Market Commentary for the week of April 18, 2011

Acknowledging that all market activity is cyclical, not linear, I am often amused at the reaction by investors to each day’s trading results and the media commentary that follows.  I am often asked by the media to characterize a market’s daily events, as if one might create a justification for volatility out of context.  In reality, I view this day-after commentary as specious, at best.

It takes days/weeks/years for real trends to evolve.  In my methodology and study of the market it is most often these secular, or generational, themes that most resonate upon asset allocation and equity selection.  I do not dismiss the influence of intraday or exogenous events upon the market, but use a quantification of numerical significance of the impact that these daily events might have upon the prevailing landscape.  Besides, as I walk the caverns of Wall Street during lunch, I see no real influence of billion dollar mega-mergers upon the real lives of people who go to work every day to earn money for the necessities of their lives.  In fact, I would posit that the gap between the boardrooms of America and the sales floor is widening, creating a negative response from those outside-looking-in.

This precondition of negativity was actually sown in the 1990’s by accommodative monetary policy and a last-surge climate of greed and speculation.  The valuation declines of the bear market now foster an opportunistic playing field in which, coupled with a continuingly emasculated Fed, venture capitalists are preying upon the leanest, meanest, and weakest, for their own gain.  Such is capitalism.  But such is the nature of political capitalism in a climate that tolerates budget deficits and socio-economic hierarchy favoring Wall Street.

In the near-term I do not see a change to the volatile nature of global financial markets.  In fact, with markets having recently met at the peak with remarkable synchronicity, it is time for a pause.  I do believe, however, that pockets of earnings growth will keep nascent industries like computer technology, alternative energy sourcing and biotechnology moving firmly.

No longer is the consumer the primary engine of corporate profitability.  Instead, supply and demand is guided by pricing power and demographics.  In spite of short-cycle acceleration in energy and commodities, which might require a period of capitulation downwards, these “tangible assets” resonate as an investment theme enduringly.  I no longer entertain questions about how low will technology stocks fall or “why aren’t retail sales more robust?”, because they are not the right questions for our time.

Both the Federal Reserve and the U.S. legislature need to do more to spearhead social spending rather than corporate merger-mania.  The country’s disparity in wealth is not the responsibility of government to change, but is the domain of equal opportunity.  Low cost interest rates, affordable second-home mortgages, and incentive sales programs do nothing to quell the psychology of negativity that permeates the market.  Government should see the nuance, not just the black and white.

In the meantime, I am comfortable with an allocation of greater proportion to stocks if the tenets of my own philosophy are met:  earnings acceleration, price performance and characteristics of relative strength that enhance the probability of those sectors responding demographically in the long-term.

In spite of robust numbers earned recently, equities now represent an increasingly larger “risk asset” representation in our portfolios.  As the saying goes, “think twice before betting the farm.”