Market Commentary for the week of June 21, 2010

Fools of the road.

We used to call them “hot rodders.”  You know the guys.  Packed four or five to a car, they’d tool around in their souped-up automobiles, hooting, hollering, cavorting, just having a wild time.  Older folks would call them “menacing.”  Others would just scoff and try to avoid their ribaldry.  In general, they weren’t bad people, just a little more reckless than most.  They acted as if the consequences of their actions were of little concern, or nobody’s business altogether.

Sound familiar?  Do these “hot rodders” remind you of today’s “Wall Streeters?”

In my mind, I draw comparisons between those yahoos of yesteryear and today’s gunslingers who populate the financial community.  To be sure, it is both inaccurate and unfair to categorize everyone on the Street as being either one or the other.  But the menace seems analogous.  I no more want someone speeding past my front bumper on the highway as I do in the boardroom.  And I have no patience for the “hilarity of irresponsibility” depicted by both.

It seems, sometimes, that the juvenile delinquents of the 1950’s have grown up to become the miscreants of the financial markets.  Yes, I know, that’s hyperbole and exaggeration, but you get my point.  Synthesized mortgage products, leveraged hedge funds, 24 hours online day trading are the hot-rods of today’s financial highway.

And as with the observers of old times, one can only look in hapless frustration over the recklessness of those who whiz past our bumpers.

Time for civility.

It’s more than past time to sound the alarm on financial irresponsibility.

The markets are currently unwinding the greed of the past few years but not without difficulty.

We seem to have lost the confidence of the average investor.  They are wary of trying to “time the bottom.”  Rather, it’s in their best self-interest not to play the game at all.

Further, the erosion of corporate profit acceleration has laid bare the dearth of new ideas and a shallow asset allocation probability.

Recently, my work indicated that a plurality of market sectors I follow have turned negative for the duration.  This raises concerns that fundamentals, alone, cannot rescue the direction of these trends.  Obviously, in that climate, the delineation between winners and losers becomes more obfuscated.

Economic fundamentals, similarly, have been of little help in changing these cyclic phenomena.  Savings rates are quite poor, debt is high, portfolio valuations are stagnant, inflation (and higher interest rates) are likely, and peripheral exogenous news is dramatically cataclysmic.

“Steady as she goes.”

If it seems as if I’m rife with negative expectations you’re half-right.  My job as ship’s navigator is to plot for a successful result.  That involves knowing the hazards and making the prudent call.  My aim always is to generate positive “alpha” with minimal drawdown.

My track record indicates that I have achieved that mission.  Now I need a little help from the external factors over which I have little control…

 

…and for the “hooligans” to lay low for awhile.

Market Commentary for the week of June 14, 2010

Door number one.

One cannot ignore immutable facts, or act as if indicators are otherwise.  The big risk for investors right now is hoping that the current scenario is an aberration from their experience and expectations, and not to try to force money into investments which they believe might perform.  Leading that data is the fact that markets are in a secular (longer-term) bear phase and not likely to change direction immediately.

While the bear might have further to run, we, the public, wait for retirement age, good roads, clean air, abundant foodstuffs, quality medical care, safe streets, peace on earth, etc.  These expectations lead many to stay too long or to flip in-and-out too quickly chasing elusive capital gains.

An argument against such haste is that objectives take time, methodology, prudence, discipline, and skill.  In a climate of “fast” money, 24 hour news, and technological interconnectedness, I’m afraid we lose our audience simply by suggesting patience.

Door number two.

Recent news has focused upon high profile events like oil spills and terrorism.  These high value assets make people nervous and threaten the stability of government, currency, markets, and home and hearth.  It becomes more difficult for investors to know whether they are “winning or losing” at any given point in time.  Perceptions become reality and measuring sticks shorten considerably.

Greater volatility changes what we think we know and our comfort with those perceived realities.  More so than ever what has emerged is an investment palate that has too many colors, too many nuances.  These multitude of choices creates fear, cynicism, and confusion.

The net result is fewer players in the game and more volatility assigned to the “professional traders” who fill the void left by the exodus of “average,” investors.

The potential that all investing might become “automated” or “black-box” is something to be considered.

Door number three.

Against this backdrop, I’m growing increasingly impatient with members of the financial community who “synthesize” investment ideas/products to sell to you.  Fast talking hucksters on television shows are inundating the public with “reverse-this” or “preferred-that” designed to “perform well in all markets,” with track records of the last ten-minutes or so.  A wide range of options is available to you to dig-out from your 401-k disaster and to right the ship before you (a) retire (b) go on vacation        (c) change jobs (d) find a job.

What’s next?

Investors must be judicious about multiplying the risk in their lives to the extent that consequences become obviously negative or narrowly opportunistic.

If you think investing is a “race,” you’re already in the wrong ballgame.

Market Commentary for the week of June 7, 2010

Man or machine?

While technical anomalies might be the root cause of recent market behavior, there is no denying that their effect is to exaggerate downside expectations for market performance.  Whatever optimism might be engendered by short upticks in the S&P, the broader economic landscape is full of reasons to believe otherwise.  Ultimately, either fundamentals or expectations will win-out, but proof needs to be tangible for the markets to reverse their current bear cycle.

Relative strength configurations are moving laterally and providing no traction for momentum indices to gain strength.  Most trends, in fact, have reversed any of the mini-rallies of the past few weeks.  While I am not predicting a break below current support levels, the data clearly indicates a lateral-to-negative configuration.

The profile that is emerging is that of a global marketplace that suffers debt poorly, lacks consumer demand, and is struggling mightily to find “diamond in the rough” new industries to fix what ails sagging consumer sentiment.

The only constant is that the finish line remains far down the road and somewhere near the completion of a major bear cycle that currently envelops us.

In or out?

It is not clear what the tipping point might be that gets us out of neutral.  The good news is that there always exists a “counter-cyclical” variance that is working while the prevailing trend is moving in a different direction.  In today’s case, while consumer equities are languishing, the defensive metals (gold, silver, etc.) are flourishing.  Hardly a scenario for “spreading the wealth,” today’s defensiveness looks more like a “hoarding of the wealth.”  This is not a time to be speculating on banks or retail stores.

A further pullback in equities is likely.  Virtually every stochastic (relative strength) integer I review is topping.  The next stop is to test support with significant velocity that we either hold or begin anew an intermediate downside consolidation.  Based upon current activity, the next cycle is overdue.

The worst part of these data analyses is that consumer complacency has heightened almost to the point of seizing the markets hostage.  Against that backdrop no one wants to hear my theories, or anyone else’s, for that matter.  “Hard data analysis” is simply another catch phrase for “more bad news, and I don’t want to hear it.”  This is particularly difficult since I am always looking for upside adjectives and modifiers to transact in my work.

Up or down?

 

But the reality is that response is tepid, markets are uncooperative, and no one seems to be addressing the root causes of diminishing profitability, poor equity performance, or peripheral “exogenous noise” that just gets worse every day.

After taking a financial beating in 2000, 2008, and 2010, markets are logically quite sanguine about a rebound in prices necessary to create a reversal in the bear.  To be sure, there will be pockets of capital gains successes.  That, however, is not a substitute for peace of mind.