Market Commentary for the week of November 25, 2013

The enemy of my friend is my…
This particular time of year is often a time of contemplation and reflection.  As families and friends gather for the holidays, many pause to consider the year almost past, and perhaps the year to come.  Whether it’s tax-lot accounting for securities bought and sold, or healthcare issues left unattended, or simply holding ourselves accountable for goals unmet, we tackle these issues as an annual right of passage each year.

For some, this annual inventory is simple.  For others it’s complex and daunting.  For all, however, the season is an opportunity to reassess and rebalance, taking stock in what we have accomplished, or haven’t, and comparing our life by yet another benchmark having elapsed.

Nothing is more striking this November than the chasm across the globe between wealth and impoverished.  It’s as if for some these are absolutely the best times, and for others a catastrophe not of their own making.

To be sure, we are all (to some degree) the product of our own initiative.  The successful amongst us have earned their success.  Perhaps, too, the financial or social laggards have failed to live up to their potential, or have just given up, altogether.  Too bad, because all of us have such enormous promise at the outset.  There is, nonetheless, a huge gap in the way equity and opportunity is administered.  Wall Street typifies and magnifies this inequity greater than most.  Consider that the disconnect between wages and wealth is at its greatest in generations.  Markets are making new highs, while many feel disassociated from wealth creation.

Decoding the data.

The rising cost of a “household basket”, also sometimes referred to as the “Twelve Days of Christmas” basket, is inflating.  And while statistics may show that global inflation is relatively benign, we all know, anecdotally, that very few costs are really going down, particularly in healthcare, foodstuffs, transportation, and other basics.  Essentially, the current price dynamic is eroding our purchasing power and savings accounts.  Obviously, these data vary by region and country, but the overall trend serves as a bellwether for comparison worldwide.  “Basic” is now becoming “premium”, at too great a cost for many. 

A main risk lies in hoarding and localization of wealth centers.  Global and domestic economies continue to perpetuate a wealth bifurcation by exerting political and financial pressures upon their citizenry.  Central banks can only do so much to incentivize capital expansion, but actualizing it is another matter altogether.

As technology and the pace of change accelerates our knowledge base, things appear to be getting worse, or better, depending upon which side of the ledger you fall.  Either way, these changes weigh upon our future expectations, our goals, and our collective psyche.

A structural and systemic backdrop is now transparent enough to uncover the vulnerabilities of many economies, businesses, and some households.  Governments may try to regulate the discrepancies, but they wind up changing the natural order of things in the process.  Globalization magnifies these effects by reconfiguring the map and relocating profit centers not by country boundaries but by pockets of industry and natural resources.  These productivity and profit centers gain financial and social leverage over other, less-competitive, marketplaces.

A pillar to sustaining, or deconstructing, economic inequities is our moral and social consciousness.  Doing good things knows no geographical borders.  Not surprisingly, whatever cycles the market may pass during the next few weeks might be benevolently influenced by an overlay of holiday good will.  A gradual shift in the perceptions of what “wealthy” and “well-off” are is causing values to migrate as well.  In some instances societal tensions are heightened by this shift, and habits are changing along with it.

I believe that all this conflict leads to a smoother transition into economic and social success later on.  We simply need to be patient enough to wait through the headwinds.

Happy Thanksgiving.

Market Commentary for the week of November 18, 2013

Hollow, or real?
Some weekly commentaries are chock full of information, editorial content, market swings, economic data, and the like.  Others, like today, reveal nothing magical about the preceding week or the outlook ahead.

Which makes this a rather unique and eventful missive, itself.

As we look at market activity during the first 10 months of the year, my perspective is shaped by the fact that despite expected, and inevitable, cyclical drawdowns, the image of this year is a near-linear upswing in equity valuations.  Whether caused by specific reactions to economic events, or simply a release of pent-up expectations, the sheer magnitude of the averages’ percentage increase is a one-off, and untraditional, event.

In fact, extremes like this when seen as “downside events” would make most investors run for the hills.  In like fashion, many are chasing after the train has well left the station.

This is not to diminish the impact of radical global economic shifts which have neutralized a lot of the bad news of the previous decade.  Rather, we must make note of the rules which govern market statistics and analysis to point out that today’s stochastic (relative strength) integers infer that while there is, indeed, a new flight to quality and equity expansion, the trend lines which support that euphoria are unlikely to sustain such a one time magnitudinal surge.

We want to believe that “new high” trends will persist, we really do.  But we know as investors, statisticians, and citizens that nothing goes straight up…forever.  We are in a stock pickers paradise, and loathe to see a bigger picture.

Yes, go.

While there is no denying a sea-change in expectations about portfolio performance, let’s drill down from an across-the-board approach to investing to explore some of the specific sources of global equity expansion.

It begins with the demise of the credit markets.  Consistently, the lack of a suitable alternative parking place for our investment funds has led to a default bonanza for equities.  The long-term is always good for stocks, but in this instance there was a benevolent confluence of credit (interest rate) erosion and a bear market in stocks brought on by a myriad number of systemic economic failures, such as overspending and excessive leverage. 

This put us in a distinct opportunity to capitalize upon the same type of negative stochastic integers, then, as are currently being touted as positive, today.  On either end of a probability scale, the excesses nearly always lead to a manic reversal in performance.

If pressed, how many of you would bet on today being the optimal entry point for stocks if you had new money, versus a starting point four years ago?  The irony is, and remains however, that there are no other alternatives for capital investment.  We have either turned a major (psychological) corner, or we are destined to expire today’s relative strength message.

In a market where any news precipitates upside or downside excitement, every rally becomes a seduction song that cannot be ignored.  In a week such as last, we should not conflate the absence of bad news as a surrogate for good news.

In the meantime, we continue to stay “fully invested”, which for our balanced accounts means at least 30% in cash reserves.  It is still possible to outperform the benchmarks, near term and long, by prudently selecting solid earnings and long duration price trends, without going all-in or becoming inexplicably manic.

 

Knowing what we do today, opportunity is capricious and not formulaic.  A restrained week, indeed.

Market Commentary for the week of November 11, 2013

Hope and change.

Here in the United States, we had local and regional elections last Tuesday.  Several of the ballot initiatives, and many of the candidates, addressed what has commonly been phrased as “the inequality gap”.  To be sure, in an ideal world, everyone has access to, and participation in, the bounty that this country has to offer.  From “sea to shining sea” we do have a plentitude of idea-makers and resources available.

Of course, there is no ideal world or perfect system.  So how, then, do we gain and prosper from the abundance at our disposal?  Well, I’m not a politician so I don’t have an easy answer.  But I know that the resolution of that question frightens Wall Street.

Society benefits always from the ingenuity and technology of a “better mousetrap.”  From bioscience to aerospace to agriculture, dozens of historical advancements have led to better citizen outcomes.  In a population of more than 300 million, there is no reason why any adult or child should go to bed hungry or impoverished.

Whether it’s their “fault” is left to the ideology of politicians and their political persuasions.

Science offers us an unparalleled record of innovation and change.  Oftentimes, Wall Street doesn’t respond well to change.  Corporations like certainty, low costs, and high profits.  Unfortunately, there is no luxury to stakeholders when profitability is held in abeyance to R&D or “moral justice”.  Corporations aren’t responsible for this inconsistency, we are.

In fact, if we spent more time addressing “what works” rather than “what’s working now” we might develop even more commercial opportunities.

Fear.

But yet despite commercial potential, the markets seem only able to embrace an approach which places many at risk for the few.  The irony is that money and politics while working holistically together, are nevertheless negatively interconnected when it comes to accepting or discovering new ideas.

Let’s look, for example, at agriculture.  For thousands of years, humankind has been tilling the soil to grow crops.  Since the advent of chemistry, scientists have attempted to magnify soil output.  Some developments have proven to be unhealthy, others enormously beneficial.

Without debating the merits of herbology in this tome, let me pose the following questions:  “if we could, would we be able to feed all citizens of the country and eradicate hunger?”

“Can we produce enough arable land and potable water so that we might build a self-sustaining, profitable, agribusiness, not only domestically but globally?”

The answers are not solely found in economics, or politics, or science.  They are found in all three.

The notion that these, and other questions, must be held in abeyance because political or business leaders are uncomfortable with change, or regression in their personal satisfaction, is another matter altogether.

Not one of these questions, by the way, will be answered without our participation, our input.  That’s why Wall Street loves the status quo and hates peering into the abyss.  They’re fearful the only thing they’ll see in an abyss is a mirror reflecting back their own image.

Market Commentary for the week of November 4, 2013

A la carte.
We’re in the midst of a rather interesting earnings season, one in which many companies are recording record profits and new highs in their share prices.  Not so unusual, that, except many of these earnings derive from a new phenomenon:  a la carte pricing.  Consider that banks segregate, at a price, costs and services which once were part of their overall service package.  Airlines, too, are charging for seating assignments, early boarding, crackers, etc.  Who knows, next thing might be a special charge for takeoff or landing?

Nickel-and-dimeing is not new.  But multinational corporations that expand their revenue base by charging you, their consumer, for “standardized” industry practices…that’s something new entirely.

 And Wall Street falls for this gambit.

Analysts actually look at these revenues not as an onerous excursion into price gouging but as a logical decoupling from excessive costs that companies can’t afford to absorb to please you, their satisfied customer.  “Satisfied” is anything but how consumers feel about a la carte pricing.  Portions are smaller in restaurants, seating is smaller in airplanes, no one “rolls down” their car windows anymore (am I dating myself?), while gadgets and gizmos are added-on (at a cost) to your cellular phone.  In fact, basic cable television has supplanted analog, over the airwaves, communication at a cost.

And what do corporations do with these new-found pennies of aggregate revenue?  In many cases we are seeing share buy-backs in record proportions, which only enhances the upside value of a companies’ stock and its scarcity.  In effect, there is an upside reversion to the mean, rather than downwards, when times are tough but companies sit with plenty of cash reserves.  This, then, is reverse engineering of traditional accounting practices, and what I once referred to as “Rapunzel Economics”, spinning gold out of nothing.

Alchemy and economics are diametric cousins, and have no place sitting at the same table.

Full speed.

As a result, the market gleefully hangs on for dear life, looking better and better (price) while engineers and marketing departments run the vision into the ground.

I asked you 2 weeks ago to name 6 companies that have high demand, consistent earnings, increasing share valuation, and which solve a “social” function of providing for the common good, for the benefit of us first, before their shareholders?  I’m still waiting for an answer.

In all, the end game is always profits.  But at what cost?  As the markets make new highs more of us acknowledge the former and care less about the latter.  That’s what makes the quantification (sustainability) of this data so unique today.  We don’t want or wish for the market to shock back to earth, but we also don’t want companies to profit without explanation or justification of their costs.

Consider that the market’s success is great for your 401-k and your psyche, but its not great for the economy at large if the gap between valuation and sustainability becomes untenable.  The correlation between corporate greed and our sense of participation has always been part of the corporate/societal compact that makes capitalism work.  We expect cyclical dips in the economy, as well as dips in the risky financial markets.  No one expects linearity either in earnings, prices, costs or happiness.

I am convinced that we have turned an economic corner following the last man-made economic synapse in 2007.  I am less convinced, however, that, as evidenced by a la carte pricing, we have turned a moral corner about the respect given to the consumer.

P. T. Barnum:  “There’s a sucker born every minute.”