Market Commentary for the week of Novemeber 21, 2016

Getting back to business
Investors are often inclined to look outside their comfort zone, at opportunities that sound good but might be, in fact, too high risk/high reward gambits to suit them.  For some inexplicable reason they shy away from "boring" parables, lured instead by something that sounds newer and shinier.  Frequently, what's right in front of their noses just leaves them uninspired.

But the problems that have grown out of the world's "new demography" have actually created investment opportunity whose capital gains probabilities quantify at the highest ranges of my proprietary statistics.

Consider water, for example.

Because of situations that relate to scarcity, pollution, aging infrastructure, and expanded commercial/private usage, the topic has been one which lends itself to discussion and opportunity like almost none other.

Urban areas around the globe have shown difficulty maintaining delivery and purification of the commodity, while rural areas are dealing with other factors, such as access and supply.  These are not just regional problems, they are universal.

The topic of water, and other socially responsible themes, has occupied a great deal of my research time.  For several decades I have built algorithms which focused upon ubiquitous demographics, specifically creating a target silo investment opportunity, the Water Concept Investment Strategy, in the past 18months.  Thus far, its performance has demonstrated that you can address socially responsible issues while still generating profit potential for the very long-term.

Better times

More people are starting to connect the dots between discussing current events and creating investment possibilities....without having to exceed one's comfort zone for risk/reward tolerance.

Changing climate and eco-systems are no longer seen as far away abstracts.  Whether one believes in the science or not, all of us are aware in some fashion of crop shortages, thirst and hunger, arid deserts, flooding, and pollution.  Similarly, water infrastructure  has made sense to me as a viable macro investment topic.  My quantitative investment tools have thus far corroborated my belief that this might also be a capital gains vehicle, as well.

Studies have shown that cumulative global capital spending on all things water-related are expected to be in the tens of billions of dollars in the next two decades.  Some of that spending is most likely also to yield investment performance for consumer portfolios.

For the past several decades the world looked at emerging markets......China, for example..... as a model for economic and infrastructure development.  Unaddressed in that scenario, however, was the design and specific investment in water treatment and potable water solutions to support that kind of rapid urban development.  We now know that these technologies exist and are ready for application.

Corporations that span the matrix of my portfolio research range from early-stage small cap membrane filtration manufacturers all the way to large cap conglomerates that use water for their internal operating systems.  Our Water Concept Investment Strategy portfolio is invested only in publically traded companies, and doesn't even address technologies not yet discovered or currently in production.  My belief is that this topic has the potential to generate innovation and profit potential for decades to come.

We also gain portfolio diversity through "special situation" allocation which I believe helps to reduce volatility that comes from the rest of the equity universe.

The right thing
With surging populations, the world is coping with increased demand for water and the prospects for reduced capacity if nothing is done to address the need.  Rapidly growing urban areas further exacerbate and localize the problem.  We face the very real possibility of running out of our valuable resources in our lifetime or that of our children.  I invite this discussion...with peers, clients, friends and adversaries.  I will be writing more on these topics in the weeks and months ahead.

"H2O" is more than just a chemical compound.  It is the very essence of life.

Market Commentary for the week of Novemeber 14, 2016

Political economics
Politics, like investing, is all about expectations and aspiration...a kind of revelation about our collective culture and mood.  Thus, it was quite revealing that in the hours and days following last Tuesday's US Presidential election stocks reaffirmed traditional growth leadership and safe-haven investing by rallying for significant gains.  Despite fears that the result of the election might have been persuasively disruptive to the expansion achieved over the past seven years' recovery effort, buyers sought out politically expedient opportunities in tangible assets (infrastructure), pharmaceuticals (healthcare), and financials (industrial development/taxes).  In fact, curiosity about which pro-growth policies might emanate from the new administration stoked concern about currency and the bond market as well, even as the prospect for an immediate rate hike by the Federal Reserve receded into the background.  Investors are particularly worried about the economic impact of domestic project spending leading to higher inflation, causing the government to back-off austerity measures.  A rise in US interest rates would have a ripple effect upon currency and central banks around the world.

The shockingly convincing Republican victory seems to be laying the groundwork for new leadership in the stock market, most notably military/defense and infrastructure, supplanting a wave of success recently made by cyclicals and technology shares.

It is safe to say that few really envisioned the magnitude of this political tidal wave as the election, at best, was considered a toss-up.  While it was always conceivable that the outcome could be exactly as happened, recent market activity posited a different mindset altogether. 

Nevertheless, Tuesday's results now underscore massive implications for change in tax policy, foreign exchange, social entitlements, and industrial development.

Now it's left for both sides to iron out the inevitable dissent and dislike.  Economic market reactions are likely to be quite volatile, as new cycles and initiatives take shape.  We know that there will be leaders, laggards, and coincidentals in this process.  That is the nature of politics  and investing.  Thus, we also expect flux in our asset allocation weightings.  We do not yet know which policies might shape the political landscape, but we do know that new themes, new investment cycles, don't simply evolve in a matter of hours.  They need time to gain traction and earn our confidence.  I see no reason to panic at this stage of developments.  It is simply too soon to know.

All change, in fact, occurs within a much broader framework and a longer timeline of interconnected (other) events.  We should try to dissuade discussion that the financial and economic "battleship" can be spun around like a dingy, or that the direction of the markets might suddenly grind to an unenviable halt.  My proprietary integers indicate new inflections in sectors that might actually improve the likelihood of long-term economic performance.  Our position is certainly cautious about the fractious debate that will ensue, but we also do not anticipate a total destruction of the global commercial network in the offing.

Domestically, any upheaval that might develop depends upon one's point of view or political affiliation.  What America should look like  is a deeply personal perspective.  A troublingly scrambled American demographic leaves open the possibility that finding consensus will be difficult, if not impossible.  While that debate, alone, cannot derail capitalism and free enterprise, it can sow the seeds of inertia and uncertainty amongst some sectors of the financial market.  We will watch carefully for any signs of cycle acceleration or dissipation as we craft our allocation weightings for the next few months.

Signs are that capital formation and asset flow in the public and private markets have already pre-set the conditions for research, innovation, and excellence to flourish.  We will know soon enough if this year's early signs of consumer demand will persist in driving  expectations, inventory growth, and profit potential, as well as which global and niche opportunities might capture the fancy of investors later on.

Our bottom line take-away from the election is that it is unproductive and premature to dissect the minutiae while the country is still absorbing the impact of the broader schism which apparently was far from healed by the outcome on Tuesday.

Market Commentary for the week of Novemeber 7, 2016

It's over
Barring any unforeseen occurrences, we should know the results of the US Presidential election by Wednesday and, hopefully, at least a few of the psychological roadblocks that have impeded market activity might be removed.

While this missive certainly does not purport to be a political science document, our ability to quantify specific market cycles and trends does allow us to draw certain inferences with regard to the durability and magnitude of financial data going forward.  As we approach nearly a decade of economic recovery, it is implausible to envision a scenario going forward without at least some capitulation to the downside following the election.  History has shown a "buyer's remorse" negative bounce occurs frequently in the weeks following a national election, and, quite frankly, no linear up trends can endure indefinitely.  No matter how long or short in duration, volatility is expected to ensue post-Tuesday.

However, this year has thus far proven to be quite satisfactory for investors as most of the global exchanges find themselves in positive territory.  For those who viewed the post-recession period as a long-cycle opportunity to position for capital gains, they achieved their objective of moving valuations from point A to point B with only a modicum of interruption or distress.  But for those others who now might choose more draconian measures... like selling everything and getting out altogether... I would recommend instead a more careful culling of one's portfolio sector-by-sector, region-by-region instead of simply throwing the baby out with the bathwater.  In all likelihood it will take time to figure out which candidate, which platform, will resonate into the longer term calculus.

Thus far this year earnings have reasonably outperformed muted expectations.  Issues which affect earnings acceleration patterns are quite complex.  Sometimes those factors are sector specific, sometimes they are more universal in scope.   There are those who argue that globalization  is the problem.  Others have posited that jingoism and protectionism diffuse growth potential.  Either way, this too is one of those issues that will be addressed by a new political administration.

The Federal Reserve (US) recently adjourned its last meeting without any action to shift interest rates, but indicating nonetheless that rates will move up at some point in the future.  While the threat of inflation is currently quite low, we believe that interest rates must begin to float upwards sooner rather than later....not so much as an inflation safeguard but as a means of creating equilibrium amongst investment choices for those who have a voracious appetite for yield as an alternative to the volatility of owning stocks.  A rebound in rates would also allow for the amassing of savings accounts, which would later serve as the fodder for new capital entering the marketplace.

Recovery

Irrespective of which party wins tomorrow, there is no stopping the tailwind of enthusiasm in specific global demographics such as healthcare and life sciences, biotech, alternative energy, agriculture and water, education, technology, ecology, infrastructure, and national security (military/defense).  Both parties are intent on maintaining a commitment to at least half of those themes listed above.

The private capital markets are actively seeking areas in which direct investment can quench the thirst for solutions and innovation for the next several decades.  Our calculation, therefore, is that the equity markets, public and private, are only at the beginning of a long-term secular phase even if any short-term knee-jerk reactions might indicate otherwise.  It is nearly impossible to put the economic "genie" back in the bottle at this point even if the mood to do so were encouraged.

So, the question we anticipate being asked is," how to cope with the aftermath of Tuesday's election, financially and psychologically?"

While there is likely to be some sort of contradiction and argument following the election's results, all eyes will be on how a true level of reconciliation and cooperation builds amongst diverse points of view.  Our view is that favorable market conditions exist to withstand the inevitable uncertainties, from which will emerge a continuation of the hard-won progress in both cycle duration and portfolio appreciation.