Market Commentary for the week of December 17, 2018

Old rules don't apply

Markets have become so volatile, and so vexing, lately that it is not unusual to see an investor figuratively pick up his portfolio "ball" and just go home to wait it out.  I'm not referring to a "sell everything" mindset in which one attempts at some later date to time their next entry back into the market.  No, it resembles something more akin to just leaving the festivities to someone else for the time being, holding on to whatever gains one already has, and reassessing the situation after the turn of the year.  To that effect, I am predicting that while the numerical integers surrounding the daily performance of the averages might continue to be significantly volatile for the balance of December, the sheer breadth of participation could be somewhat muted.

So why, then, do investors continue to play by the "old rules" in which buy and hold  produces severe emotional distress every time the Dow Jones goes down (or up) 500 points?  Certainly, not tinkering with the portfolio is more advisable than micro-managing one's account.  But current events are a dreadful reminder that markets do go down and that euphoria and bull markets can only last for so long.

Therefore, this is also a good moment to suggest that even though the last few years have been financially rewarding, the whole endeavor of portfolio construction and management is to reduce risk and to mitigate against the potential for collapse....such as we are seeing currently.

Was this bear capitulation a surprise?  Only if you haven't been paying attention.

The value of a quantitative discipline (such as the kind my proprietary database, ArlingtonEconometrics, proscribes) is that one can more easily compare valuation metrics against a reliable data history so as to remove exogenous variables that might distort the analytical process.  In other words, quantitative methodology provides a consistent numerical framework for creating asset allocation within a portfolio to reflect more precisely each client's risk/reward metrics.

Which are you... buying and holding, or rotating sector weighting  to cushion the effect of a myriad number of factors that influence portfolio dynamics and performance?  To be sure, there are many influences upon financial assets right now, from interest rates, politics, trade, social imperatives, and more.  This is not a time to move along without a science or discipline.

Lesson learned

Conventional modeling is not right for everyone because it imposes a one-size-fits-all predisposition to building wealth.  And, as we experienced in 1999 and 2008, it also doesn't allow for subtleties and unintended extremes, nor a speedy recovery from market catastrophes. 

Having a "balanced portfolio" doesn't imply inertia.  Rather, it means boasting a fluid process of daily evaluation...even if there are long periods of portfolio transactional inactivity as a result.

The basic fallacy of the "old rules" is that they accept as true that times are always indestructible.  And yet, history...and current events...shows us that each day  is fraught with its own unpredictability.  To wit, the current investment tapestry has become a living nightmare for traditionalists.

The goal should always be to diversify and to recognize that efficient adjustments in asset allocation play a greater role in the probability of portfolio success than does any individual security....or offbeat speculative wager you might make.... within that portfolio.  It is human nature to think about your portfolio in terms of each component's  profits, losses, price, etc.  I understand that.  But successful investing is regarding the well-oiled aggregate  of portfolio mixture, time horizon, and performance relative to one's long term discipline.  

Market Commentary for the week of December 3, 2018

Spiraling up...or down?

It may take considerably more time to unravel the mystery of these second half of the year intense volatility swings because the underlying issues confronting the financial markets are so diverse.  Other than measuring the point gains and losses of the financial indices on a month to month basis, many of the factors that are currently impeding or influencing stock price performance are not as easily quantifiable.

Investors seem to forget...and far too often, I would submit....that investing is a long-term endeavor and that given time, the markets usually sort out the issues.  However, it is much easier to lay blame, make excuses, project unrealistic expectations and sulk in a corner of a quiet room than to focus upon the primary purpose of putting one's money to work in the markets: to generate return on investment.

There is no question that the economy is "slowing" a bit, accounting for trade wars, tariffs, interest rate increases, and a changing perception about the ability of the world's bourses to sustain the near-linear rate of appreciation they have exhibited in a post recession climate.  But let's not forget that the data are improving nonetheless.  The incredible thing about short-term manic price capitulations is that panic feeds off of panic even when there is suspect justification for the chaos.  Don't worry....when the bears are done with their selling, the market will find an acceptable leveling off support spot.  Today might not be the most compelling entry point for the stock market, but trying to time the absolute zenith and nadir of the averages is a recipe for disaster, as well.

It is curious, and worth noting, that recent price declines are more severe and quicker than one would like.  Thus, fewer buyers are coming in to rescue the carnage, leaving some pricing gaps that will be harder to repair in short order.

As a result, there are fewer survivors of the downdrafts, including the "brand names".  All ships are lowering to a constant drumbeat.  This is a classic example of "worry" confronting "optimism".

However, it would be quite unusual for the economy to sink into a recession without anyone noticing in advance.  The battle for our hearts and perceptions is now a contest between those who follow the point changes on the Dow Jones Industrial Average  versus those whose allegiance is for the most part to the data.  Once again, a case of mistakenly conflating the markets with the broader economy-at-large leads to a perceptual disconnect.

Baby and the bath water

There really is no definitive way to defend against bear capitulations. Some are wondering aloud if they should sell everything and wait on the sidelines until the carnage is complete.  That is unrealistic....and too late at this juncture, anyway.  I had been predicting for quite some time that the stock markets were far outpacing the economy, in optimism, anticipation, and valuation.  Now that the two have inverted while intersecting it is the market's turn to pause, and the best one can do is to respect that, diversify one's risk, and wait for normalcy to return.

With business productivity escalating, earnings growing, employment widening, and portfolios expanding shareholders should rationally identify that opportunity is still abounding.  Perhaps not in a way that impatient investors are able to see at present, as consumer stocks and technology shares recede mercilessly.  But what about broader social issues that need solving in the next millennium such as healthcare, agriculture, infrastructure, and ecology?  Profits are potentially ripe if you know where to look.

There hasn't been an inflection moment quite like this one, in fact, since a decade ago.  Money being raised in private and public forums for innovative solutions is at an all time high.  With interest rates low and borrowing seemingly plentiful, the movement is about creating  capital opportunity, not dissipating  it.

Mergers and acquisitions don't by themselves create profit and productive assets, however.  We still need to be careful that we are not manufacturing stimulus for stimulus sake but, rather, taking advantage of the potential to use capital to solve problems that leverage the upside of our human condition for decades to come.

Market Commentary for the week of November 19, 2018

Anger management

Now that several-hundred-point up and down days are becoming commonplace in the Dow Jones, I'm observing that the market's mood is shifting from "what just happened?"  to "who's the SOB that caused all this chaos?"   Even if there were just one person to blame for market volatility....and there isn't....that is the wrong response to what is happening, anyway.

It wasn't that long ago that investors were laying it all on the line for a bull market advance which, for them, was paying handsome rewards and seemingly never-ending satisfaction.  That all led to a "bet it all on black"  casino-type mindset that, arguably, set the stage for the disappointment and consternation they are now feeling as valuations literally head south.

In the world of parabolic quantitative design in which I reside, these reversals were neither unexpected nor out of the ordinary.

But people seem to need a special reason why markets gyrate as they do.  Surely, it must be the Federal Reserve and their interest rate policies; or it's the fiscal and political gridlock in Washington, DC; better still, it's the Iranians, the French, the Chinese, the Russians.....

One needs to take a deep breath and realize that it is our perceptions of these problems that doom portfolio management more so than the individual (or collective) problems themselves because "problems" and "unforeseen events" are, by their very nature, unpredictable and always  a part of the investment calculus.  

So who/what is  to blame for the recent volatility and weakness in the markets........?

Money, money, money

I believe that an incoherent global lending system has cultivated an "us versus them" economy, a universe of the haves and have-nots that is exacerbated by a widening wealth gap in which the wealthy "play" with their money while the rest of the world struggles to acquire it.

Our data supports the emergence of these tectonic shifts and the quantification of their influences.

The demand for goods and services has migrated into smaller enclaves of privilege.  Yet, we rely upon those enclaves to provide the jobs, products, and security for the rest of the population.  As more wealth was created during the past decade through quantitative easing and spurious lending practices a curious thing began to happen: the benevolence of mankind morphed into the worst of man's nature.  The roads and bridges began to deteriorate....so what?  People afflicted by natural disasters or worse, warfare and starvation....let them fend for themselves.  A "living wage" that fails to account for the basics of home and healthcare....get a job and go back to school.  And, investors who lost money on risky product offerings from Wall Street....that's your fault for being careless and belligerent.

The safety nets are ripping wide open at the seams and greed is on steroids.

Acquiring money for money's sake has become the name of the game.  Fairness?  That's not what makes markets...or economies!  Ugghh!!!!

Thus, the ache of enduring traditional market cycles has become harder to endure as one's expectations for self reliance, aggressiveness and higher rewards became entrenched in an unprincipled culture of global finance.

The moral hazard of boom and bust cycles is that one becomes even more numb to the needs of others when you put all the chips "on black".

On the flip side, there are a lot of investors who simply strive for stress-free, conservative portfolios who are also getting clipped by the slide in financial assets.  To them I urge patience and a requirement that they view all asset allocation models as fluid guideposts for long-term results and risk mitigation, but certainly not an implement of straight-line capital appreciation performance.

                                                                                                  

                                                                                                                  Happy Thanksgiving!

Market Commentary for the week of November 12, 2018

Now what?

The US elections, just ended, are no longer an excuse for waiting to review one's investment objectives.  With some speed and trepidation, "New High" advocates have found themselves reworking their portfolios, trying to make sense out of a scenario I call "parallel disconnect"...the market decoupling from the economy....and how things suddenly went off the rails for their investments. 

After gathering at historically high valuations for months, the averages recapitulated due to politics, earnings concerns, and the laws of physics.

Fundamentals which had sustained growth expectations....such as low interest rates...took a back seat to quantitative conditions depicted by high P/E ratios and stochastic measurements flying off the charts.  Everyone is now wondering what happened to their piece of the pie and why it is so out of reach.  One might conclude that either the raw data is flawed, or that traditional economic fundamentals no longer apply or if, in fact, they were simply ignored altogether.

Inflation, while dormant for so long, is now my root cause for concern about the global economy going forward.  Nearly all capital expenditures will cost more as rates increase, wage push from "full" employment is accelerating, real estate prices are at a 5 year peak, commodities and other raw materials cost more, healthcare expenses are rising, media budgets are stretched thin....even the cost of a new set of golf clubs is rising.  These are anecdotal and quantitatively measurable examples of price inflation already in the pipeline.  Not to mention that the political rhetoric surrounding Asia (tariffs, trade wars, and regional threats) has exacerbated concerns regarding slow-downs in corporate margins and sustainable share price increases.

As a result, we are focusing our allocation shifts upon consumer neutral  and inflation-oriented  sectors such as metals, utilities, biotechnology, and energy.  It is also highly probable that the wave of profit taking and repositioning into cash will continue at least until the market finds a technical floor.  In the short run, the influence of the Fed's tightening policies should be negligible, but noticeable.  The international economies are now the drivers of the globe's financial markets.

Liquidity revolution

The spillover effect of a decade of global austerity campaigns is now causing higher costs of doing business to seep slowly back into the vocabulary.  "Free" money, alone, has inadvertently become the catalyst for the end of the current bull expansion.  Sometimes the seeds of something happening are planted well before its presence is made known.  Undoing a decade of accommodative monetary policies is sufficient to acknowledge those changes' potential impact.

Inflation's reemergence will impact the profit picture and indirectly set off a series of emotional and fundamental recalibrations regarding portfolio allocation.  The market will no longer be what we had come to expect from the first half of this year.  Despite what might be construed as negative, the group rotation that develops will cause us to look at the longer term, top-down scenario as an opportunity to capitalize upon new cycle emergence in the "back-end" of the realm.  Each cycle phase is yet a new reminder of what worked, what failed, and what lies ahead.

The story must always be about how to stay current with, and in front of, factors that constantly change the probability ratios of making money.  The Fed's quantitative tightening is virgin territory for the un-initiated.  Following their script, we should expect to see golden fundamentals but perhaps a weaker stock market.  This suggests that growth will be found elsewhere than stocks or, as mentioned above, in sectors which previously might have been out of favor or un-sexy to  the go-go enthusiasts.  Cash has always been an asset class of choice for me....not a default position.....which is one reason why short term bonds and cash alternatives are slowly finding their way back into our core allocation processes.

The bottom line is.....the bottom line.  We will endeavor to stay the course while searching for capital gains opportunities and portfolio protection as our core theses.

Market Commentary for the week of November 5, 2018

Parallel Disconnect, redux

Truly, the tariff wars, widening wage and wealth gaps, and fiscal (political) inertia are starting to bear down upon people's minds.  Investors don't need to pore through reams of financial data to know that something just doesn't feel right about their own economic circumstances.

Their first warning sign is a term I coined decades ago, the parallel disconnect:: the appearance of two phenomena, seemingly inexorably linked by trajectory and velocity and, yet, not really connected at all except by illusion.  In this case it is the counterfeit conflation that the stock market and the economy are one and the same.

Indeed, in the last few weeks the stock market is down nearly 9%, wiping away nearly all of the year's gains, while the average P/E (price to earnings) ratio on all S&P shares has fallen by more than 10%.  By far, the worst month in the global equity realm in at least 6 years.  (All this in juxtaposition to the economic "good news" about historically low unemployment and substantial corporate earnings expansion).  These market reversals are disappointing data that no one counted upon nor has an easy time processing.

Why, when politicians, economists, statisticians, and others are telling us that "things are improving" do so many feel so insecure about their money?

It is noteworthy that such a conundrum is both financial  and psychological  because the hardest thing to internalize during a market capitulation like the one that has happened is not the data itself, but how we feel about it.   When the monthly account statement valuation begins to recede, the pain cuts too close to the quick.

Thus, we have two very distinct issues with which to deal: analyzing the data and what then to do about it.

Understanding what's there

First, I must say that investing involves always preparing for an eventual cycle collapse.  It is part of the gradations of analysis and emotions that one experiences when investing... the euphoria of bull market success and the despair of market collapse.  Speculation and trading are for the brave and should not be the primary component of your investment calculus.  Building from the ground up...like creating a pyramid...will secure your platform and provide the kind of conservative momentum you need to build peace of mind and a consistent "floor" to the portfolio.

Much is being made of the Fed's lack of compassion, or economic comprehension, as they have embarked upon a series of rate hikes designed to stem the tide of inflation and over production.  Are you personally feeling "over production" in your household GDP?  However, the unrealistic expectations that everyone felt because stocks became their default investment...because of low interest rates this past decade....expanded the risk quotients for the market to the point that overvaluation has surely brought us near to, if not at, the top of the current expansion cycle in equities.  Once again....not the same thing as the economy or its improving underlying fundamentals.

Volatility is the norm in the financial markets.  Let's begin with the notion that all economics are cyclical, parabolic by nature.  Being seduced by the siren call of your recent equity good fortune has unfortunately made you complacent to the underlying principle I have just described.

The good news is that by applying this cyclical telemetry to your portfolio, it becomes easier to "clean up" all the exogenous noise surrounding current events such as tax cuts, tariffs, trade wars, interest rates, political invective, and climate disasters.  Cycle phase methodology is not about "timing" the markets.  Rather, it is a mechanism for building prudent asset allocation probabilities based upon sequencing the data correctly to avoid over- weighting laggard trends while positioning into opportunity that is current and enduring.  Time, not timing, is the quintessence of reducing portfolio risk.  Keep in mind, asset allocation plays a greater role in the probability of portfolio capital appreciation than does any individual security within that portfolio.

When the headlines are jumping across your television screen, try to be more discerning as to how those data and those analysts giving you the information do....or don't....play a direct role in the long-term potential of your particular circumstance.  And recognize that cycles occur...both up and down....and that they pass.

And if you can't stomach the risk, you probably shouldn't be investing at all.

Market Commentary for the week of October 29, 2018

Shock waves

It's impossible to know what is in the heart and mind  of a corporate executive, but we can measure precisely the effect of their actions.  After reviewing the compiled data from last week's 3rd quarter earnings reports the thing that stands out most significantly is that stock repurchasing and share buybacks remain the primary drivers of share price performance in this climate of (still) low interest rates.  Bear in mind that a significant portion of these executive's compensation is linked to the (upward) price momentum of their company's shares.

But what happens when the momentum stops, such as what is occurring lately?  Might it trigger a landslide of insider selling?

No matter the reason, the people in control of the money continue to exert an enormous amount of alchemic influence over the direction of the financial markets.  It used to be that the primary, and definitional, causes for market performance were demand  and sales.  No longer.  They seem to be playing a secondary role in equity price performance.

Add in the fact that political and diplomatic turmoil all across the globe is tipping the psychological scales, and you might easily see how the market could "blow up" despite improving fundamentals.

And yet, even as the market has experienced some recent weakness, an enormous amount of sequestered cash is serving as a kind of "support" for the averages as the cash is being deployed for additional share buybacks.

What used to be an orderly flow of money now feels strangely disjointed and manipulated.  This disjointedness seduces investors into greater risk-taking in an effort to squeeze every last drop out of their pursuit for wealth-building.

Look forward, not back

As interest rates rise, however, a new chapter in risk management strategies is being created.  Last week's earnings reports clearly indicate that as the cost of raw materials, wages, benefits and other expenses increases, the ability to widen the profit margin diminishes.  The higher cost of financing all corporate purchases, decisions, and capital expenditures heightens the volatility for stocks and other asset classes.  The uncertainty that ensues will likely create a faster flow of money in/money out in the market.  Stock trading profits are more likely to result in quicker sales at the top, while capitulations could cause a wave of bottom fishing at the nadir.

In either case, we know that volatility is likely to amplify.

The euphoria of the past few years has a new complement....a kind of ominous, sterner examination that overarches all sectors of the economy.  As stated earlier, despite the improving fundamental data, psychology and cycle phase momentum still exert a very powerful influence over the direction of confidence and market activity.

Besides depressing some of the euphoria investors felt during the post recession recovery, higher interest rates also offer us the chance to diversify portfolio balance.  Using short term time deposits to enhance portfolio returns is an outstanding strategy for deploying cash currently held as a surrogate (default) to buying stocks. In the long run, this might even prove to be a positive force for building cash reserves that later will be used for discretionary purchases.

The landscape of tighter money is borderless.  Global central banks are coming to the conclusion that they led this horse to the water, but couldn't make him spend!   Consumers and businesses alike are playing it close to the vest with their money right now, while concerns about the breadth of economic expansion are magnifying.

Monetary policy is obviously a very complex matter.  It is also a fluid narrative that requires us to have an open mind, a specific investment discipline, and the realization that trading in the short-term is a less successful method for generating portfolio wealth than taking a top down, multidimensional approach to financial security. 

In other words, stop trying to force a square peg into a round hole, and start to capitalize upon the growing changes we see around us.

Market Commentary for the week of October 15, 2018

Flipping the script

Ah yes, the cruel month of October rears its ugly head again.  Last week's extreme market volatility refocused everyone's perceptions from joy to panic in an instant.  But for several months much of my dialogue to you had gradually been shifting from equity strategies and chasing alpha through capital gains  to base lining a strategic floor to portfolio returns using a new found opportunity in short-term time deposits.  And why not? The current secular shift in global monetary policy combined with inflation/price increases has finally given investors the chance to build their investment portfolio from the bottom-up rather than the more risky top-down.  At long last, after at least a decade of waiting, one no longer has to use stocks exclusively as a default surrogate for bond yields or portfolio security.  And with last week's extreme capitulation this strategy makes more sense than in the past.

Think about it....too many of you had been relegated to taking unnecessary risks because the era of "easy money" (low interest rates) deprived you of an alternative investment scenario because diversification by asset class had been obliterated as a strategy.

It is a different epoch now, and the ability slowly to diversify risk is upon us.

However, this "new era" also presents us with a dual dilemma: it will become more expensive to borrow money, leading perhaps to a chapter of diminishing corporate profitability and higher household expenses.

Sophisticated investors surely must recognize that all cyclical and secular fundamental shifts in the financial markets present us with a myriad number of options, both good and bad, and that artistry....not science alone....more often than not accounts for prudent investment decision-making.  Indeed, the exuberance...and sometime headaches...of equity-only portfolio choice is being replaced by a more temperate investment landscape.  Last week was a wake-up call to that fact.

The irony of the interest rate shift is that we are finally getting what we had wished for....a base line support level for portfolio returns.

Maybe that's not as exciting a prospect as dabbling consistently in the stock market, but who said that the endeavor had to be exciting? Downdrafts, like what occurred last week, are not for the faint of heart.   The enormous responsibility of protecting and growing our client's funds is about eliminating fear and the potential aftershocks of calamitous exogenous circumstances.

Nearly there

Thus, as corporate share buybacks funded by low-cost cash reserves proliferated, the equity market had its own downside support mechanism: the vastness of cash held in savings.  Perhaps the linear over-valuation in stocks about which I have been lamenting for months was simply attributable to an improving economic climate (?)  Or perhaps the alchemy of creating profits from "nothing" was made a little easier by borrowing that cash at zero-percent interest.  Straight line capital appreciation cannot happen indefinitely.

It is yet to be determined if a rise in interest rates might adversely affect the long bull run in stocks.  I am not predicting  it.... I am watching out for it.  But the age of robotically manufacturing profits is abating.  Worse still, I am reading in many business journals about how a rise in interest rates might precipitate a bear market in bonds.  True, if you are currently a long-term bond holder.  But for those of us prescient enough to keep our powder dry on the sidelines, I reaffirm that this is an excellent time to begin "nibbling" on short term investments and laddering the opportunity before us.

The discerning investor should also recognize at this juncture that he can no longer simply "buy the averages".  Instead, it's highly likely from our projections that there are unique long-term capital gains opportunities in healthcare, alternative energy, agriculture, infrastructure, and technology shares, amongst other sectors.  More importantly, it just doesn't make good corporate sense anymore to hoard cash and ask your shareholders to reward you for impotent behavior.  I would much rather see capital expenditures in the pursuit of doing good and solving problems that affect the long term health of the planet and its citizens.  Curious that because of inertia, polarity, and malevolence in the public discourse it is perhaps more technologically  probable that these issues can be addressed than it is politically  probable.

More strongly, I believe the potential to balance investment risk because of higher interest rates is a net-positive for long-term portfolio performance.  I am more inclined to deploy cash reserves than at any time in the past decade.  Building a strategic "floor" to our client's investment performance expectations should make it more likely that we achieve extraordinary returns, with or without equity participation.

Market Commentary for the week of October 1, 2018

All things big and small

Despite the market's focus upon behemoth businesses, the clearest barometer of "retail" economic indicators resides in small business.  Twice as many jobs are in companies with less than 100 workers than in industries with over 1000 employees.  Small businesses are principally providers of jobs during periods of rising inflation and economic growth.

That is why the changes we anticipate from the world's central banks regarding raising interest rates are so important.  We believe that historically low interest rates have not sufficiently loosened the spigot for money and have, instead, created a tougher playing field for small business employment.  Just as low inflation has hurt the pricing potential for goods and services, so too has it hurt the upside potential of a vitally important second-tier of the global economy.

Because of the inability to price competitively, small business has refrained from hiring energetically.  It is the larger corporations who are gaining the majority of market share and employees at present.

However, rising inflation in the next few years should mark a turnaround for several small companies.  We expect the number of new businesses to magnify as the economy expands.  New patents, new inventions, new hires originate not only at large corporations and institutions but also, in the right economic climate, in homes, warehouses, garages, and studios.  In fact, measuring the number of new patents is an excellent way to measure the growth potential of the economy, over all.

The most practical way to succeed is constantly to adapt.  Change is an excellent barometer of the kind of innovations that only occur in nimble businesses unburdened by years of cultural strategies and monolithic structure.

The technology sector of the last 20 years is an excellent example of how "winners" develop out of a single idea, becoming themselves the behemoths of their space.  Patent creation reflects the vibrancy of innovative thought.  There is no shortage of creative thinking in energy, healthcare, aerospace, technology, agriculture, and infrastructure.  No doubt, if looking in the right place, there are innumerable opportunities for capital gains for investors who are patient enough.

The challenge, however, is in trying to gain market share from much larger more established companies.  The bigger players still have the ability to under-price their smaller competitors who have zero leverage when it comes to slashing prices and maintaining profitability at the same time.

Which is why we are hopeful that when/if price-push (inflation) does return it might make the playing field more equal by giving all players the opportunity to price their goods and services with greater efficiency.  Maximizing profits by producing a "better mousetrap".....instead of using accounting alchemy, hiring/firing, or fire-sales.....would mean that the whole landscape is thriving.  Historically, and within reason, all markets perform better when prices are allowed to "float" due to demand.

Bottom line: central banks tried incentivizing markets by making money "cheaper", but the strategy failed to produce an omnibus result.  Rather than obsessing about cutting financial costs, perhaps we need to create a new imperative that encourages capital expenditures, fulfills needs, lowers instability, and improves the quality of life not just for the elite but for the many.

Markets

The last time this type of altruistic economics  was in place was during the post World War 2 financial boom of 1951-1962.  No doubt that even during those halcyon years there were rough spots and cyclical bumps, but the proliferation and breadth of wealth-building produced a manifest landscape of opportunity and entrepreneurship.

Productivity and growth are quantifiable statistics.  They also increase the standard of living of a population.  A self-sacrificial attitude is vitally important to allow everyone to benefit from the fruits of their labor.  Building a savings hoard for oneself only discourages the natural evolution of innovation and economic vitality.

Today, success has become synonymous with consumption and overt affluence.  The more "things" one owns the more elevated their status in other people's eyes.  Spending, not saving, has become the motto for governments, corporations, and individuals.  As rampant consumerism has become more normal, savings rates have been steadily eroding.

So pervasive is this attitude that foreign nations are now being unjustly compared to each other, and to wealthier, mightier antagonists based upon financial reckonings such as GNP and GDP.  They are being obliged, more and more, to normalize integers, lifestyles, and to look like one another.  Ironically, the epidemic of consumerism and comparison is widening the wage and inequality gap at the same rate all across the globe.  The wealthy are flourishing while the less fortunate struggle mightily for pride...and for life.  Too bad, because these unfair comparisons are sowing psychological and political divisions, too.

The biggest beneficiaries to the homogenization of the global markets are the shareholders of companies that successfully sow these judgments and which work diligently to penetrate new, emerging markets.  This is an equal opportunity pandemic.  The road to fabulous wealth has unfortunately become the prospect of multiplying market share, irrespective of the human cost.

Few prominent ethicists have come forward to challenge the rules of this "new economics"....nor should they be compelled to do so.  But for how long can policy makers avoid the trap that lies therein?  The lesson we learned from recent history tells us that this rhythm is unsustainable, politically and ethically.  The capriciousness with which our lawmakers deal with stagnating wages, supply shortages, deteriorating infrastructure, illness and disease, hunger, poverty, and a generational breakdown of moral leadership is deplorable.

If prices do start to rise, there is compelling evidence that the economic expansion might be mismanaged by our politicians.  Despite its recent successes the economy is not working for everyone.

Conclusion

Investors oftentimes base their portfolio success upon how frequently they score a singular trade home run.  However, a much more realistic predictor of wealth building is to look at the bigger picture and to aggregate a series of good investments more often than the bad ones.  No investment is perfect, nor should one expect that every selection will be successful.  Instead, you must consider other benchmarks for "success" rather than the indices, themselves.

The stock market is only one barometer of the equation for building economic longevity.  Dips and turns in the averages are normal occurrences but do very little to fortify our attitudes about our fellow man....except to make us feel better when we win and the other guy is losing!  Using the stock averages to predict a country's compassion quotient  is a foolish stretch of the imagination.  Perhaps we need instead to look much further than the Dow Jones...at solutions that provide for that "better mousetrap" to flourish.

The epoch of creating enormous wealth is still in front of us.  Unfortunately, we won't find it by chasing one-off transactions without also having a clear vision of what it means to pave the way forward for a bigger landscape than ourselves only.  In truth, the biggest moral compulsion we face is to decide whether we occupy this planet singularly or collectively.  Water, food, poverty, ecology, healthcare, energy, infrastructure, aging...and a dose of empathy...are the overarching principles of how to use money to make money. 

Perhaps we need to "think small", block by block, neighbor to neighbor, to make the bigger reality happen for everybody.

 

Suggested balanced account asset allocation, Q4, 2018

Equity:                 41%
Fixed Income:   33%
Cash:                   26%

Market Commentary for the week of September 24, 2018

Rich or poor?

It is becoming inevitable that both interest rates and rates of inflation will be on the rise during the coming months.  Why would this matter?

To begin, most investors not only care about how much money they have, but also about how much they are worth.  On a relative basis, higher interest rates and greater inflation erode the imagery of one's cash.  The "fair value" of our net worth is oftentimes equal to the net worth value minus any debt or outside disorderly factors.  When the destructive values are increasing, the purchasing power of your money is diminishing.

The cost of milk, tuition, travel, home-buying, etc., creates a cacophony of "noise" that disrupts your ability to get and stay ahead.

The timing of the rate hikes really couldn't be more ill-timed.  Just as the economic recovery is taking root (following the calamity of the last Great Recession 2008) a daunting assessment is being thrust upon the backs of the investment population.  Given enough time to digest the rate hikes, the financial markets have thus far responded relatively benevolently.  But consider that as stock companies will eventually have to "pay more" to borrow money, it probably will eviscerate their heretofore maximum profits; municipalities will have to dig a little deeper to meet their debt obligations; and the average investor will have to shell out more cash to buy a car, television, or college education.

Considering the time, cost, and opportunity of pursuing higher returns with greater portfolio security, there seldom is a single panacea to complex investment problems.  The conundrum is that very long term cyclical phenomena are too often employed to try and explain short-term performance expectations.  For example, as interest rates start to rise the potential over time to buttress portfolio performance with a finite baseline rate of return (that's the long-term part of the equation) will be thwarted by the impact of "expensive money" upon current portfolio valuations (the short-term, knee-jerk response).  Consistently beating the fantasy averages is a fleeting and elusive objective.  The goal,  I believe, should be to evaluate your unique situation, define your expectations for your money, and establish the proper risk protocols to enable successful portfolio results during periods in which circumstances might be in flux.

It is a more valuable use of your time and energy to focus attention upon the processes  of your investment methodology rather than upon the outcome of the methodology, itself.

Patience

Throughout the many gyrations of the financial markets' journeys, the challenge is not only to quantify the integers which represent those changes, but also the impact of those changes upon the human condition.  While we might be able to calculate the numerical level of inflation, for example, how do we measure the financial "cost" of those data upon people's lives?

Divesting oneself of the performance expectations game  is not easy to do.  Portfolio results oscillate depending upon the circumstances of the overall market and economy.  Remaining calm in the face of imminent change is an acquired skill set.  We also know that things are always perceived as most severe immediately upon inception, while those factor's impact usually dissipates over time....good or bad.

Are you rich or poor?  It depends whether you use empirical number-crunching to answer that query, or whether a values-based judgment is a better way of prioritizing what's important. 

Market Commentary for the week of September 17, 2018

Mind games

The basic premise of successful money management  differs somewhat from the conventional definition of simply investing  on Wall Street.  This subtle delineation is the cause of so much investor consternation when things somehow stop going their way.  The former is the execution of risk strategies that protect investors from the vagaries of time, while the latter is nothing more than a roulette wheel approach to generating capital gains.

Why is the distinction, subtle as it is, so important to talk about?  Because without a methodology and a specific plan for avoiding failure, it is difficult if not impossible to quantify the opportunity you seek.

Shall we agree that investing is a daunting undertaking regardless?  At best it is an exercise in the expression of hope we all harbor about making good things happen with our money.

But it is also critical to assess how that investment landscape performs over time, in what sequence, and in what degree of duration.  Stocks are sometimes "trickier" than bonds; bonds somewhat more effective than cash; and the blend of all of these asset classes, including complex delineations within those categories, determines the probability of a successful investment outcome over a specific period of time.

Thus, those who solely focus upon tech stock gains, or municipal bond-only  portfolio return, or who bury their cash in a tin can in the back yard  are only playing with a few cards in the deck of a myriad number of other options available to them.

It's not unusual to be swayed by the sales presentation of a "shiny" new idea, but the ultimate game-player knows where and when to locate those "special situations" opportunities, how to put in the hours of research, calibrates the odds and plans for unknown circumstances which might knock him off course, just in case.

The compromise, therefore, is to turn off the 24 hour cable business news; factor in your own personal dynamic; develop a macro top-down attitude about the world in which we live; and seek solutions to problems with which we identify that also have capital gains potential for the long term.  Even still, there are no assurances of a positive outcome.  Exceptional investment results are not only just integers on a page, but our perceptions  about those expectations we bring to the undertaking.

A frenzy of one-off, risky non-strategic behaviors is the surest way to ensure investment failure.

Guard the jewels

Should you care about these methodological distinctions I'm writing about?  "What is my annual return?",  you might respond.  Well, when things are going well in your portfolio, the answer is quite simple: the number is the number.

But what about times of unique performance perversion? 1978, 1986, 1993, 1999, 2001, 2008.  Each of those years represents a severe regression  in the optimism of bull-only investors and the performance of financial assets.  Do you recall how hard it was to recover from losses of over 25%.  Or 30%.  What about the tech (dot.com) wreck of over 90%?

Every era has a difficult regressive phase.  That is the nature of cyclical investing.  If you were one of the investors who got punished in the past for failure to plan, then you might still be licking your wounds today, if you weren't' fortunate enough to have had the patience to recover after a decade or more.

Methodology and discipline are the antidotes to the "shiny new coin" approach to chasing a dream.

Market Commentary for the week of August 27, 2018

Telling a tale...

Memories of the 2008 Great Recession persist.  Despite a glowing earnings season, improving employment statistics, and modestly better wages and job security numbers, last month nevertheless harkened back to a time of uncertainty with a report that corporations are still being too stingy when it comes to capital expenditures (other than share repurchases) for new hiring and wage increases, and consumers are playing it close to the vest when considering discretionary spending or leaving their job to take another.  Why move hundreds of miles, uproot family, to take a job that might not be there tomorrow?

Most disturbing about these "precursor" messages is the litany of businesses that are falling behind or "going under" altogether.

Even though the record stock market rally continues, it leaves in its wake a chronicle of those who float successfully above the fray while a myriad number of "others" are flailing courageously under water.

As I have written in past missives, there is an extraordinary divergence between the empirical data and the anecdotal accounts.  Our view is that the financial and psychological gaps between those who are doing well and those who are not are widening and serve, at a minimum, as a discussion point about containing an economic worst case scenario were it to occur.  In the world of quantitative science and statistical analysis, the inverse is often true whereby the "top" of a market is most often a harbinger of the opposite happening from what the consensus says.....a perfect correlation of negative consequences.

That's not to say that economic data aren't moving in the right direction.  After all, there has to be a reason for all the optimism.  And indeed, as noted above, there is.  But as bull markets go, this one is getting extremely long-in-the-tooth and suggesting, ironically, that all the euphoria might be masking a fate which historically happens at the top of every bull market cycle.

....of bubbles and illusions

Fortunately, we are not ignoring nor denying the validity of the data but, rather, describing the realities of how a portfolio manager assesses potential risks on behalf of his client's portfolio allocation and acts with conviction not  to let a calamity unfold.  Any indication that the market is in its latter stages must be respected and acted upon.

One only need look, for example, at price to earnings (P/E) ratios to glimpse the future.  There has been a steady elongation in those patterns which anecdotally are not being matched by sales and demand numbers reported this past quarter.  Were any economic weakness to occur then there might possibly be an erosion in stock valuations commensurate to any turnaround in the data....perhaps not explosively, but gradually over time.

Profitability has already been reported to be outpacing the rate of share price performance.  At whatever time that spectacular tempo were to recede, we once again might expect a capitulation in the averages.

Just what are businesses going to do with their new-found profits?  Hire more people?  Invest in research?  Or continue to buy back their outstanding shares in the public marketplace to support their stakeholders' price expectations?  Unfortunately, we have already seen the answer to that "altruism" and it isn't the answer we need.  Sure, it is nice if you are a shareholder in one of these companies.  There is nothing "wrong" or illegal with that behavior.

But as the Federal Reserve moves to raise interest rates later this year, the biggest obstacle to this type of repurchase activity is that it is going to cost a lot more money to give the appearance of solvency and good governance than it has in the past.  The era of "easy money" may or may not come to an end in the near future,  but CEO's and their Board of Directors will have to give serious thought to how they deploy their cash stash beyond the mindless act of buying up their outstanding float simply to manufacture the facade of a couple of good profit quarters.      

Market Commentary for the week of August 13, 2018

Scaling the heights

Given the constantly upward movement of the Dow Jones "goalposts", it is no wonder that investor enthusiasm continues to grow, especially during the current successful earnings season.  If one stays long enough at the party, only good things might happen...or so the thinking goes.  Nonetheless, one could also make a reasonable case for caution at this juncture.

How far is the near-term upside potential for stock averages?

Instead of calling for an all-out market correction, how about we just forecast for a future a little less robust?

Look, no one can examine the data and reasonably argue that growth is anything but exemplary.  Capital spending is up, profits are widening, indicators are positive, and the recovery has firmly taken root across a spectrum of businesses.  Meanwhile, growth sectors are breaking new price (valuation) barriers and portfolio prices are skyrocketing.  The past seven years have been the benchmark for benchmarks, no doubt.

In general, this has been one of the longest, and best, bull cycles in market history.  What, then, might possibly put a lid on future prospects?

Firstly, we must recognize that sell-offs are not the enemy...they occur and must, unfortunately, be accepted.  When markets "top out" they provide an important resistance threshold from which new calibrations of potential probabilities become more efficient.  It is worth noting that without capitulations preceding them, bull cycles cannot exist!

That bit of trivia aside, the price formations of equities during the last 2 years are consistent with a choppiness usually associated with red caution lights, if not a deeper concern about price reversals overall.  No doubt profits are strong today, but they are only one factor, sometimes manufactured by exogenous influences, that change market multiples over time.  In our estimation, the path of least resistance, at present, is that we are about to enter, at best, a phase of trimming the sails and setting a backdrop of cautious confidence.

We are also looking at the possibility of near term interest rate hikes as providing additional safe-haven alternatives for those whose risk appetite has already been sated.

A top...or a correction?

Genuine bull cycles exist most efficiently in a climate of asset class diversification, rising consumer demand, and social stability.  At present, very few of those factors sufficiently exists well enough for us to convert from cautiousness to blazing optimism.  Our estimates are that consumer spending (particularly discretionary, portfolio-earned monies) has limits.  A climate of psychological anxiety is never a good thing for financial markets.  The age of chasing anything because it's "new and shiny", be it dot.com, or real estate, or taxi cab alternatives, has come and gone, along with a serious breach of confidence in many of our social and cultural institutions, including the financial organizations that peddle that kind of hype.  A reduction in end-user purchasing usually precedes a reorganization of corporate balance sheets.

The breadth and scope of some of these non-market related factors is the most onerous influence upon equity valuations, and they are not going to go away anytime soon.  Even a modest perception shift of consumer mistrust, or malaise, might likely reverse the course of the bull trend or, worse, leave a vacuum that might only be filled by falling stock prices.

The enduring legacy of this historic bull recovery will be its duration and magnitude and, quite possibly, how it eventually reversed its course.