Tipping Point.
Many of us bear emotional scars from the excesses of a debt-driven,
casino-like mid-2000 decade. The last
recession was punctuated by lost jobs, lowering wages, diminishing portfolio
valuations, putrid returns on cash savings, and a total decimation of
confidence in the so-called “Titans” who drove the Wall Street bus during that
period.
How nice, then, when almost as precipitously, the markets surged to
all-time highs in a span of five years, supposedly giving both our money and our
hubris back.
Consider, however, that the same chieftains remain in charge, valuations
simply “replenished what we lost”, and no one really believes the casino ever
gave back the house.
This type of critical thinking may be overblown, but it is a necessary
defense against a broken modality that relies on your cash, your trust to
finance, anew, the next wave of economic excesses to come down the pike. Or, as some pundits might say, “other
people’s money” is the engine that drives the economy this, and any other,
time.
Any other way and the financiers would just have too much (of their own fortune) to lose.
We’ve been down this road many times during the past few decades, enough so that one is only too prudent to take necessary precautions before jumping into the shock pool yet again. The masters of the Wall Street financial universe know how the game is played, and how to separate you, unwittingly, from your own money. Shareholders and risk-takers might do well to quell their unbridled enthusiasm for a moment and reflect that all of life’s events are cyclical, many are measureable, and not all asset bubbles last forever or go forever upwards.
And let us not forget that the “recession of our lifetime” was not the
first of its kind, nor might it be the last.
Like its casino brethren, Wall Street can bestow tremendous luck and
riches upon its players, and it can bury them, too, if they’re not
careful. Dot-com, anyone?
Overview.
The advent of the most recent bull upleg recovery was exactly what unnerved
investors needed at their hour of financial and psychological despair. From out of the depths, corporations began to
turn around their profit declines, finance new initiatives and hiring, and
reward patient speculators with double digit upside explosions. The difficulties of the credit related crisis
of 2007 seemed to have been ameliorated by government intervention and stricter
corporate oversight. While some might
argue if a “moral corner” had been turned, few would argue with the valuation
expansion and recovery in their 401-k plan.
We must remember, though, that all market cycles are finite. How long, and for what magnitude are the
fingerprints of each cyclical event? All
cycles can be measured and studied for the probability of future duration and
sustainability. That notion is the
primary thesis of my quantitative research.
Buying equity shares on a hunch, or a relative’s tip, is old hat and
likely to result in poor outcomes. As
market scientists we must expect more from our methodology and scientific
process.
It will be interesting to see whether the fourth quarter is the end of a
current cyclical upleg or the beginning of a new and more dynamic recovery
cycle. My belief is that we are due
for a correction, but not a break in the sustainability of the upside trendline
begun in late 2008. Government
gridlock, and looming deadlines on the budget debate can only exacerbate any
fear and dread the markets might anticipate.
Many with whom I speak think that the current asset explosion/recovery is
symptomatic of the same mania that brought us to the brink previously. The old paradigm of the markets is the
same as the new: over indulging is not a
methodology, nor will it make things turn out differently. A market
which lunches on mania also goes hungry by the same model.
We have seen much of the same procedures on Wall Street despite
protestations that they’ve learned their lesson and “it’s different this
time.” I am actually surprised when I
see a company with a strong balance sheet, high consumer demand, strong
top-line revenue growth, sustainable earnings, social consciousness, and higher
valuations of its shares. Quick, name
six companies of that persuasion.
The societal
purpose of investing is to aggrandize the needs of a greater social contract,
perhaps in addition to making ourselves and the corporations wealthier.
Markets.
The path of least resistance is still to own stocks. While the Fed attempts mightily to regulate
the cost of money, two factors preclude my enthusiasm for bonds: First, extremely low returns on fixed income
products reduce the “alternative investment advantage” bonds may have had over
stocks in years past. Secondly, we infer
from our cycle data analysis that interest rates will rise at some point in the near future, thereby destroying
current market value of existing bond portfolios.
Delaying the inevitable only heightens an opportunity for maintaining
momentum in U.S.
Part of the problem, too, with fixed income, which works to the benefit of stocks, is an undercurrent of reflation that is characterized not so much by official government data, but by anecdotal experiences of every corporation and household throughout the economy. Not only are core commodity and raw material costs rising, but household goods, services, and products prices are rising as well.
This sensitivity to pricing power will weave its way into market activity
by affecting net-earnings, as well as future price target projections. Thus far, those influences have not been negative
to equity price performance, but they are
there. The question is when, or if,
cost pressure will impact upon asset prices through the economy. Anything that affects profits (earnings) will
have an impact upon equity price performance. It seems unlikely that monetary compromises
are going to be made by either political party, which postpones any real enthusiasm or incentive one might
have to commit excess (discretionary) capital.
Everything comes “down to the wire”, it seems, making it less certain
that an economic structural rebound can prosper without the fits and starts
that currently punctuate the market’s cycle activity. Whatever correlation currently exists between
political debate and stock performance is holding a tenuous grip over our
collective psyche.
Strategy/Conclusion.
The markets are likely to “revert to the mean” and produce “nominal-type”
performance. Already at record levels,
the relative strength integers just don’t seem able to sustain at this rapid
rate. Without more specific details from
government and business about getting resources into the hands of consumers,
the economy becomes problematic in the near-term.
It is foolish to measure market performance or economic statistics by
calendar fiat, alone. Cycles travel at
their own peculiar rate, not governed by exogenous expectations. While history and track record can be used to
guide our quantitative science, we have to be wary of losing our commitment
when details disappoint or get temporarily derailed. Expectations are both a benefit and a
liability if the aperture of our analysis becomes too focused. Implicit in my research is that acceleration
in market performance and our expectations is appropriate if we can
marginalize excessive manic reactions to, or stress about, the reliability of
man-made events. The continuum is
moving, suggesting that portfolio progress is still likely for the balance of
this year.
Asset
Allocation:
Equity 48%/Fixed
Income 12%/Cash 40%
No comments:
Post a Comment