Market Commentary for the week of April 11, 2016

Double edged sword
The US Federal Reserve, and a significant plurality of global central banks, have made the decision that keeping money "inexpensive" is at least one of the tools at their disposal to rescue and sustain economic growth.  These policies are an obvious boon to corporations who already have cash hordes in their treasuries, but a significant hindrance to anyone wishing to accumulate wealth through dividend and yield accumulation.  A vexing conundrum exists when monetary policy is designed to promote the flow of money into dynamic expansion, but the spigot gets blocked because momentum and psychology are running in the opposite direction.  As savings rates have nearly disappeared, the "losers" in this dynamic are those who have no money to begin with, or those who wish to acquire it.

In the meantime, the markets are indecisive, seemingly consolidating around narrow inflection points within a very tight trading range.  This sideways pattern of market stops and starts dissipates enthusiasm for investing for all but those who trade on breakouts  or breakdowns  above or below the trendline.  Therefore, unless one's aperture is long range, it seems inconclusive which way the markets want to settle.

My research, though, shows a golden opportunity to abandon a short range bias in favor of longer term demographic capital gains opportunities.  Irrespective of monetary policy, political diatribe, or other current events, there is enough evidence to support capital allocation into themes which resonate about the human condition.  Look no further than ecology (waste management), agriculture, energy production, biotechnology, pharmaceutical/clinical health research, drought/famine relief, infrastructure.....there are enough issues to go around and still not complete all that can/should be done, and still generate portfolio capital gains in the process.

Protest vote

Given that our monetary leaders believe the predicate for growth is to keep interest rates low, our current portfolio dynamic must be built around that thesis.  To find yield, beyond the occasional "high yield bond" opportunity, we have to find dividend and profit growth in sustainable business models and sectors oriented around top line revenue  and consistent demand.   To do this, we have already made accommodation for volatility risk by keeping enough cash on the sidelines to afford the one-off trading occurrence, while still holding to a disciplined asset allocation structure.  Traditional consumer-led brands are not the engine of this strategy.  That role must be held by pricing power equities, like Utilities and Basic Materials.

This conservative approach doesn't generate a lot of anticipation or statistically high rates of return, but it does moderate downside risk while reflecting upon the facts as they exist.  The goal of any good strategy is to mitigate drawdown, maximize upside gain potential, and to be consistent.

But, every now and again, we do need to placate clients' thirst for "excitement".

Satisfaction delayed

To do this, we have to consider the proper sequence of events in order to draw the proper conclusions.  For example, let me ask, " which comes first.....economic expansion or stock market performance?"   History shows us that the markets tend to precede an economic recovery.  Therefore, I want to be at the leading edge of thought and policy, rather than being complacent and simply speculating about that which does not yet exist.  Those factors which dictate longer, demographic, economic, and schematic  opportunity are more attractive to this analyst than "stories" or hype one might hear on television or from one's highly placed cousin "down at the plant".

Nevertheless, short term trading is part of the game, and we are not loathe from participating.  In many portfolios, we might have as much as 6% of assets in "special situation" categories looking for a quick hit or story-based capital gain.  What we try to avoid, however, is a type of seismic-like downside occasion that could ruin the flow of the total portfolio objective.

Nothing is more destructive to our quantitative performance potential than buying securities with limited prospects for earnings expansion.  That is why if you sit back and observe the world around you, you can pretend to be a scientist, entrepreneur, portfolio manager, politician, theologian, who makes good decisions without falling off the tightrope all the time.