Market Commentary for the week of November 19, 2012

First one in.
Fortunately, no one is compelled to invest money.  They do so in a climate of tranquility, or turmoil, in an attempt to utilize their specific discipline, their risk/reward tolerances, and their expectations in order to achieve capital gains.  There is no “one size fits all” system, nor is everyone suited for an all-in, win or lose, paradigm.

But certain market geographies are better equipped to offer investors the bounty they seek.  Small emerging markets can be at once opportunistic, as well as unidimensional.  Mature geographies, in large part, offer diverse categories of sector growth, but, because of their timeline, might not yield the highest calibrated return metrics.

Since the beginning of 2009, immediately after the global credit crash, all markets resumed trading at the same equilibrium point.  Both price and relative strength valuations had hit rock bottom.  Compared to each other, all global bourses had the same zero-to-one hundred probability of recovery.

So what happened?  The U.S. basket nearly doubled in valuation and made, by comparison, any next option look weak.  While we appear to see moderation in the magnitude of the U.S. recovery, when compared to the alternative the U.S. is still “emerging.”

The domestic economy is benefiting from early policy and monetary moves designed to recapitalize the banks and to avert an avalanche of bad economic outcomes.  From amongst energy, technology, non-cyclicals and basic materials, U.S. sector rotation became a safe haven, even as the bond (lending) market was feeling its way out of morass.

Dip one toe.

My data also indicates that the picture is continuing to improve.  The moribund housing market, which many consider one of the cosponsors of the initial decline, has gained some tailwind in the past year.  At the very least, the bubble effect of margin piled upon margin has dissipated.  As each of the sectors previously affected by debt and synthesis responds, an equilibrium between leaders and laggards comes more clearly into focus.

To be sure, neither the U.S. nor any other market is growing out of proportion, in leaps and bounds.  But it is good that we are seeing a compelling argument for the long-run, once again.

So while corporate management continues to hoard capital, playing their recovery close to the vest, there is, at least, some capital to deploy.  The scenario is now set for revenues and earnings to precede any new costs, while financing remains extremely inexpensive.

And besides, with interest rates as low as they are, where else to allocate risk capital than in equities?  The yield today on equities-versus-bonds is at a generational high, nearly 7 times.  “Safe havens” are burial grounds for risk capital, and not worth the exposure to the degree we had previously, and historically, thought.

I have begun to consider deploying more capital to equities, even in conservative portfolios, because the alternative investment scenario would yield paltry results.  Although this implies higher volatility, I do not consider that to be the case if we use my metrics to farm for earnings accelerators and sector diversification.

Don’t get excited.

I am not making a major market call.  Our latest balanced advisory would have equity exposure at no more than 35% of portfolio valuation.  But that does imply an increase of nearly double from our crisis lows of 18%.  In order to generate alpha, one must look at equity exposure as the engine of those objectives.

My bias is always to err on the side of caution.  My track record is a clear indicator of reducing drawdown to heighten the probability of overall portfolio performance.  In the current climate, it’s time to come out from hibernation and overcome a reluctance that has been our psychological “teddy-bear” for the past three years.

Market Commentary for the week of November 12, 2012

Black and white.
And so, we move on.

Not simply the collective “we” of the markets, nor the political parties, nor any special agenda groupings, but, really, the global tapestry which can now divert its attention from American politics and focus once again on capitalism, peace-making and common ground solutions.

I am not a political analyst.  I am a markets strategist and scientist whose proprietary metrics of analysis allow me to zero in on market-related data that reflects both current and future trends that impact upon social, economic, political and philosophical outcomes.

One headline last week proclaimed, for example, “Obama wins, financial markets lose.”  Obviously, this is a subjective “point-of-view” interpretation of the election results.  However, let’s agree that the financial sector fumbled and fell of its own devices in the past decade, spurred on by an incessant desire to manufacture product and profit long after their halcyon days of meaningful moral contribution had ended.  In the end, as a portfolio manager I underweight financials because of their inability to create earnings derived from demand and social consciousnesses.  If anything, the President’s re-election might be a boon to that sector, an invitation for them to free up capital, participate in the free enterprise entrepreneurship Mr. Obama’s opponents so highly covet, and to do so by reviving their operations, their share price, and their moral standing.

Thus, not only might the U.S. financial markets gain by this outcome, but the global markets, too, can begin to bank (figuratively and literally) on common themes that lift people and profits.

You and I.

I have written extensively that economic ideals can be driven by one party or another.  But these ideals are not embodied simply by one man.  In that respect, my metrics show that market behavior cannot be governed or dictated by an individual.  Endemic themes, such as healthcare, technology, infrastructure, energy, education are the domain, indeed, as much of the private sector as by government.  You want it?  Invest in it.  Participate in it.  Allow your leaders to create a playing field upon which your success or failure is determined by your efforts.  But let those legislative institutions make it a fair fight, in which the backyard entrepreneur can be as successful in his realm as the most powerful corporate entity.

I call this “the better mousetrap theory” and for decades I have built quantification of capital and asset allocation based upon demand, momentum, and breadth of social and moral participation.

Going from here.

Challenges are looming, let’s be clear.  The capital markets are frozen and inert, bereft of leadership, direction, or conviction.  Left to their own devices, nations have become jingoistic, isolated.

I talk often of a seminal moment in my lifetime, when Apollo astronauts first circumnavigated the moon in 1968 and broadcast the “Blue Marble” photo of Earth back to us.  So fragile did we all seem.  For me, at least for that moment as a young man, there were no divisions amongst the peoples of our planet.  Indelibly, that image governs my science and moral suasion to this day.

Isolation, inconsiderate behavior, jingoism and me-too capitalism will not reinvigorate the financial markets.  Last week, no one “won,” and everybody “won.”  It is up to us to deploy our capital in a mature way that meets the needs of a young and old population…and a fragile planet that is our craft and safe resting place on that journey.