Market Commentary for the week of March 26, 2012

Fruits and nuts.
Hard data hasn’t been collected, but it’s a safe bet that we waste more food and energy resources than we think.  In a given year, think about the amount of waste we generate, and the potential for harvesting those products to maximize their use.

A “green boom” is a common dialogue amongst some communities but, by far, not universal.  In fact, green technology is often a luxury that only wealthy nations can talk about, while other global regions suffer from arid landscapes, non-potable water, and serious shortages of natural resources.  In some places, regional shortfalls have pitted farmer against farmer, country against country.

And yet with so much money being wasted, there are no permanent solutions for spreading the bounty.  Alternative energy and agricultural science are in their gestational periods, historically, and far from being the immediate solution to environment mis-management. 

I have written before that the most valuable natural resource we need to mine is not energy, but water.

Good for me, bad for you.

Today, one of the biggest changes we see, literally, on our planet is the evaporation of lakes and streams.  Its impact upon harvestable crops worldwide is staggering.  The stakes are getting higher as populations migrate for political and economic reasons.  To them, a gallon of drinking water is more valuable than an ounce of gold.

Those who own the resources, however, are living conspicuously.  Irrigation and abundant water aquifers feed plentiful dollars into those regions that can sustain crops and build vibrant communities.  Lurking in the shadows, always, is the notion that a cornucopia of food and water is a gift, not a given, whose absence can be the death knell of a region.

Efforts to maintain this plentitude of resources costs money.  A community that has a robust agriculture is the envy of its neighbors, particularly those that are without such an infrastructure.  As prices gyrate based upon largesse and speculation, wealth creation similarly gyrates and migrates.  By 2030 we might see an inflation rate increase of 50% or more from today’s values for a basket of commodities.  Nations will surely be affected by cost creep in the next few decades.  Politicians and world leaders must also learn to deal with these realities when shaping budgets and policies with which to govern.

Profit…at any cost.

Wall Street seems only to pay modest attention to these conflicts, focusing mostly on how to profit from shifts in cultural and agricultural demographics.  While scientists have one eye on the statistical, climatological and geographical data, Wall Street’s bankers, theorists, traders, and regional vice presidents have the other eye focused firmly on money-making product offerings from which they can supply the well-to-do with arm’s length participation in “solving a global crisis.”  The message is clear, though:  no amount of discussion or conferencing can salve the conscience of a profit-over-people mentality.

By robbing Peter to pay Paul one loses the social and moral high ground that creates real value for the planet, and which respects all citizens equally.  A sharp turn in focus by all players (institutional, cultural, moral, political) is required before this issue can assume front-burner status.

Market Commentary for the week of March 19, 2012

Blameless.
Owning something used to mean stability and opportunity.  Equity stakes, like stock or one’s home, were the “key to success,” remember?  The dream was passed on from one generation to the next.

Ownership was also thought to be the conservative course.  No gambling here, possession was the least risky thing to do.  Manifest destiny was easily encapsulated in one’s bounty of toys, hopefully paid for.

Indeed, our country flourished during the post-war (WW2) period, as home ownership, small business entrepreneurship, and stocks and bonds became part of a ritualistic dossier everyone was expected to have.  The government created and supported programs for equity to flourish.  We were also encouraged to “own” our education, and to flow into capitalism well-armed and financially flush.  Carried to its extreme, it was the right idea for the right time and the right confluence of circumstances.

As we witness now, however, this covenant became a recipe for near-calamitous results.  The strains on individuals, households, and our financial institutions were impossible to forestall.  Economic brinksmanship drove economies and families into convulsions of panic and fear that spun “conservatism” into outright “risk.”

What once was a reward for economic success became a millstone around our necks.  Stock portfolios, which were never intended to go straight up, all of a sudden depreciated, slowly at first then more severely.  Home values decelerated from their never-ending upwards capital gains of decades prior.  One’s income was no longer enough.  Leverage un-leveraged.  A tacit promise was broken.

Accompanying this capital erosion came a psychological default.  Investors looked around and discovered they couldn’t afford all their “toys.”  Further, we were left to question whether it was all worth it; the torture, the envy, the guilt.

As markets gyrated we felt our self-worth, as well as our net worth, gyrate along with them.

As long as the markets survived, so too would we.  We put more money to work, at greater leverage.  Financial institutions cajoled us into more synthesis, straw into gold.  You were less-than-ordinary if you didn’t participate.  And who wants only to be “ordinary?”

What is “rich?”

Who’s to blame?  Government bought into the myth.  So too did our institutions.  Ownership, after all, was supposed to be without risk.  How did depreciation happen?

I maintain that the deal wasn’t a fair fight. 

If money is available we take it.  If reward is dangled in front of us we go for it.  It’s human nature.  And yet, the alchemy of turning tangible reward into mysterious losses is as old as the swindle, itself.  When we are faced with a greed-driven opportunity, we typically lose.  It’s simply a mater of evaluating the choices.  The house usually wins.

Entrepreneurship and risk-taking is part of capitalism, we know that and accept it.  Inventiveness and creativity are not only wealth drivers, they are good for society.  But whomever controls the knowledge, can also mete out its rewards, in parcels he or she sees fit.

We should not try to mitigate the consequences of a free market, only to be aware.  But sometimes, below the fertile fields, the consequences are intergenerational, hardly noticeable until something bad happens generations later.

We are all driven to succeed.  What distinguishes us from one another is how we define, and execute, the value and meaning of “success.”

Market Commentary for the week of March 12, 2012

Solid state.
Are policy makers acting responsibly about credit and financial pressures?  Judging by the speculators coming into the financial
markets, one might assume not.  Instead of playing old fashioned fundamentals, gamblers are trying to pre-empt the “true north” of the markets by risking cash on dangerous bets about real estate, commodities, energy and bonds.

In the meantime, the game continues for those who seek cover from the mayhem.  Right now, there is little support for bonds or stocks.  Yields are too low, and equity valuations have gone through a dangerous cycle.  Thus, one might expect turmoil to continue.

My risk rankings suggest that there is still more potential for the secular (bear) cycle to continue than there is momentum to reverse that course.

Could it be that the rules have changed?  This notion of “hands-off” all matters relating to economics, sets a tone which drives the discounting of financial assets, rather than encouraging accountability and commitment which could drive industries and innovation upwards.  Better yet, stronger fiscal policy might generate cash flow and open ended possibilities for regenerating economic expansion.  In other words, “there is buying and there is buying.”

Rules of engagement.

The vagaries of the global austerity response is now pandemic.  All continents are infected by a fear that economic expansion cannot be sustained by inordinate debt.  The reticence in the markets are telling us so.  Against this backdrop one might conclude that the situation is dire.  Fault and blame-laying is the new political sport.  Those in authority lack the gumption to lower the heat on their rhetoric.  Methodology and process have given way to two diametric ends of the investment spectrum:  you’re either all in or you’re all out.

Interestingly, a few relatively safe havens have emerged from the chaos.  With bond yields at historically low levels, some Utility shares have become a surrogate for income-oriented investors.  Of course, there is no direct equivalency between the two, but some have found a framework for building value in that space.

Still, I would warn that without a response to the credit crisis, these false comparisons will start to wilt by their own weight.  Historically, false compromises cannot endure as well as the real thing.

Longer and meaner.

We must also look at a willingness to part with liquid reserves.  Based upon projections, global deficits are likely to endure even with efforts at remediation.  Spending cuts and pay reductions require time to gain traction.  Regions respond differently in the longer term.  There is room for execution variables, but little tolerance for failure.  If necessary, revenue increases might be required in order for a recovery to gain traction.

So, as investors see capital losses in their home, savings, and portfolios, the question becomes “how long can the markets sustain negative pressure without building too much scar tissue?”  The battle between complacency and aggression, confidence versus fear, is the driving issue of our financial time.

In a worst-case scenario, what if we supposed a massive global credit default?  Is a down-and-dirty panic preferable to a managed bailout?  Even on this question there is disagreement.  Putting it all together, there is little reprieve from dealing with these situations, and fewer good answers.  Political wrangling poses a greater risk to our financial conundrum than does a fundamental solution, however strict its imposition.

Investors need to bear in mind that much of the problem is now out of their hands, and make a psychic compromise with themselves that all will be better in the future.

Market Commentary for the week of March 5, 2012

Tenor.
What constitutes a recovery?  Is it simply the absence of negative news, or must it also imply a robustness of capital, capital gains, and euphoria.

It seems to me that we are currently in rejoice only because the steady drumbeat of negative noise has abated somewhat.  While it may foretell the redirection of a bear market/economy, we cannot yet proclaim the regeneration of a secular bull cycle.

Last week I had occasion to discuss the tenor and tone of my market weeklies with a client who pointed out to me that I seem quite negative, quite bearish.  “Hardly the tone one wants to convey to one’s clients,” she said.  My response was to point out an archive of my weekly commentaries in which it could be found that my description of market fundamentals evolves over periods of time.  In fact as recently as last spring our average equity (stock) exposure in portfolios was about 55%, a rather bullish stance for our balanced clients.  Today it is closer to 20%.

The weekly missives are nothing more than a written representation of mathematical data that derive from my proprietary algorithmic analysis.  In quantitative studies there is no such thing as a point of inflection, but rather a period of inflection during which indications and confirmations are required.  These periods might be generational, seasonal, or weekly.  The point is, I don’t become bearish overnight or without statistical confirmation.

Look around.  Despite a resurrection of good news, mostly year-over-year comparisons to 2011, there is much systemic baggage, not sufficient to scale my models into a bull cycle.  This is, after all, what makes markets.  Some might wish to be “early” to a cycle; others might “time” their entry or exit; still others might like to wait for repeated and prolonged confirmation of a trend’s duration before making a financial commitment.  I manage money according to the latter proscriptions.

While I certainly do not wish to convey a “negative” connotation to my data…it is what it is…the fact remains that today’s secular trend is down, despite recent attempts to rally within that secular bear market.

Content.

Domestic election year campaigning doesn’t help, either.  Combatants keep pointing out what’s wrong with the economy.  Communication channels are filled with negative news, creating a pessimistic point of view.  When dealing with human emotion and statistics, emotion usually wins.  In a climate of uncertainty, it is harder to cut through the noise to arrive at certitudes which govern the marketplace.  The first, and last, thing to suffer is discretionary spending.

While we are, indeed, seeing pockets of advantage, the velocity of growth is somewhat diminished by an overlay of poor confidence.  Our situation also is not unique to our shores.  As I have written, the degree of synchronicity and congruence with which all global bourses are struggling makes for a built-in retardant to expansion.  Global austerity is to be lauded, but serves as the antithesis to unbridled spending and enthusiasm.

Pressures are modestly easing, and should for the next few quarters.  Our legislators are, or should be, looking for ways to match spending cuts with mobilization of the capital markets.  If profits are the objective, there must be an hospitable climate in which risk-taking can be encouraged, and better “mouse traps” can be created.  A better rhetorical tone might also help to sustain rallies in the markets.  People need to be held accountable for their message.

Tactically, I am keeping a significant percentage (30%) of cash available for reasonable risk/reward opportunities in stocks.  It makes sense, however, not to jump in without confirmation, and to avoid rumor or hyperbole.  Altogether, I remain “conservatively aggressive” until market fundamentals offer a period of tightening-up the risk factors. There is upside potential, but I expect the rally to weaken in the short run.