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.
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