Market Commentary for the week of May 14, 2012

Calls for hope.
Celebrations normally reserved for heroic events or political ascension have been breaking out during earnings season, as first quarter (2012) portfolio valuations accelerated and year-over-year comparisons show margin expansion.  Doing what they do best, market pundits have been turning flax into gold, proclaiming that the recovery has begun.

Another anecdotal elixir.

One always wonders whether the chicken or the egg comes first.  In this case, proclaiming it to be so precedes the actual fact.

It’s important to try to quantify the cycles of market progression, both to their direction and magnitude.  In real terms, a secular downtrend rules and is likely to persist for several months hence.  Despite a cyclical rebound in the short-term, the prevailing downtrend is in place for most geographies and sectors, curiously creating a synchronicity that exerts influence over probabilities of performance across the spectrum of financial securities.  Those pressures, I would suggest, are greater than the suggestion that we may have hit bottom.

On many levels it is premature to suggest that we have passed an inflection point.  For one, simply ask if the financial pressures have been relieved from households and corporations.  After all, most year-over-year improvements in balance sheets, even in your household, have come from savings, cutbacks, and other measures of austerity.  Very seldom are we seeing top line improvements in wages, sales, and demand.  We have no use for artificial earnings manipulation in our daily lives.  Most of these improvements, and those who tout them, are drowning out the real message.

So as Wall Street and the media create enough false hope for you to part with your money, you become the victim again of a system that drags its feet, self perpetuates, and relies upon that hope to generate its own profitability.  How else to account for all those happy Wall Street commercials?

Calls for help.

More analytic scrutiny is required.  Portfolios must be constructed based upon real coefficients and real probabilities.  The pieces need to fit together symmetrically so that allocation leads the probabilities of performance, not guesswork or conjecture about one securities’ expectation for a “home run.”

Some investors rely heavily upon this type of conjecture.  Today it’s gold, next week it’s technology.  Every day, the story changes.  By default, they either win or lose. 

As a result, Wall Street keeps winning.  Without proportion or fairness, the money centers always win.  Casino extraordinaire.

“Profits were up 60%,” say the analysts, as if a lack of explanation about personal pain and sacrifice is irrelevant.  The illusion is to save the worst for last and hope no one cares.

Oil fell below $100 per barrel, and U.S. pump prices receded 7 pennies last week.  Does anyone really feel that energy is plentiful and that crude oil might not reflate if alternative sources aren’t cultivated?  Are you prepared to bet against an unseen tax hike if prices increase and eat into your family or corporate budget?

Every week speculation swirls around stuff like this:  gold, energy, technology, healthcare, food prices, unemployment, wages.  Wall Street today seems less about economics and science than it is about soap opera.  This is sad for those who aspire to an altruism about their science that more good than bad can come from capitalism.

But sadly, all that sells is glitter, the price of gold notwithstanding.