Market Commentary for the week of July 27, 2015

Demographics do matter
This most recent turmoil about debt, confidence, and political ideology between Greece and its EU partners highlights an even bigger issue about the economic disparities between nations, their value systems, and social infrastructure.  In some ways these comparisons are stark and vast, influencing how countries converse and trade commercially.  While the "rich" nations plod along on parallel paths, emerging economies, although "poor" by comparison, must work at breakneck pace simply to provide for their citizens.

As analysts and professional investors, our focus is not only upon finding capital gains and unique investment opportunity, but also to create reciprocal cash avenues that net a return on investment for both sides of the trade.  Globalization  is not simply a catch-phrase or an intellectual concept, but a real expansion of money flow around the world.

If there is truly an advantage, it lies obviously with the developed nations, those which control natural resources and money supply.  In that regard, emerging markets are always going to be playing "catch-up".  Whatever resources they might own (e.g. oil, metals, beans,) are oftentimes swept up by large conglomerates or nationalized by their governments.  A quick infusion of cash by nationalizing commodity harvesting or a merger/acquisition creates a temporary growth spurt that is difficult to sustain in the long term, potentially creating political instability in its wake.

One way to offset these temporary, one-time-only windfalls is to make sure that people are educated and connected to modern technology.  Unlike the boom towns of the early 19th century, that type of isolation and hyperbolic expansion is not the game-plan today.  The erosion of a "company town" is nearly unheard of, nor tolerable, in our complex world.  Similarly, small nations' economies are inspired to become multifaceted and not simply one-dimensional.  Quantitative statisticians are now capable of creating dynamic metrics by which we can understand societal pivot points that can measure the ratio of public education to financial longevity and economic sustainability.

Moral obligations

For all their economic superiority, developed nations are not necessarily winning the higher-education battle.  Educators and politicians are witnessing how smaller economies have transformed their countries through training, technology, and education policies that enhance their competitiveness and standard of living.  Patterns of social segmentation are constantly changing, and while we do not envision major economic (regional) shifts in the next several decades, we can say with certainty that cycles of opportunity are becoming more complementary worldwide.

As the workforce expands, so too does productivity.  The age of monolithic one-dimensional capital is receding.

Still, it requires that the rest of the world embrace "globalism" as an opportunity, not a curse.  Rather than trying to achieve dominance over its lesser counterparties, powerful nations should perceive dual exchange, importing and exporting, as the quickest way to generate sustainable profits, while also creating a well-trained labor force, more sophisticated production processes, and advanced technologies that add value to economic endeavors.

Intuitively, we know all these things...what the "right" thing, the moral thing is to do in finance, economics, and politics.  However, it is by our actions that we truly demonstrate the real value of "profit". 

Market Commentary for the week of July 20, 2015

Necessary
If, and without question when, interest rates begin to rise, it should come as no surprise to anyone who follows the markets closely.  We've had a long time to prepare for this cyclical trend reversal.  And besides, the time is right and the trend line is impatient to rise.

The first move, however, doesn't belong to the Federal Reserve or the Bank of England or any other global monetary governing body.  No, the first  move will be attributed to emerging market forces that have laid dormant for nearly three years.

Yet, each time a discussion breaks out regarding the consequences of an interest rate rise, the markets (most notably equities) act panicked, as if they are surprised by the mere mention, or unaware, of existing fundamentals.

Why the panic?  Because most businesses, economists, consumers, and market traders have gotten used to the status-quo.... "free" money with which to buy stocks; engage in corporate mergers and acquisitions; finance automobiles; and speculate, once again, in real estate.  It's time we gave more thought to what's best for the long-term sustainability and balance in the global marketplace.

If they were paying attention, economists would notice that anecdotal inflation is already quite pervasive...in home goods, family and corporate expenses, and tangible assets.  Everything except wages.  The last time non-statistical inflation was this high was in 2005, well before the credit "crash".

It appears as if unabated borrowing is a behavior to which we have grown accustomed for the foreseeable future.  For example, one might ask if stocks are rising because of fundamental underlying improvements in economics, or simply because it's cheaper to buy them today on margin, or to "buy back" company shares with excess cash?  If money is "cheap", does that make stocks de-facto targets for opportunistic traders irrespective of valuation or timing?

The amount of money on the sidelines or in corporate coffers is now at its highest since after the crash in 2009.  That money is looking for a return on investment (ROI).  Stocks are meeting those needs quite decisively.  Money "flows" just like any other cyclical phenomenon.  If the economy isn't providing those investment outlets, then it seeks opportunity elsewhere, and, today, equities offer that surrogacy, particularly if bonds (interest rates) fail to tender a suitable alternative.  As a result, equity asset valuations are being pushed (artificially) higher.

Better now than later

As stipulated earlier, consumer prices are also rising.  Electricity, transportation, healthcare (pharmaceuticals), tuition, discretionary goods, and food are all more expensive than last year.  Manufacturing surveys show that rising production costs are being passed on to the end user, the consumer.

Without wage gains commensurate to price increases, we are heading for an economic impasse of significant proportion and, perhaps, political upheaval, as well.

Despite all this, the main beneficiaries of low interest rates are the "villains" we love to hate, the financial institutions.  The same cast of characters who brought you the "repackaged, refinanced loan portfolio of foreclosed real estate properties".   If credit were to become tighter, they fear you wouldn't be so inclined to borrow money anymore.  That would be bad news for them.

Without lending credence to the bank's conundrum, it is, however, time for cycles and market forces naturally to evolve.  Sometimes, difficult patterns are still the "right" patterns.  By holding interest rates low deliberately, we have been encouraging a lend-at-all-costs  monetary policy, the kind  that leads to disastrous market crashes and personal financial catastrophes that no one wants to see repeated.

Prices will always fluctuate.  Trends will always evolve.  It's time to face the inevitability of a responsible uptick in interest rates.

Market Commentary for the week of July 13, 2015

Stuck in neutral
An already skeptical market took a huge turn for the worse early on,  then recovered at week's end, because of jitters about Greece's ongoing debt drama and China's sagging equity shares.  The selloff only highlights the "globalization" of financial data and adds one more thing to worry about for US investors.  Whereas I had previously written that sufficient firewalls had been built into global financial exchanges following the credit collapse in 2008, there was, nevertheless, an overwhelming uncertainty about financial markets' stability after the Greek nation's "No" vote on austerity measures proposed by its EU partners.  Accordingly, the selloff in global financial markets last week was more attributable to very high relative strength quotients as a result of consistent new highs in the averages than to pandemic fundamental flaws in global economic structure.

It would be entirely reasonable to expect continued pressure on stocks in the short term, without breaching any of the powerful trend lines created during the past five years.  There will always be peaks and valleys in portfolio management.  It is foolish to believe that investing is a straight-line-up proposition.

Last week represented the first real sign of panic about portfolio sustainability since the bull rally began in 2009.  Fundamentals, which have been improving, all of a sudden took on an air of vulnerability, giving many a chance to adjust their expectations about near-term performance.  We see no reason to make such a mid-course correction given that analyst's earnings projections for equities had already somewhat been tempered by the inordinate rise in stock valuations.  By and large, one must still pay attention to which  sectors are showing improvement, and then drill down to specific equities within those sectors to compare prospects for long term earnings sustainability.

Right now, I see examples of "news-proof" duration in technology (semiconductors), non-cyclicals, and high yield utilities.

If we can maintain modest, definitional improvements in domestic GDP and earnings acceleration, the net effect of the EU distress upon Dow shares would begin to dissipate.  As mentioned above, there has already been a slight diminution of analyst's projections and expectations which I think should help to tamp down investor's reactions to events not yet happening.

Without meaning to sound condescending, it looks to this observer as if Russia, Germany and Greece are re-litigating the Second World War, only this time with drachmas, Euros and rubles instead of bullets and tanks.  There is no shortage of ego and power in this storyline as the Ukraine situation earlier this year revealed.  While the end chapter to the EU/Greece saga is clearly being written as we speak, the tailwinds for financial markets are much stronger than the headwinds as we enter the second half of this year.

Gear shift
We acknowledge that it is difficult to adjust one's mindset "on the fly" in the face of such amorphous news.  The euphoria of the past few years which drove the Dow and S&P to new highs has generated such a psychological and remunerative rush that we really should have anticipated a slowdown in acceleration patterns even without Greece and its issues.  Historical patterns of appreciation in financial instruments resemble more a tortoise than a hare.  That 30 percent climb in 2013 put everyone in a terribly unrealistic frame of mind and set up a gambler's mentality.

In fact, investing requires time-consuming research and enormous patience.  Building net-worth does not happen overnight.  But because, in this instance, investors had gotten used to big percentage gains, their expectations as well as their behaviors became highly speculative and unrealistic, substituting seduction for methodology and science.  Plodding along slowly is neither attractive nor stimulating, but it is  a formula for risk reduction and portfolio aggrandizement in the long run.

Acknowledging some bumps in the road owing to current events (such as China, technology "glitches", and interest rates), our tracking algorithms nevertheless see a pattern in stocks similar to the 1980's when dividends and capital gains were more definitional and in line with nominal rates of return.  Our discipline also predicates the market as "parabolic", with ups and downs punctuating a current pattern of bottom-left to top-right.

The worst thing that could happen....with all the news about Greece, S&P gyrations, monetary pressures, etc......would be for investors to jump from style to style, opportunity to opportunity, in search of an elusive panacea.

Perfect rainbow endings are only for fairy tales.

Market Commentary for the week of July1, 2015

More Than A Color

The markets were punctuated by a succession of new highs in the second quarter, then, for good measure, an unwelcome "Greek correction" in the last few days.  Of course, the level of discomfort was increased significantly for many professional investors who had worried that we hadn't experienced a true "correction" since the bull began in 2009.  While it was encouraging that we registered seemingly uniform upwards momentum in all sectors during the quarter...and a concomitant  increase in consumer confidence ...the reality is that we must continue to be aware of the difference between daily advances and prudent asset allocation for the long term.

No one wanted to see that correction happen, and neither were they prepared properly when it occurred.  I saw too many portfolios blindly allocated towards a "never ending" bull market and unaware, or unwilling, to take some winners off the table.  In anticipation of a whole realm of possibilities in world and economic events for the next few quarters, we are tempering our enthusiasm for the markets with an identification that certain rules and processes always apply.  One must be aware that asset allocation and sector rotation is fluid, and that new sectors of leadership constantly emerge from cycle turmoil.

Going long-term

It's no coincidence that some of our keenest scientific minds are now focused upon a "green revolution" in agriculture.  A number of corporations have also come to realize that not only can genetic agricultural biosciences do good for the world, but that there is sustainable profit to be had, too.  The traditional battle between environmentalists and corporate boardrooms is morphing into a different discussion.  There's enough "on the plate" (no pun intended) for both factions, that food has become a win-win situation for all involved.

In fact, our third quarter equity research identifies sustainable trends in several food, bioscience, and agricultural companies.

Many agribusiness companies are really in their infancy across the globe.  So much so that regional disparities in research, development, and delivery have still not fully been ameliorated.  Some places are more fortunate and bountiful than others.  Age-old techniques for planting seeds and sowing crops will not suffice anymore.  Remaking the world's fertile fields is more than just harvesting product.  It is creating methods for "clean", affordable, plentiful, disease-free, nutritious food.

Our quantitative research is uncovering a revival in farming, albeit different than before, and like none since the industrial/agricultural revolution.  The differences this time involve computers, testing laboratories, and science rather than tractors, tills, and Father Time.

There certainly is still room for instinct and traditional family farms.  Man's hand in the soil can always do more than a computer manipulation alone.  But science can improve upon farmer's experience and intuitions by supplying them with better chemicals, disease resistant seed, and complex gene-splicing methods that improve upon output in ways that natural techniques might not.

Without engaging in a moral debate about codes of ethics  or political realities,  we must recognize that we have a hunger problem around the world, and a perpetual drought that impedes our ability to feed the hungry.

Agricultural biotech has proven to increase farmland production and turned some starvation ravaged regions into improving ecosystems.  Just as medicines have created ways to improve our quality of life, so too has high tech farming provided relief from those markers which characterize underutilization, underperformance, and poverty.

By no means are these perfect sciences just yet.  But by decreasing the time it takes to build countermeasures to these pressing social and moral issues one might envision how Wall Street and Main Street might find mutual benefit.

Elusive Truths

Gradually, a shift in attitudes and practices is beginning to change consumer behaviors, too.  Biotech and agricultural innovation allows government to spend less/do more, and to launch hunger initiatives that have the potential to redefine the health and well-being of their citizenry.

One of the biggest political obstacles not yet overcome, however...particularly in the United States.... is an acknowledgement of how climate change has become a factor in modern society, particularly agriculture.  Once again, this tome is not about engaging in blame-laying, or a cause-and-effect debate.  Rather, we simply need to recognize a "new normal".  Population studies clearly indicate where hunger exists.  We also know that without plentiful fresh water, each passing decade raises the specter of death and disease in regions where those resources are in short supply.

This conversation should not be about polarizing one side versus the other.  Capitalists and moral ethicists must be able to work harmoniously to begin finding a new way to get things done.

But science, itself, is not the answer.  As alluded to above, political willpower and a common altruism is the missing ingredient.  We have to find ways of converting science in the abstract  into meaningful policy and action.  Greater than the disaster of hunger is the failure of government to galvanize their resources towards alleviating their population's common social problems.

In this regard, the much maligned corporate sector has actually stepped up more effectively than the politicians have.  Perhaps it's because of the profit motive, but a number of companies are seeing how developing and sharing technology can inspire the public and improve the condition of the disaffected.  While the public might disdain the messenger, we do like the improvements their efforts bring.

The result of these "altruistic" endeavors has also created an opportunity for investors.  We know it is premature to "ordain" corporate sainthood, but profit and "doing good" are not necessarily mutually exclusive.

High Stakes

Quality of life issues are seldom well-defined, black or white.  But we do know the difference between life and death, pain and painlessness.  At the end of this journey, if we are better able to provide for those who have no other contingencies, then that outcome is better than the alternative.

Agriculture is only one of the sectors from which our research is indicating profit potential.  Seeking to capitalize upon extraordinary opportunity and trends in energy and healthcare, small and large entrepreneurships are developing products and methods that redefine a sense of what's possible.  Whether one's motive is dollar signs or world peace, the pieces are in place for enormous civic change in the next half-century.

I believe that a profit motive is only truly meaningful when behaviors and results reach those who need them most.  Unfortunately, Wall Street's credo is not about offering guarantees of return on investment, simply opportunity to make those evaluations for one's self.

Imagine, though, initiatives which fix our energy sustainability, our water scarcities, our food shortages, our healthcare requirements, and our ecological well-being.

Green is more than just a color.  It is quickly becoming an ideological blueprint for how money is spent, gets accumulated, and gets shared.  It is also a roadmap for building portfolio wealth and sustaining an economic cyclical rejuvenation.

 

 

Suggested Balanced Account Asset Allocation, Q3, 2015

 

Equities:            65%
Fixed Income: 10%
Cash:                  25%