Market Commentary for the week of August 9, 2010

Volatile.

It could be that the markets are reacting so inconsistently because the data, itself, is so inconclusive.  On one day, inventories are increasing, thus the markets go up (industrial production).  On another day consumer confidence begins to wane, thus markets pull back (consumer demand).  In fact, almost literally, each day brings a new, and sometimes disparate, reason for markets to respond.

Examples of hyperventilated fundamentals include housing starts, home sales, savings rates, interest rates, currency equivalencies, terrorism, taxes, capital spending, unemployment, etc.  You get the picture.  For every uptick there is a reason.  For every downtick there is a reason.

Do you hear the Byrds intoning “Turn, Turn, Turn?”

As I have said before, the data is less significant than the implied symbolism (interpretation) of events and the secular trend within which those data occur.  You cannot change a generational trend overnight or with the announcement of a particular day’s data.  In fact, even the accumulation of “change of direction” data might only be a seasonal or short term aberration to the prevailing secular condition.  (Think Japan with its 20 year secular decline, accompanied by anecdotal occasional changes of direction within that bear).

Manic.

The spillover stress factor of 24 hour news incites anything from greedy mania on the upside to depression selling on the downside.  Or worse, as is the case today, news/data overload creates inertia, or “net-zero” performance.  Not only am I concerned that fundamentals are missing from the investment exercise, I am nearly convinced of it.

On balance, I interpret today’s financial market performance as “shared contagion,” in which a collective attitude gathers either to move markets up or down as emotions flow in reaction to data.  This occurs not monthly or weekly but hourly as markets around the globe move with such synchronicity that there is little distinction between sectors, regions, currencies, or national interest.

If you want to make money, and we all do, you cannot hang on the periphery, you must join in.  A “stronger core” is moving the markets indiscriminately, almost without strategy or methodology.  One cannot “time” entry or exit criteria, you just have to bear with it.

A legitimate case could be made to avoid the game altogether.  In some fashion, I am using my quantitative tools to define opportunity much more discreetly than in the past.  Core balanced accounts have less than 20% of resources allocated to the global equity markets right now.  Although I seek to have broader participation (owing to my philosophy of asset allocation and sector diversification), I find that the volatility factor day-in-and-day-out is more injurious to achieving steady performance than the risk of overexposure.

Potential.

There is a coincidental effect between the widening gap in fundamentals and the deterioration in quality portfolio management performance.  As the market nears key downside inflection points I see less enthusiasm for risk-taking.  Although I am disturbed by the acceleration in short-term volatility, my measurements have me on track for understanding the broader secular themes of our time.  My focus remains upon population demographics (life sciences, biotech); agriculture (food science, land use, farming); replenishable energy; natural resources (chemicals, metals, water, wood); and infrastructure (utilities, technology).

I believe, too, that there will be a lower entry point from which to make strategic allocation decisions during the next six months.  A market “meltdown” is unlikely, but a continuation of our current bear is likely to persist into the medium term.  I still believe that absent a suitable alternative in fixed income, equities are the best opportunity to achieve portfolio accretion.