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.
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