Market Commentary for the week of June 22, 2015

Flight to quality
The potential direct impact of economic turmoil in global markets (EU) upon the US economy and corporate profitability is relatively small, although the degree of volatility the S&P is experiencing in recent weeks underscores worries that many investors still harbor from the last recession.  As a result, I am starting to see a "flight to quality", away from pure value-oriented speculation.  What differentiates this cycle, however, is that the market as a whole still retains positive earnings acceleration.

Memories of a Lehman-led catastrophe still linger near the surface.  Thus, a key question as the markets transition into the summer is whether we will choose to focus upon negative contagion or positive cyclical activity?

Without question, the work at rebuilding confidence, profits, and portfolio appreciation has been difficult and time consuming.  We've come a long way since 2008.  But the backdrop for the next several years is improving, and nowhere near the crisis levels we faced prior to or during the credit collapse.  Capital is flowing more freely and the fundamentals are quite different this time.

To be sure, there are  global financial crises still to be resolved, not the least of which is Greece's default possibility and the damage that might inflict upon its current EU partners.  But, by design, the risk exposure of the rest of the world to this, and other financial current events, is peripheral.

Nonetheless, professional traders (and corporate leaders) are concerned that a disruption of any kind in global cash flows might level a death blow to corporate earnings and expenditures here in the United States and elsewhere.  I disagree with the severity of predicting that outcome, however.  There are enough safeguards built into the EU and US monetary system to offset a temporary buildup of fiscal, monetary, or political pressures, were they to occur.

Where's the correction?

My quantitative data indicates that any headwinds created by the "Common Market" crisis are not strong enough to derail the course of statistical progress developed during the past five years.  Measures of liquidity and austerity that were effected across the globe as a result of 2008-2009 are broader and more durable than any rough patch we might currently be experiencing.

In fact, far from being impeded by "overhead supply", we are seeing a powerful initial upleg in pricing power, whose inflection point is confirmed by performance in tangible assets such as real estate, commodities, and foodstuffs.  These points usually occur concurrently with a turnaround in cycles, from downtrend to uptrend.  Obviously, then, I would also expect to see pricing power reflected in earnings acceleration patterns, assuming demand for these assets remains robust.

A key issue for the economy and the stock markets is whether we will maintain increases in corporate profits which so far have been quite good.

None less than the Chairperson of the US Federal Reserve gave quite specific indication this past week that the prospects for inflation, and concurrent rate hikes, are less a worry than maintaining the "solvency" of a growing economy.  They at the Fed, like many others, argue that the risks of "tightening" too soon outweigh the risks of tightening too late.

While it might always be prudent to anticipate corrections in the market, particularly from these lofty levels, it is also wise not to fight the current trend obstinately.  Thus, our current asset allocation into equities has steadily been increasing over the past five years even as we have been cautioning against behaviors that are either too exuberant or too speculative.  Even with the prospect of "exogenous" events redirecting the current trend, any pause would not be sufficient to stall our current recovery.

It will take extraordinary patience to evaluate and persevere through the next upleg in stocks.  Worrying is always part of the game.  Nonetheless, I remain statistically positive about profits and economic sustainability for the next cycle's duration.  For now,  our conclusion is that a pending interest rate rise should not be negatively impactful upon our macro-view for owning equities in leading demographic sectors.

Market Commentary for the week of June 15, 2015

Here they come
Day after day the market spirals upwards, then downwards, by hundred of points, seemingly incapable of making up its mind as to which trend to pay allegiance.  Last week, for example, it wasn't unusual for the naysayers to point to potential interest rate increases as justification for the end of the bull market rally.  Then, within hours, the equity averages surged because wages and jobs data showed continuing improvement.

By the way, could a default in Greece affect milk prices in Nebraska...?

Such is the craziness of intraday global market analysis.

All of these anxiety producers have caused me to shake my head and ask whether anybody still subscribes to a discipline in which more permanent, secular information defines one's perspective?

While big price moves are to be expected in "risk markets", they are becoming more pervasive, I believe, because technology....or, more specifically, a focus upon   technology.....impedes the observer from looking at the world in a "big picture" way rather than nanosecond to nanosecond, and almost forces  us to respond to a multiplicity of minutiae and exogenous events, quid pro quo.

I also see these volatility episodes scaring away average investors who, I believe, would love to come back to participating in the markets, with an altruistic meaning of equity ownership, in order to build net-worth and security for their future.

Thus, volatility causes volatility.  Certainly, we cannot eliminate risk and fluctuation from "gambling endeavors" (investing).  But neither can we afford to alienate the consumers that we seek who are vital to keeping the game (money flow) in balance.

In a way, uncertainty and volatility feed off themselves, becoming self-fulfilling prophecies.  Perhaps our obsession with economic weakness and statistical permutation actually cause  corporate and municipal capital expenditures from occurring (?)

Ground up

The past few years have been a slow recovery from the abyss of financial near-collapse.  I think it is unlikely that we will return to another great recession-type era in the near future.  Too much effort has been put into the rebuilding process.  But we also know that there is an undercurrent of mistrust and aftershocks that are causing the market to gyrate in fits and starts.

We need to start looking at the macro, big picture to derive suggestions about how to move capital effectively and efficiently.

Rather than waiting for a "hero" sector to emerge, we should play a proactive role in reading the tea leaves about certain conditions that buttress all global economics.  If, in fact, the recovery is happening, we need to be aware of pricing power, supply chains, and the demand curve.  I have written extensively, and shall continue to do so, about concurrent vectors in agriculture, potable water, and commodities prices.  Top-down macro trends are pointing to a diminution in arable farmland across the globe.  A sophisticated economic infrastructure cannot rely solely upon capricious weather patterns to support its population's food needs.

For now, in my role as portfolio manager, I would suggest investors focus not so much on the daily business news television channels as on their civic responsibilities and their moral compass.

Good health, good schools, good food, good communities, good infrastructure, good science.....

....good Earth.

Market Commentary for the week of June 8, 2015

Almost half-way
I've heard a variety of reasons given for market behavior this year, ranging from Middle East turmoil, global inflation/deflation,  to horrific winter weather, Congressional inertia, higher interest rates, and failures of the global banking system.  While each reference, individually, might have merit...and all collectively are powerful...I attribute market performance to the generational cycles which naturally ebb and flow to explain the "how and why" of economic prognostication.  Last week's volatile results notwithstanding, the economic trends are still improving.

While Wall Street shudders and recoils on an almost daily (hourly) basis over current events, the curve is unstoppable, and usually a better arbiter of potential portfolio probabilities.

24 hour news cycles are to investing as gnats are to a migrating herd of elephants.

Indeed, secular shifts are generational prototypes for prudent risk management and asset allocation sciences.  They are reflective of socio-economic mores that impact politics, economics, and civic customs for decades hence.

It is always easier to "look back" and observe generational evolutions after  they have occurred; much easier, in fact, than trying to predict what might happen in the future.  But we know, intuitively and methodologically, when certain conditions align to create strong inferences and possible conclusions that later become a part of our social landscape.

Remember the mania that surrounded the dot.com era?  Yet, despite the calamitous shakeouts, failures and bankruptcies, and market crashes, technology endured, forging ahead with new innovation and staying power.  Recall, there was no internet or email 25 years ago.  Today it's ubiquitous.

Not like before
So, where are the discoveries and innovation that will govern the next half-century?  What are the sources of potable water, replenishable energy, quality healthcare, civil and military protections?  Theorists, politicians, investment bankers, ethicists and religious leaders, market strategists, and business tycoons are all wrestling with those questions.  The answers lie in how we dissect the social and moral infrastructure of the human condition.  It depends upon unbiased, non-political, scientific analysis.

As a portfolio manager, my job is to analyze any and all information at my disposal, to reconcile fairly disparate data into an actionable portfolio methodology.  Ultimately, my goal is to build a basket of capital gains outperformers for the next decade(s) which emanate from earnings and price expectations.  While it is hard to avoid personal biases towards (or against) certain sectors, one's mood is insignificant when digitalizing organic, objective events into a coherent market strategy. 

That is not to suggest that markets are always predictable or quantifiable.  But what we do  know about certain groupings, about sector leadership, about basic human needs  can be a good place to start.  Remember, the goal is profit potential and capital appreciation.

Another element to creating capital gains opportunities is to adhere to a sustainable discipline that reveals earnings standards and characteristics of successfully enduring cycles.  For example, it is always helpful to begin with a hypothesis about consumer demand, corporate pricing power, and capacity production.  Without those three, cycles come crashing down.

All of these theories become less significant to portfolio performance, however, if investor's are psychologically reticent to purchase shares or make financial commitments.  The markets, after all, are a representation of our attitudes at the time of purchase, about our place in the world right now, and our feelings about fiscal and financial certainty in our home life.

Without question, the first baby steps towards reviving global economic integration are being taken.  How long those cycles last are fodder for my quantitative statistics.

How quickly the public "buys-in" to those statistics, however, is the great question yet to be determined. 

Market Commentary for the week of June 1, 2015

Perpetual conundrum

Last week's volatility in the equity markets raises the specter that stock valuations may have out-run fundamentals....or not.  Despite the fact that economic data have been recovering, the financial markets appear to believe that a cautionary tale needs to be told, that higher interest rates correlate to a demise in equity price prospects.  I disagree.

In fact, stronger data should foretell a stronger  stock market, just not perhaps in the sectors that have already run.  That is why it is so important to rebalance portfolios and to consider sector asset allocation as more important than bottom-up stock-picking.

The odds favor the negativists, however.  It certainly needs to be factored that the markets have run fast and far in the last two years. “New high" breakthroughs confirms it is happening.  So, while it is impossible to quantify or predict defensive retrenchment valuations, it is more likely than not that the global markets might be due for a correction.

Most of the driving forces behind such negative prospects, though, are driven by a potential tightening in monetary policy, rather than declining projections about economic fundamentals themselves.  This is where the classic conundrum exists.  Do we follow the broader, long term possibility that the global market basket is expanding, or do we look at objective stock price data to conclude there's no more room to the upside?

Furthermore, for every negative story about stock prices there is a counterbalancing theory to be found.  In this case, lagging sectors               

(e.g. utilities, energy, basic materials) are rife with upside probabilities, including new sales and profit acceleration potential.

Notably, the configuration of those stocks "at the top" (financials, cyclicals, technology) appears to be finite in the short run and troublesome.  In the aggregate, these names have been priced considerably ahead of their own fundamental projections and have an intermediate profile that makes them look "too expensive" at the moment.  More significantly, the mania that drove these shares higher might shift at any moment to other categories, raising the potential of deflating their momentum.

Long -term

I always like to look at the longer term cyclicality as a way to gauge the relative performance probabilities of global shares and my portfolio performance.  In relative terms, the market is too expensive and we need to reign in the aggressiveness in our stock purchases while making more defensive allocation decisions.

While I am not downgrading my expectations for positive alpha throughout the balance of this year, I do think that last week's reaction to monetary announcements/projections raises the anticipation level for many investors.

I see this time more as an opportunity to reposition winners and losers in one's portfolio.  Rather than thinking about an impending correction, one should look at leading, laggard, and coincidental indicators as a means of lending support to our quantitative hypotheses about prudent asset allocation leading to positive portfolio outcomes.  There are several demographics which my quotients believe have long-term staying power and profit potential, including telecom, biosciences, ecology, and agriculture, to name a few.

Besides, any talk of a calamitous correction would be an exaggeration in the context of current global fundamentals.  Sustained growth prospects are improving, and reflect burgeoning consumer confidence and global currency equilibriums that are just now beginning to gain traction.