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.