Market Commentary for the week of March 25, 2013

Despite ourselves.
Even after a global market surge that virtually “wiped away” the four year bear market, equities still seem to be the best game in town.  Corporate and individual investors are flocking back to a haven they had abandoned in favor of bonds when, in an era long ago, yields and credit rating offered them a secure place to park money.

For now, at least, low yields and discounted valuations have to be met with decisiveness, and that means speculation in the near-term prospects of stocks delivering a quality return that they cannot find in bonds.

Welcome to a bizarre world of forlorn choices.

To be sure, there is plenty of money on the sidelines just looking for opportunity of any kind.  But when investors grudgingly have to be led by the nose back into the stock market, we hardly have the rallies that make legends…in spite of the new highs.  Besides, many have come too late to the party, and others, still, see the economic fundamentals as a serious underpinning for a rally.

This rally is being achieved with mirrors.  While the bad news might be drying up, there is a dearth of really good news to replace it.  Call this a rally of suggestion, rather than choice.

Having said that, the averages do seem inexpensive despite their breakout.  After all, price earnings ratios had contracted so much because of corporate layoffs and efficiencies.  Any multiple in price performance would be simply squeezing water (value) out of a stone.  Further, corporations are starting to see value in hiring and manufacturing, suggesting balance sheets might compress as spending expands. 

More than any other group, however, the financial professionals (traders) on Wall Street have benefited from the rally while the “little-guy” sits, incredulous, on the sideline.  You saw how trading bonuses on “The Street” have been going up, yes?

The single biggest reason for the rally, according to my statistics, is the pervasive decline in bond yields, and the evaporation of the alternative investment scenario.  Clients seek return, and as long as the Fed, and other global treasuries, strive to keep inflation low, austerity high, and money cheap, investors must fill the void with something.  In this case, hopefully not to our detriment, that “thing” is stocks.

But with low volume rallies moving the averages, it is clear that institutions are playing more than you or I.  While fewer people are net sellers of stocks, it is also true that there are fewer net buyers of stocks, too!!

So, with an absence of selling, the bias is to the upside.  Perhaps this is more of a “quant” thing than fundamentally-driven, but clients could care less, as long as they see gains in their monthly statement.  As valuations go up, the appetite for stocks does also.

Hold on.

There is still fundamental and quantitative reason for concern.  If the majority can move the market up on a whim they also control the velocity pedal on the way down.  And if they sense an apex coming you can bet they’ll take their money and hide, at least in the short-run.

Bear in mind, we have come a long way, almost fifty percent, from the bottom.  The rally has been a welcome diversion from the gloom of the past crises.  Whether we can rest comfortably up here at the top is another thing, altogether.  The issue is sustainability.  Whether you choose to measure it as a function of confidence, fundamentals, valuation, or time remember that all events are cyclical.

I’m happy with our gains thus far this year.  Maybe the thing to do is to park those gains and count our bounty…rather than counting the number of self-inflicted wounds we might incur.

Market Commentary for the week of March 11, 2013

All time high.
Although ecstasy reigned supreme last Tuesday as the Dow crossed into record territory, not everyone felt as if they shared in the bounty.  It’s at times like these that we must be mindful of the distinction between economic recovery and market recovery.  Two phenomena which fly in tandem, on parallel tracks, are not always inextricably linked, and in this case the parallel disconnect is wide and obvious.

Those who don’t have the good fortune to have owned stocks or mutual funds certainly don’t care about, or are aware of, a Dow Jones new high.  Similarly, those who merely recovered the net loss they incurred since 2008 don’t feel euphoric, they feel relieved.

Financial anxiety also heightens around seminal high points in the averages.  Statistics tell us that, despite the thrill of uncharted territory, there is nowhere else to go in the short-run but down.  Of course, the prevailing uptrend might still be up, but cycles need fuel, and the capital and energy expended to get to the top needs to be replenished.

However fantastic the achievement, there remains a panoply of fundamental excuses why the rally cannot be sustained.  The origins of the debt crisis may have been ameliorated, but the globe is awash in financial indebtedness and leverage.  Those who forget the greed and excessiveness of a rush to spend money are likely to repeat the mistake.

Misplaced analytics.

There is solace to be had that bull and bear cycles evolve over time, and that we are in a pretty good bull recovery at the moment.  But bear in mind that the advance is taking place against the backdrop of a steep bear decline that just last week was breached for the first time only.  The safest place to be today is sitting with profits in your pocket.

I am also waiting, not only for more segments of the population to be included in the market/economic recovery, but also for more market sectors and geographies to participate, as well.  The acceleration in common stock is mostly benefiting “household names,” Western nations, and the already-rich.

Conversely, my portfolio strategy is to try to find pockets of undeveloped capital gains probabilities in order to maximize the sustainability of portfolio appreciation.  It is not when all stocks are rising that the best gains are made, but when undiscovered opportunities can be uncovered.

For portfolio safety, the bottom line is not to see the new high as an entry point, but to wait for a more appropriate inflection point with better relative strength probabilities.

Deploy the drogue chute.

As a mostly long-only investor I am not looking to dissuade investors from believing in the upside rally, but to make the context in which it happened more understandable.  The glass is, indeed, half-full but still early relative to its possibilities.

Q:  What would you have if everyone bought into the “it’s time” theory of investing? 

A:  The same stampede philosophy and methodology that engenders downside terror and panic when “it’s time” becomes “it’s time to get out!!”

We are in a changing economic landscape, punctuated by cyclical opportunities and inflection points.  The vast assortment of financial securities are ripe for capital gains.  I simply choose not to push too hard on the accelerator as we run into, and past, certain benchmarks of inordinate complexity.

Market Commentary for the week of March 4, 2013

More options.
The national debate about fiscal cliffs, credit crises, and sequestration clouds the fact that several reversals in fortune might accrue to our favor.  If the Fed perceives low economic activity as a result of sequestration, they might be inclined to hold interest rates low, ultimately benefiting stock activity.  Another one of the most potent of those changes is the global redistribution of sources of energy.  In particular, how the U.S. has now become a net exporter of energy supplies.

As our country emerges from an horrific generational recession it should be noted that great momentum usually emanates from periods of disadvantage.

If this seems counterintuitive to you, consider that consumer and federal debt is actually declining even though common sentiment, and politics, tells us otherwise.  While the size of the contraction might be small, more businesses, homesites, and agencies are operating leaner and meaner following the financial crisis of the past five years.  Notably, as our dependence upon foreign sources of oil diminishes, the financial ramification of that savings weaves its way into the fabric of our economy.

At the same time, the U.S. is exporting more energy commodities, such as natural gas, and providing fodder that energy independence might be a realistic goal.  At the very least, the trajectory of the change is accelerating.

New phase.

Technology plays a role in this new energy dynamic, as it does increasingly in many facets of our economy.  Where we ultimately go with this transformation is yet unknown.  But the global and domestic dynamic has certainly evolved following the recession.  More countries now rely upon us as a supplier of fuel.  Our technological innovation and resources give us the leverage to be a net seller into the global marketplace.

But politics and economics are also inextricably linked.  The proliferation of “holes in the ground” is also an environmental issue.  While we may have the resources to “drill baby drill,” we must also measure our moral imperatives against the profit motive.  The planet we leave to our kids has as much to do with clean air and water and unfettered views as how much money we make. 

It is undeniable that we need energy to exist in our modern society.  Still, many flock to our shores for quality of life.  These might be easier questions to answer now than they will be in the future.  Finding a satisfactory balance is the saga of our time.

Forward or back?

The recession also got rid of a lot of excess in other businesses, too.  Manufacturing and healthcare are experiencing a rejuvenation.  While the financial benefits might not have accrued to the average worker just yet, I would certainly hope that an employment boom will occur commensurate to the need of corporations to compete for new business.  Similarly, as the population, and workforce, gets older we could have a healthcare crisis.  We wish not only to grow rich, but to grow old with dignity.

The markets understand these changing demographics.  While short-term rallies are not the stuff of “trends,” we have picked up from off the floor to a recovery that makes some feel “better” about their financial well-being while profits are growing. A secondary issue is confidence and how the average citizen perceives his opportunity for a stake in the game.  How you answer that question is, today, largely a function of how much money you already have.  As that paradigm shifts to include more of the not-so-wealthy, the answers to a sustainable economic recovery might become more abundant.