Market Commentary for the week of Deember 11, 2017

Are we there yet?

Like the familiar refrain from passengers on a long grueling trip, it's just as plausible to ask "are we there yet?"  for investors in financial assets....with the "there" part not having been fully defined!!  Returns on investment (ROI) have been hefty in 2017, with most of the return skewed towards equities.  One would be hard-pressed to find any ingrates amongst those who have benefitted from the stock market's good fortune.  Last week's financial market activity was much the same...looking around and digesting the news of the week, without much commotion being made.

And yet, that, in and of itself, seems to this observer to be part of the problem going forward.  Make no mistake, I am grateful for the bull run and still find scientific evidence for its perpetuation.  But I also know both anecdotally and methodologically that when things are at their bleakest, hope for optimism should be  at its highest.  Conversely, most bull markets expire during periods of acute optimism.  Such is the world of quantitative statistics and inverse probabilities that I inhabit as an economics scientist.

Nowhere is it written that this bull market has to expire.  But a general sense of "what happens now?" is pervasive and likely to usher in a new phase in the markets which, if not bearish, will be a different kind of bullishness.

The global economy is subject to any number of shifts in factors, not the least of which is a troublesome era of isolationism, nationalism, and terrorism.  The recovery that sprung out of the global credit crisis and "Great Recession" is slowly being usurped by a new populism....a period of global government austerity whose design is to reign in excessive spending, "unfair" commerce, and unnecessary fiscal expansion.  Reforming taxes  is not the issue nor the panacea in this observer's opinion.  Watching people and corporations selfishly holding on to what they've already got  is.  Unfortunate as it may be, investors are hunkering down with their new-found wealth and playing it close to the vest.

This jingoistic attitude is a harbinger of an ever-widening gap between the affluent and the poor.  Should it not also be a wake-up call for markets to take the lead on capital and investment innovation, rather than lagging on the important responsibilities of our time?

One of the most nefarious passive non-decisions  of the market's recent past is how our central bankers have engineered low interest rates, thereby encouraging equity investing, and diminishing the alternative investment options that conservative and yield-oriented investors so desperately need.  Not to mention that these alchemic policies have failed to manufacture the kind of growth that policy makers envisioned when they made borrowing money "free of charge".  And now, as a result, they have literally painted themselves into a "rate-rising" corner.  Thus, government initiatives such as "tax reform" have replaced the power of the Fed to remediate the issues we have with the direction and intent of capital spending.

And now...?

The l reason I am still positive about the financial markets in the long-term is that we see enormous secular opportunities in targeted sectors such as water, agriculture, infrastructure, alternative energy and biosciences as immunization from parabolic excess and volatility surprises.  They also represent, as written in last week's commentary, the very best of us and the potential both to do good and to generate capital gains. The truth is no one knows the future.  One can only conjecture based upon ones' science, methodology, and social value system.

The bottom line is that  we still expect to be "long" financial instruments (stocks and bonds) for the foreseeable future, in the proportions which best represent our client's risk/reward tolerances, and that we continue to believe it is not about rhetoric but fundamentals to move portfolio valuations higher.  Right now, despite the context of a late-phase linear rise in stock prices, we are taking advantage of an underlying strength in earnings expansion in selected categories for the near-term.  Part of that earnings acceleration is due to consumer demand and accounting dynamics.  Another part owes its strength to nascent pricing pressure emanating from anecdotal evidence of inflation in energy, healthcare, travel and entertainment, foodstuffs, and real estate.  This, again, is where a confluence of monetary and fiscal initiatives could have significant impact upon releasing a lot of pent-up frustration...and capital...that investors are holding on to.

No one likes to overstay one's welcome at their ultimate journey's end.  We are not "there yet", but very close.  

Market Commentary for the week of Deember 4, 2017

Selective prognosis

Global hotspots, such as Syria, North Korea, Myanmar, and the Mid-East prompt a moment-in-time  effect for investors and global bourses to ponder near-term consequences and how polarized and dysfunctional some of our geopolitical dynamic really is.  What's particularly worrisome is that we've had these "moments" before in other conflict spots and thus we can extrapolate rather easily their significant cost upon the financial markets.

The direct impact of these global conflagrations, of course, is not contemporaneous.  Yet, the very starting point which makes us human has to give any of us with a conscience pause about what type of world we are going to leave to our heirs.

What we have learned from previous carnage is that it is not the actions we witness today that matter....although heinous....but the generational repercussions for the afflicted upon infrastructure, social institutions, and emotional well-being.

With global financial stock markets perched at lofty levels, one has to ask if making money is the panacea for all human ills, or simply an antiseptic arms-length way of keeping our "heads on straight" while ignoring all the perversions going on around us?

Whether because of or in spite of this obsession with making money, the markets recent cornucopia tells quite a story.  Isn't it amazing how marginalized these conflict zones become the further from their epicenter one resides? Believe me, the closing price of Amazon is the furthest thing from the mind of a refugee in Aleppo or an orphaned child in Baghdad.

There are, as earlier noted, historical precedents for how the world's financial markets have moved in concert with, or in opposition to, explosive man-upon-man atrocities.  Not too long ago the drum beat noisily for war in Iraq.  Yet the markets slowly migrated laterally for nearly half a decade.  The crescendo of political rhetoric was not enough to rally the stock markets then. 

Going back further generations, it didn't matter which side you were on during the Cuban missile crisis.....everyone was scared and the markets were paralyzed as we considered an "Armageddon-like" outcome.  One year later, though, a steadier political climate netted a Dow Jones gain in excess of 30 percent.

Steady hand

Markets are constantly traversing crisis transitions.  The impact of the fear of war or the plight of the less-fortunate is a debate for theologians, scientists, politicians, ethicists, and economists.  The repercussions of these conflict periods can have fundamental generational impact.  The message of those affected by war, racism, intolerance, or bigotry should not be dismissed because we, miles away and disinterested, don't feel it in our pocketbooks today.

The ramifications of economic and political oppression reverberate...if not today, later...into our households; our politics; our military; our religion; and, ultimately, our economy.  Worse, the disruptions they cause to our belief systems and psyche are mostly un-quantifiable.

Variables exist which either quell or exacerbate regional conflict.  Our priority, however, should be to galvanize sanity where there is none and to be committed to providing economic, spiritual, and political opportunity for all players equally.

It's not unusual that trade and industry institutions spend a great deal of time worrying about how to acquire greater profitability from their clients rather than using their financial leverage to broaden their sphere of influence for the common good.  It's not complicated, really.  We all live on this "blue marble" together.  Why not try to use all that brain power to improve the lot of ourselves and others with whom we share the ride?  

By all accounts, such "mundane" human issues....such as hunger, poverty, conflict....didn't deter the Dow Jones Industrial Average from powering forward last week, breaking into super-stratospheric levels, and helping fortunate investors to pad their 401-k retirement accounts.  Even as economic fundamentals improve, the amount of time shareholders spend working towards magnifying their net worth intensifies, as well.  While a significant percentage of us worry about holding on to financial security, there is an even larger percent of the world's population who are simply trying to acquire some.

Market Commentary for the week of November 20, 2017

What just happened?

Amid deepening concerns about foreign trade, world despots, and US tax reform financial markets last week peeked into an abyss, if only for a moment, and didn't like what they saw.  It's pretty simple.  Markets are deeply advanced and the slightest hint of conflict could send the overbought euphoria lurching in the other direction quickly.  So pervasive was the jolt, it exposed weaknesses in Europe and Asia, as well.

The point is that it doesn't take very much to induce skepticism in an age of secular momentum if the self-assurance behind that advance is inconsequential.

But lack of resolution isn't' a new phenomenon for the financial markets.  As far back as last Spring consolidation amongst sectors began to shift leadership from traditional consumer brands towards tangible assets and special interests.  The good news was that as stocks rose, all sectors participated nearly uniformly.  The bad news was that the caboose began to pull the engine rather than the other way around.  The economy, and the wealth gap, started to fracture traditional consumer demand in lieu of pricing pressure and nascent inflation.  The resiliency of the recovery, post credit-crisis, was about to be tested.

Confidence is a lovely thing when it is buoyed by facts and shared by everyone.  Unfortunately, too many risk factors weigh heavily upon investor's daily lives, which in turn affect their comfort level with their portfolio investments.

Unequivocally, the economy is moving steadily forward.  By all discernible measures the data are improving...earnings, capital expenditures, portfolio growth, to name a few.  Ultimately, there is only one true measure of financial success...capital gains.  But it also needs to be stated that financial success is not always the metric by which one gauges the quality of a population.  Good health (mental and physical); infrastructure; personal “peace"; morality and compassion for others are all other measurements by which we take the temperature of how well we are doing.

We know, too, that during periods of stock market instability there are always counterweights which serve as safe havens.  By focusing on the longer-term and eschewing the sensationalism of daily financial media, I find some of those alternatives today in biotech research, environmental sciences, education, finance, agriculture and water, renewable energy sources, and technology.  The mere fact that correlations appear to be “decoupling" is proof enough that active portfolio management is needed now as an effective tool to counterbalance the risks.

Don't brace for impact just yet

Last week's mini-eruptions in the stock market are not a harbinger of a new bear phase.  Rather, they demonstrate just how risky investing can be in a market punctuated by new highs coupled with reckless emotional abandon.  It is always the case that when probabilities exceed a maximum sustainable level, a higher premium is placed upon product selectivity, methodology, and patience.  How often does the market seduce you to buy “at the high" or to panic sell when everything is going down?  Placing enormous singular bets “on black" is the architecture for portfolio collapse.  Our clients know that that is not our style.

Within this brewing cauldron of politics and economics the markets look to any knight in shining armor to provide outside guidance.  It seems unlikely at this juncture, however, that either the Federal Reserve or the Congress has the gumption or the perspective to provide that leadership.  Embroiled in their own dysfunction, our Congress is polarized and playing to their respective base, while the Fed embodies an experimental paradigm that pays greater homage to keeping borrowing rates low than to producing results that reflect our expectations.

Despite the unsettling hiccup of turbulence last week, these are issues which take months and years to resolve...not days.  Applying a consistent process to portfolio asset allocation helps to reduce the timbre of the rough spots.  This is a business of “artistic design", not perfection.  The subset of investors who rely upon unbiased, and unemotional, decision-making is small but usually the most successful in the end.

Happy Thanksgiving!!

Market Commentary for the week of November 13, 2017

As markets apparently permanently reside "at the top", this robust landscape offers us a glimpse of a new migration into what it now means to be prudently asset allocated.  As this new normalcy comes into focus the debate about whether these benchmarks represent a dire warning sign or new definitions  heats up.  While I certainly believe that there is the possibility of retrenchment in stock prices, many are just accepting the status quo as the new norm, thus making up new rules and standards as they go along.

Contemporary asset allocation models are not, in fact, new.  Many of the investment themes we see today have been here before.  When economic power shifts towards stocks (as opposed to fixed income) upside premiums shrink and financial risk heightens.  Additionally, lower yields in bonds creates a more volatile landscape that moves to a more staccato beat, more trading, and less long-term certainty.

If this is correct, then what does the "new normal" represent for investors going forward?  The answer lies in one's tolerance for emotional stress and higher portfolio hazard.

Indeed, when investing was "easy"...requiring very little in the way of imagination or innovation....asset allocation was simply a matter of using widely held percentages and gradients to determine one's ideal portfolio settings.  Low risk (and low equity exposure) produced low(er) alpha and higher sleep-at-night quotients!!  Allowing for the occasional exogenous event was very rare and sometimes predictable as to what it might be and when/where it might occur.

In that context, companies with strong consumer franchises did better than most other stocks.  Real estate, brick and mortar retail stores, durable goods, and financials all thrived when cash was king and buyers were "flush"....a golden age of productivity and commercialism.  Investors need to realize, however, that all journeys...economic and otherwise...are parabolic and transitory.  As quickly as "guarantees" materialize they can also evaporate.  At the gambling tables this is referred to as the "law of averages", and invariably those "laws" catch up to you.

Today's consumer landscape looks much different, and far from leading  the economy is lagging quite badly.  Notice how companies who had a rich tradition of decades-long earnings acceleration and high dividends are no longer the darlings of Wall Street.  As the economy has changed so too have the metrics related to those hallowed brand names.

Correlations between and amongst our business network have changed dramatically, too.  Blue chip stocks don't transact with one another the same way they did a generation ago.  The "old normal" has been turned on its head by technology, politics, recession, terrorism, and globalism.  The" modern" portfolio has unwittingly become more short-term oriented, more volatile, more aligned towards tangible assets, and just a little bit scarier.

I still believe, however that a good portfolio is "agnostic" when it comes to capitalization, region, or sector.  For example, I remind my readers that topics that relate to future generations and socially responsible subject matter can produce significant capital gains potential.  Clean water; global security; efficient renewable energy sources; eradication of hunger, poverty, and disease; technological innovation; education; infrastructure; and personal values score quite high on my valuation and capital gains assessments.

The new baseline for the modern portfolio "at the top" should still be highly correlated to quantitative analytics.  However, the most meaningful quotient is the one that reflects people's needs in juxtaposition to an aristocratic hierarchy.  Any portfolio approach which too narrowly selects "concentrated" positions should be a non-starter for those looking to reduce risk.  In a world of overly ambitious, singularly focused, vastly speculative portfolio construction it helps to minimize drawdown potential by adhering to a strategy of top-down themes rather than attempting to corner the market on a particular sector or strategy.

In particular, classic macro portfolios should have exposure to a variety of projected earnings performers from a multiplicity of sectors and topics.  Our example seeks to challenge conventional wisdom about focusing on the near-term  or news-driven  events.  In fact, those very narrow parameters typically result in a backward looking weighting approach.  We, on the other hand, look for analogous trends and fundamentals which predict the future prospects of companies by using historical parallels regarding intermediate and longer-term outcomes.  Lastly, there is no "ideal" portfolio.  Rather, there are ideals to which one might subscribe that deescalate the impact of current events or other adaptations that amplify risk in a portfolio.

Market Commentary for the week of November 6, 2017

It has been obvious, even to the casual observer, that all market gauges are running hot, pulling an overwhelming majority of stocks along for the ride.  But for that reason alone I have been rightfully accused of being both a cheerleader and a wet blanket...stressing that one has to play the advance very carefully and with a great deal of discipline.  While the divergences that we thought might have materialized as the rally extended have not, we remind anyone reading that typical rallies do not traverse straight lines, and that ignoring caution is most always a recipe for an unexpected disappointment.

Mind you, there is very little "negative" to fixate upon at present.  There are enormous pockets of strength in Basic Materials, Non-Cyclicals, and Technology, amongst others.  But as you are aware, even after replenishing our accounts with specific "buy" candidates from our October 1st recommended list, our bias is to take profits in here, not to be speculating indiscriminately.  The glamour names might attract the balance of everyone's attention, but you can't afford simply to keep buying without any discretion at the top of a market cycle.

Although not a technical analyst, I urge everyone not to chase a price trend, and to buy when the odds favor capital appreciation instead of price reversal, especially in the short-term.

On balance, I am cautiously optimistic about the intermediate term (3-5 years) for equities worldwide.  I would only change that bias if a huge preponderance of stocks were to "tip over" and begin to break below significant price support levels.  Right now, we are a long way from that happening.

It is interesting to note, however, that following the latest earnings season reports there are fewer "aggressive buy"  recommendations emanating from Wall Street analysts than earlier in the year.  Perhaps this is attributable to late-year caution.  Perhaps it is related to the inertia in our political discourse, or global instability, or simply bull-trend fatigue.

There is very little doubt in anyone's mind that the run-up in global bourses is advanced.  As long as interest rates remain low there is just no other alternative to stocks for investors who prefer to be fully invested and who seek capital appreciation potential in their portfolios.  Once again, I must admonish that when "everyone" feels compelled to own stocks (or anything for that matter) history tells us it is the most dangerous time.  I am not  predicting an end to the bull market.  Quite the contrary.  But the market stereotypically undergoes cyclic phases, both up and down.  As long as my relative strength integers (RSI) remain as high as they are, I believe investors should at least prepare themselves for the "other side" of the parabola.

Where things get interesting now is trying to justify and pick apart the causes for the rally.....

I have already given you my primary element contributing to stock appreciation: low global interest rates and accommodative monetary policy worldwide following the credit collapse in 2008.  The Federal Reserve's Open Market Committee (FOMC) meeting last week proved to be a real yawn because their conclusion was to announce that the economy is doing well, and that they will continue to monitor closely any developments in price inflation.  It is widely expected that they will act (raising interest rates) before the end of this year.  Concurrently, October government statistics were released mid-week indicating that jobs and wage growth also are doing better than forecasted.  Curiously, the Bank of England used this same benign data last week to raise their lending rates by .25 percent for the first time in a decade...a modest acknowledgement of some inflationary pressures within. 

Were growth and demand not  to improve at the rate economists expect, central banks have left themselves with very little room to maneuver, and certainly not at the magnitude with which they did a decade ago.  Besides, monetary policy can only do so much.  The world requires coordinated fiscal policy to address social requirements and regional financial inequities which impede demand from sustaining. 

There are no warning lights, beepers, buzzers, or sirens that come with this "erector set" of investing.  Do not wait for the" opposite" of your expectations to occur before you address your portfolio comfort zones.  My role, and that of any professional money manager, is to make sure that there is sufficient diversification...by asset class and by security type...to heighten the probability of alpha, and to mitigate (but not eliminate altogether) the effects of complacency or something even more challenging.

I always prefer that markets traverse a carefully defined parabolic sine wave.  Unfortunately, in this linear, and speculatively, oriented current landscape the best we can hope for is to evaluate intrinsic value in companies whose share prices are igniting, and to orient our portfolios around long-term demographics and sectors that perform positively irrespective of short term influences.  I have said repeatedly that we find that potential in agriculture, technology, water, alternative energy, telecommunications, tangible assets, and consumer durables.

Market Commentary for the week of October 30, 2017

Statistics

Numbers can play such an important role in rendering meaning to certain things.  Doctors use numbers to calculate dosages for prescriptions; governments use numbers to determine population metrics...amongst other things; Wall Street uses numbers to quantify the range of earnings and price potential for corporations.  Even my proprietary database analytics, ArlingtonEconometrics, creates algorithmic equations to produce statistical probability integers regarding trend analysis and market forecasting.

But numbers alone do not tell the whole story.  While medical data might help to determine an ideal drug dosage, let us not forget that there is a person behind that diagnosis....someone with feelings, anxieties, and expectations about their medical affliction and its treatment.

Government statistics can also be misleading because ranges of numbers only speak to the phenomenon, not the people (and their individual circumstance) that those figures reflect.  Too often we look only at the upper range  of those data to extract "best outcome" probabilities, while ignoring the bottom half of the averages and the lives sometimes negatively impacted by social experience.

Wall Street, too, oftentimes becomes consumed by consensus integers and statistics that yield a conclusion which supports a preconceived point of view.  Markets going up?  Of course.....one can always find justification to ignore any contrary analysis.

By definition, numbers should be agnostic.  After all, they are simply integers written on a page, ten otherwise nondescript ciphers which when compiled in a certain order, by a certain methodology, produce yet another cipher!

Which is why when we look at a dashboard of information it becomes the lens through which we perceive  those numbers and the meanings that we wish to identify.  Too fast, too slow, too much, not enough.  Today's financial palate is replete with nuance, exaggeration, and innuendo.

We can use these integers to identify trends, over periods of time, if one only has the patience and experience to examine them.

Sometimes, deviations in the trend alert us to changes in the norm.  It is also incumbent upon the analyst in this case to take into account not just the upper range of the data, but the lower hanging fruit as well.  After all, in order to obtain an "average" one needs both halves of the data to arrive at a statistical mean.  I fear that a rush to judgment is creating a hybrid science which fails to do proper long-term due diligence.

People

In our current economic analysis, while emboldened by enormous progress being made both in financial data and portfolio aggrandizement, we are distressed by a deeper meaning of the "lower half" of the data....the multitude of those persons disaffected  or not positively affected  by the stream of corporate earnings reports, labor statistics, or inflation news.  Who speaks for them or to them?  Is progress, by definition, all-inclusive or only for a select few?

Long seen as a bellwether for domestic economic growth, the US Federal Reserve is walking a fine line between holding fast to a policy of "easy money" begun in  response to the credit crash in 2008, and pulling back on accommodation, running the risk of choking-off demand before it begins in earnest.  To be clear, consumer demand is improving, as demonstrated by earnings reports, and is serving as a welcome self-fulfilling prophesy.  My concern is that the average citizen pays little attention to the Fed, if truth be told, and if asked would probably concede that even the Fed Governors might not have their "kitchen table" best interests uppermost in their minds.

Think about how financial data supports a conspiracy of silence against any negative connotations.  Do you buy food?  Do you frequent the theatre or movies? Do you purchase cell phones or other technology?  Do you cross bridges or take trains as part of your daily commute?  Have you purchased a new vehicle recently?  Bought gasoline?  How much does that new prescription drug cost?  Yet, it is widely believed that inflation is in check.  While most of us don’t give second thought (or, primary thought) to the "little things" and how they might affect our everyday behaviors, some of these anecdotal figures mean the difference between being comfortable or surviving until the next paycheck.

You get the picture....

The bottom line is that information, data, statistics, etc. has the ability to create objective distinctions for the observer, but their usefulness is only relevant if we stop to consider the lives and hopes and expectations of those whom the data purport to represent.

Market Commentary for the week of October 16, 2017

Relative dis-equilibrium

Despite a historically robust economic cycle, the numbers behind the recovery can be interestingly deceiving.  Forget that Wall Street is grinding out new high after new high; that earnings from the world's largest multinational corporations are expanding; that "consensus" consumer confidence numbers are widening.  Think instead about emerging markets' failure to gain political or economic traction; how nearly 20 percent of the globe's population lives in poverty or upon arid underdeveloped land; how centuries of religious and regional conflicts remain unresolved; how despite your portfolio's good fortune over the past half-decade you still feel uneasy or financially constrained....

Is this a memo of "glass half empty" rhetoric?  Of course not.  We ,too, have felt the enormous benefits of an economic renaissance.

No, this is, instead, a continuation of a conversation about investment process, methodology, and decision-making  that needs to be revisited daily in pursuit of portfolio (and societal) alpha so that imbalances and exogenous noise have only a minimal effect upon our investments (and lives) rather than a catastrophic one .  Asset management is a fluid endeavor, not a static one.  Nor is it a "passive" exercise...buy it today and put it away.  The best way to compete in today's marketplace is to customize a solution for each client's individual risk/reward tolerances, and constantly rebalance the nuances around the edges.  Recall my oft-repeated investment mantra: asset allocation plays a greater role in the probability of a portfolio's capital gains potential than does any individual security within that portfolio. 

Indeed, the question now is whether there are recurring events that have become structural "new realities" and/or impediments to the success of this economic resurgence going forward?  In the wake of monetary incentives, fiscal reform, and a changing consumer dynamic, the outline of what we thought to be true about economics is morphing into new science right before us.

For example, whereas low interest rates might have been thought to be the propulsion behind economic revitalization, it appears that their omnipresence has become a necessary precursor  of evidence of their own failure to magnify any value to that recovery.

In other words, how might central bankers be able to unwind the stimulus factor without giving rise to a sense of panic about what's next, fear of its effect, or mistrust of any political motives?

Additionally, such fundamentally imprecise economic forces such as automation, globalization, and demographic  shifts  are concepts that private enterprise and government policymakers will have to address when creating fiscal and executive policies for the next generation of financial capital.  Redesigning the jobs market in the face of a new technological millennium, for example, is something we might not even have envisioned a decade ago.

How far is up?

I also observe that in spite of portfolio aggrandizement there are fewer of us who really feel allied to their place in the world, or associated with the prospects for eradicating poverty, hunger, war, terrorism, or disease, as well as providing for clean air, drinking water, and renewable sources of energy.  In fact, might not a "socially responsible" portfolio directed towards finding solutions to these issues be a real success in these times of uncertainty?

Before Wall Street entrepreneurs begin back-slapping each other in congratulations for a job-well-done, perhaps we should consider that the recovery is globally non-synchronized and that those doing well are doing exceedingly well, while others are struggling to keep up or are falling behind altogether.

Are profits and portfolio gains sustainable?  Yes, under the right circumstances.  But how prepared are you (and your portfolio) for an eventuality of things going in the wrong direction, or failing to meet your currently lofty expectations?

That's where this missive intends to direct your focus......

Market Commentary for the week of October 2, 2017

Rewriting Economics

Minus all the invective political rhetoric, this year has mostly been a satisfactory one for investors.  Both the S&P and Dow Jones have   delivered healthy double-digit returns.  For those whose portfolios reflected overweighting in Energy, Technology, and Financials their patience was rewarded handsomely.

The primary reason the markets continue to flourish, however, is because of an unusually benevolent global monetary bias.  The net effect of the central banks' largesse was to swell the capacity for borrowing money and to expand capital commitments in the public and private sectors.  The ramifications of this type of spiraling liquidity is to increase the employment rolls, infrastructure spending, military and defense expenditures, and foster a sense of economic stability that had been lacking just after the credit crisis.  At the end of this "rainbow" is an enormous debt to pay.

In feudal times, commerce was limited to the range of one's horse and buggy.  Politics...and monetary policies...were local.  However, in our global industrialized world, the ills of one region affect the equilibrium of all other nations.  Remember the old axiom, "when China sneezes the rest of the world catches cold"?   That mantra is truer than ever, and more complex.

Simple financial issues...such as issuing debt or defining interest rate policy....can create international epidemics around the globe.  Threats from far-away despots, heinous acts of  terrorism, or economic disequilibrium now resonate wider than a "horse and buggy radius" and pose instantaneous concern to financial markets recorded on a minute by minute basis.  While each of us tries to conjure our unique vision for the immediate future....the price of oil, holiday retail sales, job security....there is a precariousness about the sanity of world leaders whose actions thousands of miles away might impact our lives today.

If the answers to these macro situations don't match up exactly with our anticipations, the possibility exists that the economy might seize up and stagnate due to the uncertainty and pessimism that would be created.  Because the markets have run so far, so fast, I envision that our most pressing issue is the intensity of expectations about financial and portfolio success going forward.  Perhaps it might be prudent to reflect upon the past decade and realize that the equity markets missed out on the normal ebb and flow of typical financial cycles.  As we enter the last quarter of this calendar year we need to allocate resources for that "rainy day" fund should it become necessary.  Despite the fact that consumer confidence levels are rising as portfolio valuations do also, there is such a polarity in our global discourse that one can't help feeling that just below the surface of our zeal about the future lies a hidden apprehension regarding whether or not things will really turn out alright.

Markets

A guiding economic principle of Western financial markets is the law of supply and demand.  It is, after all, the bedrock philosophy behind earnings-driven investing and for finding the "next big thing."  Yet, oddly, stock market analysts often overlook the very essence of this "law" by applying subjective cognition to the shifts in the quantity of the very things they are trying to measure.

While it is undeniable that the intrinsic value of "an item" can be measured by the right tools, investors nevertheless continue to apply their subjective analytics to a innumerable number of factors that they think matter "most".  The value of an "earning",  for example, is mathematically unquestioned, but how people perceive  those integers seems to hold greater importance to the buy/sell decision than the integer's relative value, itself. 

Subjective matters aside, stocks go up and down because there are either too many, or too few, buyers.

So why do stocks keep going straight up?

Because more money is chasing a smaller amount of capital gains potential in a landscape that yields fewer and fewer opportunities.  As stated earlier, with interest rates resting at historically low levels there are also fewer alternatives in the fixed income marketplace to compete with the allure of buying equities.  As long as the public's appetite for risk is sated by a growing stock market, potential landmines in the economy can be averted by keeping one's eyes closed.

It would be unfathomable to think that equity markets might suspend the laws of physics, economics, and common sense by continuing to go up in a straight line without pause.  Just looking at recent profit reports from the past quarter is enough to put a chill into any overly optimistic scenario for unabated economic expansion.

Further, the supply of good stock ideas cannot be financed forever by low cost, "free" borrowing.  At some point a wave of profit taking will sweep over the markets.  The offshoot of cheap money is a bacchanal of unrealistic proportions.

To be clear, I am not suggesting a stock market reversal of historic proportions nor an abrupt end to the market's good fortune.  Rather, we should recognize that financial events are typically cyclical in nature and always provide us with a rolling stable of leaders and laggards.  When scientists and business leaders offer us a "better mousetrap", the supply of potential capital gains never really wanes.  The problem occurs when one puts all his eggs in one basket, consciously, and expects one idea to provide him instant success.

Strategy

Investors today are worried about holding on to the gains they have earned in the past half-decade, and about which catalysts might ignite big problems or changes for the financial markets.  There is a multitude of potential negative changes to the status quo...from wage and wealth inequality, dismissive social oratory, global terrorism, inordinately high valuations in tangible assets and financial instruments, to job security, health care concerns, and our own moral accountability in a world punctuated by hunger and poverty.  Whether it is any one of these, or a multiplicity of them combined, each (or all) of these topics transcends simple math or statistical stock market analysis.

These "exogenous deviations" occur in varying degrees for everybody, and represent very different meanings to each observer.  But the sum of  these factors weighs heavily upon our collective consciousness in our roles as investors, parents, employees, and citizens.  We each have a responsibility to factor-in their meaning before  they become intrusively bigger issues.  At the end of the day, there is only a finite amount of currency to spend, days in a year, and time to calculate the cushion we have upon which to rely. 

Instead, I prefer to execute a strategy of asset allocation, which I believe is the primary determinant for the probability of capital gains and asset protection.  This quarter our focus is upon (1) taking profits when appropriate and (2) allocation of our equity funds into exceptional earnings performers in basic materials, technology, infrastructure (industrials), agriculture, and finance.  While there are decidedly limited benefits to buying bonds in today's interest rate climate, we still recognize neutral to positive expectations for using bonds where equity risk might be too unpredictable.  Low return does not mean no return, and as such we feel comfortable protecting a portion of our long-term performance by selectively avoiding equity-like risk.  As with any serendipitous endeavor, there are few hard and fast rules except that we will remain methodologically pure and consistent with our macro overview which presupposes that growth is inevitable...as are cyclical ups and downs.

Conclusion

We see a number of "grey areas" on the horizon, circumstantial ambiguities which color investor's perception of the objective data.  For some, this may be a selling inflection point.  Others will have a more balanced scorecard with which to measure forward progress.  It is imprudent at this juncture to put all your money "on black" and roll the dice.  That type of stop-start investing is a perfect storm for inconsistency and potential disaster.  After nearly a decade of good fortune and portfolio aggrandizement we would rather play it safe until we see a more discriminating set of global circumstances that orient towards multilateral trade, earnings acceleration, and social integration.

If you think about it, this would be a good time to wonder what your portfolio will look like 10 years ahead, and to organize those numerous factors...known and as yet unknown....that objectively make the investment process less stressful.

Suggested Balanced Account Asset Allocation, Q4, 2017

 

Equities:            42%

Fixed Income:  28%
Cash:                   30%

Market Commentary for the week of September 18, 2017

Too much information

It is fairly common knowledge that the more input one has before making an informed decision the better likelihood a preferred outcome might be.  Well, I'm going to go in the other direction for just a moment to claim that the efficiency we seek in stock market analysis is sometimes dimmed by an overload of useless or redundant information found in mediums such as the internet, media, and other business outlets.

Sometimes the essence of what we seek (capital preservation, portfolio appreciation, etc.) is best obtained with less  data flow and more by a reliance upon long-term fundamental review and good old-fashioned common sense.

Some have suggested that we live in a new paradigm...one punctuated by 24 hour access to all sorts of information.  But as a result of this generation of thought there has also been a bravado to suggest that markets can't correct downwards; that access also provides greater nimbleness; and that there is an entitlement to portfolio success that older generations (ahem!!) just couldn't have foreseen in their day.

Indeed, while "new math" has given us, this writer included, models and methods that make mathematical calculus more skillful, even strategies too boldly applied  are doomed to fail because of human aggression or a reluctance to accept that markets, like life, have their inevitable ups and downs.

The fact that one might not have lived long enough to experience that reality....or to acknowledge it.....doesn't make him/her immune to the orderly progression of things.

I have even heard a member of this new paradigm generation suggest to me that "investing is not a gamble anymore".   For his generation, indeed, investing in the market has become "too easy".  Rolling the dice and always coming up a winner will do that to the uninitiated.  Whereas we have laws against playing Russian roulette with a loaded gun, we have no such prohibitions against committing financial suicide.

Deep breath

Look, I deal in numbers and calculations all day, every day, too.  I use data because when applied judiciously it can out-process even the most basic of human calculations and instincts.  Information is the foundation of successful investment outcomes.

But today's appetite for data has reached such unprecedented levels that what we used to think of as balanced decision-making has sometimes become skewed towards an expected domain, and uncorrelated to impartial schools of thought.

More so than in the past we are "data rich and strategically poor".  The tools we have at our disposal, as in yesteryear, are only as good as the operator using them.  In many cases, the tools have outpaced our ability to leverage them, leading to the proverbial "data overload".

Today one can "Google" anything.  One can also find homogenized answers to any investment question.... ETF's and mutual funds, for example.  The true value of portfolio management as a profession is to profile the client accurately and to customize a solution which is unique to his risk/reward tolerances.  Objective data mining has become richer and deeper than ever, no matter who clicks the switch on the operating system.  But antiseptic answers will only get you so far.  That's why it is vital to have an empathic professional with whom to interface.

So let me ask this question: with all this data at our disposal, why, then, have we been unable to gain traction on solving some of our cultural, financial, and moral dilemmas that continue to divide cultures, citizens, and nations?  Modern financial engineering seems only to have prepared a one way street for the most fortunate.

If you really think about it, the lessons we have learned from ubiquitous information access in this "new paradigm" should have already resulted in greater personal introspection and awareness....not less.  Not more rioting, poverty, terrorism, or hunger....but less.  No? 

The thing is, as this observer sees it, is that you can't claim to have achieved a New Paradigm of enlightenment if you don't have everyone along for the ride.

Market Commentary for the week of September 5, 2017

Not my  market

In the past 8 months we have seen a succession of new highs in the "averages", portfolio valuation explosion of historical proportions, and a skeptical but grateful buoyancy by retail and institutional investors.

We have also seen a complete breakdown (some are calling it a "melt-up") of cyclical and statistical methodology and numerical quantifications.

Is anyone really  believing what they are seeing?

Hey, like any portfolio manager (or client, for that matter) I do not begrudge the market's advance, despite how my rhetoric might be perceived.   In fact, no one can dispute that the objective economic data which underpins the economic recovery is sustainable for the long-term.  Rather, what I find most troubling is the improbable disconnect and high level of conjecture that characterizes speculation  on the one hand and hard facts  on the other, making it nearly indistinguishable between what constitutes a good investment and a less desirable one.  There are simply no options available for the kind of conservative, alternative purchases that usually define a well-balanced financial marketplace.

There is ample evidence (employment data, inventory expansion, e.g.) to support the notion, irrespective of exogenous global current events, that politicians and monetarists have been trying to learn from the excesses earlier this millennium and have attempted to fashion fiscal and moral judgments that relate more directly to the needs of their citizens.

However, there are irrefutable anecdotal episodes of corporations using low interest rates to manipulate supply and demand of their shares by buying back equity and debt in the public markets thereby helping to explain how a recovery can last well in excess of a "traditional" cycle advance duration.  It might be presumptuous to assume that trading "on margin" to increase the appearance of profitability by limiting "float" demonstrates a breakdown of ethics or good accounting practices, but there is no doubt that the wealth gap is getting wider during this bull advance as profit margins are expanding, the rich are toying with private placements and direct investments, valuations are growing...all the while the less affluent are having difficulty affording decent housing, staving off poverty and hunger, paying more for healthcare and transportation, and barely saving enough for retirement.

Who, one might ask, is helping to close the "empathy gap" that is being exacerbated by an ever-rising Dow Jones Industrial Average?  There seems to be a direct correlation between Wall Street's buck-chasing and a permeating stench of manipulation and greed.

Don't blink

Our data indicates that money flow is racing into conservative assets and "back-end" sectors, such as Utilities, Basic Materials, and Energy.  There still exists a powerful potential to make money in the market, even at these lofty levels, but the challenges of political and financial headwinds for the world’s central bankers still pose a mighty stern dilemma going forward.  Despite what we earlier described as "improving fundamentals" the laws of supply and demand always drive prices....in equities, commodities, and business services.  And right now we see demand in all phases of the economy as tepid. 

Forces of greed and empathy can  coexist simultaneously as long as compassion for others is not lost in the process.  When, or if, the bull cycle recedes there will be an asymmetrical response when the well-off race for the exits trying to protect their hard won gains.

It matters not whether you are in the economic majority or the minority.  Ignoring basic tenets of physics and mathematics can get you in a lot of trouble if you don't bring a refined and experienced methodology to your investment endeavors.  Our models are not  indicating a massive collapse of all economic tents, but there is sufficient proof that we are in the latter stages of a bull expansion begun nearly 8 years ago.

There simply is no alternative to buying stocks right now if you want to build net-worth and discretionary capital for the future.  But, of course, simply bidding prices higher because there is no other choice is the very problem we see supporting a dubious advance of our portfolio's good fortune.  With proper diversification and asset allocation we hope to keep at bay the effects of any ruin which might spoil the party.    

Market Commentary for the week of August 21, 2017

Loss of energy

It seems to require a lot to take the starch out of the market's sails but, goodness knows, they've sure been trying.  Even the brink of global nuclear war wasn't quite enough  to derail a recent sequence of new highs in the Dow Jones and S&P!!

And why not? US unemployment is at a 10 year low.  Wages are rising, if only modestly.  And corporate earnings continue to impress.

Hold on a minute.  Perception is not always truth.  And, I would argue, the markets are doing their best against a backdrop that doesn't fully corroborate people's vision of what is really happening in the economy at-large.

The most noteworthy of these contradictions is that the wealthy (corporations, individuals) are indeed prospering as stock valuations increase, but the gap between the well-off and those who aspire to wealth is dangerously widening.  Less than 17% of the population actually has a financial stake in ownership of stocks and bonds, the majority of those holding mutual funds or employer sponsored retirement plans.  We shouldn't ignore the discrepancy between direct  equity ownership/speculation and indirect passive investing.  Those aforementioned unemployment statistics also reveal the tale of many gainfully employed persons in jobs which don't offer these professional perquisites.

A majority of those earnings successes, however, is confined to multinational big-capitalization names while smaller cap and emerging market shares take a smaller percentage of the gains.  Most upside news surprises are already priced into stocks at these lofty levels.  As breadth narrows at the market's apex, I see migration into more defensive categories like tangible assets, utilities, and consumer non-cyclicals.  Last week's precipitous fall in global averages can't be directly attributable to heinous domestic political debate, or devolving race relations, or even terrorist acts.  Rather, the market fell of its own weight because, quite frankly, it is mathematically improbable to sustain linear momentum like the kind we have been experiencing.  No one knows what might trigger the next capitulation, but history tells us it's "in there".  

The second significant hedge to the market's success is that we live in a period of stingingly low interest rates that offers no real alternative to stocks as an investment option.  If, for example, one were to choose any other asset class in which to invest (e.g. real estate, art, jewelry, commodities) the cost of borrowing money to obtain these items is so low that over-leveraging, or margin borrowing, hyper-inflates the true value of the asset....the same precursor that brought upon the last credit crisis a decade ago.  We have to be careful that debt levels don't begin to surpass our real  ability to pay back the loan!!

Loss of faith

Lastly, what I find particularly troubling is the hyperbolic exaggeration with which the stock market's pace is being defined.  Indeed, fantasy is not reality, nor can one ever logically conflate the two.  The strain of daily living for those just "getting by" financially is our generation's embodiment of a lack of empathy, and an affirmation of societal greed, that defines this current linear bull phase and our public condition.

We've had these aberrations before and they lead, usually, to introspection and problem-solving at best, market corrections and social unrest at worst.  Of those two, where do you think we are now?

Not being a social scientist I am not expert enough to characterize the resolution to our social dilemma.  But the "problem", if there is one, with the markets can best be mitigated through prudent portfolio analytical methodology.  Beginning with a macro view to define all risk parameters, money flow conditions, and a host of other economic data, we should be able to cut through the subversions of "daydream investing" or hyperbole offered by television commentators and anonymous bloggers.  Reliance upon fact-based statistics and quantitative integers, for example, provides a framework which offers guidance about portfolio drawdown protection.  Taking the guesswork out of investing by using my proprietary algorithms and quantitative cycle analysis enhances our client's upside market potential, while trying at the same time to limit downside risk.

Methodology doesn't require abandoning hope or exuberance.  A healthy confidence level is an investor's best asset.  But the ultimate question for me is whether a skilled analyst can outperform in a variety of market conditions against a similarly confident amateur who tacitly winks at non-correlated events and fails to anticipate the wretched aftermath of his unforeseen mistakes.