The big picture.
With the globe’s equity markets rising and falling, and investors trying to get out in front of each cyclical swing, it is important to maintain a discipline about asset allocation, and identifying the overriding trends that might offer a less bombastic month-to-month volatility. Despite a tendency to rise or fall in the short term, markets usually are defined by longer term themes which the next generation can more easily label, but which might be obscure to those currently living it. The lifespan of these thematic events is generations, containing several intermediate (5 year) cycles within.
It is no wonder then, that doubt creeps into portfolio managers’ minds when confronted by news events that seem to knock a portfolio off course, but which, if tended to correctly, matters little in the long run.
Let the record show that asset allocation plays a greater role in the probability of a portfolio’s capital gain potential than does any individual security within that portfolio.
Thus, if managed correctly, exogenous news events, or even bad decision-making, might be obviated by implementing prudent distribution of risk, asset classes, and allocation.
It’s right in front of us.
Today, we are at the cusp of one of the most powerful bull recoveries in the last century. Portfolio contraction has been so great that seemingly all asset classes are “starting over” at an equilibrium point that will be sorted out by earnings gains, demographic leadership, and political will.
In fact, nearly all of the last decade’s gains have been destroyed by the bear cycle capitulation during the last 2 years.
Keep in mind that cycles do not simply emerge or begin, they evolve. The market, like the global economy, must recover from significant fundamental flaws to reestablish any sort of reversal. A revival might be likely in the next few months, but it will not be a “V” shape recovery, emanating from a single point in time.
How far, and how strong, the first steps of a recovery might be is a demand-driven equation. Right now, no such pent-up demand exists. Therefore, the most significant component to a valuation expansion and economic renaissance is the psychological one. Today, the “fatigue factor” is too great even to contemplate a reversal’s origin.
But it is exactly now that prudent asset allocators and methodological scientists need to be evaluating the negative data from which to predict the next leading demographic themes. History, as well as intuition, are tremendous assets when embarking upon such an undertaking. And time is certainly on our side.
Although bottoming signals abound, it is not until psychology leads that fundamental data might actualize a price mark-up phase.
Be smart.
By definition, momentum is a coincidental indicator. Therefore a catalyst is needed to initiate the spark. While I am happy to have short cycle upswings within this nascent recovery, I am loathe to call them a secular bull phase until true momentum catches up to fundamental redistributions within the larger economic landscape.
When brief rallies author a euphoria, and pull-backs generate fear, we know that a secular thematic and demographic cycle has not yet exerted its full influence over the broader topography of the financial markets.
If your portfolio is currently on the “losing end,” you should worry that your methodology has little relevance to a prototypically historical bias for upside capital gains in the long run.
Monday, July 27, 2009
Monday, July 20, 2009
Market Commentary for the week of July 20, 2009
Lethargy?
A review of some of the market’s best summer performances yields very little to inspire the notion that we can break out of the doldrums during the next two months. As the U.S. Treasury wrestles with the aftermath of last year’s credit crisis, we are left to confront an “expiring” short-term rally in stocks, as well.
These issues, while not simply academic, inspire a loss of confidence that transcends the sense that maybe we are “turning a corner” on the economy. There are, indeed, many more signals that the global economy is stabilizing, but why don’t consumers feel better?
It could be that objective data doesn’t filter down into the psyche like job security, family health, and peace of mind do. Before the crisis began, legislative officials urged us not to focus on the objective data. Now, we are perhaps being given too strong a dose of reality and in some instances, it’s causing paralysis.
There are no easy solutions. Any legitimate efforts are being met with equally as viable a response from the other side. So unless the momentum shifts in our favor, the markets might choose to hibernate for another summer.
Plenty of time.
My data is actually showing positive signs as the markets “bottom-out.” If you haven’t yet gotten back in, the next few months might provide the right opportunity to diversify your risk profile. Interest rates are rising making short term bonds more attractive. Equities are trading at valuations nearly 60% below their peaks. Despite the reflex rally of the past six months, we are far from establishing a new secular bull phase; we’ve simply begun the bottom fishing and accumulation necessary to cease the rate of downside momentum.
With only a slight risk that you might miss out on a summer rally, I believe that this is an interesting time to prepare for a portfolio rebalancing. Good or bad, low equity valuations provide us with the most potential for capital gains than any time in the last 5 years.
For that opportunity to actualize, however, one must follow certain thematic and methodological covenants. Firstly, follow the earnings trail and the cost side of the accounting ledger. Rising costs, higher inflation, are not necessarily bad for the economy. They may, in fact indicate a surge in activity.
Secondly, one must be sufficiently diversified within/amongst a basket of demographic leaders. Going back over previous bull cycle history, we know that early rallies gain a boost from cyclic indicators that include relative strength outperformers. Those RSI leaders today are Energy, Biotech, Technology, Utilities, and Basic Materials. Laggards are Financials and Consumer Cyclicals despite what the value hunters might tell us as justification for their speculation.
The central idea is simple: we must assume a perpetual secular bias for capital gains. Our interpretation of those data is what makes markets. As the summer languishes, I believe we have an excellent opportunity to adapt to a changing landscape in stocks and bonds, and channel that opportunity into prudent asset allocation strategies.
A review of some of the market’s best summer performances yields very little to inspire the notion that we can break out of the doldrums during the next two months. As the U.S. Treasury wrestles with the aftermath of last year’s credit crisis, we are left to confront an “expiring” short-term rally in stocks, as well.
These issues, while not simply academic, inspire a loss of confidence that transcends the sense that maybe we are “turning a corner” on the economy. There are, indeed, many more signals that the global economy is stabilizing, but why don’t consumers feel better?
It could be that objective data doesn’t filter down into the psyche like job security, family health, and peace of mind do. Before the crisis began, legislative officials urged us not to focus on the objective data. Now, we are perhaps being given too strong a dose of reality and in some instances, it’s causing paralysis.
There are no easy solutions. Any legitimate efforts are being met with equally as viable a response from the other side. So unless the momentum shifts in our favor, the markets might choose to hibernate for another summer.
Plenty of time.
My data is actually showing positive signs as the markets “bottom-out.” If you haven’t yet gotten back in, the next few months might provide the right opportunity to diversify your risk profile. Interest rates are rising making short term bonds more attractive. Equities are trading at valuations nearly 60% below their peaks. Despite the reflex rally of the past six months, we are far from establishing a new secular bull phase; we’ve simply begun the bottom fishing and accumulation necessary to cease the rate of downside momentum.
With only a slight risk that you might miss out on a summer rally, I believe that this is an interesting time to prepare for a portfolio rebalancing. Good or bad, low equity valuations provide us with the most potential for capital gains than any time in the last 5 years.
For that opportunity to actualize, however, one must follow certain thematic and methodological covenants. Firstly, follow the earnings trail and the cost side of the accounting ledger. Rising costs, higher inflation, are not necessarily bad for the economy. They may, in fact indicate a surge in activity.
Secondly, one must be sufficiently diversified within/amongst a basket of demographic leaders. Going back over previous bull cycle history, we know that early rallies gain a boost from cyclic indicators that include relative strength outperformers. Those RSI leaders today are Energy, Biotech, Technology, Utilities, and Basic Materials. Laggards are Financials and Consumer Cyclicals despite what the value hunters might tell us as justification for their speculation.
The central idea is simple: we must assume a perpetual secular bias for capital gains. Our interpretation of those data is what makes markets. As the summer languishes, I believe we have an excellent opportunity to adapt to a changing landscape in stocks and bonds, and channel that opportunity into prudent asset allocation strategies.
Monday, July 13, 2009
Market Commentary for the week of July 13, 2009
Typically, our investment approach is oriented not so much around bottom-up stock picking as it is looking at, and evaluating, much longer macro themes and earnings quantification. Today, however, at this juncture where the bear market is seeking equilibrium at the bottom prior to resuming what we hope will be the next bull phase, we find ourselves at an interesting confluence of undervalued equities and long-term demographics. In other words, the playing field is nearly level for all sectors, all regions, all market capitalizations, all themes.
The answer for the search for capital gains begins, therefore, with a hierarchy of societal needs.
Recent declines in sector valuations have caused traders and investors alike to search in unison for investment probabilities that match both short term and long term objectives. By capitalizing upon this unique inflection point, we can build portfolio net worth and redirect the misspent spirit of investing that was destroyed by the latter stages of the last bull phase.
Because of these conditions, my research is pointing at a gathering opportunity in agriculture, food science, and natural resources.
This is not a new play. I have written about these topics for three decades. The usual themes allow us to play market leadership while underweighting the “laggards.” As the globe “shrinks,” due to blended commerce, the internet, and conjoined objectives, the needs of one neighborhood become the business opportunity of another. Traditional borders are being obliterated by common moral imperatives.
These imperatives are creating baskets of investment opportunity in biosciences, gene research, agribusiness and nutrition. In last week’s quarterly I rhetorically asked “Who owns the water?” The tapestry that blends agricultural need with investment entrepreneurship has never been more vibrant.
That is why my work is leading us to countries like Chile, Brazil, Russia, Australia, South Africa, India and China as potential sources for investment ideas.
There is no blame to be laid, simply the idea that the globe’s captive audience has significant social and moral needs to be met.
Now, who has the money and the notion to ante up?
The answer for the search for capital gains begins, therefore, with a hierarchy of societal needs.
Recent declines in sector valuations have caused traders and investors alike to search in unison for investment probabilities that match both short term and long term objectives. By capitalizing upon this unique inflection point, we can build portfolio net worth and redirect the misspent spirit of investing that was destroyed by the latter stages of the last bull phase.
Because of these conditions, my research is pointing at a gathering opportunity in agriculture, food science, and natural resources.
This is not a new play. I have written about these topics for three decades. The usual themes allow us to play market leadership while underweighting the “laggards.” As the globe “shrinks,” due to blended commerce, the internet, and conjoined objectives, the needs of one neighborhood become the business opportunity of another. Traditional borders are being obliterated by common moral imperatives.
These imperatives are creating baskets of investment opportunity in biosciences, gene research, agribusiness and nutrition. In last week’s quarterly I rhetorically asked “Who owns the water?” The tapestry that blends agricultural need with investment entrepreneurship has never been more vibrant.
That is why my work is leading us to countries like Chile, Brazil, Russia, Australia, South Africa, India and China as potential sources for investment ideas.
There is no blame to be laid, simply the idea that the globe’s captive audience has significant social and moral needs to be met.
Now, who has the money and the notion to ante up?
Wednesday, July 1, 2009
Arlington Econometrics Third Quarter Commentary
Feudal Economy: 2009
Despite the excesses of the past decade in which the gap between rich and poor became wider, it is only during hard times that we gain a sense of perspective about the compassion of others, and our place in a society that either embraces the needs of others or rejects them for their disabilities or lack of initiative. I fear, based upon my reading of anecdotal data, that the laws which might govern our impending economic renaissance are closer to Darwinian survivalism than to universal altruism and good will.
Indeed, all social strata have been harmed by the current financial collapse. As an objective scientist, I am bound by my methods to account consistently for my representation of my data. Therefore, I regrettably report that I have overheard many express the opinion that it’s your fault you’re in a financial pickle, and it’s your responsibility to do something about it, and to make sure it doesn’t happen again. “Government is neither the problem nor the solution,” they say. “I’m not taking responsibility for the other guy, either” is another phrase I hear quite often.
Given this level of suspicion and greed which permeates the financial landscape, we might as well erect castles and moats to protect the haves from the have-nots, the privileged from the cerfs.
Whenever we get into a comparison of levels of distress we fall victim to a narrative that cannot be justified. Rather than casting doubt upon other’s motivation, it might be less costly to fix the system which promulgates the inequity in the first place. Let me ask, for example, “Who owns the food, or water, or energy resources of the globe?” Is it sheer happenstance that borders have been delineated, and countries identified, as the regions of bounty? The total bill spent to protect one’s resources is sometimes greater than the revenue drawn in by its export value.
Should stockpiling in one’s basement be encouraged? Remember bomb-shelters during the 1950’s? The fact that a government won’t, or can’t provide, for its neediest is simply not intuitive to good governance. That you are satisfied is not sufficient to cover-up the primal inefficiencies of the system. A better approach might be to encourage equal access to global resources, and to let the capitalists profit from a broader exchange of products and services.
Markets.
As we implement the allocation strategies of our portfolios is it not fair to ask if education, healthcare, housing, energy are rights of a citizenry, or are they commodities available for purchase (and stockpiling) by the highest bidder? Accordingly, when these commodities (services) reach the fewest number of participants are we to value them more, or less in the marketplace? Is the global marketplace governed by feudalism or altruism?
One might pause to consider whether we are dealing with one economy, or two.
There will always be opportunity for the entrepreneur to flourish. From amongst the ruins of our recent bear market decline strategists and opportunists will find/are finding tolerable risk and opportunity. One’s point of view determines those risks, and the willingness of undertaking the challenge. Further, risk-taking provides the opportunity to “be first” with the reward and to surge powerfully past one’s competition. Don’t forget, too, that the rush of emotion from investing is a powerful aphrodisiac. There are no perfect investments. We can only try to mitigate the effect of negative influences upon our investments as best we can. Investing is risk-taking. The probabilities we use to balance those risks are unique to each investor.
When excesses in real estate lending, financial services and commodities draw down all investment vehicles indiscriminately, the sympathetic aftershocks affect more than the intended few. This is when moral compassion and resilience are needed most. A collapse of one sector has the potential to aggravate parts of the economy previously disaffected, or disinterested, in the aggressor. While the panic phase of last year’s bear has largely stopped, a devastating wake has been created. Commercial institutions have the financial resources to rebound more quickly than the average citizen. Financial bailouts, one might argue, are inherently unfair. It can only be hoped that the beneficiaries of governmental largesse are compassionate enough to use their financial “windfalls” to benefit their clients, and not simply to use the cash to adjust their balance sheets.
Strategy.
Since the 1990’s the corporate sector has benefited from fiscal and monetary policy that enabled profitability and growth. So, too, has the investing public at large. Today, however, we stand in sharp contrast to that congruence of shared risk/reward. The “other” economy has been decoupled and left adrift as corporate priorities have been addressed first.
While the business cycle plays out, some are left to fend for themselves. As I stated earlier, these times present unique problems. Many are unwilling to fulfill their neighborly duty to lend a hand because they believe it is not their responsibility to do so. The impact of corporate greed and malfeasance was not their doing, directly, they believe. So even though the pain reverberated universally, other’s chaos is none of their neighbor’s business.
I suspect that this attitude permeates across all social strata, not given to the wealthy alone. But to some extent a level of isolation in bad times cannot be a good thing for the overall welfare of the economy. An asymmetrical discourse about public/private policy is emerging, whose end result could be more devastating than the events which got us here. I believe that without a moral compass, corporate and governmental response could exacerbate the failure already in motion.
Governments are trying aggressively to respond to the crisis. Financial institutions are much steadier than they were, economic activity is increasing, interest rates are stabilizing. Many of the variables, in regulation and psychology, are being addressed by the globe’s leaders. Conventional policy matters are quickly being brought under control. But is this a conventional time?
Conclusion.
If my research is correct, the market’s response to policy changes has been tepid, at best. Indeed, our Technology brethren were correct about New Paradigms; they were just a decade too early in their market enthusiasm. Any expected rebound in retail business/economic activity will be price induced, not simply demand-driven, and inflationary for the foreseeable future. The cost of money cannot go down any further. That strategy has already been tried, and led to a climate of excess and manipulation.
Stresses associated with “keeping up with one’s neighbors” will be supplanted by new concerns about healthcare and job stability. Spending will be sluggish. Personal savings rates, at least in the early part of a recovery, will be anemic.
The spectre of inflation will be most felt in global agriculture. The mania that drove real estate (and dot.com) will be nothing compared to the price speculation in natural resources such as food, agricultural land development, commodities, and water. In fact, I recall writing an editorial last year in which I stated that water could become the “new oil.” Core cost inflation is only going to increase.
Our asset allocation models are becoming more bullish, though. Inflation is not an inhibitor of growth, it is a sign of it. I expect emerging markets to regenerate. Energy, in all of its iterations (and those which we cannot yet imagine), will be a capital gains opportunity for the next two decades, at least.
While all investing is perception, I believe this bear market is a natural parabolic phase within an overall secular bull market. The effects of this bear are more unique because its impact upon all economic strata was pervasive, not limited by sector or region. The crisis was/is just worrisome enough that many global economies have taken historic steps to bring about a reversal. In this regard, some regions are more well-off than others. To a certain degree, however, all regions are poised again at an equilibrium starting point.
Who leads, and who follows, is the nature of forecasting. In whichever case, it will be necessary to address historic psychological and fiscal inequities that destroyed the playing field for a few. Our willingness to provide for the less fortunate will determine the sustainability of whichever stimulus policies set the stage for our predictions.
At some point bear markets become buying opportunities. Recent market negatives are powerful indicators that an upside response is likely. In the near-term, I expect the markets to capitulate (downwards) from their recent rally. But volatility data is indicating a pattern of “higher lows.” Although resistance levels are significant, the market’s pattern is building towards a “breakout,” likely by the end of the year if no further machinations impede an orderly flow of cyclic balances.
Asset Allocation:
Equity 35%/Fixed Income 35%/Cash 30%
Despite the excesses of the past decade in which the gap between rich and poor became wider, it is only during hard times that we gain a sense of perspective about the compassion of others, and our place in a society that either embraces the needs of others or rejects them for their disabilities or lack of initiative. I fear, based upon my reading of anecdotal data, that the laws which might govern our impending economic renaissance are closer to Darwinian survivalism than to universal altruism and good will.
Indeed, all social strata have been harmed by the current financial collapse. As an objective scientist, I am bound by my methods to account consistently for my representation of my data. Therefore, I regrettably report that I have overheard many express the opinion that it’s your fault you’re in a financial pickle, and it’s your responsibility to do something about it, and to make sure it doesn’t happen again. “Government is neither the problem nor the solution,” they say. “I’m not taking responsibility for the other guy, either” is another phrase I hear quite often.
Given this level of suspicion and greed which permeates the financial landscape, we might as well erect castles and moats to protect the haves from the have-nots, the privileged from the cerfs.
Whenever we get into a comparison of levels of distress we fall victim to a narrative that cannot be justified. Rather than casting doubt upon other’s motivation, it might be less costly to fix the system which promulgates the inequity in the first place. Let me ask, for example, “Who owns the food, or water, or energy resources of the globe?” Is it sheer happenstance that borders have been delineated, and countries identified, as the regions of bounty? The total bill spent to protect one’s resources is sometimes greater than the revenue drawn in by its export value.
Should stockpiling in one’s basement be encouraged? Remember bomb-shelters during the 1950’s? The fact that a government won’t, or can’t provide, for its neediest is simply not intuitive to good governance. That you are satisfied is not sufficient to cover-up the primal inefficiencies of the system. A better approach might be to encourage equal access to global resources, and to let the capitalists profit from a broader exchange of products and services.
Markets.
As we implement the allocation strategies of our portfolios is it not fair to ask if education, healthcare, housing, energy are rights of a citizenry, or are they commodities available for purchase (and stockpiling) by the highest bidder? Accordingly, when these commodities (services) reach the fewest number of participants are we to value them more, or less in the marketplace? Is the global marketplace governed by feudalism or altruism?
One might pause to consider whether we are dealing with one economy, or two.
There will always be opportunity for the entrepreneur to flourish. From amongst the ruins of our recent bear market decline strategists and opportunists will find/are finding tolerable risk and opportunity. One’s point of view determines those risks, and the willingness of undertaking the challenge. Further, risk-taking provides the opportunity to “be first” with the reward and to surge powerfully past one’s competition. Don’t forget, too, that the rush of emotion from investing is a powerful aphrodisiac. There are no perfect investments. We can only try to mitigate the effect of negative influences upon our investments as best we can. Investing is risk-taking. The probabilities we use to balance those risks are unique to each investor.
When excesses in real estate lending, financial services and commodities draw down all investment vehicles indiscriminately, the sympathetic aftershocks affect more than the intended few. This is when moral compassion and resilience are needed most. A collapse of one sector has the potential to aggravate parts of the economy previously disaffected, or disinterested, in the aggressor. While the panic phase of last year’s bear has largely stopped, a devastating wake has been created. Commercial institutions have the financial resources to rebound more quickly than the average citizen. Financial bailouts, one might argue, are inherently unfair. It can only be hoped that the beneficiaries of governmental largesse are compassionate enough to use their financial “windfalls” to benefit their clients, and not simply to use the cash to adjust their balance sheets.
Strategy.
Since the 1990’s the corporate sector has benefited from fiscal and monetary policy that enabled profitability and growth. So, too, has the investing public at large. Today, however, we stand in sharp contrast to that congruence of shared risk/reward. The “other” economy has been decoupled and left adrift as corporate priorities have been addressed first.
While the business cycle plays out, some are left to fend for themselves. As I stated earlier, these times present unique problems. Many are unwilling to fulfill their neighborly duty to lend a hand because they believe it is not their responsibility to do so. The impact of corporate greed and malfeasance was not their doing, directly, they believe. So even though the pain reverberated universally, other’s chaos is none of their neighbor’s business.
I suspect that this attitude permeates across all social strata, not given to the wealthy alone. But to some extent a level of isolation in bad times cannot be a good thing for the overall welfare of the economy. An asymmetrical discourse about public/private policy is emerging, whose end result could be more devastating than the events which got us here. I believe that without a moral compass, corporate and governmental response could exacerbate the failure already in motion.
Governments are trying aggressively to respond to the crisis. Financial institutions are much steadier than they were, economic activity is increasing, interest rates are stabilizing. Many of the variables, in regulation and psychology, are being addressed by the globe’s leaders. Conventional policy matters are quickly being brought under control. But is this a conventional time?
Conclusion.
If my research is correct, the market’s response to policy changes has been tepid, at best. Indeed, our Technology brethren were correct about New Paradigms; they were just a decade too early in their market enthusiasm. Any expected rebound in retail business/economic activity will be price induced, not simply demand-driven, and inflationary for the foreseeable future. The cost of money cannot go down any further. That strategy has already been tried, and led to a climate of excess and manipulation.
Stresses associated with “keeping up with one’s neighbors” will be supplanted by new concerns about healthcare and job stability. Spending will be sluggish. Personal savings rates, at least in the early part of a recovery, will be anemic.
The spectre of inflation will be most felt in global agriculture. The mania that drove real estate (and dot.com) will be nothing compared to the price speculation in natural resources such as food, agricultural land development, commodities, and water. In fact, I recall writing an editorial last year in which I stated that water could become the “new oil.” Core cost inflation is only going to increase.
Our asset allocation models are becoming more bullish, though. Inflation is not an inhibitor of growth, it is a sign of it. I expect emerging markets to regenerate. Energy, in all of its iterations (and those which we cannot yet imagine), will be a capital gains opportunity for the next two decades, at least.
While all investing is perception, I believe this bear market is a natural parabolic phase within an overall secular bull market. The effects of this bear are more unique because its impact upon all economic strata was pervasive, not limited by sector or region. The crisis was/is just worrisome enough that many global economies have taken historic steps to bring about a reversal. In this regard, some regions are more well-off than others. To a certain degree, however, all regions are poised again at an equilibrium starting point.
Who leads, and who follows, is the nature of forecasting. In whichever case, it will be necessary to address historic psychological and fiscal inequities that destroyed the playing field for a few. Our willingness to provide for the less fortunate will determine the sustainability of whichever stimulus policies set the stage for our predictions.
At some point bear markets become buying opportunities. Recent market negatives are powerful indicators that an upside response is likely. In the near-term, I expect the markets to capitulate (downwards) from their recent rally. But volatility data is indicating a pattern of “higher lows.” Although resistance levels are significant, the market’s pattern is building towards a “breakout,” likely by the end of the year if no further machinations impede an orderly flow of cyclic balances.
Asset Allocation:
Equity 35%/Fixed Income 35%/Cash 30%
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