Market Commentary for the week of January 30, 2017

Big love
I get a little concerned sometimes when the questions I am asked fixate upon one stock, one topic, one sector, one bias.  Not because these particular favorites aren't relevant to each questioner's interest or point of view, nor that on their own each specific element doesn't add value to any discussion about the markets, portfolio management, or economics and politics in general.

No, what particularly troubles me is a kind of obsessive component to the question and those asking the questions...as if each proprietary concern is the only concern, the only thing...according to each...that matters.  This is the residue of a "fast money" and quick profit environment that is a sign of our times.

"How did XYZ Corporation close today?"

"What's the impact of the Fed's announcement upon market performance?"

"Biotech is the place to be, don't you agree?"

"Follow the volatility indices....that's the true direction."

Yes, when taken in sum these, and many other, elements comprise a vast array of data which when correlated and analyzed together yield a sharper perspective upon investor sentiment, trend analysis, market performance, and political debate.  In fact, my proprietary database processes nearly 115 such market related data just to arrive at a probability quotient scale to determine location and duration of trend factors.

Here's the problem, though: markets and market observers have become too unyielding, too proprietary in their points of view.  As with many things in today's culture polarization and bifurcation are now becoming preferred methods of developing opinions.  I would suggest that society is becoming less tolerant, more strident in our divisions.  Interpretation of data at the expense of seeing the whole picture may not be as sexy as making 7 points in one day on a biotech/pharmaceutical stock, but sexy doesn't  necessarily initiate secular trends, define them, nor move them.

Below the soil

One of those omnibus topics that goes largely un-discussed in this fast paced world is the cyclical/secular pressure being put on the globe's overuse and under service of our natural resources.  For those who fear the inflation bogey, one of the areas in which it might manifest most aggressively is in agriculture (foodstuffs).  Concurrently, some are forecasting an uptick in civil unrest, nationalism, and an erosion in confidence in our traditional social services institutions.  One might argue that these are not future-related fears, but actualities already on display.

The fiscal crisis of 2008/09 transformed global secular cycles from consumer-led to epic manipulation of fiscal/political strategies.  At some point, inflation will  reignite, resulting in price increases for energy, basic materials, and food.  The hoarding of precious product, might also result in changes to world order, the balance of political power, and shifts in our attitude about the less well-off amongst us.  Already, the political ramifications of a wealth and commodity gap worldwide has come to the fore in world capitals as a powerful movement of social protest.

Agriculture and climate shifts are to this next millennium as industrial revolution was to the last century.  Understanding the personal and economic impact of water scarcities, food shortages, energy depletion, health pandemics, and other demographic changes helps us as investors, and citizens, to identify pockets of inequality, economic opportunity, and social/moral need.

Improvisation and science are usually thought to be on opposite ends of the spectrum.  The kind of discipline necessary to build long term profitability in client portfolios emanates from adhering to and developing strict methodology and macro strategic thinking.  That's not to suggest that there isn't room for the "human factor"...in many cases a subjective override is necessary.  But relying upon game-playing, hunch, or hyperbole is oftentimes a recipe for disjointed portfolio performance...or worse.  Open your aperture of analysis, and performance, by widening the possible number of elements for consideration. 

Market Commentary for the week of January 23, 2017

Forward or back?
It was just a few weeks ago when the Dow Jones Industrial Average went on a tear.  The index saw a large part of its annual percentage gain occur during a very brief post-election run.  "Prosperity for all", or so it seemed, was just around the corner and obviously preordained for unending duration....

Yet now, just a brief time later, those sobering questions of recovery  or reversal  are resolutely back into our analytical lexicon.

Many who watch the market's activity today are reminded of another period in the nation's history, almost a century ago, in which comparisons to another post-recession period of retreating stimulus and anti free-trade speech thrust the business community into consternation and a spiral to survive.

As a result, there are those who wait alarmingly for the historical mimicry and to see what emerges from this next session of Congress, and whether their fiscal policy proposals really do attempt to create change for the US economy.

Conversation and debate do not result in simultaneous change, however.  Because there is a lag in time between proposals and law-signing, the real "value" to be found in all this preamble lies in the reactions (and actions) by businesses and households to what they perceive  they hear.  We, of course, know what the politicians want  to do, we just don't know yet in what form it will take and how the general population will feel about it.  Basically, all the financial and business-related information we knew and had three months ago is still the same: conditions are improving, but very slowly and not at the same rate for everyone.  Simply tossing aside that data to create a "new mandate" is narcissistic and unnecessary.  Just because there are political and jingoistic concerns about fairness in global trade does not mean the nation should hunker down and withdraw.  Washington must choose whether to reign in domestic spending or to accelerate it.

The new "new reality"

The problem with all this conjecture is that the stock market now no longer seems to be an accurate barometer, or arbiter, of what's happening in the same way analysts perceived its accuracy for doing so last year.  Valuations can certainly be helpful when analyzing trend lines, but whether or not stocks represent the "best snapshot" of America's current economic condition is up for debate.

Of course, all  data are relevant.  We choose to be invested on behalf of our clients across an array of sectors and probability quotients.  But we also recognize that the market is lagging those indicators.... more so than last year.... because the political debate is much further out in front of the news, and because stocks are at accelerated price levels at which the winners and losers are less able to be delineated than when trading at the nadir of valuations.  Yes, the market is going in the "right direction".  But as I wrote last week, right and left/up and down are not definitional certainties anymore.

Despite all that, any potential slippage in valuations from here would most likely be a temporary thing.  As noted above, the data are improving, so it would be quite difficult to stop economic momentum on a dime or by fiat alone....although there might be enough hubris amongst our legislators to give it a try (?)  Even at record levels, stocks are still fairly priced because the social and financial indicators are still trending well ahead of current equity price performance.

Despite the convulsiveness that might lie ahead for the financial markets in the next few weeks and months, there are still a number of requirements that have to be filled by the private and public capital markets arena.  Looking at the macro picture, we would suggest that research, ingenuity, and financial resources have not yet scratched the surface of potential to improve the human condition.  This is why we still see secular potential from a number of sectors.

Besides, if government is not the answer  to the problem, then it must be part of  the problem.......correct?  

Market Commentary for the week of January 16, 2017

The 1 percent-ers

Economic forecasts abound about the prospects for 2017 domestic and global activity, particularly now that the US Presidential election has concluded and the pendulum of focus is shifting to elections in Europe.  Those forecasts typically depend upon quantifiable assumptions or truths that each strategist believes best represent their thesis.  However, what I find typically distressing about today's forecasting landscape is that without knowing the details, the only thing we can predict is future uncertainty and volatility.

For example, the Federal Reserve raised its benchmark interest rate last December (and promises more increases this year) predicated upon their economic references and data that additional capital spending and incentives to encourage borrowing will produce modest, if not massive, new undertakings which produce new jobs, infrastructure redevelopment, housing expansion, and technological innovations that add to the nation's GDP, productivity, and profitability of businesses.

In reality, though, the economy seems mired in an extended period of slow growth and disappointing Gross Domestic Product.  Some doom-seers actually believe that austerity programs abroad (Germany, e.g.) and a changing population demographic here at home is more likely to ignite the next recession than to create a new economic boom.

The debate about the Fed's role in all this is largely irrelevant until we know the design, intent, and details of government fiscal policy.  In effect, the Fed has already played the "spending card", while we know not whether the mood in Congress is to respond to those who put them in office who abhor deficits and Federal spending, or to lean towards the slogans and campaign promises of this new government team to become

"the jobs" administration at any cost.

No doubt, the markets would become extremely buoyant about corporate profitability specifically and stock performance overall if any stimulus was to materialize and if it were directed at projects and appropriate relief for those who feel "left behind" by the upheaval thrust upon them in the last recession by the avarice of institutions and individuals that have largely gone unpunished or identified in its aftermath.

Morning in America

What we are experiencing globally is a host of withdrawals, populism rallies, and a disdain and disrespect for government.  These feelings of mistrust threaten the world's economic and political status-quo.  This sentiment is no longer just a "political theme" as was used so masterfully during the US election campaign.  No, it is now a pending social movement waiting to explode.  The regrettable existence of a new, two-tier, vertically integrated social infrastructure that delineates rich from poor has widened the wage, expectation, and "hope" gap greater than at any time in the last  century.  Yet those in the top strata seem to be in no hurry to lend a hand "downwards" to uplift the less affluent to their level...or so it seems to this blue collar global social movement.

The exclusive, well-defined strata of Wall Street and the affluent is defined by parsing "small data" to achieve success and upward mobility.  On the other hand, for those who aspire to great wealth and empowerment their measurement yardstick is only by results.  Today's immediacy of technology and social networking delineates very specifically the boundaries of status, power, and opportunity.  The "usual" is no longer usual.

Our global leaders need to recognize and respond to this new social reality.  Either we aspire to the notion of one planet for all, or we start to carve it up for our own territorial cultivation.  The "same old ideologies"  are being torn and tested as never before.  Political speeches and slogans do not translate directly into results or prosperity.  For those who have not yet participated in this superb financial market rally of achievement that some of us have recently taken, perhaps a helping hand of charity and contemplation from their peers above might apply....

Market Commentary for the week of January 1, 2017

An Untenable Transition

As the US markets surge into the New Year, fresh off the US post-election rally, we regrettably see reason for both optimism and pessimism.  For certain, even the buoyancy of building wealth in the final few weeks of the year has done little to quell the insecurities of those who feel alienated from the facts that substantiated their good fortune.

Yes, the data are  better, and the contagion of buying stocks that we saw in the last two months was emblematic of that fact.  The question going forward is whether this is a fact-based pattern of sustainable economics, or a cause by itself to withdraw from the process and make a careful reassessment of what conditions led to the rally, or which might underpin it for months hence.

We are dismissive of this particular rally anyway because the markets have been confirming a strong upside bias ever since the post-recession boom began in 2009.  However, our concerns became even more focused when we looked at the underlying fragility of the global data, while the rules of the game seem not to apply equally to everyone on the playing field.

As such, we think we are witnessing a sub-level of defensiveness and flight to quality  into more traditional sectors of conservative investing, such as Utilities, Consumer Staples, and Tangible Assets (real estate, metals, etc.)

The financial riot into stocks that began last November caused the Federal Reserve to pump the brakes by raising interest rates and threatening to do so repeatedly in 2017 to steady what they believe is, or is yet to be, overdone enthusiasm and far-reaching plans for domestic capital expenditures.  In its December "leaked commentary" it was revealed that the Fed's officials were rife with references to "economic market risk”, "caution", and "deceleration in consumer spending",  as well as static expenditures for new job creation.  In other words, go slowly and do no harm to this very cautious, nascent recovery.

In their view, a history of wage deceleration and earnings gap issues between the ultra-rich and the not-so-wealthy figures to cause more corroboration of deflationary pressures than inflationary ones.  Thus, in their minds, the recovery really hasn't matured at all and looks more to be an opportunity for those flush with cash than a reason to go all out fighting the promise of unbridled GDP.

Although there are those who argue that economic activity is vindicated and has been responding dependably in the last few years, we still see many signs of gaps in the way in which the recovery affects different segments of the economy.  Most retailers last year, for example, are admitting that despite seasonal adjustments, they had been relying more upon price reductions  during the year than price (and margin) expansions, citing their customer's tenuous job and earnings status.  Further, even though the unemployment rate has been going down in the US, there is an even stronger suggestion that unemployment in certain regions is higher than the national averages, worse specifically in areas of poverty that continue to suffer from manufacturing declines and inexpensive overseas competition .  This conversation was, after all, one of the central theses upon which the outcome of our recently concluded election was premised.

We would suggest that price-pressure and price-consciousness will continue to reverberate for several more quarters at least, until the political and fiscal debate is ironed out.  Energy prices have recently spiked, and many consumers can cite anecdotal examples of cost increases in their daily lives.  As a result, our research is looking for muted corporate earnings acceleration patterns in the next few quarters.

We have also stated that we believe the Fed overplayed its hand even in attempting to prime the spending pump as far back as the mid-2000's.  Indeed, the markets may have rallied for the last decade because there were no alternatives in which to invest while rates were so low, but the economy failed during that same period of time to reproduce the fundamental underpinnings of a traditionally strong market base.  It is for this reason almost entirely, that we enter the new year with a skepticism about the stock market's ability to maintain upside linearity in a decidedly uncertain parabolic world.

 

Markets

It used to be thought, perhaps 30-40 years ago, that globalism  was the panacea for what ailed a failing regional economy.  Selling into other markets, for profit, was a lot better than going into bankruptcy in one's own neighborhood.  It wasn't unheard of to be envious of one's rivals and other leaders of entrepreneurship.  In fact, Wall Street made a fortune out of peddling product development in country-specific funds  as the solution for uncovering new opportunities for capital gains.  Identifying those demarcations that revealed the basics that made for unique competition amongst nations was at the core of solving our capital gain diminution problems.

However, the conversation today seems to have turned on a dime...now suggesting that what made us cooperate and conjoin for progress has become the roller-coaster ride that has precipitated the cause of all our negative imbalances, the cause of our displeasure and personal misfortune.  The current conversation lays bare the present conundrum that domestic and other global hangers-on must convert to our way of thinking, of doing things.  Does the march to success of one nation really preclude the possibility of other nations participating......or encourage it?

While the developed nations appear more cordial and willing to dissect the issue, it is a more strident underbelly of conflicted and aspiring nation-states which hold grudgingly to the notion that the world's economic fabric is unfair, disconnected, and something to be feared, not embraced.

Fundamentally, it cannot be refuted that growth is driven by demand, that earnings are the successful execution of management of expenses.  Yet, there are still those who aspire to earnings at any cost, to the exclusion of social and moral responsibilities of building a better planet.  This misplacement of our value system is intolerable, and indefensible.

This past quarter was a manifestation of those basest elements, we believe.  In the aftermath of the election, those market forces that rallied for national pride and exclusionary practices.... profit at any cost..... won big.  The result is going to create a rift, politically and economically between the notion of globalism as savior of the underserved versus a hardening in defense of jingoistic politics and standards of evaluation.  Any misappropriation of resources...natural or otherwise (water, food, energy, technology, real estate) by countries or individuals for nefarious reasons is an affront to the principles of socially responsible capitalism, and should be disavowed.

The essence of truly great, sustainably responsible profit-making is not how  or when, but why.  In a broader sense, we in the financial community are at a crossroads at which we run the risk of leaving behind the least fortunate; the truly hungry and impoverished; those without access to replenishable resources like energy, housing, education, and personal security. 

Households got wealthier during the 4th quarter.  But at what cost?  The debate between....and potential cooperation amongst.... political science, ethics, economics, and national pride will become the question of our generation in our analysis as we embark upon our quantitative review of opportunities for the next several quarters.

It is too early to tell whether the trajectories of both stock prices and alchemic earnings accretions can keep pace as synchronistic allies.  Somehow, somewhere, the bills for our indiscretions are going to have to be paid.  Ranting about those things that divide us does not make us seem as one.  If, by some stroke of political genius, the world economy does  coalesce even while being harangued by federalism  and populism it could prove to be the single greatest economic super-nova since the Great Depression.  But it won't take us long to know that outcome, because traders are smart, savvy people who seem to know the score before others even recognize the similes.

Conclusion

Do you remember the year 2000....all the hoopla over Y2K, the changeover in the millennium?  Do you remember the anxiety everyone felt about the mystery and majesty of how a new technology would turn over and transform into the next generation?  Would the shift work, or not?  Recall our innocence in a pre-9/11 world, a more introspective time full of hope and potential?  I ask because the world seems now to be juxtaposing a sense of anxiety about technology with human deviousness that fills some of us with a sense of foreboding and fear.

The long political season just-passed was about answering the questions of why, in a world accelerating marvelously at such an historic pace, so many feel a lust for a bygone era, a time when they felt more connected to persons and events that surrounded them.

And that sense of ill-at-ease has become the new measure for quality of life discussions, stock market analysis, morality, and other factors which might sustain economic and social opportunity and prosperity.

Thus, we are fastening our seatbelts and preparing for a whole lot of turbulence.....

 

Suggested Balanced Account Asset Allocation, Q1, 2017

Equities:            52%

Fixed Income: 15%
Cash:                  33%