Market Commentary for the week of March 21, 2016

When is "an earning" not an earning?
In this post-Great Recession (2008) period we have seen a remarkable dependence upon accounting mechanics and alchemy to try and rebuild both the infrastructure of, and consumer confidence in, the global economy.  It wasn't unusual, for example, for companies in difficult straits to lay off employees and cut other expenses, instantaneously producing a rise in "earnings".  Combined with massive stimulus and diligent changes in fiscal directions, monetary policy "experts" sought to stem the tide of intrinsic deficiencies that brought us to the brink of insolvency.  Unfortunately, we still stand at an interesting confluence of aggressive financial strategies and profound disaffection and mistrust of the players.  To some, it seems as if the experts are as much in the dark about competent systemic solutions as are the rest of us.

But aggressive policies and actions are a necessity to help assuage our concerns and to begin rebuilding the capitalist infrastructure that too often fails because of its own reliance upon the profit motivation at all costs.  We need, I believe, a third leg to the solution: moral policymakers who can guide the hand of those others in control towards more informed and compassionate solutions.

Why there is so little attention paid to social morality in the capitalist structure is a question not many are willing to risk their reputation to answer.  But it makes perfectly good sense to consider that fixing falling bridges or polluted water systems is equally as valuable to the equation as are net profits and EBITDA multipliers.

Are socially responsible expenditures any more "expensive" than any other costs?

There are reasons given by our financial and political leaders for failures to address altruistic investing.  In large measure, the justification given is that the return on equity is too difficult to calculate, or sometimes simply not worth the effort.

They find no need to "study" the issues that might make life worth living and more wholesome.  In fact, the last recession was the inevitable by-product of that laziness and an egregious exploitation of an era of greed and financial chicanery.  By their own admission, policy makers contributed to the failures by looking the other way or by rescinding rules and regulations that provided for the oversight of avarice.  Such is the lifecycle we seem to endure every financial generation as the pendulum of prosperity inevitably swings from left to right, then back again.

What constitutes an "earning"?

Unlike the policy makers, who seem befuddled by the right objectives, the general public knows if things pass "the sniff test".  Millions of people were displaced by the recession, and today stand in opposition to the status quo which perpetuates a myth of wealth concentration in one geography, one sector, or one social strata.  Perhaps the credit crash played a role in galvanizing that latter school of thought, but I think not.  Common sense cannot be impeded by foolishness, and too many of us sensed what was happening even if we had no intuition about how to stop it.

In nearly predictable fashion, most of the market's convulsions earlier this year seemed syncopated, timed just right to take down any ardor that might have developed for stocks in 2015.  Yet, despite all the worries and fright that developed, the severe sell-off has nearly been erased, thanks to steadier heads and strict fundamental analysis bringing money back in at a cautious pace.  While we wrote that it was wise to be vigilant about stocks "at the top", we nonetheless saw...and still do...reasons to be optimistic about the recovery's staying power.  Primarily, some of the "accounting concerns" we spoke about above have been supplanted by greater consumer confidence and higher demand.

So now the solutions (for politicians, scientists, entrepreneurs, and educators) are becoming clearer.  Systemic factors that produce unbridled, and oftentimes misdirected, greed are not the cause of one person, but are perceived as unwelcome irritation to the steady hand that guides financial markets.  An emerging political consensus is coalescing in the United States around the notion that that we all play a role in the success of capitalism and the financial well-being of each other.  An informed and motivated populous shouldn't shy away from its responsibilities for supervision.

The creation of earnings and responsible outcomes is not an either/or proposition.  It's simply a function of building trust, fair play, equitable distribution of opportunity, and conscience back into the conversation.

Market Commentary for the week of March 14, 2016

The long view
Despite concerns to the contrary, one needn't spend a great deal of time trying to figure out the subtleties of Fed announcements, or GDP quarter-over-quarter data, or surveys and opinion polls.  Large secular events like the kind that govern market direction are not usually driven by small "shocks" or manias.  As I have been echoing in my two most recent missives, there is a distinct difference between fixating upon market-driven events and longer-term macro asset allocation.

My proprietary science accounts for that divergence by factoring in those circumstances which most often affect duration and trajectory of trends, while lowering the probability that "one-off" events might create undue risk to our clients.

Right now, there are fewer of those short-term factors which might knock portfolios off course, and significantly more occurrences that might preclude hard crashes to the economy.  Furthermore, as the risks are receding, there are broader factors that are more accommodating to an even greater number of sectors to participate in the expansion.  No doubt, a large majority of stocks are trading near their cyclical highs right now, but that doesn't mean we are ready to abandon their forward progress just yet.

The one cautionary note I need to address is that, for those whose attention span, discipline, or focus is of a much shorter-term orientation, there is a greater chance, now, of a market pullback intraday, like the kind we had last week, than there was 5 weeks ago.  This is due to a three week buying spree that occurred in the markets immediately after the January decline, once again raising stock valuations too quickly.

That having been said, I see fewer systemic bubbles, and certainly not  the type of danger that we were forecasting, for example, just prior to the dot.com collapse or the credit crisis in 2008.

Also, energy prices, which admittedly decimated our portfolio prognostications in the past year, are beginning to show a turnaround.  Global demand is eating into surpluses, which will have an upwards impact upon energy prices.

Fight or flight

For those who still fear an economic slowdown, let me remind them that slower growth  is not no growth,  nor a reason to shun any opportunity to commit assets to an investment program.  In fact, January's market swoon opened up the possibility to replenish the statistical probabilities of capital appreciation in stocks, whereas the end of last year clogged up those probabilities with unrealistic linear upside expectations.

The markets are improving not because prospects are low, but because we are seeing vast cumulative improvement in recovery projections from a myriad number of sectors.  The disparity between nations and other global bourses in their progress forward that some use as justification for a potential global "meltdown" is simply an adjustment of reality, different chronologies, and different post-crisis phases that are naturally occurring all the time.

One thing that in fact unifies the global recovery is that nearly all central banks remain committed to normalizing, and accelerating, economic growth.  Some banks are doing this with capital easing and others are doing it with "tightening".  But all policy measures are aimed at maintaining underlying fundamentals that lead to earnings creation and prosperity.  Even if we might not agree that all is working "just right", maybe we should simply ascribe those differences to cyclical timeline discrepancies.

We are not breaking news when we strongly suggest to our clients that investing is a fluid undertaking and that the implementation of portfolio strategy is complex.  But it does require from them a patience; a willingness to accept ebb and flow performance; and a wisdom to know that basic truths and good science win out, most usually, over hunch, innuendo, panic, fear, and fanaticism.

Market Commentary for the week of March 7, 2016

What price performance?
Let's try, shall we, to distinguish between portfolio profits  and economic surge.  On the one hand, you have valuation expansion by stocks held sometimes by an elite class of investors; and on the other hand you have an attempt at creating viable, long-term solutions for the overall common good. 

For the most part, we as investors tend to fixate upon the former to the exclusion of the latter.  There has been significant decoupling in recent weeks between officially reported financial information and our attitudes about our real role in...and benefit from...the whole process.  These subtle distinctions may not affect you directly, particularly those who are reading a weekly financial markets commentary.  But a very wide subset of those both connected to and/or dislocated from Wall Street are nonetheless deeply affected by what I have earlier termed a parallel disconnect.  That's not to say that there isn't a connection between the economy and the markets.  Of course there is. But, in the main, three month portfolio performance figures do not necessarily define secular trends.  Yes, it is true that as you feel more "well off" there is a certain spillover effect in one's mood, spending habits and certain segments of the economy.  Who's to argue that these data, by themselves, couldn't foster longer-term trend development?

But please don't confuse stock market activity with an equivalence  in macro symmetry, or the quality of political and fiscal debate that could ultimately lead to better medicine, better roads and bridges, cleaner air and water, and greater moral relevance.  Despite being bolstered by last week's strong surge in stock prices, confirmation of economic statistics by the markets is often a fleeting thing.

As I wrote last week, the data are indeed "healing" after a long recession and post-recession recovery.  More good news pervades than in the past half-decade.  But households and ideologies remain under significant pressure, and are extremely sensitive to short-term evaluation and subjective interpretation.

There are, of course, no "ideal" benchmarks or quotas, but census and polling data today show that many of us recall feeling more secure, more happy  at other times in our lives.  Yes, last week's labor figures report that wages and opportunities are trending in the right direction.  We are reaching new economic plateaus in corporate research, jobs creation, and personal savings.  But we don't yet have an across-the-board sense of relief, nor a feeling of participation with an emotional/psychological connection to all the economic good news that one might ordinarily associate with good times.

Therefore, the question before us is "what to believe...the statistics or our intuition?"

Compared to that elusive benchmark of "happiness"....  a sense of fulfillment and opportunity.... the markets are doing a terrible job, for the most part, of assuaging our suspicions or allaying our fears.  It's just too volatile out there.

Yours, mine, others

This is why it's dangerous for financial "talking heads" to go on television or give an interview in the media and cite economic statistics, only.  Obviously, we all have a vested interest in the stock market doing well, I concede.  But the titans of Wall Street's boardrooms have their eyes on the bottom line and their quarterly profit reports to analysts almost exclusively....and that's how their stakeholders believe it should be.

But ownership of stock, and managing a public company, brings a different kind of accountability beyond the range of the smallest shareholder, only.  Raising accountability to the level of socially responsible behavior also constitutes the role of a well-oiled, well-regulated marketplace.  Corporate valuation and share price performance is simply not enough.

It is obviously better for everyone when stock prices are going up, rather than going down.  But I would ask how many of you feel a connection to your corporate neighbors or, more importantly, feel that they share an intrinsic connection with you?

The merits of the bottom-line cannot be debated.  More closely watched, however, should be the attitudes the general marketplace manifests on behalf of all "the other guys" who also have a stake in the outcome.  My work in socially responsible investing, for example, such as our health and life sciences strategy and, currently, our water-related  strategies serves as a perfect adjunct to our broader macro orientation towards capital gains and earnings expansion. 

The sum total of all capital gains should be enough to take care of everyone.