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.