Market Commentary for the week of August 29, 2011

It’s not you.

A number of factors have conspired to make investing not the same game it used to be, not the least of which is the excessive need for speed and immediacy of information. Keep in mind that before the internet, fortunes were also won and lost.  Key elements of due diligence exist today, just as they did then.  The difference is access and acceleration of information digested.  The human brain, unlike the computer, just isn’t wired for that type of speed when processing data.

As a result, many investors are unprepared for the impact of exogenous events upon their “plan.”  When the market moves at a snail’s pace, it is unacceptable to traders, when it moves at warp speed it is too fast for investors.

Whether you are one or the other, there is very little choice but to carry on dissatisfied, scared, or disassociated.

Fewer investors today, by my reckoning, are satisfied with their portfolios or their agents.  Many make it worse, in my judgment, by going it alone, trading off of discount platforms and do-it-yourself systems.  Those stresses don’t get any worse than having a full-time preoccupation with Wall Street’s faults and inefficiencies.  Most investors have an unrealistic set of expectations for success.  More often than not their one big “home run” is offset by a sequence of smaller, or larger, failures that net-out to nothing gained.  Too often, they fall short of their goals, increasing the stress level in their lives.

No compromise.

Sticking to an investment discipline is more often successful in achieving portfolio gains than jumping around looking for the next “hot” idea.  Going on vacation and forgetting the market sometimes produces a better result than a week of constant trading.

Everyone feels the pressure of trying to perform.  It appears, though, that the “experts” have bungled the assignment altogether.  Fiscal policy, boardroom decisions, computer programs, global politics, and exogenous influences have conjoined to produce a less efficient combination than at any time in market history.  These inefficiencies therefore create greater discomfort for the investment community.

It used to be an anomaly for the market to lose 4% of its value.  Last week, it happened at least twice…in one day!!  It is no longer an aberration that the market gyrates at this magnitude.  Moreover, its frequency is increasing, as well.  It is no wonder that investors might abandon the undertaking altogether.  And they have.

Others rush into gold, cotton, real estate, anything to provide temporary, but quick, relief.  That is not a strategy or methodology, despite what your best friend (the stock market genius) might tell you.  It is fear, greed, and selfishness at its worst.  It is the other end of the investment spectrum.  It is like a valium for the distressed mind.

The markets are likely to continue along with manic progression for awhile.  Fears about job security, real estate and portfolio valuation, and a global economy in ruins are sufficient to sustain a guesswork paradigm that could affect portfolios severely.

While I won’t suggest we turn off the computers and study our hunches more profoundly at the library, I might offer that man is a more potent weapon than a machine, and less likely to need a re-boot at the worst possible moment.

Market Commentary for the week of August 22, 2011

Stumbling.

My market overview continues to be moderately bearish, supported by quantitative data which, despite the turbulence of the past few weeks, indicates relative strength quotients resting at or near intermediate resistance levels.  In other words, cycle measure projections are more likely to gain downwards acceleration than to break out above technical and psychological upside barriers.

And yet, the Federal Reserve Board’s announcement that it intends to keep monetary policy “easy” flies in the face of chronology, rhythm, common sense, and secular redirectedness.  By their words they introduce a perplexing dilemma for investors and the markets:  at what level does “easing” become inhibitive to savings rates, employment, and speculative borrowing rather than supportive?

Business pretty much answered that question.  No new capital spending, no hiring, and no additional capacity until demand returns to the economy.  In this game of “chicken or egg,” corporate America and corporate Globe is fine waiting to see when/if the consumer returns.  In the meantime, my data shows a deterioration in momentum, earnings acceleration and breadth.  My belief now is that we will have to wait until the end of the year, at the earliest, before any traction or clarity is gained.  In between, the secular bear bias extends.

As a result, my asset allocation favors defensive, yield oriented investments, including utilities, telecommunications and high yield paper.  My enthusiasm for speculating in the indices is diminishing.  I am focusing upon global opportunities, but the wealth of ideas is smaller “at the top.”  America’s monetary policy is hoping to create an expansion in exports, but competition isn’t always bound to the value of currency, moreso to the quality of ideas, products and services offered.  Political and fiscal weaknesses in the Eurozone help to create the illusion of U.S. economic strength.  In reality, we are all too aware of our own difficulties in moving off of square one.

Promise denied.

By far, the markets are influenced more by decades of avarice which preceded us than by any inspiring theme or objective which lies ahead.  Inevitably, cycles play out to their own rhythm, but our current aversion to risk and capital spending means we keep one foot in the past.  These factors give rise to the volatility quotients of today.  Either by force or by inference, no one wants to get caught in a “Tech-Wreck” or a “Credit Crisis.”  The limitations of our psyche play a greater role in market activity today than do fundamentals.

The very nature of today’s global political discourse is punctuated by a conservatism, and a retreat to simpler values.  Fiscal policy discourages the “have-nots” from participating with full vigor.  As a result, financial instruments which were inflated by political and business rhetoric previously, are today being deflated by the same influences.  It’s as if one’s wealth was one’s entertainment yesterday, one’s greatest disappointment today.

A new political dynamic is overspreading the globe.  It is a force not only of political will, but fiscal interests.  It sets up a defensive, cash-only paradigm which favors no one but those who have capital.  Ironically, this new renaissance is concentrated not in regions of vast wealth already, but in the more distressed areas of the globe.  The countries which most could use capital are now demanding capital.  Hopefully capitalists can find a productive return on investment without immoral exploitation.

The implications are vast.  Foreign investment in these regions in agriculture, water purification, industrial development, and manufacturing could prove to be the next revolution in capital spending that saves the markets and people in need at the same time.

Market Commentary for the week of August 15, 2011

Peril.

Has the market’s crisis been averted because Congress passed a debt-ceiling bill or because the bear panic last week “wiped out” a lot of doubters?  Not at all.

One can forget the immediate knee-jerk responses.  The most powerful ally we have now is time.  The indecision and ambiguity which triggered the panic is still firmly entrenched in boardrooms and kitchens around the globe.  Multiple solutions only confuse the market’s direction.  While spending and stimulus are probably what’s needed to avert a recession, neither is going to happen in this climate of political intractability.  The presidential election now becomes the end-point in achieving even modest resolution.

Look for the global markets to take their cue from us, and to remain inert for at least another year.

While these fractious debates carry on, the volatility indices are likely to heat up.  Debt and uncertainty cause market paralysis.  The same deja-vu scenario is likely to play out at least once more in the next twelve months.  Political discourse, or lack thereof, can only carry speculation so far.  Otherwise, the real world sets in and produces default inertia.  Lack of confidence breeds negativity, negativity breeds lack of confidence.

Stay the course?

During this time, economic data also stagnates.  Manufacturing, demand, and earnings are falling to depths not seen in decades.  This obviously impacts upon recovery (capital expenditures).  Lower profit margins mean lower stock prices.  How long can the global economy sustain negative numbers?

As the job market erodes, so too does discretionary spending (demand).  The cycle begins all over again.  This now becomes a matter of priorities, but our political leaders can’t even agree on which ones and which hierarchy.  The worry is no longer about compromise or solutions, but about winning or losing political favor.

Whichever side or point of view wins, the markets are likely to be evenly divided in their response, and likely to remain undecided and inert.

Methodology wins.

It is important to separate the current short-term mania from the larger systemic fundamental flaws that govern the economic landscape.  We may forget the Congressional debate in three months time, but we cannot afford to forget the greed and foolishness which manufactured a leveraged global debt crisis for more than a decade.

A standard critique of both the markets and investors is that their focus is too short term oriented.  So too are the Wall Street analysts whose quarter-by-quarter projections influence speculation in fundamentally sound companies, or the boardroom chieftains who manage their companies to assuage the analysts’ quarterly projections.  It would be nice first and forever to break this unseen bond between these unwitting conspirators.

Besides the incidental risk, there are systemic flaws in capital management.  Not all profit is socially responsible.  No one should die from hunger or lack of healthcare.  Anywhere.  That would be a burden too great to live with if you had the means, delivery system, or product to remediate the suffering of the human condition.  The lack of attention paid to Somalia, and even the U.S. Appalachian region, should shame many, and make the rest of us think a little harder about where our priorities lie.

Get with it.  Solve something bigger than your next car payment.

Market Commentary for the week of August 8, 2011

Where’s the herd?

Historically, the most potent bull markets and vibrant economies are led by significant consumer demand and corporate capital expenditures.  We know, today, that corporations are sitting on cash reserves and that consumer demand is lacking owing to confusion and concern about fiscal and monetary policy and government’s direction.

In addition, there has been a drastic decline in disposable household spending, shifting the burden to government intervention to keep production incentives viable.

The loss of the retail investor does not necessarily signal a death knell for a market recovery, but it does elongate the timeline for a trend reversal which might “make up” the annualized, and decades long, stagnation in total return from equities.  Be aware that the traditional long-term underpinnings of rising earnings patterns are not in place for global equities and will require significant, and creative, remediation to build breadth and exposure to capital gains opportunities once again.  In the 1990’s one could “throw darts” at an S&P chart and have a reasonable chance of making money.  Today, an increasingly smaller universe of corporations qualifies as legitimate earnings performers with enduring growth and income possibilities.

Run and hide?

The new landscape has brought on a different investment dynamic.  Faced with the loss of purchasing power, job stability, portfolio security, and home savings, Wall Street’s customers have chosen to tread carefully, or not at all, into defensive short-term oriented targets.  While long-term fundamentals ultimately determine portfolio stability (alpha), portfolio volatility (beta) is very much sustained and exacerbated by the market’s lack of confidence.

This is a perfect storm of how declining participation feeds on itself, snowballing into a bear mania.  Net sales of mutual funds have declined significantly in the last 7 months, while the number of households/individuals who hold equity assets has also declined.  In addition, the value of those assets has produced no performance for this calendar year as the bear influences drive a decline in potential.  It’s hard to stop a moving train.

Whether guided by the profit motive or something more altruistic, the markets need to stop, recalibrate, and redefine the reason for their existence.  Quite simply, a fair exchange for goods and services, or the potential for moral good, should be the strongest incentive behind boardroom, governmental, and personal money-making objectives.

This impasse between “wants” and “needs” is the most significant issue our leaders (corporate and government) shall address before radical upswing enthusiasm can reemerge.

What to do?

There is an unquestionable flight to quality and income happening right now.  Investors are sending the message, by their purchasing and lack of purchasing, that they want to protect downside benchmarks at a minimum.  Their behavior is correct in my estimation.  My integers auger for a continuation in across the board bear market scenarios, with the exceptions in yield, utilities and select global brands most notably in food, pharmaceuticals, and non-cyclicals.  The difference today is that the boardroom bullies are out of ammunition to entice you into making foolish decisions.  Their decades of hubris and historical miscalculations are hopefully coming to an end.  The herd mentality is becoming more discreet and, ultimately, performance will win out over hype.

Market Commentary for the week of August 1, 2011

Conflict.

Since the end of the internet bubble in the late 1990’s, the media’s search for the next “it” sector of the market has been incessant.  Let me suggest an area for your consideration:  crops and farmland.

While a debate rages about climate change and global warming, it is indisputable that the search for fertile natural resources is basic to humankind.  The displacement of populations in search of food and water is as old as time.  Today, any magnitude of population shift is based less upon need than vanity (climate, geography, etc.), but a focus upon survival in some distressed areas redirects our attention to the search for replenishable natural resources.  Usually, the most vulnerable are those most at risk.

There is little debate that resource conflicts have far-reaching implications for population stability and economic, social, and environmental security.  This creates a transcendent quality which changes moral imperatives and response to basic human issues.

Competition.

Competition for scarce resources is exacerbated in regions where climate and population are already in disharmony.  When lives are threatened people can flee, fight, or perish.  A major source of current tensions, of course, is water.  Engineers and investors seek innovation and cooperation in managing access to potable water and the “elimination” of drought in productive farmland.  Globally, there is as much variation in the uniqueness of each region’s environment as there are regions.  It is man who imposes solutions (or problems) upon the landscape through deforestation, exploitation, degradation and divergence of natural freshwater basins.  As the population grows, resource constraints might become the single most significant financial and social demarcation.

No one can predict with certitude about the future.  But we do know, empirically and anecdotally, that access to resources is the origin of civilization.  As territorial sovereignty issues become more in dispute, these “artificial” barricades can increase tensions and suffering, causing hoarding of crops, oil, water, minerals, and money.

Unification.

While it may seem as if Henderson, Nevada and Santiago, Chile have little in common, that which binds them is a boom-bust cycle in fertile agriculture.  We cannot know how many population centers are dependent upon outside resources, but access to and prices of commodities dictate their probability of survival.  Soaring commodity prices have driven the globe’s stock markets for the last half-decade.  They have either eroded or exploded earnings projections, depending upon the sector.  In that vein, weekly changes in speculation-driven commodity futures have the power to eradicate the financial survival of global population centers.  Once again, Wall Street’s reach exceeds the boundaries of lower Manhattan.  Everybody’s talking big things about commodity prices, and my numbers confirm the trend’s aggressive elasticity.

Despite the decline in equity prices last week caused by budget disruptions, credit crises, and a hostile political discourse, a major shift in demographics is taking place.  Asset classes and sectors which typify an explosion of agricultural, population, and climate shifts are only beginning to capture the market’s fancy, and to generate the probability of capital gains in the long run.

Before we can focus upon generational disruptions, however, we must address with competence, professionalism, and compassion the financial ills which are staring us in the face.