There’s a fine line between
suggesting that “economic data appears to
be turning around” and stating “the
economy is good.” Similarly, while
any short-term day rallies and interday price advances in the global bourses
are always preferable than the alternative, it is far from true to suggest that
the markets have bottomed and are poised to reverse course, upwards.
The theory that we have hit bottom is simply not supported by my data,
economic or financial.
It would be wrong, then, to bet
otherwise and risk the possibility of capital deterioration. In fact, by my readings, any conclusions to
be drawn as to fiscal, economic, or monetary successes might extend into
mid-summer of 2011, at best, and could (as I recently wrote) marginalize 2011
altogether.
Federal debt, personal debt,
political gridlock and global currency imbalances are systemic problems. It was difficult and time-consuming getting
into these predicaments, and will be equally as difficult from which to
extract. I am seeing indications in my quantitative database that we are in the
early stages of cyclic deterioration, a period during which the rate of capital
gains probabilities declines and market valuations perform indiscriminately in
a non-correlated way. We should be prepared
for the opposite of what we expect
or want.
You say potato…
What if I’m wrong? What if a concerted, cohesive global effort
to revitalize capital production succeeds?
In that case, then, we simply rebalance our asset allocation to allow
for, not only, the possibility of these things occurring, but also to profit
from it. I’m not in this business simply
to hypothesize, but to benefit from the validity and science of the hypothesis.
In the absence of good science, the worst thing you can
do is to guess, or to chase fads.
While sentiment and hope are
not sufficient market tools, without them we have little in the way of creating
the very theories we wish to prove or disprove, profit from or avoid altogether. The problem, really, is when “conventional
wisdom” or “mania” guide one’s theoretical decision. From a scientific point of view, it is always
those theses that are loosely followed that
might bear the most fruit. Follow the
gold hordes? Certainly. But not at the expense of knowing when to get
out and rotate into better opportunity.
Notably, the current configuration of relative strength
data shows me that this market cycle is overdone, long-in-the-tooth, and
susceptible to a pullback of significant proportion. In the
aggregate, despite news stories that indicate otherwise, economic activity is not picking up, earnings are not accelerating, and confidence
(indicated by hiring, savings, and capital expenditures) is not robust.
What we are seeing are
year-over-year comparisons to figures which were dire, morbid, and cyclically
negligible, thus creating the perception that improvements are in the offing.
Bottom line is the bottom line.
Clients and prospects have
commented to me that I’m “getting negative.”
You think? Check back to my
writings in 2006 and 2007. At that time
I began to lay out the scenarios for trend dissolution in which we currently
find ourselves. The mania of real estate
and asset speculation was then at its peak, capping off a decade of low
interest rates, indiscriminate borrowing and “dart-throwing” investing.
If anything, I am now cautious
about our current trend, but cognizant that, ultimately, we are closer to the
end of the decline than we were two years ago.
While I remain tactically defensive, I anticipate continuing to
outperform the benchmarks through prudent asset allocation. No single stock, or sector, is going to
account for wholesale changes in our portfolio probabilities. Rather, we can buttress against heightened
volatility and still deliver positive “alpha” by planning for the best,
expecting the worst.
No comments:
Post a Comment