Despite the market's extremely violent, and quite negative, response to stimulus attempts private and governmental, the hope is that this week might be better after the carnage is digested. I believe, however, that irrespective of the short-term gyrations, both in sympathy and valuation, the actions of the global markets confirm my data that the bear is entrenched.
In fact, any obsession with short-term patterns in market direction are misplaced, and analogous to trying to put square pegs into round holes. The facts indicate that consumers have stopped spending, corporations have stopped investing, and that financial institutions have simply expired, altogether. So why bother to fight the trends when so many other vectors are pointing us in another direction. Instead of trying to fight for what we expect to happen, a better solution might be to recalibrate a baseline assessment of market trends, valuations, and sector opportunities, and to move on from there.
For example, money-flows out of traditional stocks might be an opportunity for the emergence of new alternatives in medicine and bioscience, energy sourcing, and education. In addition, the globalization of commerce might be redefined by geographic regions heretofore not in the mainstream of public thought, such as Latin America or the Central European countries. Rather than trying to guess the economic output of traditional Western nations, we might follow the data in telecommunications advancements from less "traditional" sources. The money flow and earnings patterns of the last year show a much different analog than the one we keep trying to resuscitate.
It becomes disheartening to watch the averages bottom out, recover, and then go lower again. It seems we keep asking the question "where is the bottom?", when the real question is "where are the sector rotations, and into which equities might we see profit opportunity?"
Our leaders have indicated that fiscal stimulus might take a long time to filter into the economy. I agree. That is why it is fruitless to buy the banking stocks down here, at these levels, only to hope for a percentage gain born out of speculative bottom-fishing. Instead, it is much more intelligent to seek out the tangible signs of asset and sector rotation for the more enduring long-term possibilities. Already this year, bottom fishing has resulted in "more" bottom fishing, and net losses of twenty percent or more. Our clients have held their head above water by reallocating into cash, bonds and selected equities in proportion to the risk involved, and the profit potential offered. This, then, is my methodological advantage for my clients. Bear in mind, too, that while the averages have given back almost all of their gains from the past decade, most of our clients have seen returns during that period that result in double digit net profit, and certainly better than the averages. I caution all of my advocates not to get too concerned with day-to-day, 24 hour news cycles, and to focus more on our methodology of driving returns with asset allocation, earnings, and risk reduction.
The data also clearly shows that inflation, while not currently the most significant problem in the economy, is the most significant long-term problem the markets might face. By printing money, expanding the debt, and focusing on stimulus, the global parliamentarians are boosting dependence upon natural resources. Concomitantly, the opportunity for Basic Materials' exploration and development might be the most glaring sector opportunity I see for the future, far greater than betting on devalued financial institutions or expiring industrial companies.
In future weeks, I will write some columns about currency, interest rates, and inflation. Bear in mind that my focus is on building portfolios with a long-term, sector-allocation orientation.
And I will have my eyes far away from the talking-heads on television whose primary interest is to keep your focus on them, and the short-term backwards-looking conversation they promote.
Monday, February 23, 2009
Friday, February 13, 2009
Market Commentary for the week of February 16, 2009
Def., Bank 1. Establishment for receiving, keeping, lending, or issuing, money, and making easier the exchange of funds, etc.
Def., Banking 1. The business of operating a bank
How many of us today, in the wake of the global credit crisis, truly believe in the definitions above. The fact that confidence in our social institutions has been ripped apart is testimony either to the fact that our institutions failed us or we failed to hold those institutions accountable for their mission statement.
In either case, something is drastically wrong with a moral code that can allow greed, avarice (ill intentions), leverage, and banality to infuse the most precious of trusts we place in our financial institutions to uphold a standard of equity, peace of mind and good values.
Make no mistake, the banking system is not alone in inflicting damage upon the investing public. Wall Street brokerages are equally guilty in manipulating their product offerings so as to make it appear that we need their latest toys to accumulate wealth.
And, of course, where would the global financial system be without a “willing” customer base.
A higher calling.
Today’s missive is not about ascribing guilt or blame for the financial crisis, but rather to highlight the gross disrepair of trust and confidence that the crisis engendered, and upon which it was able to sustain.
Today’s markets are inert and confused by attempts to resuscitate the flow of capital. After all, without customers no business can survive.
So how, then, to lure us back? Through innovation and new product offerings?
As with the golfer learning (or re-learning) to play the game, it always boils down to fundamentals.
I get fatigued observing all the “hotshots” making their way to investment banks and brokerages with a sense of entitlement, as if they know more, can do more than their superiors. Look, that’s the attitude any fledgling must have to make it in this world,
But the world of money is more sacred than many professions. It’s not about what we can do for ourselves, its about what we as representatives of our profession can do to help our clients achieve their objectives. The scions of our industry seem to have forgotten that mission.
Where to begin.
The makers of our crisis’ resolution must begin with fundamentals, pay heed to undeniable definitions, and sprinkle-in a little humility to go with their morning coffee.
Consider, as well, that we are only in the “infancy” of the global crisis. Typically, tectonic events such as this take years to unfold and resolve. The cyclical patterns of current market behavior indicate an economic overhang that is not going away easily. As with all bubbles, the destruction of momentum and confidence can endure and permeate, creating the need for systemic changes and innovative, non-traditional, solutions.
Therefore, whether by innovation or fundamentals, the bull will rebound. The date not-yet certain.
Def., Banking 1. The business of operating a bank
How many of us today, in the wake of the global credit crisis, truly believe in the definitions above. The fact that confidence in our social institutions has been ripped apart is testimony either to the fact that our institutions failed us or we failed to hold those institutions accountable for their mission statement.
In either case, something is drastically wrong with a moral code that can allow greed, avarice (ill intentions), leverage, and banality to infuse the most precious of trusts we place in our financial institutions to uphold a standard of equity, peace of mind and good values.
Make no mistake, the banking system is not alone in inflicting damage upon the investing public. Wall Street brokerages are equally guilty in manipulating their product offerings so as to make it appear that we need their latest toys to accumulate wealth.
And, of course, where would the global financial system be without a “willing” customer base.
A higher calling.
Today’s missive is not about ascribing guilt or blame for the financial crisis, but rather to highlight the gross disrepair of trust and confidence that the crisis engendered, and upon which it was able to sustain.
Today’s markets are inert and confused by attempts to resuscitate the flow of capital. After all, without customers no business can survive.
So how, then, to lure us back? Through innovation and new product offerings?
As with the golfer learning (or re-learning) to play the game, it always boils down to fundamentals.
I get fatigued observing all the “hotshots” making their way to investment banks and brokerages with a sense of entitlement, as if they know more, can do more than their superiors. Look, that’s the attitude any fledgling must have to make it in this world,
But the world of money is more sacred than many professions. It’s not about what we can do for ourselves, its about what we as representatives of our profession can do to help our clients achieve their objectives. The scions of our industry seem to have forgotten that mission.
Where to begin.
The makers of our crisis’ resolution must begin with fundamentals, pay heed to undeniable definitions, and sprinkle-in a little humility to go with their morning coffee.
Consider, as well, that we are only in the “infancy” of the global crisis. Typically, tectonic events such as this take years to unfold and resolve. The cyclical patterns of current market behavior indicate an economic overhang that is not going away easily. As with all bubbles, the destruction of momentum and confidence can endure and permeate, creating the need for systemic changes and innovative, non-traditional, solutions.
Therefore, whether by innovation or fundamentals, the bull will rebound. The date not-yet certain.
Monday, February 9, 2009
Market Commentary for the week of February 9, 2009
Science or science fiction?
Given the widening divide between perception and reality when it comes to economic and market-related data (last week’s record unemployment numbers, for example), it becomes more important to rely on science to evaluate the real winners and losers. The enormity of the landscape makes it almost impossible to devise absolute responses, but it is possible to understand “relative performance,” and hit-or-miss probabilities.
Firstly, the financial sector, globally, is not only part of the problem but they are the originators of the problem. Lest we forget that these are institutions whose primary mandate is return on equity for shareholders, it is wrong now to ascribe an altruistic morality to their lending practices. When, and where, they see profit potential they act. In today’s climate, irrespective of bailouts or monetary policy, they believe, un-altruistically, that it is in their best interest to hoard cash. Thus, their shares are moribund, their public relations are in disrepair, and they, as institutions, play no real part in economic recovery.
“Fixing the banks” is an oxymoron that has meaning only to those who hold so dearly to a sense of patriotism and morality that they can suspend disbelief long enough to commit their own money to these shares at today’s prices.
My analysis forces me to look elsewhere for capital gains probabilities.
Safe havens.
In our “what have you done for me lately?” market, there are few safe havens. The market is down more than 10 percent already this year. To our credit, our private client accounts have shown modest portfolio increases owing to profit-taking, bond price recoveries, and prudent asset allocation.
I am seeing capital flows into demand-driven equities in Consumer Non-Cyclicals and Basic Materials, however. These shares offer both relative and probable performance. Without seeming to equivocate my “enthusiasm,” I must hasten to add that upswings in stocks are tenuous, at best, and likely of short-duration in the best of circumstances. The markets are under such duress and scrutiny (and subject to such severe mood swings) that a common cold in one region can have flu-like symptoms, elsewhere.
More than likely, the global markets will make several stop/start attempts this year before gaining any legitimate traction. The margin for error is quite small, while investor expectations remain quite large.
It’s up to you.
A market recovery depends not so much upon the economic underpinnings, as on a heightened sense of hope and renewal. As we discussed last week, the parallel disconnect between financial markets and economics is subtle. But the chasm between them is deep. If sentiment can bottom and level-off, even before the data does, then there is hope for recurring speculation and profit-making in equities.
The rhythm of today’s dance is staccato, not smooth. Today there is hope, tomorrow despair. The markets (you and me) react accordingly. That is why I believe in removing as much emotion from the debate as possible. Given that we can, indeed, quantify market cycles and equity locations, it is incumbent on me to remain strictly within the confines of my science. For my clients it has worked for nearly three decades. For today’s despondent investors, it might represent the only voice of moderation and hope amongst a cacophony of exogenous noise.
Wall Street needs to return to its roots of market science, portfolio management, and research. Enough already with the “total Merrill” analogies and “walk-on-the-beach” television commercials. There is no substitute for scholarship. Diverting your attention from these firm’s profit imperative, and their synthetic-product hubris, made you their gullible subjects.
No longer, perhaps?
Given the widening divide between perception and reality when it comes to economic and market-related data (last week’s record unemployment numbers, for example), it becomes more important to rely on science to evaluate the real winners and losers. The enormity of the landscape makes it almost impossible to devise absolute responses, but it is possible to understand “relative performance,” and hit-or-miss probabilities.
Firstly, the financial sector, globally, is not only part of the problem but they are the originators of the problem. Lest we forget that these are institutions whose primary mandate is return on equity for shareholders, it is wrong now to ascribe an altruistic morality to their lending practices. When, and where, they see profit potential they act. In today’s climate, irrespective of bailouts or monetary policy, they believe, un-altruistically, that it is in their best interest to hoard cash. Thus, their shares are moribund, their public relations are in disrepair, and they, as institutions, play no real part in economic recovery.
“Fixing the banks” is an oxymoron that has meaning only to those who hold so dearly to a sense of patriotism and morality that they can suspend disbelief long enough to commit their own money to these shares at today’s prices.
My analysis forces me to look elsewhere for capital gains probabilities.
Safe havens.
In our “what have you done for me lately?” market, there are few safe havens. The market is down more than 10 percent already this year. To our credit, our private client accounts have shown modest portfolio increases owing to profit-taking, bond price recoveries, and prudent asset allocation.
I am seeing capital flows into demand-driven equities in Consumer Non-Cyclicals and Basic Materials, however. These shares offer both relative and probable performance. Without seeming to equivocate my “enthusiasm,” I must hasten to add that upswings in stocks are tenuous, at best, and likely of short-duration in the best of circumstances. The markets are under such duress and scrutiny (and subject to such severe mood swings) that a common cold in one region can have flu-like symptoms, elsewhere.
More than likely, the global markets will make several stop/start attempts this year before gaining any legitimate traction. The margin for error is quite small, while investor expectations remain quite large.
It’s up to you.
A market recovery depends not so much upon the economic underpinnings, as on a heightened sense of hope and renewal. As we discussed last week, the parallel disconnect between financial markets and economics is subtle. But the chasm between them is deep. If sentiment can bottom and level-off, even before the data does, then there is hope for recurring speculation and profit-making in equities.
The rhythm of today’s dance is staccato, not smooth. Today there is hope, tomorrow despair. The markets (you and me) react accordingly. That is why I believe in removing as much emotion from the debate as possible. Given that we can, indeed, quantify market cycles and equity locations, it is incumbent on me to remain strictly within the confines of my science. For my clients it has worked for nearly three decades. For today’s despondent investors, it might represent the only voice of moderation and hope amongst a cacophony of exogenous noise.
Wall Street needs to return to its roots of market science, portfolio management, and research. Enough already with the “total Merrill” analogies and “walk-on-the-beach” television commercials. There is no substitute for scholarship. Diverting your attention from these firm’s profit imperative, and their synthetic-product hubris, made you their gullible subjects.
No longer, perhaps?
Monday, February 2, 2009
Market Commentary for the week of February 2, 2009
Short or long?
While many of the short-term cyclic patterns I measure are well into their uptrends for the year, there is a danger that as they extend, a reflex contraction becomes likely. Such is the case with the transportation equities, for example, which experienced a mini-boom when energy prices retreated late last year, but which are now suffering either from over-exaggerated expectations or, simply, profit-taking. Therefore, one must be diligent about riding stocks excessively without regard for cycle measurements or fundamentals.
Some sideline observers question whether it is appropriate to be playing in the markets at any cost. I discourage an either/or approach to that topic by suggesting that asset allocation will play a greater role in the probability of one’s portfolio performance than any individual security within that portfolio. Therefore, careful, selective stock-picking (along with a balance of fixed income and cash) is appropriate, particularly in secular growth equity sectors such as non-cyclicals (as the name implies), utilities, and basic materials.
I do not believe there is anything new that can be written about our systemic recession. However, I will affirm that equities are inexpensive and, in some cases, too compelling not to own for the long-term.
The government is making every effort to help remediate the economic stalemate, as well as to create a competitive landscape for new ideas and investments. Whether you are in agreement, politically, with these policies, there is no denying a positive fundamental backdrop for environment, healthcare, infrastructure, finance, and agriculture equities.
A new opportunity?
As an earnings-driven analyst, I see new momentum in those sectors which play a global, not regional, role in solving problems that dominate our conversation.
I am mindful, of course, that we are talking about long-term secular themes and solutions, as well as those which represent an immediate expectation for short-term performance. To that extent, there are stirrings here “at the bottom” that are attractive.
Before these themes become profitable, however, they must become part of conventional conversations and low-risk to the investing public. There is little tolerance for risk-taking or additional portfolio underperformance following the struggles of the past two years. Even in more traditional markets, the percentage of dollars allocated to “risk” ideas was smaller than the safest harbors. The question today is “what and when.” Unfortunately, both of those questions are coming up empty.
Whereas the answers are not immediately apparent, the context for them is brightening. I have often written that the markets and the economy are not identical twins. I have referred to this notion as a parallel disconnect, a phenomenon in which two paths seem to be moving in concert, but which oftentimes are governed by two different sets of data.
Use your science, not your hunch.
Today, market data certainly looks more quantifiable and more predictable than economic data. Last week’s horrid unemployment and layoff numbers, coupled with unprecedented declines in Gross Domestic Product (GDP) for the fourth quarter of 2008 offer no indications that the economy is near its nadir. However, some distressed market sectors are entering inflection periods from which their next logical secular pattern would be up. Financials and Technology equities are poised for recovery soon. Not all, not today, but at some point I might be suggesting that valuations have no more room for decline.
Quantitative science tells us that at its maximum limits (up or down) markets respond with trend reversals. We have seen in the last decade two major bear trends. They were disruptive, in some cases catastrophic. However, following a decline, a bull response is expected. When we can get past the fear, the opportunity for a recovery is indicated.
While many of the short-term cyclic patterns I measure are well into their uptrends for the year, there is a danger that as they extend, a reflex contraction becomes likely. Such is the case with the transportation equities, for example, which experienced a mini-boom when energy prices retreated late last year, but which are now suffering either from over-exaggerated expectations or, simply, profit-taking. Therefore, one must be diligent about riding stocks excessively without regard for cycle measurements or fundamentals.
Some sideline observers question whether it is appropriate to be playing in the markets at any cost. I discourage an either/or approach to that topic by suggesting that asset allocation will play a greater role in the probability of one’s portfolio performance than any individual security within that portfolio. Therefore, careful, selective stock-picking (along with a balance of fixed income and cash) is appropriate, particularly in secular growth equity sectors such as non-cyclicals (as the name implies), utilities, and basic materials.
I do not believe there is anything new that can be written about our systemic recession. However, I will affirm that equities are inexpensive and, in some cases, too compelling not to own for the long-term.
The government is making every effort to help remediate the economic stalemate, as well as to create a competitive landscape for new ideas and investments. Whether you are in agreement, politically, with these policies, there is no denying a positive fundamental backdrop for environment, healthcare, infrastructure, finance, and agriculture equities.
A new opportunity?
As an earnings-driven analyst, I see new momentum in those sectors which play a global, not regional, role in solving problems that dominate our conversation.
I am mindful, of course, that we are talking about long-term secular themes and solutions, as well as those which represent an immediate expectation for short-term performance. To that extent, there are stirrings here “at the bottom” that are attractive.
Before these themes become profitable, however, they must become part of conventional conversations and low-risk to the investing public. There is little tolerance for risk-taking or additional portfolio underperformance following the struggles of the past two years. Even in more traditional markets, the percentage of dollars allocated to “risk” ideas was smaller than the safest harbors. The question today is “what and when.” Unfortunately, both of those questions are coming up empty.
Whereas the answers are not immediately apparent, the context for them is brightening. I have often written that the markets and the economy are not identical twins. I have referred to this notion as a parallel disconnect, a phenomenon in which two paths seem to be moving in concert, but which oftentimes are governed by two different sets of data.
Use your science, not your hunch.
Today, market data certainly looks more quantifiable and more predictable than economic data. Last week’s horrid unemployment and layoff numbers, coupled with unprecedented declines in Gross Domestic Product (GDP) for the fourth quarter of 2008 offer no indications that the economy is near its nadir. However, some distressed market sectors are entering inflection periods from which their next logical secular pattern would be up. Financials and Technology equities are poised for recovery soon. Not all, not today, but at some point I might be suggesting that valuations have no more room for decline.
Quantitative science tells us that at its maximum limits (up or down) markets respond with trend reversals. We have seen in the last decade two major bear trends. They were disruptive, in some cases catastrophic. However, following a decline, a bull response is expected. When we can get past the fear, the opportunity for a recovery is indicated.
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