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.