Investors often confuse profitability with competition, overlooking the fact that you can manipulate profits, but it’s harder to concoct demands for one’s better mousetrap where none currently exists.
Thus
the markets were dealt a dose of reality last week by focusing upon inflated
valuations with unsustainable “profit” margins, simply reflecting better
year-over-year accounting statistics, not real growth in top-line demand.
Even if a company experienced technology efficiencies,
one must consider the social impact of its products and practices to consider
how, and who, their impact most affects within the landscape in which they
operate.
Everyone
admires the bottom line. Sometimes,
however, suspicions arise about the organic mechanism by which “the black” is
created. In riskier markets, for
example, it is often times the risk-taker who winds up on top. Think about how many dollars must be
allocated to risk before a big bet pays off.
We cannot discount the complicitness of those who simply play to put up
big numbers versus those who steadily push forward a solid agenda.
The single biggest trouble we manifested during the
last, and previous, market crisis was a sense of exuberance about bigger and
bigger rewards, manufactured and synthesized by unnatural greed and avarice.
What’s appropriate?
So
why are the markets seemingly “stuck in neutral” even thought first quarter
valuation increases might be so compelling?
A good part of the answer lies in the difficulty of overcoming negative
connotations about what spurs market growth in the first place. More trading is done by computers for computers. Much of the toxicity and malevolence is still
in the pipeline. Despite technological
efficiencies developed during previous decades, it takes longer to
eradicate negative psychological residue.
Unemployment, war, politics, and business-as-usual permeate client’s
thoughts and cause behavior to recoil with mistrust.
If you’re looking for solutions that capture above
average potential with limited volatility, it’s imperative to create asset
allocation models that correlate benefits with positive alpha, and which
diminish the risk of concentrated positions and/or high risk leveraging.
This
is important because today’s investors have become one-stop shoppers, looking
for an “all-in” strategy that yields big rewards. The majority of all-in strategies fail, and
are usually implemented to generate above average returns.
I
find this pattern quite disturbing because new relative strength data is again
confirming the unsustainability of cyclical (short-term) patterns of aggression
begun last October. Despite the
first quarter’s siren song of re-entry, more equities worldwide are either
topping or entering into a pattern of distribution that confirms a migration
from “no risk” to “higher risk” in equity selection.
Thin ice.
As
if on cue, the second quarter of the year has started to mitigate the annual
bull effect, providing remediation from historical excess. Because the markets seem so fragile, the slightest
deceleration rekindles a panic which destabilizes our psyche. That’s what last week’s market resembled.
The
fundamentals don’t really change that much, only our perception of their
meaning and significance.
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