As earnings are reported, the
most obvious accelerator of profitability is pricing power. Nowhere is the evidence of the laws of
supply/demand more obvious than in tangible assets, such as metals, oil and
paper. For many years previously, investors
were buying-up real estate in anticipation of reaping easy reward. In hindsight, the plethora of cash and low
borrowing rates at that time magnified the potential for opportunity in the
sector. Now, money seeks new opportunity
in other “depleting” natural resources.
This near-manic search derives
not only from the scarce nature of the resource itself, but also from its
application as tools of industrial development.
Minerals used in technology
(copper, eg.) energy components, and foodstuffs (agriculture) are the next best
tangible resources to own after the real estate collapse.
Despite rhetoric about “value”
during a market collapse, there is always a counter-cyclical opportunity
elsewhere, outside the primary focus of our vision. Besides, instead of profitability through
layoffs and “efficiencies,” demand in these sectors provides room to grow,
along with potential increases in prices.
In that context, real earnings acceleration is quite probable. And the opportunities are borderless, lying in
regions that are yet to be cultivated.
Macro equals micro.
Not only are the locations of
these “commodities” global, but the potential demand is, as well. The population of these regions needs homes,
technology, food, and energy. Global
data confirms that a large portion of our unmet demand is within the next two
decades, a factor that equates to a rebalance in our asset allocation for many years
hence.
An additional benefit from
this data, too, is that the market’s response thus far has been muted. Predictably, analyst’s focus has been on
highly visible underperforming sectors like banks and retail. At
present, negative psychology is more influential on market performance than
fundamentals or future projections.
Stock picking and capital preservation is a stronger driver of market
activity than any other influence. Thus,
fear trumps idealism, and long-term forecasting goes unheeded.
Cycles.
To be sure, current cycle
measures within the economy and markets are abysmal. Large downdrafts have wiped out a serious
portion of discretionary cash and portfolio valuation. No one is sitting and waiting for the “next
best thing,” anymore.
Rendering traditional
fundamental analysis invalid, investors are guided by fear, safety of
principal, and boredom.
I would hasten to note that
cycles do end, they do reverse. The tech upside explosion in 2000 reversed
precipitously downward. Sometimes bear
markets reverse course in similar fashion.
Usually, I can see early signs of accumulation in certain demographics
that have longer-term implications.
Following the demand side, there are nascent indications of
countercyclical strength in those sectors discussed herein.
The key is to know where the
cycle originates, have a “good idea” where and when it might end, and to be
judicious with one’s asset allocation.
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