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%
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