Market Commentary for the week of February 25, 2013

Trend?
We seem to be in the grip of an unsustainable psychological dichotomy, one which pits the search for “perfect” portfolio performance versus the variables of unrelenting realities.  Through some manic barometer of absolute perfection, investors are struggling with achieving an unattainable goal: high returns with no risk.

Unfortunately, the real world offers them no such solution.

This thankless desire to nullify superficial and exogenous events, and to homogenize them into a clear paradigm, mitigates the entire investment experience.  Because there is no perfection, the goal of finding it becomes pointless.  Perhaps a shift in our orientation might help us to redefine the quantification levels we use to base our expectations.  Rather than fixating upon an integer’s worth of performance, it might be more productive to express our goals as a process-driven phenomenon.

Without such a refocus, it becomes harder to accept whatever gains we do achieve.  The search for perfect portfolio balance causes us to lose balance, and magnifies negative perceptions.

Shift.

Investing succeeds best when we get out of our own way, and not impede the process with stereotypes, comparisons, or emotion.  Obviously, it is hard to divorce oneself from standards.  Nor can it happen at a whim.  It takes years of practice and patience to learn how to achieve standardized methodology without expecting a “standardized” result.

Thus, the current market well defines our dichotomy because, despite early season gains, there is very little leadership.  Oh sure, investment banking deals are making a comeback, but this is simply a consolidation of balance sheets that achieves effective profitability.  My wish is that we start to see growth in demand, which leads to growth in sales and inventories.  How surprising it is that with low interest rates and relatively stable economic news, corporations have so little inventory and so high a cash stash.

Expansion is possible.  The potential for capital gains in biotech, infrastructure, and alternative energy should be enough to stoke ones’ interest.  However, the trendlines have not yet emerged to indicate a leadership construct.

Turn the corner.

This first quarter is shaping up to be a ping-pong match between upside expectations and speculation versus the sordid reality of politics and exogenous current events.  The fundamentals are compellingly good, but our ability to digest the news and run with it is fleeting.  As I said, trying to squeeze round pegs into square holes looking for perfection impedes the expected end result.

As we wait, though, the opportunity broadens. Irrespective of capitalization, I see global equities poised to respond to the upside.  It is not an accident that my clients endured the biggest economic crisis of our generation without significant rupture.  We constantly rebalance allocation to take advantage of the most compelling trends, and today that trend is in an equity renaissance.

The key going forward is to be patient and not to expect “perfection.”  Our methodology deflects those expectation risks.  Greed is seductive.  Try to avoid it.

While the pent-up demand for equities is rising, due in large part to a decline in fixed income return, I still believe we need to traverse some short cycle capitulation from the fast start in January and the gridlock from Washington, DC.  But the phases have turned, in my opinion, towards a marginally winning year.

Market Commentary for the week of February 19, 2013

Values.
Despite an efficient velocity in market direction during this past January, and an expected capitulation this month, there remains an inefficiency in our emotional response to whether we're "doing well" or "doing poorly."

Don't get me wrong.  Steadily, we've seen a recovery in many facets of economic measurements.  Earnings are broadening, housing prices are increasing, portfolio and 401-k valuations are rising, unemployment is creeping back down.  But while we may herald a new enthusiasm for all things financial, we are suspiciously left scratching our heads about why it is that we feel as if it's all happening to someone else, not necessarily for us, but to us.

The single biggest predictor of financial growth is not how much money we have stashed away in secret savings accounts, but how much confidence we feel about a fair return for the deployment of those dollars.  In that sense, corporations and individuals alike uniformly adhere to a quid pro quo matrix.  Investing must be fair; it must be reasonable; and, win or lose, it must be swathed in aspiration that makes us feel worth making the investment in the first place.

Right now, the chasm that exists between our perception of value and its real impact upon our "bottom line" is still quite wide.

Science.

Many are quick to inform us that markets are inherently unfair, that the playing field is not nor should be really "fair," in the sense that there should never be a guarantee of quid pro quo.  After all, they argue, it is entrepreneurship and risk-taking that makes economies function efficiently.  In all endeavors, money too, they believe that there should be winners and losers.  Such is life.  No equivocation.

My proprietary science does not disagree objectively.  However, if the purpose of investing is not only to generate profit but also to provide capital for meaningful social contribution, then there is an additional burden at work when evaluating risk versus reward.

Anyone can scam the public with a "get rich now/get rich quick" scheme.  Fewer, though, can subpoena capital for a "purpose."  In that regard, values-based investing provides meaning as well as the chance to get rich.  Who wouldn't want to hit that jackpot of success?

In this dichotomy between being rich and feeling rich, what one stands for is as much a confidence boost as the quantification of how large the profit.

Decline versus advance.

One factor that seems compelling in understanding consumers' mood is an ability to separate time and anxiety from the process of investing.  Getting impatient about portfolio returns, even when executing a well-structured methodology, is the worst thing one can do.  Either we feel that we're not making money fast enough, or we lose patience when caught in a short term decline.  But in either case the answer to building wealth is not in a staccato-like goal orientation, but rather to be patient and diligent in effecting one's science.

Time after time, confidence (and success) comes from maintaining a steady hand on the rudder.  January's sudden burst out of the gate is analogous to a long-distance runner beginning the race as a sprinter.  There has to be a perception of time and value, duration, calmness, and trust in order to succeed at investing.

Are we "doing well" or "doing poorly?"  In life, a sense of equilibrium emanates from an inner peace and a longer term purpose.  Losses and gains are ethereal.  Discipline is not. 

Market Commentary for the week of February 11, 2013

Chicken or egg.
For many months I have been commenting that the critical element most lacking from our rebound in economic development has been “consumer confidence.”  Wouldn’t it be nice if we could not only quantify confidence but also to define it, accurately?  After all, something so nebulous as one’s opinion about something, also has the power to shape behavior and consequences for a myriad of financial and economic events.

Besides, one man’s opinion might not be shared by a multiplicity of others.

We hear and read everyday about how excited the markets and its participants become over a series of news data.  This is unfortunate, as the panoply of behaviors and activities this “excitement” generates causes peaks and valleys in our emotional responses.  As a result we might be emboldened one day, downright depressed the next.

The era of buy and hold investing has been supplanted by a technology-driven short-term orientation whose effect has been either to shake “confidence” or to bolster it.

In fact, not only are these demarcations driven by daily news, but they are also shaped by one’s financial status before the events unfold.  In other words, if you’re well-off financially some things might not bother, or influence, your perception the same way as if you’re living paycheck to paycheck.  Middle-to-low income consumers are being/feeling squeezed by “fiscal cliff” stuff, so much so that their confidence is nearly exhausted.

At the same time, Washington’s dalliances are simply a minor nuisance for the well-to-do.

Overall, consumers either zip up their wallets, or open them, based upon the financial pressures they feel, individually and collectively.  Right now, a significant majority of us are grateful for small recoveries, but still not feeling exuberant as the global economy trudges out of its depths.

Success or failure.

Still, maintaining the discipline to forge ahead without the brief staccato of everyday interruptions takes a hearty constitution.  We must continue to monitor our goals, and our methodology, diligently and not allow our horizons to be affected by exogenous noise.

It is always fun to see our valuations increase.  One’s mood rises or falls sometimes, based upon the value of our monthly brokerage statement.  But the reality is that all cycles are evolutionary.  They do not traverse a straight line but do, over time, define a trendline which is either rising or falling.  It is toxic to be on a falling trend; but it is equally dangerous to allow our mood to be affected by short-cycle variances.

Last week the market logically began to tread water.  As I wrote prior, it would be unrealistic to expect an unimpeded upside.  We will continue to vacillate, up and down, and no fear should be engendered by that fact.

Which comes first, confidence or momentum?  Ask a golfer and he might tell you momentum, you know, five birdies in a row.  It’s a tricky tightrope we walk as investors.  But there’s no question that building confidence, and gaining momentum, are inextricably linked through a kaleidoscope of factors.

At present, we’re looking ahead at building a fair measure of small, incremental successes to erase any uncertainly about the sustainability of our recovery.

Market Commentary for the week of February 4, 2013

Surge.
You don't really want to keep doing this to yourself, do you?  You know the feeling, as those tinges of anxiety turn into unbridled enthusiasm, only to be dashed again by unseen forces onto the rocks of despair and doom.  Too dramatic?

No, I'm not referring to your Super Bowl predictions, or your Senior Prom, but to those inexorable fates of investing in the financial markets.

It's happening again, and it's going to continue to happen because such is the cyclicality of life and the world of finance.  Honestly, to think otherwise, hopeful as it might be, would be foolish.

To be sure, we're all very glad for the January surge that elevated S&P valuations by almost five percent.  In fact our balanced accounts, which presently consist of less than thirty percent exposure to stocks, were up nearly two percent for the month.  But let's also be realistic.  You don't really believe that you could go twelve full months appreciating five percent per month, do you?  As a portfolio manager this is tough sledding.  I know that if I can mitigate downside volatility and complement that with competitive growth rates, I am succeeding on behalf of a greater mission for most of my clients.  Let others play the "home run derby," which so often ends in unexpected negative consequences.

Hold your breath.

There is solace to be taken in getting the year off to a good start.  Remarkably, we have been able to sustain the rally in equity prices that began more than four months ago.  Rather than starting the year with realized "angst" (the unrealized kind is always more debilitating) we can cheer a half year of untethered momentum.

But we all know that nothing moves in a straight line.  It is conceivable that 2013 could be the year of redemption we all hope for.  It's also possible, and most likely, that it won't set precedent and rise sixty percent by year's end.

One of the reasons we might expect slower growth this year is the content of political and corporate dialogue.  More and more, the conversation hinges upon austerity and belt-tightening.  We're not yet back to the go-go 1980's, a period of enormous risk-taking and profligate spending.  That era, both fiscally and psychologically, may never be repeated, in part because the moral code and conscience of the markets took advantage of a laissez-faire enforcement policy, and partly due to the cultural mores of that time.

Minute by minute.

Indeed, the climate of our time might be more opportunistic for equity and portfolio valuation increases.  The sheriffs have returned and promised to make a concerted effort to clean up the landscape.  Most importantly, we are starting to believe that it might be so.

Demand for stocks is increasing.  As the fixed income markets recede, albeit temporarily, the need for suitable, sustainable options builds.  Factors in the economy are germinating slowly, but moving from generic to specific conclusions.  As the year goes on, hopefully more of the solutions to these problems (taxes, unemployment, housing, corporate earnings) will take root.  As I have written before, the last, and most significant, of these quantifiables will be consumer confidence.  Once that returns, seedlings of economic growth can turn into mighty oaks.

The outlook for year-end is considerably brighter than we might have expected during the depths of the credit/economic recession.  But be forewarned that January's progress was an aberration, not the norm, and that we want to avoid that "hangover effect" one experiences after a night of unbridled celebrating.  For those reasons, and more, I hope your team won the Super Bowl, and that you enter February with a more realistic set of portfolio expectations.