Market Commentary for the week of July 25, 2016

Theory versus practice
Last week, we began by asking , "did the recovery pass you by...?"
This week, we examine exactly "what recovery"  we were referring to.

There is no question that both the stock market and the global economy have shown significant improvement since the commencement, and darkest hours, of the financial crisis in 2008.  But those improvements are somewhat mitigated by structural and operational complexities that still linger for various industry groups, regions, and individuals that are still trying to gain financial traction.

This current earnings season is already punctuated by acceleration "slowdowns" and uncertainties about a reluctant public that just can't seem to muster the courage to spend money without justification.  Those disinclined buyers are not being helped by the failure of corporate leaders who have chosen a bunker mentality over innovation, capital investment, or designing a "better mousetrap".  This complex political, financial, and moral state of affairs might be summarized best by whomever blinks first....but that's hardly the vibrancy of a 1950's-style economic juggernaut.

There is no denying that digging out from the credit collapse has been a complex, time consuming process.  Facing the impediments it did, the market responded aggressively, with stimulus and belt tightening.  But still we face the most persistent of all obstacles: the failure to rebuild confidence in the very institutions that took us down the primrose path in the first place.  While no one hopes these bastions fail (?), there is a feeling that no one yet has been held accountable for naive or, even worse, nefarious behavior.

Last week, European central bankers announced that they would leave interest rates unchanged...at historically low levels. Continued monetary easing has not succeeded, however, in producing the desired result.  "You can lead a horse to water, but you can't make him spend"  is a phrase I coined recently to describe the unfortunate situation that currently engulfs us.  Without security and confidence, corporations and citizens will simply sit back and hoard money until they feel justified in changing course. We now concede that the Fed, the ECB, and other nations' monetary boards will likely continue to prime the pump with additional stimulus and accommodative monetary policy.  What else could they do to encourage spending and capital investment?

A potentially disquieting geographic reallocation is going to occur as a result of the Brexit vote, further exacerbating the competitive imbalance and currency disorder of the European markets.  Politics seems to be driving the continent's monetary policies, not fundamentals.  This could have onerous consequences for global commerce in the next few months as the negotiations for Britain's pullout settle in.

A new/old  prototype

Despite this potential global disequilibrium, we still believe that selective opportunity in "secular-themed" equities exists.  Even though the markets are making "new highs", this is likely not  to be the last time we reach a new valuation apex.  Demographic themes such as ecology, alternative energy, biotech and pharmaceutical research, water purification, infrastructure renewal, agriculture (food distribution and supply), and technology innovation are resistant to short term schematics.  By their very "moral" and socially reaffirming nature, they provide innumerable response...and capital gains potential....to what ails a directionless financial landscape.  Companies that respond to the halcyon call will be duly rewarded.

Our mission...my mission...is to navigate through the exogenous noise and "ice floes" of conversational and current events obstruction to arrive at a capital gains destination without unnecessary divergence or interruption.  It matters not whether the instrument is cash, bonds or stocks....valuation appreciation with minimal drawdown is the ultimate objective.

Imbalances and distractions aside, I believe the goal is attainable.  The value of our unique quantitative screening and portfolio management process is that we are able to analyze and construct solutions to a myriad number of issues more efficiently using integers and probabilities which complement traditional fundamental analysis as a stand-alone discipline.  There is no doubt that our product correlates more closely to the "action on the ground" while also creating the longer term, top-down perspective that high net worth investors require to smooth out the inevitable news-driven bumps in the road.