Market Commentary for the week of April 27, 2015

Reaching the top?
Economists are engaged in a heated debate about whether we are in "full recovery" mode or simply in yet another speculative bubble in stocks.  While there is clearly no empirical answer to that question, the answer is..."yes, and yes."

Particular demographics, such as technology and healthcare, are in a cyclical advance, likely to continue for decades.  On the other hand, where confusion and dissipation of customer demand are at their greatest, the influence of cyclical/secular trend advances is weakening.  Unfortunately, the drag on the economy by consumer inactivity far outweighs any biases attached to stock performance in the past two years by traders and speculators.   That is why it appears as if we are sitting on the edge of a disbelieving precipice which commands our attention immediately.

There is reason to be dubious about the fantastic equity numbers, but not necessarily to pick a fight with them.  Ride the wave, for sure, but be careful to apply strict scientific analysis to what appears to be a once in a generation outcome.

There are trillions of dollars still on the sidelines, mostly in corporate coffers.  No one wants a war between government and the private sector, but will it take taxation, or an act of Congress, to part with those resources?  While it's unlikely that one can beat the private sector into submission, the "public" waits eagerly for capital investment in projects that benefit them, not the benefactors themselves.  Immobilizing the wealthy only antagonizes them, but coddling the "haves" for the sake of politics or profit only alienates the 99% who "have less".

In a sense, the markets are a didactic struggle between moral persuasion and uber-wealth.  When economies break down into rioting, terrorism, or civil war, such as in the Middle East, you have run out of fiscal and monetary solutions to abate the crises.

Not in one day

To be sure, these are complex issues, morality and money.  It didn't take one policy, one political leader, or one nation to initiate global economic inequality, nor might it take one person, or one election to remediate it.  On the other hand, each of us plays a role, through our vote, our pocketbook, our choices, to build the emotional firepower to bring a cause and effect response to what ails us.

Past actions, while relevant, are less instructive than what it is we choose to do in the future.  Globalism...interdependence...is real and important, whether the topic is politics, economics, or morality.  Bottom-line profits derive as much from the function of nations thousands of miles away as they do from local neighborhoods and customers around the corner.

To be clear, I am quite optimistic about the direction both of the markets and the global economy.  Statistically, for example, my data are closer to "bullishness" than at any time in the previous decade.  But I am concerned that many of us are grudgingly being pulled along for the ride, devoid of enthusiasm, hope, and expectations about the future.  Obviously we need to address the depths of concern of our fellow citizens and turn them into the engine of fertile opportunities.  To do so requires time, however.

So just what is the economy able to tell us today about tomorrow?  For one, we are closer to the beginning of a new secular up-cycle than being at the end of the last recession.  Government stimulus is exhausted; the heavy lifting must begin now.

While growth is currently inhibited by diminished consumer demand, its effects might be also to limit the upside range of stock valuations.  As an earnings-driven analyst, I see a preponderance of evidence indicating growth opportunity in equities, but perhaps with slower acceleration patterns.  Long term systemic pressures from "resistance" patterns (such as overhead supply and diminished buying enthusiasm) are within range right now.

Be grateful for the past two years' performance, hopeful for the next two, and cautious about "betting it all" on one more run of the dice.

Market Commentary for the week of April 13, 2015

A big miss
Is public access to potable water the domain of government, science/technology, capitalism, or ethicists?

The most interesting part of that question is whether it should have to be a question at all.  While we know that water already is a utility in most states/countries, like oil and gas, electricity, sewage, etc., to what extent can there be specific rules and regulations to ensure that all the ethical, moral, and financial issues are addressed uniformly and globally to everyone's benefit?

At the very least, with more than two-thirds of the planet covered by water, and concurrently deadly drought conditions overwhelming many regions, there is room for discussion about what role we all play in addressing these issues for ourselves and generations to follow.

For the sake of argument, let's agree that at least two points of view maintain:

First, there are those who think that government provides for the common good of its citizens.
Secondly, some argue that private enterprise is the best provider, and that if one "chooses to" live where there is no access to water, it’s their own fault for doing so.       

Obviously, on either side of a paradigm issue, both answers might seem a bit harsh.  I agree, neither opinion is "right" or without flaws.

Sorry state

Water influences life as we know it.  Science identifies it as the building block to mankind's existence.  We launch spacecraft to search the galaxies looking for signs of water and the origins of other "life forms".  As a priority, there is none higher than maintaining the purity of our own planet's natural resources, including water.  Why, then, is there any difference of opinion about how we treat the commodity, and how we regulate access to it for the rest of our fellow global inhabitants?

The bigger issue, I would posit, is allowing any inherent monopoly to capitalize, literally and figuratively, upon building channels of distribution for this most basic of commodities.  In any business, the two primary elements towards profitability are access and distribution.  When we allow water to become an access-only commodity, we condemn a portion of the consumer base to exclusion....no matter the cost.  In this instance, exclusion equals thirst, famine, poverty, politics, and marginalized populations.

There is not enough money in the world to be gained (earned) to justify making water a profit-based proposition.

Today, channels of distribution and access to clean water are already controlled by a few major players.  Rather than a globally compassionate approach, control of potable water is regionalized, nay localized, for most persons.  Because we have "competition" for creation of and access to clean water, we also have by definition "losers" in the game.

It's time to face facts:  water is not nor should be treated as a bonus or prize that goes to the highest, or most efficient, bidder.  In fifteen years, you don't want to be the one on the losing side of that equation.

However, the degree to which we already take plentiful access for granted says a lot about our business, political, spiritual, and moral infrastructure.  It is time we show an inclination to meet the capitalists and ethicists half-way so that "competition" is not a dirty word, and we witness a win-win possibility for both sides.

Market Commentary for the week of April 1, 2015

New Order Polemic

 

Sometimes, any theory which espouses spontaneous, random market behavior gets put to the test.  Conversely, it is my belief, and my science, that markets, while certainly influenced by exogenous and disparate events, are not random at all, but rather quantifiable and somewhat predictable.

The past two years have certainly been a statistical aberration to that notion, but not in any way un-measureable or undefined.

While the supply side of the economy has been expanding, the demand curve has been quite restrained.  As a result, spontaneous discretionary spending behaviors have largely been imperceptible.  Despite heavy influences and persuasions from monetary and fiscal authorities, consumer spending has been a bore, and not consistent with producing the kind of vibrancy and enthusiasm that austerity and cheap money policies might usually expect as their legacy.  Incentives are only as good as the value people place upon them, and in this instance discretionary spending has not been inspired.

"Free money" and the "free market" are not free.  Nor have they been the progenitors of wealth-building we might have expected to see as an outcome emerging from this past recession.

Instead, the markets are hung up on creating capital gains at any cost... layoffs, accounting engineering, and budget cuts, for example.  This obsession has set the stage for a continuous downward trajectory in the standard of living for the less-affluent, diminished expectations for their heirs, and created a kind of disposable underclass of citizens, goods, and services.  Profit at any cost, indeed has a cost.

I would argue that the stock market's recent success induces repeatable, oftentimes vile, outcomes such as class warfare and structurally inefficient production. Witness, for example, the glut in oil production worldwide or the housing boom several years back.  We are simply obsessed with making more, of anything, simply because we can.  If it seems "normal" that we just indiscriminately discard those who fall short, or can't or won't participate in the global marketplace, then maybe we have to look at our own value systems and ask "at what point are we creating too much stuff?"

A fair race is not necessarily where the winner is the fastest.  It is one in which everyone follows the same rules for getting to and finishing the race.

While it is entirely appropriate that subjective evaluation of success is different for everyone, our greatest contribution to the planet would be to ensure that no one voice or special interest represents a greater value than any other.

Markets

Today, a significant percentage of the globe finds itself beset by problems and internal conflicts that have a direct bearing upon the well-being of its citizens.  Guns and revolutions are not the things we have in mind when we think about economics, free markets, and providing our platform with comfort and opportunity.  In fact, because of the burden placed upon governments by war and terrorism, global production capacity has become terribly skewed.

Demagogues and dictators who promise religious salvation, or jobs, or panaceas for poverty are only using the "rest of the world" as scapegoats.  But rather than increasing the production schedules of their populations, the unequivocal net effect has been to stifle GDP.  Thus, selected regions of our planet are running behind schedule in providing education, healthcare, housing, food, quality of life, and peace of mind to their citizens.

Even as the global recovery accelerates, the rewards have mostly been heaped upon a select few.  While the private sector has effectively been able to manage its budgets, the public sector has become gridlocked by austerity, ideology, and plain old politics.  It was praiseworthy that we were able to avert a global banking collapse in 2007-2008, but today we find that those institutions that survived the crisis seem somehow unwilling or unable to reinvest and/or lend their capital.  They don't realize that they not only are the holders of our money, but they also hold the key to our expectations and aspirations for a better future.

The retention of money by the banks costs the economy by limiting projects and hope.  Their failure to take a longer term perspective of risk is sullied by the follies of their previous lending practices, thus ruining the velocity of what could be a faster moving economy.  Because of them, the rest of us are partially stymied by policies (fiscal and monetary) that are short sighted and apprehensive.  Watching the "experts" be tight with their money also influences our spending habits.  Heck, if they are going to be frugal, so then should we.  And despite fancy banners and balloons at the local bank, no matter how inexpensive it is to borrow money, you can lead this horse to water, but you can't make him spend!!

A massive redistribution of wealth is occurring right in front of us, but not the kind which forewarns of gloom and doom.  Money localizes with money, making the capitalists feel better about themselves and the things they possess.  However, the stage is being set for a change in our social contract because many people are not having their basic needs met, and that could seriously impede the global recovery.

When this condition exists, as indeed it has during other periods in our history, political discourse becomes more harsh, less compassionate.  "Aren't we, after all, responsible only for ourselves?", say many of us.   Ethics have become disposable in this survival climate.  Bureaucrats argue for “local" needs, against an altruistic mindset which seeks common ground for everyone.  Certain belongings are becoming more expensive because things are hoarded and more closely held, and in the case of commodities, more difficult to find and depleting in quantities.

While it is certainly advisable always to be biased against profligate spending, limitations upon civic spending can only be supported if those limitations lead to responsible allocations of law and order, food, and the common good.  A balanced budget is always preferable to taking on debt, but alleviating chaos by being creative and proactive on behalf of citizens is preferable even more.

Summary

How come so many of the world's stock markets have been doing so well in the face of such underwhelming confidence and limited breadth of participation?  Are bull markets impervious to fundamental inconsistencies, full speed ahead always?

The answer might lie in the temporary displacement of the bond market because of low interest rates.  Professional investors and traders are the embodiment of a narcissism that believes that traditional investment in energy, infrastructure, emerging markets and business formation are less desirable than a reasonable rate of return and collecting "unrealized" portfolio gains.  They appear to worry less about the rest of us...the environment, energy alternatives, agricultural shortfalls, global disease pandemics, housing and homelessness....than making sure that their stakeholders are rewarded with fatter portfolios.

All the while, stocks have proven them correct as a suitable alternative to capital spending.  There really is no other game to play.

There is no end in sight to this "paper profit" mentality, either.  My measurements show an array of sectors not yet having participated in the capital gains bonanza.  Because we know that there will always be "rotation" in the markets from productive sectors reaching full potential back into the laggards, we can quantify the flow of funds and anticipate the valuation potential of the markets.  Absent a suitable alternative in bonds, investors are likely to stick around a bit longer in the stock market.

During the next few months, the relative performance of equities is less likely to be influenced by long term objectives, remaining mostly oriented towards immediate and quicker capital appreciation with relatively little drawdown.  A return to long term demographic "theme" investing is difficult to sustain in an environment of hysteria and hyperbole.

More significant, though, would be to see a recognition of moral and ethical responsibility between the markets, investors, and their community.  That kind of seismic shift would resonate with the public, and help to create dialogues that might provide solutions to economic and social problems which heretofore have been thwarted by the basest of human behaviors.

Suggested Balanced Account Asset Allocation Q2, 2015:

Equities:            65%

Fixed Income: 15%

Cash:                  20%