Market Commentary for the week of August 26, 2013

Moderation = Loss.
Investors deserve a little sympathy over their confusion about world events and microeconomic factoids which do a better job of confusing our sense of equilibrium than creating it.  Armchair analysts and professional critics alike have less than a 50/50 chance of “getting it right” when even the experts seem oblivious to the outcome of their pronouncements.  A technological revolution, which is supposed to make our lives easier, was part of a three hour “market glitch” last week.  Hardly the stuff which engenders client confidence and solemnity.

It is with no surprise, then, that the Federal Reserve continues to put its foot in its mouth by playing around with an ambiguous notion that it “may or may not” allow interest rates to creep up without its (the Fed’s) steady hand on the rudder.  While they may indeed be justified in their ultimate objective, the outcry of disdain and confusion their “leaking” of this tactic creates has greater impact upon the economy than the policy itself.  While a certain percentage of economists favor economic “easing” (and some others might not), I believe they should just keep quiet or be less ambiguous about something as amorphous as stimulation and interest rates.

Talking about something and doing it are two distinct things.  While it is great fodder for discussion, and instrumental in helping investors plan for the future, it is silly to suggest that “inference” is a policy.  Besides, there are macro secular forces at work here that lie well outside the domain of monetary policy.

For example, as the population grows older investment criteria change, not only for households but for government as well.  The Fed might not admit it, but stimulus borne from low interest rates is not the same thing as stimulus engendered by a healthy robust economy.  What we seek, in fact, is inflation, not the kind which ravages economies in underdeveloped nations but the kind which raises prices, production, demand, wages, and people’s hope for a better, more vibrant, standard of living.  Interest rates will be rising over time, irrespective of the Fed.

For the most part investors are tired of inference and suggestions, instead seeking real solutions, real growth.

Failure to launch.

With nominal interest rates at or near zero it is harder to drive the economy into vigorous “inflation-type” growth, and harder still to create savings and capital reserves…unless you’re already wealthy and rife with cash, in which case you are now part of the problem.  If you “believed” enough in the future, at this point you would have deployed your excess reserves towards hiring, production, and product development.  For the most part, and acknowledging the exceptions, this is rarely being done right now.  Hence, the markets sit, stupefied by their inertia.

Obviously, as noted above, the key to stimulus is belief.  There is a remarkable emotional and mathematical symmetry when economic facts meld with personal expectations to create a desired result.  That policy, that belief, is not sufficiently present today to drive the markets, and the economy, beyond a 24 hour news cycle dictated by announcements rather than sustainable policy.

Instead, policy makers have an asymmetric view of the problem and its solution.  To be sure, they have at their disposal a host of tools to deal with the issues, but choose not to do so at present. In fact rather than err on the “right side” or “wrong side” of policy, they err through omission altogether.  Right now, my data almost “seizes” at the lack of momentum accorded to cyclical phenomena.

And yet, data is everywhere.  Local, regional, and global events continue to happen, every day.  These events themselves become cycles and patterns. Great things are being done by citizens, doctors, researchers, lawyers, policemen, firemen, professionals in all endeavors every day, every hour.

Our leaders, however, have failed to create a landscape, a “hope-zone”, in which these great acts can be fulfilled.

Market Commentary for the week of August 12, 2013

Preparation.
Despite the market’s jittery, almost daily, responses to the Federal Reserve’s inferences about “taking their foot off the pedal”, the reality is that secular changes, like the kind considered, occur very slowly and give us enough time to prepare for, and analyze, the consequences real and imagined.  Most importantly, we need to see significant changes in data, and perception of that data, over the long term in order to corroborate the Fed’s decision.

Most observers foresee a redirection in interest rates, anyway.  At these levels there’s not much more room on the downside for rates to go, and their impact upon economic stimulus at this point is still questionable.  Where are the buyers and cash hoarders if these generationally low savings and borrowing rates can’t engender confidence…or speculation?

The anticipation of the Fed’s actions have been much discussed and have already resulted in a tapering in public bond buying, and therefore a new appreciation of global equity potential.

Assuming that rates reverse course, we should expect a two to three year window of cyclical economic redirection and a gradual reallocation of portfolio risk.  If, in fact, portfolios were to lose yield power during this time, one would hope that economic fundamentals would commensurately be improving, offering the potential to mine the equity markets for capital gains in technology, manufacturing and industrial development (sectors which heretofore have remained dormant during the recession).  A solid base of earnings and dividend performers would more than offset a decline (erosion) of income power from bonds.

Obviously, it is critical to have a discipline, a focused approach, that complements one’s risk profile.  As you might imagine, the same risk assessment one employs today would be as valid in the future, simply using different data for different economic times.  Jumping from strategy to strategy, however, is not the right way to go, in my opinion.  That means that you have no overriding plan, or science, with which to evaluate the “fluid” times in which we live.  Those who got “suckered” by the dot.com siren song of the 90’s know what I’m talking about.

Falling.

Rather than this type of strategic methodological planning, I witness, on a daily basis, a more neurotic response to fundamental data.  Many investors pay only passing homage to terms like “the Fed”, or “the G-7”, or “the New York Stock Exchange”.  The average working person, professional in their own right, finds our involvement in the world of Wall Street to be capricious and mostly insignificant to their own situation.

Of course, we know that finance and economics are extremely important to the world in which we live.  But how do you respond to someone who laments that they work “as hard as they can” but see no economic or social advance?  The heavy toll of tuition, medical costs, housing, transportation, food, and miscellaneous items eats into the average paycheck, and savings account, as no other time in the past two generations.  These citizens are too busy to check the stock pages or the Dow Jones Industrial Average.

Time is not always money.  Those who are well-off still feel “401-k vulnerable”, while the less fortunate are working several jobs to make ends meet.  The percentage of time and money spent worrying about, and working towards, wealth creation is greater now than ever, while the actual reward is less.  A larger percentage of people are probably worrying about wealth than acquiring it.

Typically, financial institutions spend their time worrying about how to acquire greater profits from their clients.  There is no question in my mind that the disconnect between institutions and the citizens they serve is getting wider, not smaller.

It’s not complicated.  We all live on this “blue marble” together.  Why get up every morning if not to improve the lot of ourselves and others with whom we share the ride?

Market Commentary for the week of August 5, 2013

Special.
Every investor is unique.  Similarly, every investment opportunity is unique.  Despite our desires to see otherwise, each situation must be measured on a paradigm of possibilities rather than being pigeon-holed into a structured definition.  The irony of these “uniqueness-es” is that as investors we tend to define ourselves, and the investments we make, with standardized definitions which inhibit our potential for achieving success.

“I’m risk-averse.”

“I’m yield-oriented.”

“I’m a risk-taker.”

These are all colloquialisms that button us up neatly in our mind, or that of our portfolio manager, so much so that we fail to acknowledge any “margins” or things which deviate from our comfort zone.

Wait a minute.  Don’t I constantly chastise those who fail to abide strictly to a discipline, any professed analytical science, about investing?  Yes, I am, and yes I do.  But what I try also to convey is a moral imperative about acknowledging what’s right in our universe or what must absolutely be discarded in order to make probabilities work in our favor.  Before we can control our process of investing we must cultivate a climate of morality in which it exists.  For example, banks that engage in marginal behaviors in order to generate a profit must be defined as unscrupulous profit-mongers, or be labeled as inconsistent with the norms that make “profitability” an end-result.  What if a percentage of corporate profit was allocated to eradicating hunger?  Charity only goes so far.

Similarly, maximizing portfolio gains at any cost is not how one would characterize a portfolio strategy, or one’s personal style, unless they, too, had no perfunctory moral compass.  Failure is acceptable if the alternative is to succeed immorally.

Focus.

Portfolio appreciation is an amalgam of techniques, processes, disciplines and behaviors which meld into an analysis of available, and sometimes intuitive, data.  It is the intuitive part that sometimes helps or hinders us.  If we find our intuition to be corrosive to our objectives we can sometimes fall back upon someone else’s opinion (an analyst, for example) or revert to a “black box” discipline that removes all thought from the process.  But, of course, that’s no fun.  We need to have emotion and intuition as part of our overall complex.  The issue, then, is how much intuition versus how much data?

One of the benefits of quantitative statistics, my science, is that the world is constantly feeding us information, some of which is redundant and repeatable, some of which is random.  As in life, the information we get about corporations (earnings, P/E, valuations) can either be anticipated and usual, or highly unanticipated and unusual.  We, as analysts, use our science to quantify the redundancies and to plan for the exogenous noise.  The degree to which we can balance and modulate the risks, and to diversify the probabilities, is what makes one manager more “competitive” than the other, even though the common data set is the same for all of us.

The next profound impact upon performance, then, is the moral oversight one places upon a fast-paced, never-ending stream of information.  What leaves portfolios vulnerable to huge draw-downs is the reduction of choices we voluntarily impose upon our own process.

“Greed” and the “herd mentality” can either be the bane of one’s portfolio discipline, or forever banished from our mindset of understanding how best to use intuition, science, and random noise to make us happier and wealthier.