Market Commentary for the week of November 23, 2015

Patient resting comfortably

While we managed to endure through a series of up and down cycles in the past 6 weeks, evidence convincingly suggests that the economic recovery and the bull market are sustaining.  Midweek rises in the S&P, Dow Jones, and other global exchanges confirmed that investors are hungry for good news, even if it is short lived.  Reports of a modest uptick in consumer prices and wages, for example, did not  turn out to be the precursor for a recovery-busting inflation spiral that some had feared.  Quite the contrary, they are indication of a vibrancy, albeit hidden beneath ordinary perception, that offers hope beyond the rhetoric of a rancorous political season.  The "bogey in the room", a rate increase by the Federal Reserve, is demanding to be perceived as a good thing.

This kind of stirring in the tailwinds is necessary to confirm that policy initiatives and consumer confidence is starting to take root.

Additionally, the cumulative good news from the current earnings season demonstrates a persistence in share recovery in a number of sectors previously hard hit.  Although I bemoan the fact that many of these profit accelerations are happening without robust capital expenditures and consumer spending, earnings patterns are more likely to expand than contract if/when the consumer finally does filter back into the equation.

However, the" jumbled mess" that is the stock market is another phenomenon, altogether.

While the data might indicate progress in corporate profitability, traders are punishing any company's shares that don't meet the smallest of yardsticks, or which aren't the darlings of hedge funds and institutions.  Even the most modest of warnings ("guidance" is the term we use on Wall Street) leads to discounting of current valuation.  We saw last year how the Energy sector got punished in this way.  Now it appears as if retail stocks (Cyclical) are feeling the wrath.

All major global bourses are experiencing the weight of expectations like this, even as their economies are modestly climbing out of recession.

Here in the US, for example, the S&P broke its October winning streak abruptly in the last two weeks, bringing total return for 2015 back to "zero" or just below.  These capitulations seem to be driven more by panic and psychology than by real numbers.  As a result, investors have a choice either to fixate upon the market's performance integers, or to realize that many data are much better than they were just prior to and just after the onset of the recession in 2008.

Yes, we do have much further to go to rebuild market/economic equilibrium, but at this juncture in the secular recovery the risks of falling back into recession are quite low.  Evidence would suggest that Main Street's apprehensions are misplaced or overdone...even if one acknowledges that the economy is not yet in a perfect place.

Playing through

Think of it this way:  since analysts typically make year-over-year comparisons  when offering their evaluations, shouldn't we consider that even tepid increases in sales, profits, or capital expenditures in the next few months might yield better comparative returns in the next  year's earnings cycle?

It's clear that the markets are riding with "one foot on the brake", and very few of us are ready to commit with full abandon....and all our cash....to far-reaching forecasts for improvement in the economy.... or our collective attitude about it.  Understood.  But the next few quarters, assuming geopolitical exogenous noise (terrorism, e.g.) is not too extreme, might be the catalyst for building up those expectations.

That having been said, my proprietary integers are suggesting that the markets might continue a short-term pattern of advance/sell-off for the foreseeable future while it works out leadership and sector rotation themes for the coming year. This pattern does not rule out prudent evaluation and stock purchasing, however.   We are still finding sector strength in Utilities, Financials, and Technology, with specific opportunities in water power generation, filtration, and commercial uses; regional borrowing/lending; and biotech research. With turmoil in the Mideast, we also can't rule out a short-term recovery in the Energy space.

Above all, maintaining a strict investment discipline...and having a little patience...is key to surviving end-of-year unpredictability.

 

 

(note: we will not be publishing a Market Commentary next week.  Happy Thanksgiving to all our readers.)

Market Commentary for the week of November 16, 2015

Inches, yards, decimals
Global stock markets were largely biased to the downside last week as divergent signals from central banks (Federal Reserve, ECB) raised concerns about the short-term durability of the recovery and the risks of earnings deceleration patterns worldwide.  There is little agreement amongst analysts about which path is correct, or which figures are to be believed.  For many, last week's convergences offered a convenient excuse presented by "the data" to unload equities and to reduce exposure to risk before year end.

In last week's commentary I alluded to how the general public perceives and ranks annual performance statistics around this time of year, ranging from portfolio valuation accretion all the way down to simple yields on bonds and cash.  All around us, data and measurements proliferate.  As a means of comparing ourselves to others....or more specifically, others' prospects....numbers are the easiest reference point.

Technical sciences and investment methodologies have sprung up in such volume that our hunger for comparative integers has become insatiable.  In my own field of quantitative research there are myriad numbers of purveyors, and even greater nuances to that discipline’s analytic conclusions.

Yet, despite the enormity of information processing we've amassed in the last 20 years, the most recurrent tool that portfolio managers and clients use to evaluate performance is still how they feel  about met or unmet objectives.

At the end of the year whether we cogitate about investing in gold or the direction of interest rates, performance analytics notwithstanding, the key question is whether we perceive ourselves "better off"  and comfortable with where we have been and where we're headed going forward.

No, this is not the classical standard of institutional measurement, nor an applied statistical criterion.  But investing is a blend of math and emotion, and a difficult dragon to battle against.

To be sure, quantitative algorithms and statistics have made it easier to aggregate the information that all investors need to screen for consistency and/or any aberrations that might affect portfolio equilibrium.  If you've survived market crashes and recessions, as many of us have, you recall the painstaking process of rebalancing and rebuilding not only sector weightings in your account, but expectations  and timelines  for measuring that performance.  Psychology has nothing to do with mathematics, but considerably much to do with portfolio management.

Accessing data is one skill set, executing those data is another skill set, altogether.

Broken systems

To some extent, in our fast paced world of omnipresent technology and, in particular, the world of Wall Street.....in which everything is "what have you done for me today?".....the volume of information has outpaced our ability to process it.  Essentially, we have more "stuff", more facts, than we know what to do with them.  The gap between knowledge  and instinct  is widening which, I believe, moves us further from the real essence of investing, which is to create remunerative and psychic reward from promoting innovation and social progress.

A vital financial issue of our time, in this writer's opinion, is how to use information effectively to cultivate premium output from our vast alternatives for capital expenditures.

From that standpoint, I would say that regardless of annualized performance numbers, sector balances, money flow, investment banking mergers and acquisitions, and targeted market research, capital markets and corporate influences are not doing as well as they could be.  We are facing an important economic inflection point in which further pressures on the private sector might exacerbate the stresses being felt in the financial (stock) markets.  Response strategies to these issues are also influenced by the complexity of worldwide perspectives.

When tabulating your investment scorecard, think about tracking the usefulness and relevance of the harvest you are measuring.  Are we searching only for better metrics, or for decisions that are more responsive to the questions and initiatives that matter?

Calibrations and statistics are only constructive as comparative illustrations for keeping score.  Each of us is the ultimate arbiter of these numerical distinctions.  There are no "right answers".  Those semantics are too complex for quantitative analysis.  Making information "operational" is sometimes just a matter of combining innate learning with old fashioned common sense.

Market Commentary for the week of November 9, 2015

Home stretch
With just a few weeks remaining until the end of the calendar year, some are looking at the remaining time as a jockey might see the last few furlongs of a race: how to adjust, how to position for the highest finish, how to make a closing dash for the finish line.   Acknowledging that 2015 market performance hasn't been what many had expected, there are still a variety of factors, beyond the data that we already know, that are good enough to confirm that the recovery is for real, and that the financial markets are building a base.    Most significantly, there has been a shift from the paralysis and illiquidity wrought by the recession towards demand-based purchasing and widening earnings acceleration.

It remains to be seen, of course, whether these intermediate trend improvements translate into further inventory expansion, new hiring and wage increases, and critically necessary consumer confidence numbers.

I view the recent October rally as a "gift" to those who were patient enough to wait out the volatility of this year's third quarter.  However, I am selectively cautious about committing new money to the top of a short term cycle advance.  In fact, if anything, the uptick has enabled us  either to take profits in winners or to reevaluate our allocation to losers that haven't panned out.  The rally, as said, is fortuitous, but it hasn't really produced a slew of new highs or breakout frontrunners.

In the corporate sphere, we are still facing significant reticence from those who have "parked" their money on the sidelines to go "all -in"    with conviction.  Declines in commodity prices and other core costs have not yet converted into anything other than increasing profit margins.....hardly the kind of expansion and production activity the markets need to see to confirm an economic renaissance.  Even as business balance sheets widen, a contraction of "retail" pocketbooks represents real risk to the staying power of earnings in the private sector.

As one might observe from the dichotomies presented in the preceding paragraphs, polar anxieties in the fiscal markets are exacting a toll upon whatever tailwinds have developed in the global financial markets.

However, overall recovery risks are  diminishing.  Financial bourses are at nowhere near the same kind of crossroads they faced in 2008, a period during which all global credit and economic systems were stretched, and close to imploding.  Rather, we are witnessing growing pains and cycle amplitudes that are normal, and necessary, to reduce the likelihood of future capitulations like those we experienced 7 years ago.

In fact, only where economies are still obliged to tightening and austerity programs are the potential vulnerabilities still magnified.

One medium-term notion now applies nearly everywhere around the globe: where deleveraging and private sector investing intensifies, the growth trend also strengthens, increasing the sustainability of economic development.  Therefore, the probability of the bubble bursting, as it did a few years ago, is decreasing, while the duration of economic cycles is stingily elongating.

Good enough

Even if nominal stock market performance is met in the next few years, investors should prepare to ratchet down the "integer of expectations"   they associate with satisfactory annualized gains.  Remember, while there is a significant percentage of equities who are meeting or exceeding their bottom-line earnings (profit) projections, there is an equal or greater number of companies that are falling short of top line revenue goals.

Doing more with less...and less, yet again....is a skill which too many in the corporate domain are becoming artful at mastering.

Given the complexity of the issues that initiated our last global recession, a quick fix is unlikely.  It might require several generations during which sector balances recalibrate and transition from industrial to technological.  I would like to see a period of government leadership in which legislative policies encourage funding for science and research, as was done in the early years of our space program.  We cannot simply abide bottom-line efficiencies to the exclusion of socially responsible solutions.  Government, in fact, does  serve a purpose: its purpose, along with other societal institutions we have created, is to keep fiscal, moral, and social consciousness from spiraling out of control again.

Equity (stock) prices are starting to reflect these new realities.  This past year's best performing sectors were healthcare (pharmaceuticals, biotech) and Technology. We are also seeing the influence of grass roots movements upon boardrooms worldwide in focusing upon issues like energy replenishment, healthcare pandemics, global hunger, and access to credit.

At the end of the day, the best way to gauge our remaining few weeks of the year is to see conviction on the part of investors that they're in this for the long haul...that the economy really is  improving in their eyes...and that simply jockeying for position in the stock market is wasted exercise.

Market Commentary for the week of November 2, 2015

Food for thought

Scientific advances in genomics, hydroponics, and chemistry have yielded significant cost savings and production efficiencies in agricultural output versus the "old" methods of planting, watering, and harvesting.  The world's biggest biotech scientists can now ward off crop diseases and boost yield, making food production and delivery more profitable. 

Why, then, is a significant percentage of the globe's inhabitants going to bed hungry?

Population explosion, natural and man-made disasters, natural resource shortages, and political turbulence are making it seem as if we are reverting to an earlier time when bread basket migrations caused sociological, political, and economic shifts.  People who are rioting in the streets, starving from drought, or dislocated because of political tyranny are not hungry for a piece of the profit....they are hungry for their fair share of the food, water, and shelter.  Hunger permeates not just the impoverished regions of the globe, but the wealthiest, as well.

The dual issues of hunger and population displacement are frequently ignored or spoken about only in hushed tones.  Indeed, it sometimes seems, as with many things, that they are not even relevant emergencies until they lay at your doorstep.  Unfortunately, the tragedy is likely to widen without a hero stepping forward.  In our modern world, a sophisticated economic and social infrastructure cannot rely solely upon luck, capricious weather patterns, or the happenstance of one's birthplace to support the needs of all its citizens.  A reasonable goal should be not only to produce  enough food to eradicate hunger, but to develop the political, corporate, and spiritual synergies to distribute  those resources to those who need it most.

Climate, population, and agricultural shifts are to this millennium as industrial revolution was to the last century.

Experts agree that today's farming systems are not effective enough.  With the earth's population set to tip 9 billion in the next half-century, farmland is disappearing at a rapid rate due to weather changes, population migration, and political discord.  That means we have to cultivate more production out of less available space, and with less water with which to irrigate.

Stuck in the wrong lane
In a strange kind of way, our equity analysis and research observes that there is a sort of corporate hubris which posits that "if it's not happening to me, then it’s not happening at all".   This hardly seems possible in a world where everything.....every image, every factoid, every opinion...is merely a mouse-click away.  From a bottom-line perspective only, cyclical pricing pressure owing to population dislocation could become a secular (generational) crisis.  Beyond the significance of these shifts upon financial markets, however, are political consequences being manifested in Europe, the Middle East, the United States, and elsewhere.

Purists in the protest movements have opined that they don't want corporate polluters or miscreants who head-up large multinationals to participate with them in their efforts to "solve" all the world's ills.  But isn't the time right for all possible derivatives of solutions to step up with creative answers to issues like hunger and geopolitical disorder?  The capital markets should mobilize immediately to address not only the profit motive for science and technology, but the moral payoff, as well.  There is no question that states and municipalities, countries and corporations would welcome the influx of money into "green" industries and socially responsible projects....not to mention an explosion of job creation into energy, agriculture, biosciences, infrastructure, and technology.

History has shown us that it's easier to "look back" and say that a secular change has occurred than to forecast that it might.  In this case, however, all the social and financial stochastic measurements are aligned at a starting point that creates more than just inference about the value of integrating solutions in food, energy, water development and replenishment, and farming into the tapestry of our conversation and policy-making.  I believe that the next great beneficiary of top-down macro trend analysis will be in agricultural foodstuffs including corn, coffee, wheat, soy, poultry, beef, grains, sugar, and dairy.

Parenthetically, those who bemoan the demise of the real estate industry (and the glut of uninhabited private homes) might find a potential rebound in that sector not in cities or private developments but in arable farmland.

Too many are consumed by the daily upticks and machinations of the stock markets...a philosophy of the "big score"....to the exclusion of methodology-based analysis which rightfully places the focus upon macro strategies for maximizing portfolio return and moral quality.