Market Commentary for the week of June 12, 2017

The well-informed investor

We've been watching for several weeks as the stock averages have been registering a series of new highs, wondering how the effusiveness of owning stocks really  corresponds to the underlying news and data.  I'm still of the belief that you must play these rallies selectively and cautiously.  This is truly where an investment discipline becomes more valuable than hyperbole or hunch.

I've tried also to point out in these missives that the divergences in the numbers are subtle, but significant enough that there is no such thing as a sure bet or an all encompassing A to Z rally.  Even if your portfolio is currently "in the black" for the year, you can't afford simply to rest on your laurels at these lofty heights.

Having said that, we are far from morphing into a huge negative bear phase.  To the contrary, the rally is justified and based upon years of rebuilding and economic reorganization.  It's just that not every sector, nor every stock, is matching up against others with the same degree of precision.

We remain bullish on those sectors that demonstrate end-user demand (biotech, energy, utilities) at the same time favoring categories that hedge our portfolio's bullish posture (basic materials, foodstuffs, cyclicals).  Somewhere in the middle lies the great unknown both in terms of equity price performance as well as earnings expansion potential (financials, industrials).

The coming months are going to be revealing as we digest all sorts of exogenous news events (terrorism, politics) and organic machinations (new highs, trend reconfigurations).  It is important to be aware both of the positives and  negatives that inject themselves into any comprehensive analysis.  Without a doubt there are plenty of variables on both sides of the equation.

One must also factor that trends are transitory, constantly ebbing and flowing, and that nothing...in either direction ...is indelible or permanent.

That is why we continue to look for "one-off" transactions to fill in the gaps, and also to broaden our portfolio diversification.  While there certainly might be some unavoidable valuation capitulation in the near future, we don't want to give it all back by inadvertently forgetting our fundamental tenet that asset allocation plays a greater role in the probability of portfolio capital appreciation than does any single security within that portfolio.

In conclusion, we view the current market trends as solid but pointing towards a possible exhaustion.

Primer

When evaluating a "trend" we look not only at where we are, but where we've come from.  In that regard we are clearly topside of the current price trend in the global averages and relative strength integers.  Think about it: we would not only have to confirm current underlying statistics to move higher from here, but also to place our faith in the fact that gains will extend several standard deviations well above their valuation levels begun nearly six months ago.

By definition, quantitative science tells us you can't fill a vessel "fuller than full" (100%) nor empty it more than "empty".  One would conclude, then, that successful portfolio management at this juncture breaks down to a game of statistics in which you, the investor, must decide "how much is enough?"  The worst thing any client can do is to become greedy.

What if you miss the next up-leg?  How much is the gamble worth?

One can always find a reason to be bullish about the long term.  It's the waves and troughs that I get paid to worry about....

Market Commentary for the week of June 5, 2017

Systemic inequality

With so much anticipation and focus being directed towards "earnings season", it's helpful to reflect upon what constitutes "an earning", and why there are differences amongst them.  Think about it....we have all read recently about unfortunate passenger-versus-airline experiences.  It's no coincidence that cutbacks in customer service, seat spacing, and fare increases are directly attributable to a culture of financial restraint that insists upon getting the most with the least amount spent.  At least that is what the narrative appears to be from our perspective.  These short-sighted decisions fail to take into account the most critical element of any business equation: customer satisfaction and repeat business.

Thus, big business puts cost in front of service.... an homage to Wall Street biases.... delivering earnings based exclusively upon appeasing analyst expectations.  But rest assured this is not only an issue for the airlines industry.  Every one of us has a story to tell about a diminution in customer service reflective of a change in mindset that puts the balance sheet ahead of moral suasion.

Lest you think this thesis is an indictment of all businesses, a broad-brush condemnation of all corporate decision-making and government culpability, consider that even amongst earnings performers there is a hierarchy of responsible, well respected companies, as well as an “asterisk" placed next to those whose sole purpose is to reward stakeholders at the risk of alienating customers.  The paradigm is never all black or white.  Somewhere in the middle resides the preponderance of well meaning, well intentioned do-gooders.

Reformation

This missive hopes to open a dialogue about what constitutes meticulous, competent equity analysis and why it is important to identify ineradicable earnings performers versus the one-shot-wonders and hangers-on.  Reckless use of common accounting practices in order to fabricate surpluses and profits places the supremacy balance at risk, and modifies the true structure of portfolio management by rewarding the alchemists equally as well as conscientious citizens. 

Simply because a company has the ability to increase quarterly dividends by one penny does not indicate anything deeper about their value system or how they view their obligation to their environment, their neighborhood, or their customers.  Rather, it says only that they have figured out how to oblige their stakeholders to make a profit.  The analysis, however, must be deeper than that.

Sometimes it seems as if the corporate "bar" has been set so low that profitability is merely "one more widget sale away".

The fact that the stock market is sometimes oblivious to this dichotomy between earnings and socially responsible governance speaks volumes about what moves the needle on Wall Street.  When bull market rallies occur, even bad news is not sufficient to penalize companies that refuse to adhere to societal standards of good behavior.

The next time you're treated rudely at the bank; bumped from a seat on an airplane; paying more for less service; or pleading for technical assistance to no avail, think about the board of directors of these companies sitting in their offices who frankly don't give a damn.

There is a reasonable argument to be made that in today's cost conscious environment the relationship between quality service  and expenses paid has become inverted.  The reason why businesses can get away with such rude behavior is because they can!! The demand cycle in our economy is still not such that business feels any responsibility to respond to a decline in civility or to train employees that service is a right, not an option.  When the economy improves to such a point that financial power really does shift back to the consumer, perhaps then we will see a gradual shift in the culture of sales and service.

That is when earnings analysis will become more of a precise and rewarding science, and shareholders might finally be on equal footing when comparing data with which to gain a competitive edge.