Perception vs. reality.
Despite what appears to be a successful 2009 rebound, we should bear in mind that the recovery bounce has come a long way, indeed, because it has come from such a low origin. Measured over a longer cycle, the basic first upleg in our recovery is nothing more than a significant price spike driven more by value-hunting than by a turnaround in previously corrupt fundamentals. In fact, the net effect to the market (including this year’s recovery) over the last 10 years is zero percent gain.
Secular bulls and bears take decades to unfold. The record is clear that 2009 might have rescued your 401-K, but did little either to establish or refute potentially negative consequences to a growth cycle predicated, at its later stages, upon greed, excess and over-indulgence.
It is upsetting to see a market slide by on complacency. But in reality, very few of my compatriots or clients are convinced enough that this recovery is for real to go “all-in” without discretion.
Those who proclaim these trading rallies as the “real deal” are premature in their conclusion.
History vs. today.
Comparing our present situation to others in the past is also misleading. There have, in fact, been comparable periods in the market’s past, but none identical. We can gain insight from similar market patterns, and we can quantify the probability of market cycle’s performance probabilities even if the patterns themselves are unique. What we cannot know, and current market activity bears this out, is when these cycles and probabilities might unfold.
We know the life span and magnitude of previous bull/bear markets. Referencing the past can be a handy resource but not always a correlative indicator. What we do know is that the depth of the market’s RSI decline before March 2009 gave every signal that the most statistically probable direction for the global market after that date was to go up.
But before we can declare a bull we must go through several important cyclical inflection points and a whole lot of psychological recommitment to owning risk of any kind.
What about tomorrow?
There is no question in my analysis that the next two decades hold the most significant statistical probability of upside performance than at any time since the 1980’s. But I would caution any client, any investor, that the configuration of that opportunity is also the most diverse and unique. The “likely” conclusions are not yet obvious, and may be punctuated by more pain and more mania.
If a turnaround in global markets/economies is to occur we must reconsider the effectiveness of the playing field, and whether or not the rules allow for fairness and opportunity for all participants.
Otherwise, there will be nothing to “give thanks” for, except that this year saved you from more serious declines than you had otherwise expected when the year began.
Monday, November 23, 2009
Monday, November 16, 2009
Market Commentary for the week of November 16, 2009
A top.
Following a compelling weekly rise last week, and the near-completion of a bull rally begun in November 2008/March 2009, my indicators are suggesting that, while the nascent bull trend remains intact, there is increasing evidence that we are bumping-up against cyclic “tops” in near-term performance. Valuations, having expanded significantly during the rally, are offering high/medium risk entry points that raise a level of skepticism about short-term expectations.
Despite the impact of short term stochastic indicators, the longer bull rally, in its infancy, is nevertheless building momentum and gathering a host of earnings momentum and price performance summaries in its wake.
Significant, too, is the breadth of capitalization spectrum of participation globally, from industrial infrastructure to early-stage biotech.
Segmented opportunity.
When spanning the panoply of risk/reward opportunities, my belief in an “earnings acceleration model” generates greater performance probabilities than at any time since the global markets “peaked” in 2006-2007.
Our quest to identify perpetual (secular), thematic opportunity also involves several metrics that broaden any traditional top-down model of industrial development and economic expansion. For instance, a traditional consumer-led recovery is not the paradigm I see at work today. For whatever reason, the key contributor to economic resurgence, at present, is the location of natural resources and domestic intellectual talent. In other words, opportunity is “borderless” except for happenstance in which those precious commodities happen to be located.
In our desire to find these secular themes, our database mirrors a globalization of the playing field, and other objective risk-adjusted performance characteristics.
For example, there now exists a commonality between nations about the need to keep interest rates low. Such congruent monetary policy has, at its core, the desire to make money so affordable that you and I feel compelled to borrow. The trouble with this notion of course, is that absent a robust jobs market, many feel disinclined to take on more debt when they still worry about their jobs. Similarly, corporations feel no obligation to expand hiring, or other capital-intensive projects, if there is no marketplace into which to sell their goods and services.
So, as low interest rates present the potential for borrowing and spending, as well as the nascent seeds of inflation, my oft-writ maxim is as true today as it was in previous recessions: “You can lead a horse to water, but you can’t make him spend.”
Focus longer term.
Recall, too, that we didn’t just fall into these crises, they originated and culminated over time. Huge market sectors don’t simply collapse overnight. Our theses about market data evolve along with the changing landscape. As earnings dissipate, so, too, does a market’s ability to sustain capital gains. Thus, earnings that derive from illogically expansive accounting, or untenable speculation, must reverse and ultimately decline. It’s always that simple, and so complicated at the same time.
When these trend reversals occur, it is necessary to rebalance portfolio asset allocation, either by category, sector, or security type. We did this two years ago and avoided serious downside beta.
Jobs.
In an earlier missive I spoke about the need to address employment as a precursor to fixing the demand-side of the economic equation. Last week we heard anecdotal evidence of a potential shift in hiring practices. Unfortunately, until business perceives a reduction in risk, and an increase in demand, we are likely to have to make do with earnings that are artificially manufactured through “productivity enhancements” and cost-cutting.
The other side of this dilemma would be for someone to create a “better-mousetrap,” a product, an industry, or a social need that is just too compelling for us not to invest.
I see that paradigm in biotech/life sciences, agriculture, environmental controls, healthcare, and alternative energy.
Following a compelling weekly rise last week, and the near-completion of a bull rally begun in November 2008/March 2009, my indicators are suggesting that, while the nascent bull trend remains intact, there is increasing evidence that we are bumping-up against cyclic “tops” in near-term performance. Valuations, having expanded significantly during the rally, are offering high/medium risk entry points that raise a level of skepticism about short-term expectations.
Despite the impact of short term stochastic indicators, the longer bull rally, in its infancy, is nevertheless building momentum and gathering a host of earnings momentum and price performance summaries in its wake.
Significant, too, is the breadth of capitalization spectrum of participation globally, from industrial infrastructure to early-stage biotech.
Segmented opportunity.
When spanning the panoply of risk/reward opportunities, my belief in an “earnings acceleration model” generates greater performance probabilities than at any time since the global markets “peaked” in 2006-2007.
Our quest to identify perpetual (secular), thematic opportunity also involves several metrics that broaden any traditional top-down model of industrial development and economic expansion. For instance, a traditional consumer-led recovery is not the paradigm I see at work today. For whatever reason, the key contributor to economic resurgence, at present, is the location of natural resources and domestic intellectual talent. In other words, opportunity is “borderless” except for happenstance in which those precious commodities happen to be located.
In our desire to find these secular themes, our database mirrors a globalization of the playing field, and other objective risk-adjusted performance characteristics.
For example, there now exists a commonality between nations about the need to keep interest rates low. Such congruent monetary policy has, at its core, the desire to make money so affordable that you and I feel compelled to borrow. The trouble with this notion of course, is that absent a robust jobs market, many feel disinclined to take on more debt when they still worry about their jobs. Similarly, corporations feel no obligation to expand hiring, or other capital-intensive projects, if there is no marketplace into which to sell their goods and services.
So, as low interest rates present the potential for borrowing and spending, as well as the nascent seeds of inflation, my oft-writ maxim is as true today as it was in previous recessions: “You can lead a horse to water, but you can’t make him spend.”
Focus longer term.
Recall, too, that we didn’t just fall into these crises, they originated and culminated over time. Huge market sectors don’t simply collapse overnight. Our theses about market data evolve along with the changing landscape. As earnings dissipate, so, too, does a market’s ability to sustain capital gains. Thus, earnings that derive from illogically expansive accounting, or untenable speculation, must reverse and ultimately decline. It’s always that simple, and so complicated at the same time.
When these trend reversals occur, it is necessary to rebalance portfolio asset allocation, either by category, sector, or security type. We did this two years ago and avoided serious downside beta.
Jobs.
In an earlier missive I spoke about the need to address employment as a precursor to fixing the demand-side of the economic equation. Last week we heard anecdotal evidence of a potential shift in hiring practices. Unfortunately, until business perceives a reduction in risk, and an increase in demand, we are likely to have to make do with earnings that are artificially manufactured through “productivity enhancements” and cost-cutting.
The other side of this dilemma would be for someone to create a “better-mousetrap,” a product, an industry, or a social need that is just too compelling for us not to invest.
I see that paradigm in biotech/life sciences, agriculture, environmental controls, healthcare, and alternative energy.
Monday, November 9, 2009
Market Commentary for the week of November 9, 2009
The financial markets pretend to be all things to all the people. For its supporters, it is a playground of opportunity, arbitrage, and capital gains. For its detractors it is a labyrinth of greed, stealth and mistrust. In reality, the playing field is a little of both but, on balance, more the former than the latter.
Why, then, is the generic Wall Street perceived so poorly and generally so misrepresented?
As originally conceived, the “street” is a global exchange of capital. One man’s loss might be another’s gain. One person’s opportunity to make money is correlated to the risks he is willing to bear. The exchange is not an egalitarian zero-sum game. There are losers and winners to the ultimate degree. Anyone can play.
Fairness.
The problem arises when the perception of risk seems to be stacked against anyone but the untrustworthy, the miscreants who manipulate risk-taking into a rigged game only for a chosen few. No matter the regulators or oversight committees, compared to its original intent, the markets have taken on a geo-political context that seems to suck the life, and the opportunity to succeed, from anyone who gets in.
Critics of my thesis might respond by saying that a “new paradigm” of technology and transparency widens the playing field, making opportunity that much more affordable to the masses. Such perversions of fairness don’t exist, or are, at worst, the price of admission.
Of course, either scenario is an exaggeration of the real truth. No such gap between good and evil exists, and besides “my portfolio is up for the year,” they might exclaim.
I would posit that the solo-flying investor is the problem. If he’s in it for his own advantage, he’s not playing the game with the right intent.
Investing is not like a modern day Monopoly game, where he who accumulates the most wins, unless he with the most invests those gains back into the market for a common good. The principle of globalism (and transparency) requires a borderless playing field, not a hoarding of the wealth. Bailout money and Federal stimulus that fails to reach its intended market is money not well spent.
Greed.
I contend, also, that the promise of profits is a misrepresentation of the exchange of capital. There are no guarantees or representations of profit assurances. But the absence of reward takes all the fun out of the exercise and dissuades the unfortunate from even engaging.
Admittedly, it is pointless, and naïve, to expect equanimity in the distribution of capital gains. A little envy and jealousy towards those who “win” is a healthy motivation. But how long can the markets survive squeezing out those who play fairly while rewarding the unscrupulous?
Many thought it would have been wiser to let banks and auto companies fail from their ineptitude. They played the game and lost. Why do they deserve special dispensation? Are the regulators there to regulate…or to reward failure? That’s a good question.
The next leg of any economic renaissance must be couched in a healthy debate not only about profit and loss, but about right and wrong.
Otherwise we are destined to convolute even further the intent of this game we all enjoy playing.
Why, then, is the generic Wall Street perceived so poorly and generally so misrepresented?
As originally conceived, the “street” is a global exchange of capital. One man’s loss might be another’s gain. One person’s opportunity to make money is correlated to the risks he is willing to bear. The exchange is not an egalitarian zero-sum game. There are losers and winners to the ultimate degree. Anyone can play.
Fairness.
The problem arises when the perception of risk seems to be stacked against anyone but the untrustworthy, the miscreants who manipulate risk-taking into a rigged game only for a chosen few. No matter the regulators or oversight committees, compared to its original intent, the markets have taken on a geo-political context that seems to suck the life, and the opportunity to succeed, from anyone who gets in.
Critics of my thesis might respond by saying that a “new paradigm” of technology and transparency widens the playing field, making opportunity that much more affordable to the masses. Such perversions of fairness don’t exist, or are, at worst, the price of admission.
Of course, either scenario is an exaggeration of the real truth. No such gap between good and evil exists, and besides “my portfolio is up for the year,” they might exclaim.
I would posit that the solo-flying investor is the problem. If he’s in it for his own advantage, he’s not playing the game with the right intent.
Investing is not like a modern day Monopoly game, where he who accumulates the most wins, unless he with the most invests those gains back into the market for a common good. The principle of globalism (and transparency) requires a borderless playing field, not a hoarding of the wealth. Bailout money and Federal stimulus that fails to reach its intended market is money not well spent.
Greed.
I contend, also, that the promise of profits is a misrepresentation of the exchange of capital. There are no guarantees or representations of profit assurances. But the absence of reward takes all the fun out of the exercise and dissuades the unfortunate from even engaging.
Admittedly, it is pointless, and naïve, to expect equanimity in the distribution of capital gains. A little envy and jealousy towards those who “win” is a healthy motivation. But how long can the markets survive squeezing out those who play fairly while rewarding the unscrupulous?
Many thought it would have been wiser to let banks and auto companies fail from their ineptitude. They played the game and lost. Why do they deserve special dispensation? Are the regulators there to regulate…or to reward failure? That’s a good question.
The next leg of any economic renaissance must be couched in a healthy debate not only about profit and loss, but about right and wrong.
Otherwise we are destined to convolute even further the intent of this game we all enjoy playing.
Monday, November 2, 2009
Market Commentary for the week of November 2, 2009
I want to stray from my usually empirical analysis to offer 3 anecdotes, from which you will be asked to draw your own conclusions. These stories might shed some light on how Wall Street and Main Street differ in defining terms. Take for example “profitability,” and “productivity,” sometimes used interchangeably, but most always used to explain why layoffs might enhance the bottom line:
Scenario 1:
A young woman stops in at her local hairdresser for her regularly scheduled monthly appointment at 2pm. The receptionist tells her that she’ll have to wait, they’re running a little late today. An hour later, at 3pm, she finally gets in to see her hairdresser.
“What’s the delay today?” she inquires.
“Oh, management laid off a technician two weeks ago, so our people are “doubling-up” on clients. Sorry if it’s any inconvenience.”
Scenario 2:
A man drives his sedan to the service department of his local auto dealer at 8am Monday morning. He explains to the attendant that he is there for his semi-annual tune-up and repair. Being that he has to take the bus into work, and the bus back later that afternoon, it is imperative that the car be ready by the end of the day. He returns to the dealership at 5:30pm, after having left his place of employment one-half hour early.
“I’m sorry, sir, your car’s not ready yet.”
“What?” he exclaims. “Why not?”
“Well sir, we’re short two mechanics. We had to let them go in August because of poor volume. We got backed up and didn’t start on your repairs until just this afternoon. We’ll try to finish your vehicle as soon as possible.”
Scenario 3:
“Ladies and gentlemen, ABC Airlines is sorry to inform you that the 12:50 flight to Dallas has been delayed up to two hours because of a backup in traffic at another hub.”
Just two weeks earlier ABC Airlines had reported that they were firing 20 pilots and 100 air service personnel due to budget-cutting and cost savings measures.
Do any of these scenarios look/sound familiar to you? And if so, what significance do these everyday anecdotes play in our lives, or of a broader analysis of economic patterns?
Analysis.
No one is foolish enough to suggest that companies must absorb unnecessary expenses, or that they shouldn’t adjust budget items in order to manage profits appropriately. But is should not go unnoticed that these decisions have a ripple effect which resonates far-beyond the intended consequences of managing profits and personnel. Today, we hear so much talk about employment data that I think we need to focus on “preemptive decision-making” versus “strategic growth initiatives.”
Time management is a consequence of “stacking” tasks upon the workplace, and can have a deleterious effect upon productivity, morale, and efficiency.
Economists are concerned about these secondary consequences of productivity “enhancements,” and worry about a “w-shaped recovery” or a second downleg in our nascent economic recovery. Indeed, as it starts to look better, the economy might become overburdened by demand. It’s a nice problem to have, and much further down the road than warrants our concern today. But the ripple effect of yesterday’s decisions do play a part in whether we have the labor force sufficient to meet any actualized pent-up demand.
Additionally, it would be wise to look beyond any gyrations in short-term purchasing patterns and look, instead, at systemic growth industries and patterns that represent capital gains potential for the next five years and beyond. No one’s interests are served by short term gain at the expense of long term strategic success.
While some statistics seem to show year-over-year growth in the economy, consumer spending is weak because incomes remained static, wage rates decline, and unemployment remains stubbornly high. If spending vacillates into the holiday season, savings levels might continue to diminish, while debt could expand. That could lead us to the “second downleg.”
Scenario 1:
A young woman stops in at her local hairdresser for her regularly scheduled monthly appointment at 2pm. The receptionist tells her that she’ll have to wait, they’re running a little late today. An hour later, at 3pm, she finally gets in to see her hairdresser.
“What’s the delay today?” she inquires.
“Oh, management laid off a technician two weeks ago, so our people are “doubling-up” on clients. Sorry if it’s any inconvenience.”
Scenario 2:
A man drives his sedan to the service department of his local auto dealer at 8am Monday morning. He explains to the attendant that he is there for his semi-annual tune-up and repair. Being that he has to take the bus into work, and the bus back later that afternoon, it is imperative that the car be ready by the end of the day. He returns to the dealership at 5:30pm, after having left his place of employment one-half hour early.
“I’m sorry, sir, your car’s not ready yet.”
“What?” he exclaims. “Why not?”
“Well sir, we’re short two mechanics. We had to let them go in August because of poor volume. We got backed up and didn’t start on your repairs until just this afternoon. We’ll try to finish your vehicle as soon as possible.”
Scenario 3:
“Ladies and gentlemen, ABC Airlines is sorry to inform you that the 12:50 flight to Dallas has been delayed up to two hours because of a backup in traffic at another hub.”
Just two weeks earlier ABC Airlines had reported that they were firing 20 pilots and 100 air service personnel due to budget-cutting and cost savings measures.
Do any of these scenarios look/sound familiar to you? And if so, what significance do these everyday anecdotes play in our lives, or of a broader analysis of economic patterns?
Analysis.
No one is foolish enough to suggest that companies must absorb unnecessary expenses, or that they shouldn’t adjust budget items in order to manage profits appropriately. But is should not go unnoticed that these decisions have a ripple effect which resonates far-beyond the intended consequences of managing profits and personnel. Today, we hear so much talk about employment data that I think we need to focus on “preemptive decision-making” versus “strategic growth initiatives.”
Time management is a consequence of “stacking” tasks upon the workplace, and can have a deleterious effect upon productivity, morale, and efficiency.
Economists are concerned about these secondary consequences of productivity “enhancements,” and worry about a “w-shaped recovery” or a second downleg in our nascent economic recovery. Indeed, as it starts to look better, the economy might become overburdened by demand. It’s a nice problem to have, and much further down the road than warrants our concern today. But the ripple effect of yesterday’s decisions do play a part in whether we have the labor force sufficient to meet any actualized pent-up demand.
Additionally, it would be wise to look beyond any gyrations in short-term purchasing patterns and look, instead, at systemic growth industries and patterns that represent capital gains potential for the next five years and beyond. No one’s interests are served by short term gain at the expense of long term strategic success.
While some statistics seem to show year-over-year growth in the economy, consumer spending is weak because incomes remained static, wage rates decline, and unemployment remains stubbornly high. If spending vacillates into the holiday season, savings levels might continue to diminish, while debt could expand. That could lead us to the “second downleg.”
Subscribe to:
Posts (Atom)