Hangover?
Now that the Presidential inauguration is over, it becomes tempting to count down the markets in “Obama minutes,” as if the mere transfer of power confers ownership upon the new administration of all which preceded it.
Indeed, in the minds of many and in point of fact, the new team takes responsibility for setting a moral tone, fiscal policy and success/failure of the economic ills which envelop not only the United States, but most global economies.
But it is equally important to reflect that economic cycles are beholden to no man or single event in time. By definition, cycles are evolutionary. They transcend moments and reflect a period of time that might be generational.
No Change.
The globe’s current “bear market” evolved from a period of prosperity that preceded it, but a period also punctuated by excess leverage and speculation, increases in costs of raw materials, depletion (to excess) of natural resources, and inequity in the distribution of profits.
If the new President is responsible for anything, it is to change the tenor of conversation and fiscal imperatives which might ameliorate feelings of hopelessness and fear by those who feel “left out” of the game.
Stimulus packages are tools of that endeavor, not solutions. The President hopes, and the markets expect, that an era of shared responsibility might usher in a redirection of the current trends.
Note that a redirection is not in and of itself a new cycle. Instead, it might represent a slowdown in the acceleration of the current negative influences that exacerbate the downtrend. Success will be “U-shaped” not linear, and like all trends can only be quantified in its aftermath. We will know we are changing course when we can look back and measure the points from which we came.
In the meantime, I expect a continuation of the current bear cycles, short and long term. While governments attempt to re-liquify their banking systems, the public is determined not to be the first “test-case.” Cash is king, spending is passé. The first order of business is the balance sheet, not hope or expectation.
However…
Are things really as bad as most say? Well, opportunity is all around us. Equities are inexpensive, bond prices are so low that yields are attractive, real estate is a bargain. No one would suggest that you make silly mistakes or take inordinate risk. But a climate of potential is compelling. Our asset allocation levels are ridiculously skewed away from risk because of large cash holdings and reduced exposure from financial instruments. In that environment, one might only envision a period in which portfolio allocations return to historical denominations.
As the population ages, new discoveries in pharmaceutical medicine become significant. As the global population expands, agricultural science will provide solutions to feed the many or disadvantaged. As the demand for energy expands, alternative sourcing is required to fuel an economic renaissance.
There is no shortage of new ideas or new problems. Invest wisely, and the reward will be there.
Market cycles will continue their parabolic rhythms. The congruence with which all global bourses are behaving will decouple at some point, producing a net-sector-gain for one region versus others. Whether that decoupling is natural resources driven, scientifically driven, or militarily driven is yet to be determined.
Hierarchy is the natural order of things.
Monday, January 26, 2009
Friday, January 16, 2009
Market Commentary for the week of January 20, 2009
Bonanza.
Did you cash your billion dollar check today? It seems that anyone who asks, and some who don’t, is getting a bailout check for several billion dollars. Whether to shore up a deleveraged balance sheet, or to acquire a competitor, or simply to forestall the inevitable, cash is flowing into corners and crevasses that had previously never seen the light of day. Many, if not most, of the same corporations that showed poor governance the first time around are being given financial “second chances” with your money. Many offer assurances that “it won’t happen again.” More, still, are smiling like the Cheshire cat, and dismissive of admonition for success.
Bailout or not, the latest news is prompting concerns around the globe.
In country after country, gross domestic product (savings, consumption, exports) is falling, representing a serious gathering of downgrades and bankruptcies. After the market’s early year (one week) explosion out of the box, things have settled back into a secular decline which, in reality, never went away. The upswing in equity prices since October/November last year was simply the “third leg” in an intermediate bull cycle within the more enduring global bear phase.
And Wall Street is the least of our problem.
Quantitative decline.
The decline in equity prices is directly attributable to poor consumer sentiment. When one’s job is threatened, discretionary spending is the first to suffer. However, not only are “superficial” purchases declining, but basic necessities are becoming either/or decisions both for corporations and individuals.
My models show a decline in earnings acceleration patterns that rival historically moribund periods. The average P/E has declined from 20 to 7 in the last 12 years, with the highest reversion occurring in the last 2½ years. There is still money to be made in stocks, but a buy and hold strategy no longer works for all equities, or in an environment of extreme volatility like today.
The dual problems of poor governance and greed are still here despite our government’s best efforts to undo the past. Regulators are not regulating, banks are not lending, investors are not investing.
While I am in principled agreement with the global stimulus, I am wary of overreacting to the problem. Methodologically, I think that extensions to market cycles that are man-made are disruptive to the recovery rate. To conclude that “the gains outweigh the risks” is false because the values that created the problem are not being addressed. The debate should not be about bailout amounts, but about bailout responsibilities. After all, under previous monetary policy, money was readily available, and ultimately led to the leveraging not only of valuations, but expectations. In the meantime, leveraging our morals is not an option.
When everyone was making money, there was no imperative to change the moral culture. On Tuesday, the United States inaugurates not only a new man to the office of President, but, hopefully a new moral imperative to get it right.
The financial markets will be closed on Monday, January 19th in honor of Martin Luther King Day.
Did you cash your billion dollar check today? It seems that anyone who asks, and some who don’t, is getting a bailout check for several billion dollars. Whether to shore up a deleveraged balance sheet, or to acquire a competitor, or simply to forestall the inevitable, cash is flowing into corners and crevasses that had previously never seen the light of day. Many, if not most, of the same corporations that showed poor governance the first time around are being given financial “second chances” with your money. Many offer assurances that “it won’t happen again.” More, still, are smiling like the Cheshire cat, and dismissive of admonition for success.
Bailout or not, the latest news is prompting concerns around the globe.
In country after country, gross domestic product (savings, consumption, exports) is falling, representing a serious gathering of downgrades and bankruptcies. After the market’s early year (one week) explosion out of the box, things have settled back into a secular decline which, in reality, never went away. The upswing in equity prices since October/November last year was simply the “third leg” in an intermediate bull cycle within the more enduring global bear phase.
And Wall Street is the least of our problem.
Quantitative decline.
The decline in equity prices is directly attributable to poor consumer sentiment. When one’s job is threatened, discretionary spending is the first to suffer. However, not only are “superficial” purchases declining, but basic necessities are becoming either/or decisions both for corporations and individuals.
My models show a decline in earnings acceleration patterns that rival historically moribund periods. The average P/E has declined from 20 to 7 in the last 12 years, with the highest reversion occurring in the last 2½ years. There is still money to be made in stocks, but a buy and hold strategy no longer works for all equities, or in an environment of extreme volatility like today.
The dual problems of poor governance and greed are still here despite our government’s best efforts to undo the past. Regulators are not regulating, banks are not lending, investors are not investing.
While I am in principled agreement with the global stimulus, I am wary of overreacting to the problem. Methodologically, I think that extensions to market cycles that are man-made are disruptive to the recovery rate. To conclude that “the gains outweigh the risks” is false because the values that created the problem are not being addressed. The debate should not be about bailout amounts, but about bailout responsibilities. After all, under previous monetary policy, money was readily available, and ultimately led to the leveraging not only of valuations, but expectations. In the meantime, leveraging our morals is not an option.
When everyone was making money, there was no imperative to change the moral culture. On Tuesday, the United States inaugurates not only a new man to the office of President, but, hopefully a new moral imperative to get it right.
The financial markets will be closed on Monday, January 19th in honor of Martin Luther King Day.
Monday, January 12, 2009
Market Commentary for the week of January 12, 2009
Only one Man.
Beware the Obama Bounce. The turn of the calendar’s page has prompted all sorts of conversation about how the market is due for a turnaround and why we’ve gotten quickly out of the gate in 2009. I don’t have a significant difference of opinion with others about either of those topics, but I am loathe to ascribe their meaning to one individual, or one event for that matter.
In the same way that we should not refer to a Greenspan rally, or a dot.com failure, or an Iranian oil recession, we must bear in mind that the market is a marvelous tapestry of interrelated events whose confluences lead to the initiation or termination of economic phases and cycles. No one event, or person, is responsible or should be given ascription for the market’s peculiar turns. In fact, certain immutable laws of quantitative analysis are devoid of “single event” purpose (or cause) and are generally thought to be consequences of generational, top-down, macro currents.
While it is true that corporate events might move stocks intraday, consider that the most recent secular equity cycle (1999-2008) resulted in net losses for equity averages worldwide. In other words, you can’t time the market, only go with the flow, and respect the existing cycle potential.
I am suspicious, then, of those who believe that energy replenishment and independence, bioscience and pharmaceutical discovery, electrical and industrial grid infrastructure, agriculture, war and peace, are uniquely Obama-driven market phenomena. In fact, I have written on these topics for more than twenty years. A unique confluence of opportunity has indeed presented itself today, embodied by a charismatic leader. But the life-cycle of cultural, fiscal, and economic norms transcends any one person.
Recession-proof?
Besides, the case might be made that these issues could be stymied by an intractable recession and a nervous public. We do not yet know which, if any, names will emerge from these historic times, any more so than we might have guessed about the acceleration/decline in tech stocks a decade ago. People are cautious with their money today. In spite of the will to invest, many have not the gumption.
If momentum were to grow in the next few months, it should come from the demand-side of the equation. After a dismal year in 2008, we put aside most theories about speculation and hypothesis. Instead, earnings performers and high-demand companies should lead the market’s early stage efforts to stabilize and rebound. Fundamentals are back, and never really left, anyway.
Be real.
Most recent forecasts indicate a protracted recession worldwide. Right now, no continent is immune from cyclical downturns. As I wrote last week in my quarterly market analysis, these times are unique because of the congruence of global decline. Unlike the past, no region or country seems to have absolute immunity from withstanding these cycle devaluations.
The good news, though, is that a baseline equilibrium is being established from which these new rallies might be created. All together, this means that the panic should be short-lived, while the vacuum created by its occurrence is the petri dish of new growth opportunities for the next decade and beyond.
Beware the Obama Bounce. The turn of the calendar’s page has prompted all sorts of conversation about how the market is due for a turnaround and why we’ve gotten quickly out of the gate in 2009. I don’t have a significant difference of opinion with others about either of those topics, but I am loathe to ascribe their meaning to one individual, or one event for that matter.
In the same way that we should not refer to a Greenspan rally, or a dot.com failure, or an Iranian oil recession, we must bear in mind that the market is a marvelous tapestry of interrelated events whose confluences lead to the initiation or termination of economic phases and cycles. No one event, or person, is responsible or should be given ascription for the market’s peculiar turns. In fact, certain immutable laws of quantitative analysis are devoid of “single event” purpose (or cause) and are generally thought to be consequences of generational, top-down, macro currents.
While it is true that corporate events might move stocks intraday, consider that the most recent secular equity cycle (1999-2008) resulted in net losses for equity averages worldwide. In other words, you can’t time the market, only go with the flow, and respect the existing cycle potential.
I am suspicious, then, of those who believe that energy replenishment and independence, bioscience and pharmaceutical discovery, electrical and industrial grid infrastructure, agriculture, war and peace, are uniquely Obama-driven market phenomena. In fact, I have written on these topics for more than twenty years. A unique confluence of opportunity has indeed presented itself today, embodied by a charismatic leader. But the life-cycle of cultural, fiscal, and economic norms transcends any one person.
Recession-proof?
Besides, the case might be made that these issues could be stymied by an intractable recession and a nervous public. We do not yet know which, if any, names will emerge from these historic times, any more so than we might have guessed about the acceleration/decline in tech stocks a decade ago. People are cautious with their money today. In spite of the will to invest, many have not the gumption.
If momentum were to grow in the next few months, it should come from the demand-side of the equation. After a dismal year in 2008, we put aside most theories about speculation and hypothesis. Instead, earnings performers and high-demand companies should lead the market’s early stage efforts to stabilize and rebound. Fundamentals are back, and never really left, anyway.
Be real.
Most recent forecasts indicate a protracted recession worldwide. Right now, no continent is immune from cyclical downturns. As I wrote last week in my quarterly market analysis, these times are unique because of the congruence of global decline. Unlike the past, no region or country seems to have absolute immunity from withstanding these cycle devaluations.
The good news, though, is that a baseline equilibrium is being established from which these new rallies might be created. All together, this means that the panic should be short-lived, while the vacuum created by its occurrence is the petri dish of new growth opportunities for the next decade and beyond.
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