Market Commentary for the week of February 28, 2011

Pushed to extremes.

Among the economic havoc wrought by turmoil in the Mid East and severe weather around the globe has been the impact upon inflation and upward pressure on prices for raw (and core) materials.  Today, most economists and market analysts fear that this confluence of factors could accelerate inflation in energy prices, foodstuffs, and industrial materials, thus undermining a nascent uptick in consumer spending, global trade, and consumer confidence.

Over the past few months, rising demand has put welcome pressure upon producers, forcing inventories down and production schedules to accelerate.  Should the current climatological and political pressures exacerbate, the potential impact might not only affect energy and food prices, but any hope of congruent development in the emerging markets.

Like gold before it, the price of oil gyrates not only to a fundamental beat, but also to the whims, worry, and fanaticism of politics, consumer confidence, and investment speculators.  Obviously, any interruption in the supply chain caused by political unrest, multiplies a swing in price pressure geometrically.

Laisser-faire.

Wall Street remains “non-plussed,” however.  Acceleration in energy prices, basic materials, and worry yields a daily dose of upticks and portfolio capital gains.

Grim news from the Mid East makes energy soar, intensifying the vortex that squeezes consumers on one hand while generating positive alpha on the other.

Obviously, federal treasuries worldwide must deal with these inflation pressures or risk sending their economies into a tailspin.  This dilemma underscores the fragility of an early recovery whose underpinnings are eroded by the slightest tremor of consumer doubt.  These doubts are exaggerated even more in developing nations where resources are not as plentiful and reserves are not as deep.  From China to Chile, Bahrain to Brazil, drought, floods, earthquakes and political unrest takes a bite out of statistical growth measurements.  When surpluses turn to deficits, confidence to doubt, economic statistics roil in harmony.

Facts or fantasy?

Whether one is to believe objective inflation data concerning prices, production and inventories, speculators and market-makers will have a field day betting on prices in response to any perceived threat.

Over time, “hedges” will magnify the risk by testing the outer cyclical limits of stochastic measurement.  This puts the markets into precarious risk by leaving prices nowhere to go.  The sky is not going to fall by this observation, but at some point prices might.  If not, certainly consumer spending and confidence will.

From food, energy, tuition, transportation, clothing, entertainment, and healthcare, prices are rising, forcing moral life-and-death decisions upon the public.  Food or medicine?  Mortgage or tuition?  Transportation or employment?

These extremes are too extreme for some.

Market Commentary for the week of February 22, 2011

Tactics.

Global stock markets continued their tepid advance last week, although it seems that the cyclical advance is giving way, once again, to the longer term secular (bear) bias.  While advances during this upswing (since November 2010) have been robust, they nevertheless are contained by overhead resistance, making for little net gain during the past three years.  Indeed, as we’ve stated before, the only real bull component to the economy and markets has been pricing power in tangible assets.

As a result, portfolio allocations tend to become idealized and provocatively positioned to chase gold and other natural resources.  This is a mistake for investors who remember the monochromatic theme during the dot.com era and, as a result, paid a heavy price.

Chasing individual asset classes might be temporarily rewarding, but can most usually be destructive to one’s manic psyche.

Making matters worse, dismissing traditional asset allocation provisions as “pedestrian” or “vanilla,” disparages a nuance that our chasers don’t seem to get: asset allocation always plays a greater role in the probability of capital gains potential than does any individual security within that portfolio.

An all-or-nothing discipline is great when you have nothing, or everything, to lose.  It is not, however, an investment strategy that optimizes tactical fundamentals.

It is for these reasons that I believe the markets are extended and at risk of consolidation.  If one is compelled to invest, I would urge caution, patience, and dollar-cost-averaging rather than an “all-in” philosophy at this time.  The big picture for financial securities is long-term positive but short-term precarious.

Alternatives.

During periods of equity risk, investors have traditionally rebalanced their portfolios according to the “alternative investment scenario,” which takes into account a diminution in equity exposure with a simultaneous increase in bond purchases.  Unfortunately, we are at a period in global transition where incentive-based borrowing and fiscal stimulus have taken yields to an historically low level.  Thus, the opportunity to “park” money in bonds is equally as risky (in a rising rate environment) as playing with stocks at their peak.  Global inflation is making bonds as speculative as buying overextended equity prices.

If we wish to be “early” in discovering the next big thing we have to widen our aperture of perspective and, rather than chasing the current fad, begin to look at long-term demographic themes such as biotech, agriculture, alternative energy, and technology.  The highest frequency of names in my universe are gathering for an upside inflection in those sectors within the next two years.

Too often we get in our own way trying to outsmart the markets, or taking excessive risk with volatility.  No one sleeps well putting all their eggs in one basket, or checking the ticker hourly to see if they are wealthy or poor.

Redesigning risk according to longer schematics implies higher returns and less catastrophic outcomes.

Market Commentary for the week of February 14, 2011

Oasis.

While many are transfixed by the chaos and confusion in Egypt, Tunisia, and Yemen, it is important to recognize that such unrest is not uniquely Middle Eastern, nor is it caused specifically by unruly despots.  Indeed, the root cause of social upheaval usually lies in the breakdown of social institutions whose function is to provide, or create, fairness and opportunity amongst the citizenry.

The deficits we see are not structural treasury deficits, but rather the deficits from unequal distribution of education, social access, financial equality, religious opportunity, and basic freedoms.

That is why we in the West should heed the elementary message of these demonstrations and apply their implications to ourselves.  Without sufficient access to opportunity, and a level playing field upon which to implement that access, no society can truly be invulnerable.

Moral ingredient.

While America describes itself as the “shining moral beacon upon the hill,” let us look carefully at the landscape of our own social network.  No child should go to bed hungry.  No child should be denied access to educational opportunity.  And no citizen should be meant to feel that the “haves” have acquired their well-earned fortunes through devious manipulation of unfair access.

To that extent, the revolution in the Middle East is a capital revolution.  Not just a fiscal capital revolution but an intellectual capital revolution in which each citizen aspires to the same opportunity to be free, be a teacher, become a president.

In addition, secondary issues exacerbate the dangers.  As the global food chain becomes stretched, increased demand creates upwards pressure upon prices, forcing many to make choices that are without a logical moral basis.  Rioting for self preservation reeks of a perfidious choice.  How long these danger signs linger is not a matter of days, but years.

Are we really prepared to answer this great moral question of our time?

It only seems a million miles away to us because shortages haven’t hit our shores.  Developed countries have created the infrastructure to distribute and supply its citizens with enough raw materials and processed product to avoid falling victim to global idiosyncrasies.  “If it’s not in my neighborhood, why should I care?” one hears.

Stretching the limit.

But not only do shortages affect less-developed countries more because of price constraints, but also because the societal infrastructure has been disposed and broken for so long.

If we expect global standards of living to rise, we not only have to finance connectivity of the internet, but also distribution channels for knowledge, faith, food, and capital.

Being thrifty simply to create more immediate profit is a shortsighted view of a capitalist utopia.  Our leaders should know better, that a well educated, health-conscious, fully employed populous stimulates more investments, more growth, more optimism, than simply hoarding a dollar.

At some point, the moral value of capital reserves must be stronger than an engorged bank account, alone.