Market Commentary for the week of April 22, 2013

Perspective.
The deadly bombings in Boston last week, along with a spate of senseless killings in Newtown and Aurora, should highlight for those consumed by economics and financial market statistics the fragility of life and a sense of perspective about helping those in need at their darkest hour.  How noble that on the day of the U.S. equity market’s most damaging point collapse in years, our focus was on Boston and not on our wallets or portfolios.

My view is that most of us look for a “glass half full” approach to life.  It scares us to think of the enormity of problems we encounter in our lives, so we have to prioritize the real meaning of things, such as good health, family, and psychological peace of mind.

Global hunger, poverty, political and religious strife sets in motion not only a kaleidoscope of pessimism and fear, but an opportunity for us to respond and cope aggressively.  In that regard, the most obvious hazard we face is how we react to the exigencies of life.

Forge ahead.

Within that backdrop, I find it hard to change horses in midstream and declare, as a result of last week’s “points gyration” that the fundamentals of our nascent economic spurt have abated.  There may be soft patches and missteps along the way, but the glass is filling, according to relative strength integers that define this period.  Nominal earnings forecasts suggest that the consumer is coming out of his spending shell, albeit modestly, and that weaknesses in policy are being addressed, particularly at the local level.  Corporate capital expenditures are nowhere near pre-recession levels but are picking up in selected sectors, such as housing and technology.  A reluctance to invest beyond the next quarterly reporting period is finally abating.

A broader trend is also emerging as equities move with greater synchronicity.  This might be a function of “all boats” being lifted by the capital tide, but it also might suggest a wider diversity of capital gains opportunity and corporate entrepreneurship globally.  Either way, the “old” patterns of investing and delivering services to the public are changing the corporate bottom line. 

Don’t trip.

My optimism does not necessarily rule out another points calamity like Monday.  It merely suggests that the longer-term trendlines are slowly modifying their level of ascent.  The markets are always at the mercy of quarterly, and daily, reports.  But the axis of performance changes subtlety and finally I see the emergence of patterns that might work in our favor.

Some of those patterns include trade, employment, and overall government willingness to address financial matters.  The fiscal debates are contentious, but having the debate is a good place to start.  While the policy makers have so far been the impediment to progress, the former two trends are going to put pressure on the debate to ameliorate any embedded disfunction.  Either way, business momentum will not stop if the consumer first gets a head of steam and a little bit of confidence back.

Overall, market valuation will advance and recede during the coming months, but the aggregate total should be “in the black” if we show no signs of derailing initial efforts to establish new, potential upside benchmarks.

At this juncture, the only cause for a reversal in market performance trends would be we, ourselves, and a fear of following through on the initiatives that need to be addressed.  A muted, but positive, outlook is indicated.

Market Commentary for the week of April 15, 2013

Really up?
Despite recent gains in portfolio valuations, I question whether we are really “profiting” from the upward surge.

To be sure, there is more money in your account, according to your last three monthly statements.  And who’s to argue that doesn’t translate to “real” dollars, “real” well-being.

But don’t confuse stock market gains with progress in economic macro-data, or symmetry in political ideology.

Yes, the economy is healing, and more data is directed upwards than in previous years, but households remain under significant financial pressure and many still feel the pinch of tighter budgets at home and at the workplace.

While there is no “ideal” benchmark, many of us can still remember unemployment below 5%, expansion in wages and opportunity, and the markets hitting “real” new highs based upon corporate earnings growing from higher demand in the product marketplace.  That’s not what we have now, nor is the emotional/psychological connection to the markets as strong.

So are we better-off as the market traverses its upside trajectory?  Maybe.

But compared with that ideal benchmark to which we aspire, the new market momentum is not a cause for elation, but concern.  As stock multiples expand they do so without significant “retail” participation.  Instead, daily volume looks more “institutional” and mechanical.

Really strong?

Statistics might suggest that fewer of us have a vested interest in stocks, or corporate machinery, and that those who do are more fearful, more wary.  Retail investors are insignificant to the titans of corporate boardrooms, but that’s not how it should be.  Instead, accountability to shareholders, large and small, is the basis of equity ownership.  The market’s surge is not raising corporate accountability, just corporate valuations.

Look, its better when stock prices rise than the other way around.  But with interest rates as low as they are, stocks are the only game in town.  One would expect the influx of bond money to raise equity prices.  How many of us, though, feel an intrinsic connection to the stocks we own, or, reciprocally, their interest in us?

Really uncertain.

I believe the data shows that the public still harbors a suspicion about the financial markets, not a euphoria.  In many ways that suspicion carries over into the workplace.  Are we being rewarded yet for the economy’s largesse, or are corporate CEO’s hoarding their good fortune?  There’s a feeling that a long-term, deep seated ambivalence exists between retail America and the investment community.

The merits of this quarter’s market surge can/will be debated, but the bottom line has not changed significantly for the majority of us.

Market gains driven by cheap valuations is not a surge, it’s a speculative bubble with specious and undetermined consequences.  Good faith does not cost a lot of money, but judging by the negative attitude of many, the rewards are still forthcoming, and not here just yet.  The paradigm might indeed be changing, but the benefits of that change are ethereal and tight fisted.

Market Commentary for the week of April 1, 2013

Again and again.

 

My work has always been predicated upon using quantitative modifiers to enhance portfolio value through greater efficiency of information processing and the creation of momentum-driven asset allocation models.  But because so many investors quizzically suffer from a herd mentality, they find it difficult to digest common sense solutions to diffuse problems.  And yet, our methodology and its consistent point of view has enabled clients to benefit without compromising investment expectations.

Meanwhile, the search for “meaning” to economic data and forecasts muddies the objective overlay of any discipline worth its value in a cyclical market place.  These subtle deviations affect performance, and result in portfolios which still lag the benchmarks, and certainly suffer in comparison to our metrics.

Market crashes inevitably come.  The last 3 years of bear mania was not the first such crisis I have seen.  While most indices collapsed mightily during that time, history has shown that, after the dust settles, those same indices go on to make new highs.  Thus, any rational methodology should be designed to mitigate the severity of downside risk when crisis occurs, and to maximize upside leverage during a period of rebound.  Unfortunately, most don’t and you pay the emotional and fiscal price.

Markets.

The economic environment today is still problematic.  There are, to be sure, pockets of strength geographically and/or financially.  Where imbalances occur, we seek equilibrium.  My macro economic forecasts are noticeably stronger today than one year ago.  But problems persist and they are embedded in the infrastructure of government, finance, and markets.  Deficits create a weight around our ankle; currencies are “uneven” and vex global trading patterns; historical demographics are changing, necessitating a new orientation towards healthcare, agriculture, natural resources, energy, and territorial defense.  We cannot ignore the problems, but we might be able to capitalize from them as investors.

In short, we don’t have to have all the answers today.  We might not even know the names of companies that could become market titans in the future.  We need only to apply our metrics of evaluation, consistently, to come up with the right decisions for a longer view to become successful.

I believe, for example, that successful investments take time to gain traction.  A plausible scenario for me would be to identify the macro-opportunity, and to let a company fill the void over time with repetitive earnings.  That provides me an outcome that is rational, time-tested, and less panic-driven.  It also removes the pain and anxiety of being wrong, like the dot.com enthusiasts, who followed the crowd to an unfortunate catastrophic demise.

The most important questions for investors in the period ahead revolve around how the current climate of fundamentals meld with the psychological climate of mistrust which, I believe, are stronger globally than any set of representative data we have so far analyzed.  Although markets have shown a significant rate of acceleration from their lows, nothing has yet moved the meter in changing the appetite for risk and the divide that exists between sophisticated investors and the average citizen.  That worries me enormously. 

The long view of investing, as I previously alluded, is cyclically positive.  The effectiveness of that data, however, is rooted in the stability of the financial system and the transactions of government.

We not only have to battle traditional demographic themes, historical metrics, and market fundamentals, but we need to assuage a global populace that is disinterested in our rhetoric, and still suffering from the effects of the last credit and market debacle they endured.  Until we in the industry address that disapproval no fancy television commercials or hyped-up advertising will be sufficient to coerce their dollars, or their trust, back.

Strategy.

As the global credit crisis slowly recedes, our focus shifts from brinkmanship to profit-making.  We are impeded somewhat by lower flows of investment capital at the Federal, corporate, and personal level.  To be sure, we are “awash” in austerity packages targeted at one sector or another.  But the cascade of stimulus money is no replacement for moral leadership in areas such as public health, renewable energy, infrastructure, bio sciences, technology and national defense.  The financial industry is in disrepair and, in my mind, a non-factor in the current equation.

Globally, it is inconceivable that nations “can go it alone” in this internet society.  The profit opportunities and social needs are borderless.  Going to bed hungry is not an option for citizens who hope to build bridges, farm the landscape, invent new technologies.  If mere survival is the highest aspiration of a nation, their sights are set too low or we have failed to provide the resources for them to dream bigger.

The gap between rich and poor is widening.  Some countries do not experience these disparities, others do to the extreme.  Monetary and fiscal policy are not playthings for the few, but a tool for creating bounty for the many.  Solutions are not quarterly by nature, nor do they respond to anniversary dates on the calendar.  Instead, they are cyclical, generational, and need a generational mindset to transact.  Until our sensitivities are heightened to the depth and duration of solution-making Wall Street will continue to respond, inversely, to a 24 hour timeline.

Norms are changing.  Our rational approach to yesterday’s problems might not work today.  But logic and common sense never become antiquated.  That is why everyone intuitively acknowledges the problems, but becomes immobilized by the Herculean effort required to address them.

The last market catastrophe was exacerbated by a failure to address the future, while remaining dispassionate and inert as long as things kept going our way in the short term. Burying our heads this time around is not an option.  The creation of moral imperatives is not the “other guy’s” responsibility.  Each member of society is part of the fabric of his culture.  While we expect bankers and monetarists to exert influence over wholesale financial matters, core moral values reach us in many other ways, and ultimately resonate more deeply than government dogma.

Conclusions.

My raw data is not altogether positive in the short term.  Already we have rebounded from valuation lows in a near-linear fashion, making any additional upleg extensions hazardous for late-entry.  The alternative, allowing the economy to flatline, would be calamitous.  The question is “how long can the market sustain an intermediate, unabated advance in the face of imposing economic circumstances?”

My vision is for the market (and the economy) to focus upon secular themes that offer the highest probability of earnings growth and sustained capital gains.  We have seen an acceleration in health sciences equities, but not yet matched by a consistency in earnings acceleration patterns across the board.

Those sectors which offer the next generational upleg opportunity are:  alternative energy; agriculture; water filtration; biotech; brick and mortar infrastructure; technology; aerospace; and pharmaceutical research.

History tells us that there is always an upward bias in the stock market.  It is the nature of man to be “greedy.”  As the fictional character Gordon Gekko once said, “Greed is good.”  I agree.  But I would add that capitalism has an inherent “morality clause” which can drive greed to be the engine of constructive profit-making, and not the “again and again” mess we continue to fashion from ignorance. 

 

 

 

Asset Allocation:

Equity 40%/Fixed Income 25%/Cash 35%