Market Commentary for the week of June 20, 2016

Is the current volatility "good"?
With the markets roiling at the top, particularly following a seven year recovery and a recent 5 month price surge, one of the strongest emotions being felt by investors is that more volatility and uncertainty probably lies ahead.  That is mainly because investors have become fiscally and emotionally complacent when things are going well for them and practically apoplectic when things turn the other way.  Of course, while living on the edge of extremes is no way to carry on a money management practice, one can't always predict the exact moment  of capitulation...up or down...so we need always to prepare for either one, and sometimes both.  Ideally, my discipline is predicated upon preparation for either happenstance, and usually tuned-in to the myriad opportunities for capital gains that might seem hidden "beneath the talking points".

The current market correction has been swift and, indeed, problematic.  But it is not the first capitulation we have ever seen, nor will it be the last.  For the most part, it is causing us to elongate our forecast of optimistic returns, but not to abandon them altogether.  It's interesting to note that the Fed also said last week that they were lengthening their own timeline for redirecting monetary (interest rate) policy for the foreseeable future.

(Strategic note: as equities have declined in the past several weeks, we have also been opportune to place the proceeds of some profitable stock sales into short-duration bonds with above average yields-to-maturity.)

While overall bond yields remain low and in a state of perpetual uncertainty over the direction and intent of Federal Reserve policy, the equity markets remain, by default, the beneficiary of the market's confusion.  Let's face the fact that the equity recovery is long-in-the-tooth but still the only game in town.

I think it would be healthier to accept the volatility in stocks, rather than to bemoan it, and consider that an earnings and price-driven analysis is still one of the best methods for finding unrealized capital gains potential.

Sometimes, the contagion of panic selling and economic disappointment becomes a self-fulfilling prophecy which overshadows improving fundamentals and diminishing risk quotients.

Outside the margins

One of the main questions we have been asking during the sell-off is whether the damage is limited to one specific segment of the market, one particular geography, for example; or whether the panic is justifiably universal...all equities, all geographies, all categories, all capitalization spectrums?

Even though portfolio valuations have taken a (temporary) hit, we believe that improper overweighting and sector allocation might be accounting for the pullback, not a universal pandemic that is infecting all businesses worldwide, in similar magnitude.  At the end of the day we do not  believe that the global economy is going to fail, just that valuations got far ahead of themselves, and that projections for unrealistic expansion of earnings acceleration patterns and global growth got much too euphoric.

If we are, indeed, in for a soft patch, it should not be unexpected or unwelcome.  In fact, a correction in market valuation, portfolio appreciation rates, and economic forecasts for growth is beyond due, and might allow us to recalibrate the trajectory for market bourses worldwide into a more-normal axis.

We do not mean to diminish what have become common talking-points about risk: China, terrorism, monetary policy, global currency exchange rates, economic viability, domestic US politics, a devolution of social and moral imperatives....had enough??

There's no doubt that we are influenced by the media...what we hear and read...sometimes for the good, and sometimes to our own detriment.  Maybe, however, we should focus upon an undercurrent of long-term, redundant socially responsible needs and opportunities that truly define what it means to be an investor...to make a capital commitment outside the bounds of "conventional wisdom", from which discovery and opportunity are usually less affected by headlines, rumor, panic, and hyperbole.

Market Commentary for the week of June 13, 2016

Soft
Although there have been several sectors that have recently registered significant relative strength quotients (healthcare, technology, energy), there is escalating realization that rotational redistribution is likely to occur very soon.  While we always wish to overweight leading trends, we have been net sellers in our accounts recently.

The key to successful market allocation is to anticipate basic drivers of profitability and to invest where resiliency and duration are nearest to their strongest inflection.  That is why I see an extraordinary opportunity in hard and soft inflation trends in foods and agriculture stocks.

Spending on food is likely to remain brawny worldwide...much more robust than in many other cyclical/discretionary arenas.  There is ample scope for producers to maximize output and to increase margins all the way through the supply chain.  Food expenditures per household are rising and destined for additional increases as an ever growing necessity widens.

Meanwhile, global investment exposure in these groups is broadening due in part to the expansion of the developed nations' middle and under classes, as well as a socially responsible narrative that seeks to address hunger and poverty where it exists.  Food export/import volumes are rising at a faster rate than exports/imports of almost any other industrial sector.  Prices are following suit, mounting up as a bigger percentage of family income except for medicine.

While there is always an issue with currency exchange rates when dealing with global commerce, the "high" dollar has failed to impede the competitiveness and vitality of annual net consumption of US-based meat, vegetables, wheat, and other agricultural components.

More importantly, advances in science and technology are accounting (literally) for greater output and a higher bottom-line than at any time in history.  Forward earnings projections in this (agriculture) and related sectors are rising faster than any comparables across the spectrum.

Hard

Concurrently, we have been extrapolating our projections about the food group to other, "harder", commodities, as well.

I am encouraging our clients, for example, to take a positive long-term view about lumber, metals, and other tangible assets given the rampant pessimism about financials, cyclicals, and other traditional front-end, consumer-led sectors.  The portent of a massive rebalancing in global social, industrial, and moral priorities underscores the need to focus upon earnings and price trends before  they actualize in order to circumvent market inertia or panic.

Are we forecasting these rebalances just yet?  Not specifically. 

Lest anyone jump to the conclusion that we believe the food/agriculture group is a panacea for what ails your portfolio, let us quickly disavow you of that notion.  There are significant problems that need to be addressed all throughout that segment.  For example, as food inventories expand worldwide, there are fewer places in which to store it after harvesting, leading, in some cases, to enormous waste and dumping.  Inadvertent waste is also an issue in regions of plentitude, where vast tonnage of partially-eaten product goes into dumpsters and landfills, leaving those in greatest need with next to nothing.  Think about it: in a world that has so much, how is it that tens of millions of people might go to bed hungry?  Issues of supply and distribution are not exclusive to agriculture, but also to energy, medicine and pharmaceuticals, water, and other "staples" of life.

Patient, professional investors recognize that there are going to be lulls after growth spurts, and accelerations within downtrends.  Thus, in a lackluster earnings season like the one we just went through, we observe that capital markets need to identify those upside alternatives as efficiently as possible. While it's difficult to guess correctly what the prevailing cycle characteristics might be, we are using our proprietary metrics to be in the vanguard for measuring the probabilities for which sector capital appreciation might come next.  Compounding portfolio gains while avoiding big drawdown is a hallmark of our overall quantitative strategy.  Our work developing Water Concepts Investing, for example, is already paying handsome dividends for investors.

As long as trends converge/diverge along a parabolic continuum, the window is always open to be "long" that which works, both in absolute and relative terms.  That is the essence of cyclic phase methodology.

Right now we see a "discounting" of valuation and strength at the top of the markets, as occurred late last week, and a fervent search for the next alternative sweet-spot.