Intangibles.
If you’re reading this missive, you probably have money. Some of you are ultra-wealthy, others might be comfortable. Others, still, have just enough to get by. In any case, having money means having certain rights and responsibilities. Our parents taught us that, remember?
One of those rights is to do with your cash as you please. That’s your prerogative. You also have a responsibility to be wise with the allocation of your financial resources, not to be indiscriminate or capricious.
Why, then, do so many of you fall victim to the hucksters and hype that tries to separate you from your money?
Greed?
Here come the pitchmen.
Wall Street and the banking fraternity have a non-altruistic mission to get you to buy something. Sometimes the message is delivered in dulcet tones, with images of children, beach houses, and expensive cars. Other times, the message comes at you in fractious, staccato pace delivered by an almost “infomercial” frenetic salesman, sleeves rolled up, his face contorted into a funny or disfiguring image. You know those guys. They talk fast, their peers pump them for today’s hot stock. They are seen by you on reputable distribution channels with 24-hour access and global reach. You buy it all.
Consider, that very few of them actually interact with you. Maybe you buy their books or phone-in to their program. But, ostensibly, their pitch is directed at you not necessarily for you.
And still you buy.
“Buy real estate, buy stocks, buy gold, buy (fill in the blank)…”
Fundamentals.
All good investing is relevant, respectful, and based upon methodology. It makes you feel good and it produces the desired result. It connects you to your environment in a way that depicts your culture and your morality. It produces something greater than the individual. It defines capitalism, complete with risk/reward parameters. It is better than gambling. It creates leverage.
Today, the climate in the financial markets is tenuous. Despite the public’s low levels of trust and confidence in their institutions, particularly their financial institutions, they continue to invest.
The subtleties cannot be overlooked, that those financial institutions which you mistrust also need you to keep buying, selling, and trading. Their job is to invent new products, new trading platforms, new software that makes it easier for you to commit. Given that you feel the need, and they have “the goods,” an uneasy marriage is thus consummated.
I would love to see an overhaul in the delivery system. Shut down the do-it-yourself software packages, muzzle the hype, and return to a long-term non-synthetic marketplace in which patience replaces immediacy.
It’s no laughing matter when you get taken-in by wildly unrealistic expectations, and then bemoan your unfortunate fate.
Monday, January 25, 2010
Tuesday, January 19, 2010
Market Commentary for the week of January 19, 2010
Innovation.
We take it as an act of faith that the lights turn on when we flip a switch, that water flows from a spigot, and that there is food on the dinner table. Think about it: electricity, water, and food are utilities, for all intents and purposes.
Those sectors are dramatically different in this millennium than they were twenty years ago, and will be different, still, in the next two decades.
We should try to take a new perspective about these and other “utilities” as we allocate money for capital gains expectations. Like so much of what we see today, it is important to prepare for, and be imaginative about, expensive and innovative changes to our infrastructure. Already, we are getting significant feedback from these industries about what they must do to keep pace with changing demand patterns globally, and for updating the delivery grids upon which we depend so much.
As with all innovation, the weaker companies will fail, while “better mousetrap” providers will succeed. Who these winners and losers might be, though, is still an open question.
It is not the role of investors, or governments, to decide which amongst them succeeds or fails, but, rather, the influence of demand, solutions, and free market innovation.
Where to go?
I stress these points because money seems to be at an impasse. On the one hand we are eager to ride the wave of euphoria and capital gains which began in March of last year. Conversely, the averages are up significantly from those lows of a year ago and seem to be stifled by resistance points, low momentum indices, and lack of imagination and suitable alternatives. As with most things, when it’s easy to make money, we don’t worry quite as much. Today, we need to know which path to take when we reach the fork in the road.
My work is leading me towards smaller cap and emerging markets as untapped sources of capital gains. Additionally, since earnings acceleration patterns are quite narrow, the universe of possible candidates is more loosely defined, in geography as well as capitalization.
What we know is that traditional metrics will be challenged, and possibly be replaced by creative top-down paradigms, some of which we don’t (or can’t) currently define.
Traditional front end leadership in Consumer Staples, for example, are long-in-the-tooth, and likely to be displaced by aggressive solutions from agriculture, water-use, electricity, medicine, energy and transportation. Any of these sectors might emerge as market leaders.
If it “looks like” you may have missed the last bull-leg extension, in reality, the search is just beginning.
We take it as an act of faith that the lights turn on when we flip a switch, that water flows from a spigot, and that there is food on the dinner table. Think about it: electricity, water, and food are utilities, for all intents and purposes.
Those sectors are dramatically different in this millennium than they were twenty years ago, and will be different, still, in the next two decades.
We should try to take a new perspective about these and other “utilities” as we allocate money for capital gains expectations. Like so much of what we see today, it is important to prepare for, and be imaginative about, expensive and innovative changes to our infrastructure. Already, we are getting significant feedback from these industries about what they must do to keep pace with changing demand patterns globally, and for updating the delivery grids upon which we depend so much.
As with all innovation, the weaker companies will fail, while “better mousetrap” providers will succeed. Who these winners and losers might be, though, is still an open question.
It is not the role of investors, or governments, to decide which amongst them succeeds or fails, but, rather, the influence of demand, solutions, and free market innovation.
Where to go?
I stress these points because money seems to be at an impasse. On the one hand we are eager to ride the wave of euphoria and capital gains which began in March of last year. Conversely, the averages are up significantly from those lows of a year ago and seem to be stifled by resistance points, low momentum indices, and lack of imagination and suitable alternatives. As with most things, when it’s easy to make money, we don’t worry quite as much. Today, we need to know which path to take when we reach the fork in the road.
My work is leading me towards smaller cap and emerging markets as untapped sources of capital gains. Additionally, since earnings acceleration patterns are quite narrow, the universe of possible candidates is more loosely defined, in geography as well as capitalization.
What we know is that traditional metrics will be challenged, and possibly be replaced by creative top-down paradigms, some of which we don’t (or can’t) currently define.
Traditional front end leadership in Consumer Staples, for example, are long-in-the-tooth, and likely to be displaced by aggressive solutions from agriculture, water-use, electricity, medicine, energy and transportation. Any of these sectors might emerge as market leaders.
If it “looks like” you may have missed the last bull-leg extension, in reality, the search is just beginning.
Monday, January 18, 2010
Market Commentary for the week of January 18, 2011
Losing a step.
Since 1981, and the origins of
the last great secular disinflation trend, both bonds and stocks have benefited
from the tailwind that “cheaper money” had to offer. Equities and bonds together have experienced
significant capital gains expansion as a result.
Contrast that with the secular
inflection points at which we presently stand.
Today, bond and stock inventors sit at the edge of a
new paradigm, indeed, where inexpensive money has yielded about as much as
possible from corporate balance sheet expansion, while lower interest rates no
longer offer high yield or capital gains probabilities to fixed income
investors.
In such an environment
conventional wisdom calls for us to ladder maturities, sit tight with
short-term deposits, and wait for rates to rebound upwards. The thinking is that over time yields will
supplement any disadvantage to owning stocks in an alternative-less
environment.
Caution.
The difficulty today, however, is that stocks are at a
significant inflection point where the likelihood of perpetual sustainable
upside gains is limited. Thus we find ourselves on the horns of a
dilemma: in order to safeguard capital
it is necessary to do less, not more,
and to be reticent to chase secular trends when the markets look more and more
like a trading basket.
Since most of us are taught to
be long-term buy-and-hold investors, the strategy of trading for opportunity is
anathema to our psyche. Undoing that
philosophy is a tedious and time consuming exercise.
Every market cycle consists of
several parabolic periods. Markets don’t
move straight up or straight down.
Instead they contain upside and downside inflection points, periods of
high or low probability capital gains, which my methodology is able to
identify. These rhythms have become less
regular, and more staccato, particularly as psychology, cash, and expectations
expire from exhaustion.
The current market upcycle
(July 2010-present) is becoming old and mature.
Similarly, the best time to have locked in bond capital gains has
passed. What remains is a landscape of one-off transaction opportunities,
represented by some secular demographics, some depressed securities, and some
news-driven events.
While I have always considered
bonds to be a necessary component to building balance and risk-aversion in my
client’s portfolios, the universe of yield-related fixed income products is
diminishing, and, of those that do exist, less attractive than years prior.
Key drivers.
What we need to focus on are
classic secular trends (e.g. healthcare, infrastructure, energy, agriculture)
and try to isolate capital gains potential within the framework of diminishing current market earnings and momentum, as
well as a doubtful investor constituency who finds little of what Wall Street
says palatable.
Within that context I am comfortable saying that opportunity
exists in all spectra of equity investing, but that the approach needs to be
tighter and less connected to long term buy-and-hold strategies.
As big as the damage done to
our economy by leverage and excess speculation, no one would suggest that
presumptive cycles of recovery aren’t in the offing. The issue, as always, is timing. It is wrong to couple market performance with
economic performance, as the correlation is sometimes by inference only. But we do have a remarkable pent-up
resilience which I believe can be manifest in demographic and secular rebound
as other standards of behavior are addressed in the near-term.
Monday, January 11, 2010
Market Commentary for the week of January 11, 2010
All tech, all the time.
Speed kills.
No, I’m not talking about drugs or automobiles or other metaphors. I’m talking about the advent of technology and its impact upon today’s qualitative decision-making.
In our world of internet and ubiquitous connectivity I hear more about day-trading, weekly evaluations, and 24 hour market cycles than ever before. As if speed has replaced accuracy, some investors measure their portfolio in staccato beats rather than long term sine waves.
In just the first four trading days of this calendar year I have heard investors ask about “annualized portfolio projections” from trades executed on Monday, management teams projecting budgets based upon first week revenues, and companies issuing year-end prognostications deriving from sales figures in the first week of 2010.
Please, get real.
If decisions about 2010 emanate from first week statistics something is more wrong with the mindset than the numbers themselves.
Turn that off!!
Quantitative statistics that existed on December 31st, 2009, still exist in nearly identical proportions today as on that date. If you were optimistic and aggressively allocated in December, you should be so today. If you were cautious and conservatively positioned last month, you must be so now. Quantitative, and fundamental, data evolve over time, they do not reposition or reaccelerate week-by-week, minute-by-minute.
But more importantly, to think that they do, or that this Monday is statistically any different from last Monday, is an assumption that might lead to more portfolio ruin than simply being a bad stock-picker, or having poor information to start with.
Stubbornly, many investors believe that because instant information exists they must use it.
At the risk of sounding old-fashioned (and I am frequently accused of being just that) let me posit that any portfolio methodology which derives from technology, alone, is often a black-box surrogate for common sense and subjective evaluation. Even more interesting is that my own discipline, Arlington Econometrics, a quantitative evaluation methodology, is also mostly tech-oriented. The difference, I would argue, is in how those data are executed, and how they are evaluated.
There is no substitute for experience, common sense, or long-term perspective.
The best requirement for being a turn-key scientist is an unwavering belief in one’s methodology, a few “grey hairs” worth of experience, and a healthy dose of skepticism. There is no excuse for not believing in “manual override” regarding any data output.
These characteristics I have, even before I turn on my computer.
Speed kills.
No, I’m not talking about drugs or automobiles or other metaphors. I’m talking about the advent of technology and its impact upon today’s qualitative decision-making.
In our world of internet and ubiquitous connectivity I hear more about day-trading, weekly evaluations, and 24 hour market cycles than ever before. As if speed has replaced accuracy, some investors measure their portfolio in staccato beats rather than long term sine waves.
In just the first four trading days of this calendar year I have heard investors ask about “annualized portfolio projections” from trades executed on Monday, management teams projecting budgets based upon first week revenues, and companies issuing year-end prognostications deriving from sales figures in the first week of 2010.
Please, get real.
If decisions about 2010 emanate from first week statistics something is more wrong with the mindset than the numbers themselves.
Turn that off!!
Quantitative statistics that existed on December 31st, 2009, still exist in nearly identical proportions today as on that date. If you were optimistic and aggressively allocated in December, you should be so today. If you were cautious and conservatively positioned last month, you must be so now. Quantitative, and fundamental, data evolve over time, they do not reposition or reaccelerate week-by-week, minute-by-minute.
But more importantly, to think that they do, or that this Monday is statistically any different from last Monday, is an assumption that might lead to more portfolio ruin than simply being a bad stock-picker, or having poor information to start with.
Stubbornly, many investors believe that because instant information exists they must use it.
At the risk of sounding old-fashioned (and I am frequently accused of being just that) let me posit that any portfolio methodology which derives from technology, alone, is often a black-box surrogate for common sense and subjective evaluation. Even more interesting is that my own discipline, Arlington Econometrics, a quantitative evaluation methodology, is also mostly tech-oriented. The difference, I would argue, is in how those data are executed, and how they are evaluated.
There is no substitute for experience, common sense, or long-term perspective.
The best requirement for being a turn-key scientist is an unwavering belief in one’s methodology, a few “grey hairs” worth of experience, and a healthy dose of skepticism. There is no excuse for not believing in “manual override” regarding any data output.
These characteristics I have, even before I turn on my computer.
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