions.
Friday, October 23, 2009
Monday, October 19, 2009
Market Commentary for the week of October 19, 2009
Dow 10,000 again, and again.
For those who experienced unbridled joy when the Dow hit 10,000 last week, let me be the first (second, third?) to remind you that we’ve been here before, and before that, too.
Ten years ago we passed the “magical” threshold, that time on the way up and during a fairly strong bull market powered by Tech and dot.com.
More recently we hit 10,000 again, but this time in a downdraft of significant proportion, on our way lower, and to generational historical lows.
Last week the significance of the integer itself was only relevant because it more so represents a redirection from psychological and economic distress experienced during the last three years brought about by capitulation-causes that historians will document for decades to come.
In other words, it’s just another number.
Up or down?
Oh yes, I heard one pundit say that “5 integers is more significant than 4.” But in reality, passing through this benchmark over and over, without any forward progress, is like driving through Cleveland repeatedly on one’s way to the West Coast. If you find yourself constantly crossing the same threshold from different directions then you’re truly driving in circles. Keep in mind that the net 10 year gain in the Dow from the first time we crossed 10,000 to today is zero percent.
Of greater significance is the prevailing, and comparative, trend of the financial averages. While growth and consumption are clearly not at the levels of our first 10,000 sighting, it appears we are making progress towards remediating the ills of global stagnation.
Certain asset classes, such as Basic Materials, Technology, Energy, Utilities and Industrials are remarkably strong and resilient. The credit crunch might have diverted a secular growth market, but it hasn’t derailed it.
A dynamic corporate response is underway, muted slightly by a concerned populace that hasn’t yet mustered the psychological will to consume with discretionary monies. Nonetheless, there is more investment opportunity than at any time in the last three years, and it is time to commit.
Full spectrum.
Yield, which hardly exists in the traditional fixed-income market, is available in global telecommunications, energy, and traditional consumer non-cyclicals.
Capital gains, as alluded to earlier, are germinating in secular, long-term demographics such as industrials and materials (tangible assets).
The difference, today, is in the sequencing of those commitments. Rather than traditional, consumer-led equities signaling the advance, we are finding more modest success in the “back-end” of the market, more defensive themes and brick-and-mortar businesses.
Indeed, reinventing profits and creating top line revenue growth is the challenge for corporations. Squeezing efficiency from job cuts, wage reductions and the like will no longer suffice. Investors are looking for “better mousetrap” companies whose innovation drives new customers and social good-will at the same time.
To keep those ideas replenished, banks need to lend money more freely, and emerge from their cocoon of isolation and handouts/bailouts. When cultivating an environment for strategic growth, one can’t look at oneself as the sole beneficiary, only. Instead, I believe a partnership of corporate, private, public and governmental sponsors holds the ultimate responsibility for making “Dow 10,000” a permanent support level, and not just another back-and-forth footnote.
For those who experienced unbridled joy when the Dow hit 10,000 last week, let me be the first (second, third?) to remind you that we’ve been here before, and before that, too.
Ten years ago we passed the “magical” threshold, that time on the way up and during a fairly strong bull market powered by Tech and dot.com.
More recently we hit 10,000 again, but this time in a downdraft of significant proportion, on our way lower, and to generational historical lows.
Last week the significance of the integer itself was only relevant because it more so represents a redirection from psychological and economic distress experienced during the last three years brought about by capitulation-causes that historians will document for decades to come.
In other words, it’s just another number.
Up or down?
Oh yes, I heard one pundit say that “5 integers is more significant than 4.” But in reality, passing through this benchmark over and over, without any forward progress, is like driving through Cleveland repeatedly on one’s way to the West Coast. If you find yourself constantly crossing the same threshold from different directions then you’re truly driving in circles. Keep in mind that the net 10 year gain in the Dow from the first time we crossed 10,000 to today is zero percent.
Of greater significance is the prevailing, and comparative, trend of the financial averages. While growth and consumption are clearly not at the levels of our first 10,000 sighting, it appears we are making progress towards remediating the ills of global stagnation.
Certain asset classes, such as Basic Materials, Technology, Energy, Utilities and Industrials are remarkably strong and resilient. The credit crunch might have diverted a secular growth market, but it hasn’t derailed it.
A dynamic corporate response is underway, muted slightly by a concerned populace that hasn’t yet mustered the psychological will to consume with discretionary monies. Nonetheless, there is more investment opportunity than at any time in the last three years, and it is time to commit.
Full spectrum.
Yield, which hardly exists in the traditional fixed-income market, is available in global telecommunications, energy, and traditional consumer non-cyclicals.
Capital gains, as alluded to earlier, are germinating in secular, long-term demographics such as industrials and materials (tangible assets).
The difference, today, is in the sequencing of those commitments. Rather than traditional, consumer-led equities signaling the advance, we are finding more modest success in the “back-end” of the market, more defensive themes and brick-and-mortar businesses.
Indeed, reinventing profits and creating top line revenue growth is the challenge for corporations. Squeezing efficiency from job cuts, wage reductions and the like will no longer suffice. Investors are looking for “better mousetrap” companies whose innovation drives new customers and social good-will at the same time.
To keep those ideas replenished, banks need to lend money more freely, and emerge from their cocoon of isolation and handouts/bailouts. When cultivating an environment for strategic growth, one can’t look at oneself as the sole beneficiary, only. Instead, I believe a partnership of corporate, private, public and governmental sponsors holds the ultimate responsibility for making “Dow 10,000” a permanent support level, and not just another back-and-forth footnote.
Monday, October 12, 2009
Market Commentary for the week of October 12, 2009
Let’s get real.
Now that we’ve gotten the fourth quarter starting date out of the way, let’s begin to focus upon more significant data such as earnings, demand, unit volume increases/decreases, and trading patterns.
Just off the top of your head, knowing what you do about your home savings, your job, your neighbors, the neighborhood …would you buy a retail store stock? How about a bank stock?
You might if you’re a “bottom-fisher.” Or maybe a day-trader, or perhaps, even, an altruist who believes they’ll “come around again.”
Would you buy an electric utility, or an energy company?
Or course, your answer depends as much upon methodology as psychology.
Play the trend.
I believe in long-term secular (generational) trends as the ultimate arbiter of portfolio allocation processes. To be fair, I enjoy trading for high powered (or any) short-term capital gains, too. Using cyclic phase methodology only to determine long term patterns limits the scope of my own tools which calibrate location and momentum of financial instruments on any scale, daily, monthly, annually.
But betting against the trend is not my choice. Short term or long, I believe trading patterns and their intricate inflection points, up or down, are a useful tool in mitigating betting by hunch or inference, without any corroborating science.
I feel comfortable, for example, that research in alternative energy sourcing, production and delivery is a secular theme that will yield portfolio profits in this decade. No one needs to scream at me to make me see the potential for return in this sector. Efficient new uses, as well as consumption patterns globally, are more than enough incentive for overweighting these themes.
The theme resonates, as well, into utility stocks and industrial infrastructure. Energy grids, and mass production of new automobiles, occupies a significant content in these metrics. The vastness of possibilities and potentially new alternatives makes you wonder why anyone after the next three decades might buy oil at all?
Technology shares, metals, research and development complement the arc of due diligence.
Infinite choice.
If these sectors resonate from one topic, such as energy, think of the myriad of concentric circles one might envision within their investment portfolio tackling issues like food, water, ecology, national defense, housing?
The fourth quarter (2009) not only opens up a new chronology for our portfolios, but unveils a new era of discussion for portfolio management, methodology, asset allocation, and coffee-table conversation.
Now that we’ve gotten the fourth quarter starting date out of the way, let’s begin to focus upon more significant data such as earnings, demand, unit volume increases/decreases, and trading patterns.
Just off the top of your head, knowing what you do about your home savings, your job, your neighbors, the neighborhood …would you buy a retail store stock? How about a bank stock?
You might if you’re a “bottom-fisher.” Or maybe a day-trader, or perhaps, even, an altruist who believes they’ll “come around again.”
Would you buy an electric utility, or an energy company?
Or course, your answer depends as much upon methodology as psychology.
Play the trend.
I believe in long-term secular (generational) trends as the ultimate arbiter of portfolio allocation processes. To be fair, I enjoy trading for high powered (or any) short-term capital gains, too. Using cyclic phase methodology only to determine long term patterns limits the scope of my own tools which calibrate location and momentum of financial instruments on any scale, daily, monthly, annually.
But betting against the trend is not my choice. Short term or long, I believe trading patterns and their intricate inflection points, up or down, are a useful tool in mitigating betting by hunch or inference, without any corroborating science.
I feel comfortable, for example, that research in alternative energy sourcing, production and delivery is a secular theme that will yield portfolio profits in this decade. No one needs to scream at me to make me see the potential for return in this sector. Efficient new uses, as well as consumption patterns globally, are more than enough incentive for overweighting these themes.
The theme resonates, as well, into utility stocks and industrial infrastructure. Energy grids, and mass production of new automobiles, occupies a significant content in these metrics. The vastness of possibilities and potentially new alternatives makes you wonder why anyone after the next three decades might buy oil at all?
Technology shares, metals, research and development complement the arc of due diligence.
Infinite choice.
If these sectors resonate from one topic, such as energy, think of the myriad of concentric circles one might envision within their investment portfolio tackling issues like food, water, ecology, national defense, housing?
The fourth quarter (2009) not only opens up a new chronology for our portfolios, but unveils a new era of discussion for portfolio management, methodology, asset allocation, and coffee-table conversation.
Thursday, October 1, 2009
Arlington Econometrics Fourth Quarter Commentary
Manic Edge
The market completed its steady climb last quarter, up nearly 50 percent from its twelve-year-lows in early March. Unfortunately, opinion about its ability to sustain upside momentum falls on either end of a psychological paradigm. On a positive note, “everyone” is clamoring to get back in, but on the other side “many” have decided the game just isn’t worth playing anymore. Right now the sentiment data might be more significant than the economy’s underlying fundamentals.
However, fundamentals are improving. Employment data, while not satisfactory, have reversed months of declines. In the early stages of turnaround, modest reversals or declines in acceleration might be viewed as positives.
Risks, too, are more dispersed globally. Domestic commerce is global commerce, as well. It is conceivable, because of information technology, that your local retailer might be as well known in London as he is in your neighborhood. In the next decade, the definition of borders, ownership, and brand identity will evolve in ways that require adaptations to our thinking about what it means to own equities.
In fact, this quarter’s summary indicates a widening of global opportunity, and a shift in secular momentum trends away from the U.S. towards unit volume growth and pricing power from themes whose origins lie in diverse regions. As always, we try to vet opportunity for its intrinsic capital gains value and macro-modeling relevance. The data is now indicating greater capital gains and earnings potential in non-U.S. markets than at any time in the last decade.
Because investors are edgy about a sense of security when investing, I believe it is imperative to adhere to a methodology with which one feels comfortable. If trading is your forte, go with it. If balance and conservatism is to your liking, stay with that. The key, though, is not to deviate from what “feels right” and from what works on an absolute return basis.
I believe market cycles can be identified and quantified as to their location, duration, and magnitude. Indeed, cycles are “parabolic” not “linear.” They always offer entry and exit points, which I refer to as “inflection points.” These are not points at all, really, but periods during which characteristics of accumulation or distribution can be calibrated.
Therefore, investing in trends is not a day-trading profession, but rather a generational opportunity that endures. The direction of interest rates, the price of energy, demographic population shifts, are examples of trends that economists, sociologists, politicians and philosophers use to make learned discourse about the state of affairs. Limiting ones aperture to the “price of semiconductors”, or “when to buy XYZ co.” limits one’s capital gain potential, as well, and might result in negative performance during periods in which the focus is not on those bottom-up characteristics.
While I quickly acknowledge the myriad of diverse and successful investment philosophies, our metrics have worked well for our clients whose focus remains upon wealth preservation, risk aversion, balanced opportunity, and competitive absolute return.
Markets.
The global theme is fluid, not static. We are not suggesting that markets are abandoning the dollar or traditional non-cyclical U.S. companies. Instead, our metrics are showing areas of the globe that are rich with natural resources, labor, intellect, and solutions for macro problems that are devoid of borders or country identity. As this shift in opportunity takes place, we are suggesting one be ready for it and that the trend is already beginning.
Technology has already created a 24 hour marketplace. It also allows for greater transparency and uniformity of data analysis. These shifts have only occurred in the last two decades, during which contemporary data sharing has made global investing less adventurous. As traditional brick and mortar industries have evolved, so too have non-tangible “ether-net” businesses.
Many emerging market countries are learning not only how to produce but how to prosper. The “trickle-down effect” is less a political slogan than it is a reality of capitalism. Although many nations might suffer from a governmental comparison to the United States, they are nonetheless learning to cultivate their natural resources, entrepreneurial spirit, and a willing labor force to sustain economic viability. Whereas these nascent industries might be reliant upon the globe’s more mature market baskets into which to sell, they nevertheless represent a growing commercial challenge to less nimble industries.
Broadening competition from India, China, Germany, Greece, Brazil, Chile and South Africa accelerates the locomotion of secular trends and global problem-solving.
Meanwhile, here at home, growing budget deficits heighten inertia and constraints upon corporate capital expenditures. Our nation’s GDP is choking on a declining labor force, lower discretionary capital, and a psychologically debilitated consumer psychology. With or without Federal stimulus/bailout packages, a growing baby-boom generation is fearful whether their retirement savings will be sufficient or that their quality of life will be as robust as their predecessors.
Our global partners’ unwillingness to finance our largesse might come back to bite us. Friends, and adversaries, are aware of our internal political debate. They see that it might be cheaper to consume goods and services produced elsewhere. In spite of the dollar’s decline, domestic U.S. spending on war, social programs, and infrastructure might be sufficient disincentive for attracting foreign capital. Our trade deficit widens concurrently. Our consumption of exports is outpacing our ability to sell overseas.
Global quality, and competition, is a trend whose roots have already taken hold.
Strategy.
Arlington Econometrics is predicated upon the science that market events are not necessarily random. There are discernable, measurable statistics that can be quantified, secular trends that overlay all data, and cyclical patterns of advance/decline within those longer demographics.
The most significant secular evolution is occurring today in natural resources, particularly food and agricultural sciences. Whoever controls grain production and harvesting, water resources, meat and poultry production, corn, fertilizer and soybeans will be a profit beneficiary of the next secular wave.
While this may be a boon to emerging markets and fertile land resources, we also need to look at how these enterprises are financed in the public and private domain. No government should subsidize the destruction of crop harvests in order to maintain “equilibrium” in the supply chain. Further, no citizen should ever go to bed hungry. Lack of distribution, not production, is the bane of the agriculture industry.
Secondly, energy resources are the most inefficiently applied new science in our database. One of the most significant influences over economic and social policy is renewable energy production. The potential to match declining resources with alternative sourcing is not uniquely an American problem, it is a global problem. Expanding sources of energy production is a governmental responsibly, not just a profit incentive for the private sector. The solutions require technological sophistication and intellectual capital to achieve their ends.
And brain power might be the most important commodity export any nation has to offer. Investments in education, infrastructure, healthcare and security are requirements for emerging markets as well as our most sophisticated industrialized nations. To that extent, countries can provide the capital to each other for a renaissance in commerce as well as mutual protection.
Conclusion.
As the short cycle advance gathers at the top, risk heightens that those on the fence about investing will be dissuaded from jumping in with cash. Every downdraft creates more skeptics. Although the much larger bear correction is nearing its nadir, the recent monthly advance indeed has created a more risky entry inflection point.
I too am cautious about chasing short-cycle advances. However, with the multiplicity of longer-term, secular themes on the horizon I believe acceleration patterns in the market over the next few years will be upwards, not downwards, and will give our clients a chance to benefit from conditions that set the stage for an enduring bull phase.
Rather than living on the manic edge, I believe the science today quantifies fundamentals over fear, profit over hyperbole.
Asset Allocation:
Equity 40%/Fixed Income 25%/Cash 35%
The market completed its steady climb last quarter, up nearly 50 percent from its twelve-year-lows in early March. Unfortunately, opinion about its ability to sustain upside momentum falls on either end of a psychological paradigm. On a positive note, “everyone” is clamoring to get back in, but on the other side “many” have decided the game just isn’t worth playing anymore. Right now the sentiment data might be more significant than the economy’s underlying fundamentals.
However, fundamentals are improving. Employment data, while not satisfactory, have reversed months of declines. In the early stages of turnaround, modest reversals or declines in acceleration might be viewed as positives.
Risks, too, are more dispersed globally. Domestic commerce is global commerce, as well. It is conceivable, because of information technology, that your local retailer might be as well known in London as he is in your neighborhood. In the next decade, the definition of borders, ownership, and brand identity will evolve in ways that require adaptations to our thinking about what it means to own equities.
In fact, this quarter’s summary indicates a widening of global opportunity, and a shift in secular momentum trends away from the U.S. towards unit volume growth and pricing power from themes whose origins lie in diverse regions. As always, we try to vet opportunity for its intrinsic capital gains value and macro-modeling relevance. The data is now indicating greater capital gains and earnings potential in non-U.S. markets than at any time in the last decade.
Because investors are edgy about a sense of security when investing, I believe it is imperative to adhere to a methodology with which one feels comfortable. If trading is your forte, go with it. If balance and conservatism is to your liking, stay with that. The key, though, is not to deviate from what “feels right” and from what works on an absolute return basis.
I believe market cycles can be identified and quantified as to their location, duration, and magnitude. Indeed, cycles are “parabolic” not “linear.” They always offer entry and exit points, which I refer to as “inflection points.” These are not points at all, really, but periods during which characteristics of accumulation or distribution can be calibrated.
Therefore, investing in trends is not a day-trading profession, but rather a generational opportunity that endures. The direction of interest rates, the price of energy, demographic population shifts, are examples of trends that economists, sociologists, politicians and philosophers use to make learned discourse about the state of affairs. Limiting ones aperture to the “price of semiconductors”, or “when to buy XYZ co.” limits one’s capital gain potential, as well, and might result in negative performance during periods in which the focus is not on those bottom-up characteristics.
While I quickly acknowledge the myriad of diverse and successful investment philosophies, our metrics have worked well for our clients whose focus remains upon wealth preservation, risk aversion, balanced opportunity, and competitive absolute return.
Markets.
The global theme is fluid, not static. We are not suggesting that markets are abandoning the dollar or traditional non-cyclical U.S. companies. Instead, our metrics are showing areas of the globe that are rich with natural resources, labor, intellect, and solutions for macro problems that are devoid of borders or country identity. As this shift in opportunity takes place, we are suggesting one be ready for it and that the trend is already beginning.
Technology has already created a 24 hour marketplace. It also allows for greater transparency and uniformity of data analysis. These shifts have only occurred in the last two decades, during which contemporary data sharing has made global investing less adventurous. As traditional brick and mortar industries have evolved, so too have non-tangible “ether-net” businesses.
Many emerging market countries are learning not only how to produce but how to prosper. The “trickle-down effect” is less a political slogan than it is a reality of capitalism. Although many nations might suffer from a governmental comparison to the United States, they are nonetheless learning to cultivate their natural resources, entrepreneurial spirit, and a willing labor force to sustain economic viability. Whereas these nascent industries might be reliant upon the globe’s more mature market baskets into which to sell, they nevertheless represent a growing commercial challenge to less nimble industries.
Broadening competition from India, China, Germany, Greece, Brazil, Chile and South Africa accelerates the locomotion of secular trends and global problem-solving.
Meanwhile, here at home, growing budget deficits heighten inertia and constraints upon corporate capital expenditures. Our nation’s GDP is choking on a declining labor force, lower discretionary capital, and a psychologically debilitated consumer psychology. With or without Federal stimulus/bailout packages, a growing baby-boom generation is fearful whether their retirement savings will be sufficient or that their quality of life will be as robust as their predecessors.
Our global partners’ unwillingness to finance our largesse might come back to bite us. Friends, and adversaries, are aware of our internal political debate. They see that it might be cheaper to consume goods and services produced elsewhere. In spite of the dollar’s decline, domestic U.S. spending on war, social programs, and infrastructure might be sufficient disincentive for attracting foreign capital. Our trade deficit widens concurrently. Our consumption of exports is outpacing our ability to sell overseas.
Global quality, and competition, is a trend whose roots have already taken hold.
Strategy.
Arlington Econometrics is predicated upon the science that market events are not necessarily random. There are discernable, measurable statistics that can be quantified, secular trends that overlay all data, and cyclical patterns of advance/decline within those longer demographics.
The most significant secular evolution is occurring today in natural resources, particularly food and agricultural sciences. Whoever controls grain production and harvesting, water resources, meat and poultry production, corn, fertilizer and soybeans will be a profit beneficiary of the next secular wave.
While this may be a boon to emerging markets and fertile land resources, we also need to look at how these enterprises are financed in the public and private domain. No government should subsidize the destruction of crop harvests in order to maintain “equilibrium” in the supply chain. Further, no citizen should ever go to bed hungry. Lack of distribution, not production, is the bane of the agriculture industry.
Secondly, energy resources are the most inefficiently applied new science in our database. One of the most significant influences over economic and social policy is renewable energy production. The potential to match declining resources with alternative sourcing is not uniquely an American problem, it is a global problem. Expanding sources of energy production is a governmental responsibly, not just a profit incentive for the private sector. The solutions require technological sophistication and intellectual capital to achieve their ends.
And brain power might be the most important commodity export any nation has to offer. Investments in education, infrastructure, healthcare and security are requirements for emerging markets as well as our most sophisticated industrialized nations. To that extent, countries can provide the capital to each other for a renaissance in commerce as well as mutual protection.
Conclusion.
As the short cycle advance gathers at the top, risk heightens that those on the fence about investing will be dissuaded from jumping in with cash. Every downdraft creates more skeptics. Although the much larger bear correction is nearing its nadir, the recent monthly advance indeed has created a more risky entry inflection point.
I too am cautious about chasing short-cycle advances. However, with the multiplicity of longer-term, secular themes on the horizon I believe acceleration patterns in the market over the next few years will be upwards, not downwards, and will give our clients a chance to benefit from conditions that set the stage for an enduring bull phase.
Rather than living on the manic edge, I believe the science today quantifies fundamentals over fear, profit over hyperbole.
Asset Allocation:
Equity 40%/Fixed Income 25%/Cash 35%
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