Moral Hazard.
Overall, equity market risk is dissipating. There appears to be a stronger momentum
ameliorating a global tapestry of “ills.”
What may have been a domino effect when the credit crisis began has
stopped short of a cataclysm and turned closer to equilibrium. As a result, equities might be poised to
perform. The question is when?
Amongst that basket of variables, only investor confidence has the
power single-handedly to change the trajectory of market prices with any degree
of persuasion. We know the enemy: he is us.
Despite recent market gains, we seem range-bound by overhead supply
(previous highs) above and deeply discounted prices (below). While the upcoming U.S.
Markets.
The financial markets have been held hostage by factors unrelated to
strict fundamental analysis, because it is not stock market fundamentals that
govern the everyday lives of citizens.
Filling the gas tank, getting the kids a quality education and a start
in life, holding onto one’s job, keeping a family together are ethereal factors
whose quotient is not as easy to determine as a price-to-earnings ratio. Further, the cost of that “ethereal quotient”
keeps rising while incomes are not.
A classic imbalance between “what is” and “what it feels like” has tilted
the landscape precariously towards inertia, debilitating the debate and the
search for solutions. Those who benefited
most from that inertia were not serving well the citizens they represent,
whether business or government. Instead
of consumers leading the charge, we feel as if the tail is wagging us!!
Most recently, the factors which have led to the market’s demise have
begun to steady. Therefore, I look for
market performance to improve also. Dependent
upon the trajectory of the current bear, it may take several months before we
can look back and say that the cycle (trend) has been defeated. We might be able to track that reversal not so
much by equity price performance in the near-term but, rather, by an uptick in
consumer demand and inventory expansion.
Interestingly, no one seems concerned yet, by the specter of
inflation. Despite its current seemingly
benign status, inflation is all around us, in tuition, pharmaceuticals, energy,
even the cost of movie tickets. Price
increases are insidiously driving our households to make choices, shifting our
burden from discretion to necessity.
This is an unhealthy “Hobson’s Choice,” one which segregates individuals
from their communities, communities from their nation.
For example, it was once assumed that consumer demand for disposable
items was limitless. This, in turn, led
to the notion that a “feel-good” economy emanates from the number of “things”
we acquired. No longer. Our collective identity no longer is
dependent upon how many toys we have, but on how we care for those who have
less…or nothing at all.
The flight from consumption is healthy, so long as it reinforces social
mores which connect us as a planet. Usurpation
of power is today held by the quality of ideas, not just by the magnitude of
one’s military. The “Arab Spring” is
a clear example of that fact. We may
find this hard to accept, but there is more that citizens of the globe share,
than that which divides them.
Strategy.
One of the most effective uses of my
proprietary market database is to uncover and isolate patterns of commonality
which create economic probabilities of sector or trend appreciation. The question is not which individual cycle we might
isolate but which trends in the aggregate blend to produce an enhanced
cyclical phenomenon. We
don’t have to be correct only once, but by the preponderance of correct
outcomes. Quite simply, it is more important
to be a keen observer of the trends of our time than to be a good stock picker. Maximizing portfolio profitability is about
subjugating the “need for speed,” and being analytical, and correct, about
the balance of risk.
The problem with our current summer rally is that fewer industries are
actually accelerating their profit margins by increasing the amount of units
they sell. Some are doing just this, but
a significant percentage are manufacturing profits, without manufacturing jobs,
through technological enhancements and layoffs.
If they can control costs, they look as if they are accomplishing
something. That “something” is sometimes
deleterious to the community and, hence, the community’s psyche. The most noble form of profitability in a weak
economy is the moral strength to produce dividends to your shareholders and a
sense of belonging to the community in which you reside.
One reason for the empathy vacuum on Wall Street is its disassociation
from anything but downtown New York
Global stock markets have surged to a price-to-earnings level well above
reasonable valuation as a result of the summer’s speculative surge. Thus, in the short run, the market looks
“more expensive” than it did on January 1 of this year. Fair market valuation, for a period of
inconsistent earnings growth, should be lower than where we are, so it becomes
problematic to consider that we might continue to expand the “P” without also
expanding the “E.” I will be very
surprised if we don’t narrow the gap before year end, most notably on the price
side. Moreover, any exogenous influence
exerted by the U.S.
At this point in the secular cycle psychological
influences play a stronger role in the possibility of regenerating capital
gains expansion than fundamentals.
Because of the strong likelihood of acrimony, inertia, and discord
following the election, the markets will be searching for any sign of reconciliation
and leadership.
I believe that global treasuries’ posture about holding interest rates
low is de-stimulative, particularly as it relates to savings accounts
and return on investment. Higher
interest rates are coming, we just don’t know when. Following a nearly thirty year period of disinflation,
the cycle is destined to reverse. Its
influence will be significant in rendering a new dynamic to managing money,
growth expectations, and political discourse.
Bear in mind that “easy money” is what precipitated the global economic
crisis, and when we lose the influence of “spending and acquiring” we
deprive the demon of its fuel.
Hoarders of cash are not putting it to use. To them, what doesn’t directly benefit the
bottom line becomes unnecessary. This
demonstrates a short sightedness of cultural and ethical valuation. The one constant “free money” has created is
that potential has become more valuable than results, so it’s
better, they reason, to hold on to their potential. The market will respond accordingly, creating
fewer fixed income securities with any real return, and limiting equities to
low earnings multiples because of a tapped-out marketplace. This is the legacy of greed, innuendo, and
suspicion.
Conclusion.
As my readers are aware, I believe in risk-adjusted balance and asset
allocation to identify and quantify enduring secular themes. Current trends, while unspectacular, are for
the most part confirming the likelihood for market upside performance but with
a “duller edge” than most recoveries in the past. Earnings forecasts are flat and derive,
still, from a hope that you, the consumer, will start to spend more of your
money. This while reeling from the
pressure of tuition increases, energy price hikes, food inflation, job
insecurity, global terrorism and political gridlock, not to mention timidity
about portfolio security and Wall Street’s old bad habits.
Why take the risk? Because participation
is better than withdrawing entirely. Entrepreneurs
need to keep seeking their fortune, corporations need to pursue their mission
to serve their public, and risk is the only pathway to future reward. Most of all, we need a better sense of
tolerance for one another.
The strongest sectors at the end of the year will be those which have
already met those burdens at the beginning of the year, and before. There is no room for late-comers or those who
wish to grow “on the cheap.” Indeed,
there is room for all to succeed, but secular patterns and common sense dictate
an unabashed need for owning one’s moral responsibility as well as one’s bottom
line.
On balance, only a handful seem to have it right as measured against
what’s required. Before we fulfill the
demands and expectations of business, they should reciprocate for us.
Asset
Allocation:
Equity 35%/Fixed
Income 30%/Cash 35%
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