Market Commentary for the week of December 17, 2012

Power down.
It’s not surprising that the markets responded with a resounding “so what” to Fiscal Cliff negotiations in Congress, and a  Federal Reserve pronouncement that it intends to tie low interest rates to low unemployment for the foreseeable future, in order to maintain whatever stimulus effect low-cost borrowing might be having upon economic development.

Unfortunately, my data has seen nary a blip in significance as regards real change in secular demographics which persevere despite current events, exogenous influences, or the Fed Chairman’s machinations.

My statistics, instead, show that Technology, Healthcare, Agriculture, Energy, and Industrial (infrastructure) development are the stepping stones not only to domestic economic renaissance but for global integration, as well.

You might notice that, in terms of hierarchical priority, consumers and lending institutions while vital, play less a role in the next generation of global prosperity than in the past.  This is due in part to an aging infrastructure, an aging population, and efficiencies in production brought about by technology, itself.

Indeed, the American Dream, the Human Dream, of advancing economically beyond the previous generation is a fallow hope, replaced instead by moderate recapitalization in infrastructure and a hardnosed approach to unnecessary capital expenditures of any kind. 

The energy complex, for example, offers future capital gains to investors in shares that focus upon research, development, extraction, and delivery of product in a cost effective way.  Post fiscal crisis America will be a different place than the 1950’s.  And from an investor’s perspective these new “demographically-driven” industries offer a new opportunity to change horses in mid-stream without getting wet in the process.

One might also ascribe an economic “slower-pulse” to political and regulatory changes taking place worldwide.  For nations in debt, a new set of financial covenants must be drawn, while the very wealthy must also absorb their share of any burden to effect globalization and fair trade.

Markets responding.

These changes offer a remarkable opportunity for building portfolio wealth in the next few decades.  In the real world, earnings remain supreme in guiding our expectations for future equity share price performance.  As technological advancements gain traction to the corporate psyche, one might expect enduring and noteworthy changes in decision-making.  As important as profits are to the corporation, stability and mission statements are to the public.

Slower growth rates, while unspectacular, are good for the rebuilding process.  Tremendous amounts of free cash will create sustainable outcomes and hopefully net an extraordinary basket of opportunity.  Therefore, diversity in one’s portfolio will be more important than concentrated portfolios by aggregating as many chances to succeed as possible.

Not everyone is convinced that we are on the cusp of portfolio greatness.  To be sure, investor confidence in the economy, in the financial marketplace, is the last critical component to fall in line.

Sometimes, though, when everyone expects the worst possible outcome, the very best of possibilities might occur.

Being “three-over” after nine, doesn’t, shouldn’t, mean that the game is out of reach.

Market Commentary for the week of December 10, 2012

The big bar.
Economics is a science in a constant state of flux.  While it is true that any science is defined by its immutable laws, few disciplines are as influenced by emotion and perception as the science of “money.”

For example, we know how to assert certain data about interest rates, or capital formation, or equity price valuation.  But do we really know how to acknowledge perception of those data and its influence upon trends and expectations?  Might we consider that “capitalism without customers” erodes all laws of economics, and that prosperity and wealth, while measurable in dollar amounts, is only significant if it represents a scale of opportunity that is shared by everyone?  “Good times” are more than just the absence of recession and bad news.  It is a commonality of experiences that is shared by a majority of the players in the game.

It would be a very good thing if the drivers of our current debate recognized that some people go to bed hungry, homeless, or incapacitated in some way.

Down is up.

Usually, the strongest phase of an economy is at the peak.  We are not at that point right now.  As I wrote last week, looking up from the bottom of a well is a quantitative “lay-up” for reversal of a downtrend.  In real terms, however, the bottom of a well is a disaster.

We cannot dismiss the pressures that joblessness places on an economy, or the hopes that citizens have for finding some good in all the negativity.  Our economists and politicians like to talk about science and data.  They do less, however, about addressing the individual crisis that some of the unfortunate amongst us must endure.

It is encouraging, for example, to see Fed policy designed to ease pressure on interest rates for the next few years.  But the message is not pro-active.  “You can lead a horse to water but you can’t make him spend,” is my catchphrase for arm’s-length initiatives that do little to address the real problem:  people’s concern for themselves, their children, their aging parents, their neighbors and their country.

If you want to own a pristine balance sheet, that’s one thing.  Making cognitive benefits for society is quite another.  The message of the markets is too unidimensional:  up is up, down is down.  I would contend that the nuance of that message is lost in translation to most people in their everyday lives.  The message of our last Presidential election is that demographics are changing…and they matter!!

Crisis communication.

The core of this “message-disconnect” is that what matters to most theorists is not always what matters to social scientists.  Somewhere between boom and bust lies a shade of grey that is not all about the extremes (win/lose, up/down, bull/bear) but about an advocacy which shapes the perception of the time.

Wall Street has always been trapped on the horns of this dilemma.  Should it promise a solution to people’s investment needs, or should it launch new product initiatives to solve problems we didn’t know we had?  Who can say that the financial market’s product alchemy over the last decade has led us in the right direction?  In the process of creating these synthesized solutions, they banked upon our gullibility, our greed, our excess margin (leverage), and our appetite for the garbage they proffered.  It will take a long time, indeed, to sell the alternative side of the equation, and to make it palatable to a large group of people.

When we look around and see how much “money” other people have, reconsider what standard of measurement we really mean.  In the aggregate none of us is as poor as we might think, but no one “of wealth” has found all the answers, either.

Psychologically, you are only a casualty if you think you are one.

Market Commentary for the week of December 3, 2012

Locked and loaded.
Now that the election is over, and the markets are oversold, the Mideast is again volatile, and the “fiscal cliff” is fast approaching, most market concern rests with “who’s going to be the first one in the pool?”  Interestingly, although the stars are aligned once again to make money in the equities markets, it is still a psychological, not financial, component that governs people’s capital deployment considerations.

As interest rates have been manipulated into a zero-sum game, literally and figuratively, the only option for converting cash into capital gains has become stocks.

But who is going to trade the security of the fixed income markets for the volatility of owning stocks?  And why must they?  No one is forcing investors to make those choices.  Besides, in the real world that I live in, both professionally and personally, navigation through the financial landscape is not a question of either/or but of fine shadings and degrees of risk-taking.

Why must one consider equities today?  Because a cornucopia of other options is receding into smaller and smaller baskets, and most of those don’t include traditional risk-averse vehicles such as CD’s and Treasury bonds.

Most problematic, though, is that even as a climate of confidence widens, investor’s risk appetite has not appreciably kept pace.  The gap between “feelings” and “actions” is narrowing, but not sufficient to turn a wary stock market into a raging bull stampede.

But to be fair, that’s not how the game works, anyway.  Everything in my universe is measured on a timeline that would make sprinters wince with anxiety.  “First one in” is not only a motto, it is a funeral dirge when compared to the average investor’s expectations for portfolio performance.  In an age of instant gratification, a five year reversal is intolerable.  And to the intolerant I remind them that it took years to bury ourselves in debt and greed, and it will take years to replace them with patience and profitability.

Style versus substance.

The reasons for our expansion in breadth are as much secular as they are micro.  Industries which led the cyclical decline in equities (e.g. Retail, Financials, Housing, Industrials) have “bottomed” and are showing nascent signs of recovery.  Along with demand, earnings projections are also rejuvenating.  If it can be said that low interest rates fueled a greed-inspired excess in borrowing, it might also be argued that low interest rates make stocks look more attractive for their potential capital gains.

The uncertainty surrounding micro-data (fiscal cliff, taxes) is already priced into the market, so rather than being an obstacle, those data become an opportunist’s upside probability.  Recognizing that there are very few “straight lines” in quantitative studies, the odds now favor a protracted period of accumulation in equities, foretelling a longer cycle of upside equity price mark-ups.  In particular, the U.S. equity basket is becoming a safe haven for global investors who see geopolitical uncertainty stalling regional growth.

During the summer, I had been writing that we were “closer to the end of a bear cycle than we were at its initiation.”  The obviousness of that statement shouldn’t be overshadowed by the fact that we needed nearly three years to complete that bear journey.  Perversely, it always looks bleakest from the bottom of the well, but we only have “up” to go if, in fact, we are at the end of this bear market.

Any symmetry in the financial markets is always slightly askew.  When we feel best, is always the time to look out for disaster.  When we feel worst, good times are around the next bend.  Understanding the inverse nature of market timing and psychology is just the first step towards using that knowledge to prosper from one’s methodology and discipline.  But it is a healthy sign that we pay attention to empirical changes in policy, data, and current events than to let mania and negativity ruin what might be an opportunity to profit from emerging secular trends.

As with most things “Wall Street,” there will always be a healthy skepticism of the industries’ motivation.  In this case, let’s try to be good stewards of our client’s needs for responsible capital gains and security.  If so, we might be turning a corner from despair to guarded optimism.