Value?
Let’s not get carried away by short-term bursts in the market which, seemingly, ease all the pain we feel from a ubiquitous bear trend. Although the past twelve months have been a salvation to our portfolio values, we have not really eradicated the causes of a bear in the first place, not the least of which is lack of confidence in the financial markets/institutions, themselves.
The prevailing view amongst the cynics is that unless a clearer social agenda is presented, rewiring the game for game’s sake is an empty offering.
Investors seek enduring earnings growth, growth that engages all elements of the business/social compact, not just those that enrich a few or that presume “efficient productivity” is a synonym for philanthropy and sustainability.
The markets are transitioning from “old industry” to “new industry,” creating and responding to new challenges in emerging markets, emerging technology, and emerging demographics.
These transitions are multidimensional, requiring unique partnerships across many industry sectors, and many global regions. We’re not there yet, but the markets await such a bold confluence of factors to rid themselves of the same-old climate of inertia.
As a result, what passes for surges and retreats in the market’s current cycle is simply a resolution of old wounds without much headway. Nonetheless, I see the potential for these cross-currents producing something dynamic, enduring and innovative.
Wider aperture.
To do so, we have to avoid the “daily trap” of valuing our self-worth by the value of our portfolio, or the integer of that day’s closing price on the Dow. The most aggressive capital gains are those that emanate from prudent portfolio methodology and a long-term orientation about economic dynamics.
Perhaps it’s our appetite for instant results that accounts for the impatience we all feel during the natural parabolic course of financial events. We love linear spikes, up and down, because they provide exactitude, point A to point B in no time.
Adhering to a wider aperture is not in our corporate culture, either. Boardrooms manage a 24 hour profit/loss balance sheet. All of their favorites, products that are working today, are held onto, because it is easier to avoid innovation, capital expenditure, and new science if shareholder’s equity is doing well.
I prefer to look at portfolio management as a balance between risk/reward, current/future, moral/inconsequential. I find, too, that it’s easier to glean direction from the market as a whole than from any particular constituent element that comprises it. As a result, disparate readings about interest rates, inflation, consumer demand and earnings might have a short-term negative impact upon the value of global equity prices, even though one or more of those factors could be improving.
I look for a “Spring-rally” after the dust settles…and the snow melts.
Monday, February 22, 2010
Tuesday, February 16, 2010
Market Commentary for the week of February 15, 2010
Two sides of the curve.
Students of my quantitative investment disciplines are typically impressed during bull markets. We seem to be able to maximize efficiencies in up-markets by utilizing cycle phases and inflection points. Seemingly more impressive, and more useful today, is the use of these tools, and others, to leverage the other side of the parabola, the downlegs that occur after upcycles are completed.
Clients tend to look only at the “long” side of the markets. Their portfolios achieve an upside dollar value and, as if looking at a money market balance, they believe that having attained that valuation is the equivalent of locking-in that value. Despite repeated admonitions that “markets are cyclical,” it is nonetheless difficult for them to accept that portfolio valuations fluctuate.
It is important to recognize the prevailing secular theme and to be allocated so as best to maximize the upside probabilities of that trend. But it is nearly impossible to avoid up and down cycles that exist within those trends. Thus, one’s portfolio manager is a magician when riding the upleg of a parabolic curve, and a “bum” when the curve ends or reverses course.
Remember, asset allocation plays a more significant role in the probability of upside portfolio performance than does any individual security within that portfolio. Therefore, you only need to be “right” more often than wrong to achieve actual portfolio performance
Today’s market requires both magic and patience to be successful.
The right side of the curve.
As global markets transition from secular bull (1990-2007) to secular bear, I see a narrowing of opportunity in traditional assets, and a shift towards newer, more resilient business models that take advantage of pricing power, productivity, and thematic demographics. These industries, and their equities, underscore the staying power of international baskets whose underlying business activity remains upbeat and profitable.
I have previously identified these sectors as Agriculture, Life Sciences, Healthcare, Technology, Alternative (and Renewable) Energy, Telecom, Basic Materials, and select Infrastructure Industrials.
The dollar might be losing the short-term battles, but its base is too mighty to erode completely. Dire predictions to the contrary are premature. However, in a global economy, shifts in currency valuations and strengths are to be expected.
My current strategy is to continue expanding yield and dividend payouts within my portfolios, while using earnings accelerators to account for capital gains potential. The main risks to this long-only strategy is the current secular (bear) trend and the possibility of continued deterioration in equity support levels. This might worsen if earnings patterns and/or global demand further weaken.
The next left hand side of the curve.
There are, I believe, certain other immutable trends that are initiating. We know, for example, that interest rates had been in a decline since the mid-1980’s. Their decline, and prolonged period of “disinflation” which accompanied, produced the largest (magnitudinally) and longest bull market cycle in stocks and tangible assets in history. As with all trends, they expire. We have been at an inflection “point” since 1999-2002. (As you can see by my example, trends are not points on a calendar, but rather periods of time during which they are accumulating or distributing.)
Instead, owing to the expiration of the disinflationary curve and the current indebtedness of global nations from excessive over-borrowing, we are likely to see an upswing in the cost of money, savings rates, and prices, all of which could usher in a new cycle of economic phenomena.
Students of my quantitative investment disciplines are typically impressed during bull markets. We seem to be able to maximize efficiencies in up-markets by utilizing cycle phases and inflection points. Seemingly more impressive, and more useful today, is the use of these tools, and others, to leverage the other side of the parabola, the downlegs that occur after upcycles are completed.
Clients tend to look only at the “long” side of the markets. Their portfolios achieve an upside dollar value and, as if looking at a money market balance, they believe that having attained that valuation is the equivalent of locking-in that value. Despite repeated admonitions that “markets are cyclical,” it is nonetheless difficult for them to accept that portfolio valuations fluctuate.
It is important to recognize the prevailing secular theme and to be allocated so as best to maximize the upside probabilities of that trend. But it is nearly impossible to avoid up and down cycles that exist within those trends. Thus, one’s portfolio manager is a magician when riding the upleg of a parabolic curve, and a “bum” when the curve ends or reverses course.
Remember, asset allocation plays a more significant role in the probability of upside portfolio performance than does any individual security within that portfolio. Therefore, you only need to be “right” more often than wrong to achieve actual portfolio performance
Today’s market requires both magic and patience to be successful.
The right side of the curve.
As global markets transition from secular bull (1990-2007) to secular bear, I see a narrowing of opportunity in traditional assets, and a shift towards newer, more resilient business models that take advantage of pricing power, productivity, and thematic demographics. These industries, and their equities, underscore the staying power of international baskets whose underlying business activity remains upbeat and profitable.
I have previously identified these sectors as Agriculture, Life Sciences, Healthcare, Technology, Alternative (and Renewable) Energy, Telecom, Basic Materials, and select Infrastructure Industrials.
The dollar might be losing the short-term battles, but its base is too mighty to erode completely. Dire predictions to the contrary are premature. However, in a global economy, shifts in currency valuations and strengths are to be expected.
My current strategy is to continue expanding yield and dividend payouts within my portfolios, while using earnings accelerators to account for capital gains potential. The main risks to this long-only strategy is the current secular (bear) trend and the possibility of continued deterioration in equity support levels. This might worsen if earnings patterns and/or global demand further weaken.
The next left hand side of the curve.
There are, I believe, certain other immutable trends that are initiating. We know, for example, that interest rates had been in a decline since the mid-1980’s. Their decline, and prolonged period of “disinflation” which accompanied, produced the largest (magnitudinally) and longest bull market cycle in stocks and tangible assets in history. As with all trends, they expire. We have been at an inflection “point” since 1999-2002. (As you can see by my example, trends are not points on a calendar, but rather periods of time during which they are accumulating or distributing.)
Instead, owing to the expiration of the disinflationary curve and the current indebtedness of global nations from excessive over-borrowing, we are likely to see an upswing in the cost of money, savings rates, and prices, all of which could usher in a new cycle of economic phenomena.
Monday, February 8, 2010
Market Commentary for the week of February 8, 2010
Micro-investing.
Financial markets have to stop pulling on old scabs, or else this could get pretty ugly. Already, the market’s activity during the previous two weeks has not only eliminated significant, hard-won valuation, but it has all but eroded any positive sentiment that might have accrued as a result of 2009’s rebound. The odds grow stronger that we might see further erosion.
Our portfolios have at maximum less than thirty percent equity allocation at present.
Some of the driving forces behind the decline are the same “wounds” we have been discussing for two years. To wit, earnings acceleration patterns are in decline because of poor industrial and consumer demand, jobs are being cut in an effort to build efficiency, wages remain stagnant, currency imbalances put a strain on export activity worldwide, worldwide debt continues to expand, and consumer sentiment remains “arms-length” skeptical about the veracity and viability of financial institutions.
But the key to today’s numbers are the excessively negative range they occupy. Productivity, for example, is at its logical termination point. Earnings cannot abate much further without companies filing for bankruptcy. As wages and jobs fall, the reverberations in housing, spending and savings exacerbates algorithmically.
Thus, they dynamics of the financial markets take on a manic context for the moment, while technical and quantitative modifiers move into extreme levels.
Is there a tomorrow?
Commonplace conversation is no longer talking about long-term asset allocation, but rather survival and capital preservation. Such is the fate of ignoring economic warning signs while glossing over negatives when things are deemed to be alright.
Because I have discussed these negatives for quite some time, I would call the market’s capitulation an “annoyance” rather than a “trend.” In relative terms, we have had a near linear rebound since March of last year, one which by any quantitative measure was unsustainable. It is prudent to remain “aggressively-defensive,” but it would be unwise to walk away from the whole endeavor and not to participate at all.
We know that trends take years to develop. We also know that all things are relative, whose meaning is only valuable when attached to another quantifier. Thus, it is likely that after the current carnage, there will be sector opportunity. Perhaps not all sectors, but if it were that easy anyone could index their portfolio to one basket and sit back for the duration.
It is crucial to note that time is not the enemy of investing, and that sector strength always increases or wanes in cyclical fashion. When the opportunity is greatest is usually when everyone has packed it in and abandoned the playing field.
Be smart.
Investors also owe a portion of their unease to their own lack of discipline. We become infatuated with uptrends and hot tips, and lose perspective in the process. Our behaviors move markets, and without our obsession/compulsion the markets would have no one to blame, no place to go. What appear to be unrelated events take on greater significance when we act greedy, foolish, or manic.
There is no question that we are in a fiscal and monetary bear cycle. It is also likely, as I stated earlier, that we might absorb further deterioration in portfolio valuation. Asset allocation usually wins these battles, so I find no reason to abandon ship, just yet.
Financial markets have to stop pulling on old scabs, or else this could get pretty ugly. Already, the market’s activity during the previous two weeks has not only eliminated significant, hard-won valuation, but it has all but eroded any positive sentiment that might have accrued as a result of 2009’s rebound. The odds grow stronger that we might see further erosion.
Our portfolios have at maximum less than thirty percent equity allocation at present.
Some of the driving forces behind the decline are the same “wounds” we have been discussing for two years. To wit, earnings acceleration patterns are in decline because of poor industrial and consumer demand, jobs are being cut in an effort to build efficiency, wages remain stagnant, currency imbalances put a strain on export activity worldwide, worldwide debt continues to expand, and consumer sentiment remains “arms-length” skeptical about the veracity and viability of financial institutions.
But the key to today’s numbers are the excessively negative range they occupy. Productivity, for example, is at its logical termination point. Earnings cannot abate much further without companies filing for bankruptcy. As wages and jobs fall, the reverberations in housing, spending and savings exacerbates algorithmically.
Thus, they dynamics of the financial markets take on a manic context for the moment, while technical and quantitative modifiers move into extreme levels.
Is there a tomorrow?
Commonplace conversation is no longer talking about long-term asset allocation, but rather survival and capital preservation. Such is the fate of ignoring economic warning signs while glossing over negatives when things are deemed to be alright.
Because I have discussed these negatives for quite some time, I would call the market’s capitulation an “annoyance” rather than a “trend.” In relative terms, we have had a near linear rebound since March of last year, one which by any quantitative measure was unsustainable. It is prudent to remain “aggressively-defensive,” but it would be unwise to walk away from the whole endeavor and not to participate at all.
We know that trends take years to develop. We also know that all things are relative, whose meaning is only valuable when attached to another quantifier. Thus, it is likely that after the current carnage, there will be sector opportunity. Perhaps not all sectors, but if it were that easy anyone could index their portfolio to one basket and sit back for the duration.
It is crucial to note that time is not the enemy of investing, and that sector strength always increases or wanes in cyclical fashion. When the opportunity is greatest is usually when everyone has packed it in and abandoned the playing field.
Be smart.
Investors also owe a portion of their unease to their own lack of discipline. We become infatuated with uptrends and hot tips, and lose perspective in the process. Our behaviors move markets, and without our obsession/compulsion the markets would have no one to blame, no place to go. What appear to be unrelated events take on greater significance when we act greedy, foolish, or manic.
There is no question that we are in a fiscal and monetary bear cycle. It is also likely, as I stated earlier, that we might absorb further deterioration in portfolio valuation. Asset allocation usually wins these battles, so I find no reason to abandon ship, just yet.
Monday, February 1, 2010
Market Commentary for the week of February 1, 2010
Up, then down.
Now that the early-2010 momentum appears to be cracking, the odds heighten that we might continue to see increased volatility and a quicker trigger finger on the sell side. It’s becoming obvious that global stimulus packages are having, in some instances, the opposite effect of their intended result. Large debt and declining demand are disappointments for the investing public. Historically, this is not a good combination for the growth in asset classes.
Additionally, and anecdotally, the types of calls we are getting are more “manic,” worrying more about capital preservation than capital appreciation. Recall, it was only the first week of January when everyone used their early momentum to try and calculate annualized year-end projections.
Although I remain bullish about long-term capital gains probabilities, I also play it close to the vest regarding overexposure to sectors that have had dramatic run-ups in the last nine months. The relative strength configurations are unjustifiably high, and likely to pull back in the short cycle before initiating any new uptrends. Be wary, for example, of the high valuations in Financial and Consumer Non-Cyclicals sectors.
The markets are trying to break into new highs, but more likely to test support levels.
As a tactical move, traders might look into expanding their global short positions rather than adding new securities at present.
It’s not all bad.
However, a number of sectors are running “counter-cyclically” to the market, most notably Energy, Agriculture, and Utilities. It is no coincidence that these sectors are also those with the highest dividend yields. A number of factors point to these stocks doing well in the long-term, while maintaining a “defensively-aggressive” posture in the short-term.
As policymakers grapple with issues of the day, their delay imposes a lengthening of the timeline upon equity markets, which wait in anticipation of what incentives lie ahead and which projects have little chance of succeeding. It’s a casino game of highest prejudice. At this point, the topographical overlay is extremely unclear.
Driving the markets’ unease is a lack of discretionary capital. Valuations have peaked, but unless we see a catastrophic sell-off, there remains little speculative capital on the sidelines to re-ignite a rally. I do not envision a manic sell-off (although some might claim that last week was exactly that), but I could make the case for a slow drip from the trajectories we have thus far achieved. Such a configuration would exacerbate the mental reluctance many investors already have for buying into a volatile marketplace.
Don’t panic.
None of these “corrective forces” is immutable. Fiscal policies aimed at stimulating jobs and income growth could pull the market out of a paralysis. Seasonal earnings patterns might capture the imagination. Lastly, someone, somewhere, might invent the “better mousetrap” in life-saving medicines, renewable energy, or potable, plentiful water resources.
The aftermath of a bull leg is sometimes unpleasant. We are experiencing a normal capitulation in stock prices that follows the remarkable success of last year’s bull cycle. “Unleveraging the euphoria” is far from crisis levels, yet, but unsatisfying, nonetheless, while it’s happening.
Now that the early-2010 momentum appears to be cracking, the odds heighten that we might continue to see increased volatility and a quicker trigger finger on the sell side. It’s becoming obvious that global stimulus packages are having, in some instances, the opposite effect of their intended result. Large debt and declining demand are disappointments for the investing public. Historically, this is not a good combination for the growth in asset classes.
Additionally, and anecdotally, the types of calls we are getting are more “manic,” worrying more about capital preservation than capital appreciation. Recall, it was only the first week of January when everyone used their early momentum to try and calculate annualized year-end projections.
Although I remain bullish about long-term capital gains probabilities, I also play it close to the vest regarding overexposure to sectors that have had dramatic run-ups in the last nine months. The relative strength configurations are unjustifiably high, and likely to pull back in the short cycle before initiating any new uptrends. Be wary, for example, of the high valuations in Financial and Consumer Non-Cyclicals sectors.
The markets are trying to break into new highs, but more likely to test support levels.
As a tactical move, traders might look into expanding their global short positions rather than adding new securities at present.
It’s not all bad.
However, a number of sectors are running “counter-cyclically” to the market, most notably Energy, Agriculture, and Utilities. It is no coincidence that these sectors are also those with the highest dividend yields. A number of factors point to these stocks doing well in the long-term, while maintaining a “defensively-aggressive” posture in the short-term.
As policymakers grapple with issues of the day, their delay imposes a lengthening of the timeline upon equity markets, which wait in anticipation of what incentives lie ahead and which projects have little chance of succeeding. It’s a casino game of highest prejudice. At this point, the topographical overlay is extremely unclear.
Driving the markets’ unease is a lack of discretionary capital. Valuations have peaked, but unless we see a catastrophic sell-off, there remains little speculative capital on the sidelines to re-ignite a rally. I do not envision a manic sell-off (although some might claim that last week was exactly that), but I could make the case for a slow drip from the trajectories we have thus far achieved. Such a configuration would exacerbate the mental reluctance many investors already have for buying into a volatile marketplace.
Don’t panic.
None of these “corrective forces” is immutable. Fiscal policies aimed at stimulating jobs and income growth could pull the market out of a paralysis. Seasonal earnings patterns might capture the imagination. Lastly, someone, somewhere, might invent the “better mousetrap” in life-saving medicines, renewable energy, or potable, plentiful water resources.
The aftermath of a bull leg is sometimes unpleasant. We are experiencing a normal capitulation in stock prices that follows the remarkable success of last year’s bull cycle. “Unleveraging the euphoria” is far from crisis levels, yet, but unsatisfying, nonetheless, while it’s happening.
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