Inertia.
Worriers, and machines, ruled the markets last week. After flirting with record-breaking new momentum for the past 5 months, the cash spigot was turned off dramatically. Indicators stagnated, then fell, as profit-taking and fear crept back into investing. As if to substantiate the markets’ volatility, consumer confidence and capital expenditures dropped for the week. It’s all so “predatory.”
The most troubling part of this behavior is that the markets become seized by a paralytic horde, first buying then selling everything. Nobody invests with any real conviction, so the whole thing becomes a series of “program trades,” replete with upside sell barriers and downside loss-limits.
It’s no wonder that current reality is on hold for the time being.
But are the markets “out of control,” or merely acting out an orderly progression of accumulation prior to any mark-up phase?
Science, not fiction.
My research indicates that this stop/start progression is more reflective of an end-of-cycle context than random and, somehow, devious plot. After all, doesn’t the end of a secular bull cycle look something similar? Recall that the mania that gripped the final throes of our last (or any, for that matter) bull wave also acted on impulse, greed, and a never-ending belief that equity price increases were inevitable.
Well, here (at or near the bottom of the bear leg) the staccato-like reaction of share prices looks as if no one believes in the upside anymore, and that downside catastrophe is immutably prescribed.
Being foolish is definitionally part of either end of a secular cycle.
In the end, fundamentals always win out. Not just for investing, but for most things, as well.
Which side are you on?
The case for optimism is not rooted in the day-to-day gyrations of equity and bond prices, but in the longer-term demographics which serve both a moral and capitalistic incentive.
My work is laying out the foundation of new paradigms for investing in biopharmaceuticals, alternative (and traditional) energy sources, agriculture, technology and infrastructure, and water purification and distribution.
Your disappointment in equity prices today is shortsighted relative to the magnitude of opportunity, solutions, and potential the globe faces in the next 50 years.
It is important, too, to fight through the week-to-week negativity in order to develop a long-term strategic risk/reward paradigm for investing. Focusing on the excesses and the little things puts you squarely at odds with methodological science, and places you, instead, on the periphery of good judgment.
This missive is not intended as an optimistic misstatement of the facts, but rather a careful observation about the potential for capitalism and morality to coexist profitably. Others may think about throwing in the towel. Our objective data proves otherwise.
Mr. Spock?
As technology becomes obsolete think back to rotary phones, VCR’s, propeller aircraft, analog television. Think also about the future potential in medicine, irrespective of the political context, to solve and cure “incurable” diseases.
Think, also, about the role of the markets in providing long-term capital and speculation for progress in education, life sciences, healthcare, agriculture, and environmental studies.
Worriers will always find justification for their point of view. Let them tiptoe into the future.
Tuesday, August 25, 2009
Monday, August 17, 2009
Market Commentary for the week of August 17, 2009
It is different this time.
In several of my last pieces I have referred to “a new equilibrium amongst global equity bourses.” By this I mean to say that the declining tide in equity fundamentals worldwide (earnings, manufacturing, productivity, etc.) spared no region, no capitalization, no sector. Simply, the “pause” in global market expansion was all-encompassing.
But I have also referred to this baseline equilibrium as a positive, of sorts, because it affords us as investors a chance to redo our thinking, our analysis, and our asset allocation without the worry about catching a moving target in haste.
The characteristics of this “new equilibrium” include slower earnings growth acceleration, price-driven profits (as opposed to unit volume increases), lower downside risk to equities, sector rotation towards inflation-sensitive stocks, higher nominal interest rates.
My portfolios began to adjust for this new paradigm more than two years ago. When equity markets “broke out” of traditional upside barriers, it became apparent that the low cost of money was skewing traditional growth and investment patterns towards near-manic levels. And, just as psychological depression is no incentive for wading back into stocks, nor is euphoria a reason for buying “anything that moves.” In all cases, either side of the bell curve is not the prime location in which to be.
A return to traditional accounting and fundamental analysis is also a by-product of the hysteria the bull/bear cycle created.
Top-down.
One should remember that market cycles are generational. Although we have the tools to calibrate efficient quotients on a minute-by-minute basis (and the television “talking-heads” who constantly remind us of the necessity to do so), the outlook for capital gains potential lies in broader demographic themes which resonate far beyond commercial earnings cycles.
Longer-term does not mean less excitement. Putting one’s money to work at the proper inflection point means having more than one opportunity to buy. Correlating short-cycle activity within the broader top-down trend is the essence of Arlington Econometrics’ quantitative discipline. We have demonstrated an ability to do more within a cycle than traditional buy and hold investors.
The expansion of our themes began well before the data was perceived by the masses. Thus, the gap in our upside performance versus the S&P, for example, widens over time in our favor.
Ready, set……
I still believe in a higher potential for stocks over the next decade than at any time since the last secular global bull cycle in 1982. Utilizing our value and earnings models, I am forecasting a major three year reversal that can ultimately support the next secular bull phase, and uncover significant sector leadership in the process.
How efficiently we process these data will determine the spread over global bourses we achieve in portfolio capital gains. With so much contraction having taken place, the fun will be in the new competition to perform and to lay out the macro-themes that will guide our allocation decisions.
I believe we are starting to see those themes’ potential in agriculture, biopharmaceuticals, materials, energy, and technology.
For the time being, that should be plenty to digest.
In several of my last pieces I have referred to “a new equilibrium amongst global equity bourses.” By this I mean to say that the declining tide in equity fundamentals worldwide (earnings, manufacturing, productivity, etc.) spared no region, no capitalization, no sector. Simply, the “pause” in global market expansion was all-encompassing.
But I have also referred to this baseline equilibrium as a positive, of sorts, because it affords us as investors a chance to redo our thinking, our analysis, and our asset allocation without the worry about catching a moving target in haste.
The characteristics of this “new equilibrium” include slower earnings growth acceleration, price-driven profits (as opposed to unit volume increases), lower downside risk to equities, sector rotation towards inflation-sensitive stocks, higher nominal interest rates.
My portfolios began to adjust for this new paradigm more than two years ago. When equity markets “broke out” of traditional upside barriers, it became apparent that the low cost of money was skewing traditional growth and investment patterns towards near-manic levels. And, just as psychological depression is no incentive for wading back into stocks, nor is euphoria a reason for buying “anything that moves.” In all cases, either side of the bell curve is not the prime location in which to be.
A return to traditional accounting and fundamental analysis is also a by-product of the hysteria the bull/bear cycle created.
Top-down.
One should remember that market cycles are generational. Although we have the tools to calibrate efficient quotients on a minute-by-minute basis (and the television “talking-heads” who constantly remind us of the necessity to do so), the outlook for capital gains potential lies in broader demographic themes which resonate far beyond commercial earnings cycles.
Longer-term does not mean less excitement. Putting one’s money to work at the proper inflection point means having more than one opportunity to buy. Correlating short-cycle activity within the broader top-down trend is the essence of Arlington Econometrics’ quantitative discipline. We have demonstrated an ability to do more within a cycle than traditional buy and hold investors.
The expansion of our themes began well before the data was perceived by the masses. Thus, the gap in our upside performance versus the S&P, for example, widens over time in our favor.
Ready, set……
I still believe in a higher potential for stocks over the next decade than at any time since the last secular global bull cycle in 1982. Utilizing our value and earnings models, I am forecasting a major three year reversal that can ultimately support the next secular bull phase, and uncover significant sector leadership in the process.
How efficiently we process these data will determine the spread over global bourses we achieve in portfolio capital gains. With so much contraction having taken place, the fun will be in the new competition to perform and to lay out the macro-themes that will guide our allocation decisions.
I believe we are starting to see those themes’ potential in agriculture, biopharmaceuticals, materials, energy, and technology.
For the time being, that should be plenty to digest.
Monday, August 10, 2009
Market Commentary for the Week of August 10, 2009
Is it that good?
For all the right reasons, everyone loves upticks in the financial markets. But bear in mind that all market phenomena are cyclical, not linear, and that nothing goes straight up, or down, without pause or capitulation.
The danger in ascribing too much value to the market’s short-term rise since July, then, is to fail to recognize the overwhelming evidence that we’re still in a secular bear. Albeit slowing in their downside magnitude, the globe’s economic trends are languishing nonetheless. Last week’s mixed bag of unemployment, merger and acquisition, and earnings news highlights an underlying weakness that left the averages searching for momentum.
The “problem,” of course, is that short-term gains are obviously good, and skew the mindset of investors to trade more/invest less, thus elongating the pattern of recovery which might happen otherwise.
In truth, only yield and capital gains can mollify any concerns one might have about portfolio returns and sustainability.
The engines of capital gains, consumer demand and earnings, are at their lowest levels in decades, and strongly suggesting that their demise is not overblown.
For those with a longer-term horizon the future might be brighter, but nothing assured. Vulnerable to political will, and consumer demand, the sectors of greatest opportunity lie dormant until the funding sources kick-in. “It’s not a good idea unless there is demand for it,” would be a handy catchphrase for seeking investment ideas for the next decade. Presently a lot of “good ideas” don’t have the necessary demand.
Process, always.
Investing always implies risk, even within the most conservative of objectives. The goal of any portfolio manager is to balance risk with the total reward, so as to mitigate the impact of wrong choices or market volatility. I expect the market’s risk level to dissipate during the next few months. There is sufficient worry and devaluation built into stock and bond prices so as to level the playing field for most everyone. In the face of poor consumer sentiment and an overriding mistrust of the financial community, investors have a significant chance to recapture lost value through prudent asset allocation. All that’s missing is the correct upcycle and the confidence to “get ones feet wet,” again.
There are some clues that the market will move up in time. Relative strength quotients for financial instruments are rising, making “higher lows.” Hyperbole is being replaced by good old-fashioned fundamental analysis, and demographic themes are emerging which, under the right circumstances, might turn into venture capital and capital gains opportunities.
As more benchmarks “bottom-out,” I am hopeful that magnitude and velocity of bear trends will abate. As said, the response will not be linear, but, rather, cyclical. That should afford us the time to benefit from the upswings, protect against the capitulations, and to balance our asset allocation accordingly.
For all the right reasons, everyone loves upticks in the financial markets. But bear in mind that all market phenomena are cyclical, not linear, and that nothing goes straight up, or down, without pause or capitulation.
The danger in ascribing too much value to the market’s short-term rise since July, then, is to fail to recognize the overwhelming evidence that we’re still in a secular bear. Albeit slowing in their downside magnitude, the globe’s economic trends are languishing nonetheless. Last week’s mixed bag of unemployment, merger and acquisition, and earnings news highlights an underlying weakness that left the averages searching for momentum.
The “problem,” of course, is that short-term gains are obviously good, and skew the mindset of investors to trade more/invest less, thus elongating the pattern of recovery which might happen otherwise.
In truth, only yield and capital gains can mollify any concerns one might have about portfolio returns and sustainability.
The engines of capital gains, consumer demand and earnings, are at their lowest levels in decades, and strongly suggesting that their demise is not overblown.
For those with a longer-term horizon the future might be brighter, but nothing assured. Vulnerable to political will, and consumer demand, the sectors of greatest opportunity lie dormant until the funding sources kick-in. “It’s not a good idea unless there is demand for it,” would be a handy catchphrase for seeking investment ideas for the next decade. Presently a lot of “good ideas” don’t have the necessary demand.
Process, always.
Investing always implies risk, even within the most conservative of objectives. The goal of any portfolio manager is to balance risk with the total reward, so as to mitigate the impact of wrong choices or market volatility. I expect the market’s risk level to dissipate during the next few months. There is sufficient worry and devaluation built into stock and bond prices so as to level the playing field for most everyone. In the face of poor consumer sentiment and an overriding mistrust of the financial community, investors have a significant chance to recapture lost value through prudent asset allocation. All that’s missing is the correct upcycle and the confidence to “get ones feet wet,” again.
There are some clues that the market will move up in time. Relative strength quotients for financial instruments are rising, making “higher lows.” Hyperbole is being replaced by good old-fashioned fundamental analysis, and demographic themes are emerging which, under the right circumstances, might turn into venture capital and capital gains opportunities.
As more benchmarks “bottom-out,” I am hopeful that magnitude and velocity of bear trends will abate. As said, the response will not be linear, but, rather, cyclical. That should afford us the time to benefit from the upswings, protect against the capitulations, and to balance our asset allocation accordingly.
Monday, August 3, 2009
Market Commentary for the week of August 3, 2009
· Politics and sheer willpower combined to inch the markets higher last week. The absence of something negative was simply enough to get “sideliners” interested in value hunting, and for once (and a little bit) it paid off.
The most combustible elements of the equities markets took a short hiatus, and could best be described as resting at arm’s length from it all.
What’s going on? In short, earnings weren’t as poor as expected, politics took a break from occupying the news cycle, and most global investors hunkered down to assess the successful first month of the new quarter.
As a cessation of negative news might now be interpreted as the underpinnings of a cycle reversal, the only question is whether any negative news might throw cold water on the gains thus far grudgingly won.
For example, the Federal Reserve Chairman commented that he sees “positives” emanating from the bailout activity, as well as a slowdown in the magnitude of cycle decline from the bear market and the economy. His assessment is made (hopefully) from an unbiased point of view, but served to attract investors to the market, capital expenditures from corporations, and some stimulus to the housing market. All this as investors gain a modicum of confidence in the potential for an economic turnaround later in the year.
Certain barometers in my work are offering corresponding conclusions, but with a note of caution. While the short-term relative strength (RSI) numbers are moving higher, they are coalescing around upside resistance points which might be problematic in the near-term. Indeed, before I am willing to anoint the new bull phase, I expect to see some profit-taking from the June-July rally, bringing RSI calculations down to a more manageable level. Recall, that most linear upside rallies (like the kind we are in) are usually met with mirror-like linear capitulations. Buy and hold is definitely not the prudent strategy today.
The effectiveness of one’s portfolio strategy in the near-term will depend upon nimble equity-picking and short-term, high yield fixed income opportunity. At least, that is, until a real bull market takes hold and sector weightings take on a new significance.
I mention this because new clients, as well as existing ones, might be noticing more volatility and “exchanges” in their accounts. Traction, these days, means a short-term head start.
While my methodology always focuses upon long-term, top-down oriented themes, many of those data lay dormant in the short-term. The underpinnings of my long-term analysis remain as I have previously written: the depletion of natural resources, an age of technological discovery and interconnectedness, healthcare and related demographics, as well as social and moral governance of institutions such as financial, educational and infrastructure. Unfortunately, the consumer-led paradigm of traditional “front-end” bull cycles is nowhere on my radar, thus forcing me to underweight Cyclicals, Non-Cyclicals, and Financials.
There is no “truth” to investment strategies, only points-of-view. During tumultuous times it is imperative to modulate one’s investment methodology to reflect the changes in data, not simply to try to place square pegs in round holes.
Last week offered a little something for everyone, but be mindful of the cyclicality in financial markets. Try not to ride the downdrafts as vigorously as you search for the upswing.
· Wall Street is coming at you again, with extreme prejudice. Have you noticed that recent television commercials for financial services (banks, brokerage, insurance) contain one or more of the following: a young child (most likely a daughter); an elderly couple walking arm-in-arm; a beach scene; a skyscraper. These subliminal tugs at your heart are designed to convey trustworthiness, strength, compassion….this from the same firms that almost broke your retirement one year ago. Just asking?
The most combustible elements of the equities markets took a short hiatus, and could best be described as resting at arm’s length from it all.
What’s going on? In short, earnings weren’t as poor as expected, politics took a break from occupying the news cycle, and most global investors hunkered down to assess the successful first month of the new quarter.
As a cessation of negative news might now be interpreted as the underpinnings of a cycle reversal, the only question is whether any negative news might throw cold water on the gains thus far grudgingly won.
For example, the Federal Reserve Chairman commented that he sees “positives” emanating from the bailout activity, as well as a slowdown in the magnitude of cycle decline from the bear market and the economy. His assessment is made (hopefully) from an unbiased point of view, but served to attract investors to the market, capital expenditures from corporations, and some stimulus to the housing market. All this as investors gain a modicum of confidence in the potential for an economic turnaround later in the year.
Certain barometers in my work are offering corresponding conclusions, but with a note of caution. While the short-term relative strength (RSI) numbers are moving higher, they are coalescing around upside resistance points which might be problematic in the near-term. Indeed, before I am willing to anoint the new bull phase, I expect to see some profit-taking from the June-July rally, bringing RSI calculations down to a more manageable level. Recall, that most linear upside rallies (like the kind we are in) are usually met with mirror-like linear capitulations. Buy and hold is definitely not the prudent strategy today.
The effectiveness of one’s portfolio strategy in the near-term will depend upon nimble equity-picking and short-term, high yield fixed income opportunity. At least, that is, until a real bull market takes hold and sector weightings take on a new significance.
I mention this because new clients, as well as existing ones, might be noticing more volatility and “exchanges” in their accounts. Traction, these days, means a short-term head start.
While my methodology always focuses upon long-term, top-down oriented themes, many of those data lay dormant in the short-term. The underpinnings of my long-term analysis remain as I have previously written: the depletion of natural resources, an age of technological discovery and interconnectedness, healthcare and related demographics, as well as social and moral governance of institutions such as financial, educational and infrastructure. Unfortunately, the consumer-led paradigm of traditional “front-end” bull cycles is nowhere on my radar, thus forcing me to underweight Cyclicals, Non-Cyclicals, and Financials.
There is no “truth” to investment strategies, only points-of-view. During tumultuous times it is imperative to modulate one’s investment methodology to reflect the changes in data, not simply to try to place square pegs in round holes.
Last week offered a little something for everyone, but be mindful of the cyclicality in financial markets. Try not to ride the downdrafts as vigorously as you search for the upswing.
· Wall Street is coming at you again, with extreme prejudice. Have you noticed that recent television commercials for financial services (banks, brokerage, insurance) contain one or more of the following: a young child (most likely a daughter); an elderly couple walking arm-in-arm; a beach scene; a skyscraper. These subliminal tugs at your heart are designed to convey trustworthiness, strength, compassion….this from the same firms that almost broke your retirement one year ago. Just asking?
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