Market Commentary for the week of December 12, 2016

Wall Street's tantrum
Short-term thinking in the business world, particularly in light of the remarkable post-US election rally, is becoming a problem for serious investors.  This issue which seems to bubble and roil below the surface of public discourse warns of the perils of becoming too obsessed with stock price gains at the risk of devaluing long-term strategic planning.

The issue is mostly masked because (1) no one questions its impact as long as portfolio values are increasing and (2) it undermines serious discussion about morals, values, priorities, and goals.

When the singular focus of corporations is to generate quarterly return to shareholders, the greater driver of capital expenditures becomes "immediate reward".  Left in its wake, however, is a cacophony of fewer services, less money spent on research and development, a lack of attention paid to synergies within the community, and fewer new-hires from the surrounding population.  In effect, it becomes all about the here and now. 

Under pressure to respond to Wall Street's demand for higher share valuation, business offers up to the public a litany of unique perks such as dividend payouts, stock buybacks, and other favors for those to benefit the quickest and the most.  As we hear a smattering of news announcements about the new political administration's intent to roll back regulations and other cost burdens from the business community, we worry that we are going to see an acceleration of more greed, more of the same...or worse.

In the face of declining or stagnating earnings and consumer demand, accounting alchemy and chicanery have yet again become substitutes for prudent corporate governance.

Hide in plain sight

By itself, there is nothing inherently wrong with rewarding shareholders.  The problems arise, however, when the interests of the corporation are at odds with the greater good of the public they service.  Shareholders and shareholder interests are basically the same the world over...we expect competent stewardship of our money.  But by holding so dearly to short-term values as their singular motivation, corporate boards and executives are under-delivering on their promise, even if their public shares are rising on the stock exchanges.

In theory, those two should not be mutually exclusive.  In practice...in the real world....they are unfortunately diametrically opposed.

The fundamental human traits that are causing the markets to conflate making money  and doing well by others  have become frivolous excesses...almost annoying conversation.... in today's manic get-rich-quick market climate.  "Cash in hand" has become the moniker of this generation's speculator, even if that money might be worth more  if invested for the long run.

It looks to this observer as if Wall Street has almost created a "discounted modifier" as the denominator for current research, analysis, and decision-making.  Somehow, even the phrase "all time high"  doesn't have the same cache or relevance as it once did.

High acceleration, instantaneous trading has engendered more randomness into the investment landscape.  Instead of having confidence in the markets, more investors talk about uncertainty and fear than ever before, even as the wealth gap continues to widen between those who are reaping the reward from the stock markets and those who are still just managing to get by.  There is a palpable panic pace of simply lining one's pockets while the getting is good.  For those fortunate enough to have money to play with, they are just trying to get out of the way in the event their largesse suddenly comes to a screeching halt. 

This is the market we have created and which, unless something is done, will be the pattern of making money we pass on to the next generation of investors.

We should have plenty of fodder about which to write in the coming months......

 

Our next publication will be the Quarterly Market Outlook, January 1, 2017

Happy holidays.

Market Commentary for the week of December 5, 2016

New rules.  Old game.
The over arching thesis behind money management discipline is that at any given moment some parts of the world economy are doing well (rising) and some parts are doing poorly (falling).  It rarely happens that everything rises or falls in unison.  Therefore, the true measure of any portfolio strategy is to try and quantify the relationship between the sum of the parts, and to be sure to overweight, on a risk-adjusted basis, those sectors that are succeeding and to underweight those sectors that are doing less well.

Obviously, each client's tolerance for risk is different and factors into the overall asset allocation weighting by asset class.  But the goal nonetheless is to be alert for anything and prepared for the worst of everything.

Linear (straight line) trends are the most onerous.  Parabolic influences are much more preferable.

Given all this, as we look back "post election”, and forward towards year-end, it is clear that the surge in stock prices is welcome relief for portfolios, but also problematic for its linear composition.  This is not to suggest that we are ready to abandon our allocation to stocks.  To the contrary, we have been preaching for several months about the necessity for long term secular demographic investing, focusing upon silos of opportunity in selected themes.  Global markets are experiencing a post-recession recalibration that will be hard to reverse indiscriminately, no matter the risks of holding equities.

However, some of those accelerating sectors are running on empty at the moment.  Financials and Cyclicals, for example, register extended relative strength integers (RSI) and are too expensive for us to chase at the present time.

As our initial thesis implies, there are, however, sectors that are not running excessively.  In those sectors one might find opportunity to begin positioning any sideline money for future potential growth.  Although not as exciting as the current crop of winners, there is back-end opportunity in Utilities, Consumer Non-Cyclicals, and Technology shares.

Same questions.

Investors are constantly faced with difficult decisions:
"Is the market too expensive?"
"Can I afford the risk of loss in my portfolio?"
"When is the right time to sell out of my winners?"

While the answers to these questions sometimes depend upon the optimism or pessimism of each person's makeup, we know that for every up there is a down, and vice versa.  There is always something in which to invest if we have the patience to sift through the data and make an informed decision.

The easiest thing to do is to do nothing.  Acknowledging that there is also reason for caution, our macro view finds that by any reasonable analysis basic fundamentals are uncovering a myriad number of companies that create good product with high consumer demand and which generate qualified profits for their stakeholders.

Usually, fear of the markets is spurred on by a kind-of anecdotal approach to investing rather than a scientific method that produces consistent results.  Consider, for example, that our planet will require potable and replenishing sources of water, strong agricultural harvests, scientific innovation, medical and biotechnological research, modernized transportation and infrastructure, communication interconnectivity, and renewable sources of energy.  That looks like a pretty good list from which to create any new portfolio, if one had to choose.

I always try to look for earnings accretion and acceleration patterns as potential sources for new portfolio candidates.  The list above is a compelling starting point when looking for profitable portfolio allocation in the next several years.