Market Commentary for the week of April 30, 2018

Demystifying the mythical

With all the volatility and uncertainty swirling about the financial markets, including last week's 400 and 500 point maneuverings on the Dow Jones, there is so much talk on the internet and in pubic media now about alternative investments, IPO's, ETF's, imaginative currencies (bitcoin, cryptocurrency), and new platforms for trading them in order to assuage our doubts about the long-term viability of "traditional" stock and bond investing.  Let's begin by acknowledging that this generation's "masters of the universe", as with generations past and future, have demonstrated a boldness and audacity to try and reinvent the wheel and to change the world to a vision more sympathetic to their ideals.  One should not begrudge or condemn this generation of visionaries for their spontaneity and enthusiasm.

However, one cannot ignore the contradiction of developing a “new" investment logic, nor fail to hold those responsible to account.

To begin, it is too hasty to attempt to create such a tectonic change in how trade is effected and the means by which that commerce is paid for when imagining an overhaul of the currency scheme, for example.  Might we, perhaps, use tea leaves  as an alternative method of remuneration between nations?  Oh wait...we already have tried that in the era of the great sea-going explorers Magellan, Columbus, and Vasco de Gama.

So let's dig a little deeper to examine further just what a new currency arrangement might entail.  There is almost a rush to judgment to decree that cryptocurrency would now become more valuable than dollars, or Euros, or gold....or perhaps even potatoes?  Remember a time-held tenet that any investment is an expression of claim by the purchaser about current or future remuneration or value.  How, then, can purveyors of "phantom coin" ascribe future, or current, value to their ether-invention unless someone on the other side of the transaction allows so?   Their notion, instead, relies more upon an ephemeral value that others  say these currencies are worth, rather than on the value the owners wish to confer upon it.  And right now the bloom is off the rose as markets diligently try to find a stable pricing basis and a true quantitative metric to these ideas as well as traditional financial assets.  Just look around you to see whether the climate is right for a total disruption of the status quo.

If its creators want a comparison to gold, then gold, after all, is the "gold standard" for measuring the impudence of creating a cryptocurrency universe.  At the end of the day, gold is merely a rock mined from the earth.  A rock which throughout history has been given  value based upon mythology, politics, warfare, and shared community.

Perhaps bitcoin finds its traction in the fact that its proponents are really making a declaration about their fears and lack of faith in traditional economies, government policy, taxation, and the legitimacy of rule run-amok while the state-of-the-state implodes.  The narrative about alternatives...of any kind....always seems to have its roots in fear  and the desire to prove alternative methods more effective and respectful of human fragility. 

The future is never easy

Most economic indicators are improving, if not capriciously rebalancing.  Is the world economy so unstable as to suggest now is the time for an overhaul of the global monetary system?  I think not.  The idea of a transparent and philanthropic commerce structure is a heroic one.  But I would not go on public media, myself, and advocate allegiance to the notion of fantasy currency just yet. 

As with many things "new", the marketplace for these concepts is sometimes late to gain acceptance but oftentimes infused by get rich quick schemes and consumer fraud.  The abusers, it would seem, far outweigh the altruistic few who desire change and the aspiration to address global inequities and monopolies.  I applaud the market's creativity, but fear that the landscape is not structurally ready to sustain such boldness.

It is natural for humans to believe in the sanctity and virtue of the future.  That's what makes pioneering...and financial markets....valuable to our infrastructure.  Why crash the ship on the rocks just to disavow the status quo?

Just ask Vasco de Gama.....

Market Commentary for the week of April 23, 2018

Tippy toe

The long, steady uptrend in the financial markets has been under intense pressure recently, most notably from an uncomfortable conclusion to the first quarter because of disorderly political rhetoric, and from an inevitability that interest rates will be rising in the not-too-distant future.

Going from a Pollyanna mindset to Godzilla-like panic in the span of just weeks, the market is revealing...as it always does....the capriciousness of unexceptional buy and hold investing.

Of course, certain segments of the economy (Non-Cyclicals, Technology) have shown an immunity to the short term volatility, but an even larger universe of stocks has "given back" its first quarter gains when the going got difficult.  There is no calculus that applies uniformly to all sectors.  Instead, it is imperative to look at financial and non-financial factors individually when making selections for a balanced portfolio.

The likelihood of continued volatility in global markets is putting investors in a foul mood and heightening the probability of even more unpredictability in financial markets for the near term.

Thus, we expect to see a diminution in the percentage upside probabilities  for stocks and other financial assets for the balance of the year.  Unfortunately, the marketplace has become too dependent upon double-digit returns in the past decade whereas it should have been considered as aberrant from historical norms.

By far, the biggest concern we have about continued corporate profitability falls upon the consumer demand side of the equation.  An uncertain consumer is less likely to part with his discretionary cash....particularly if he perceives to have less of it!  Concurrently, corporations are loathe to invest in infrastructure, inventory, and research if the demand is not already built into the pipeline.  Who goes first?  Time will tell.

The banks have it wrong

Tighter monetary policy, on the other hand, is a non-negotiable burden for economic growth for some.  Prices are rising, particularly in core commodities and foodstuffs, exacerbating the possibility that the Federal Reserve and global central banks will hasten to move quickly in addressing inflation concerns.  A worse-case scenario exists when you have prices rising, consumers recoiling, and portfolio valuations receding....all of which are germinating in their infancy right now.  If interest rates do climb this year at the projected rate forecasted, it will mark a line of demarcation away from  the boom in financial assets that the last decade gifted us.

Curious, too, that the commercial banks have taken their good ol' time in offering up any incentives and rewards for their savings account customers by mimicking the steady, but slow, rise in interest rates and offering some of those increases to their depositors.  Instead, they have been sitting on a mini-windfall by taking those several basis point increases in yields and applying them to their own assets in the lending area.  It's time they be held to account for their role in delaying the availability of an alternative investment scenario for clients in CD's and other time deposits.  So much for the feel-good, trickle-down effect of the recent tax cuts upon the average stake holder.

Alternatives

The jingoism and isolationist/protectionist oratory we have been hearing in the past year is indicative of yet another sea change in global commercial standards.  While "red meat" for its supporters, it represents a nearly 180 degree turnaround from the compassion and optimism expressed by world leaders over 40 years ago at the beginning of the last great bull market expansion.

We have been championing for a more enlightened discipline to investing during the past several years, one in which a keener appreciation of earnings growth driven by need and demand, along with a social benefits dynamic, combine to yield a more patient approach to investing overall.  In fact, it is wearisome and generally more risky trying to create a "quick hit" philosophy, typically the product of a millennial mindset and technology evolving from an instant gratification way of thinking about how to exploit on-line trading platforms "efficiently".  More significantly, our goal is to avert the panic and mood swings that unfortunately have become commonplace and more disruptive to today's portfolios, and which throw significant roadblocks into the symmetry of smoothly moving valuations from point A to point B.

Market Commentary for the week of April 2, 2018

It's a lovely  view up here...



"Oh, the view is tremendous",  said one of America's astronauts as his space capsule rocketed out of Earth's gravitational pull for the first time.  And as physics tells us it is so, at some point his spaceship returned from its apogee and fell unfailingly back to land.

So, do the laws of physics apply to all moving objects....such as the parabolic, sometimes linear, trajectory of stock prices?

Financial markets are not specifically governed by physics, but by the laws of economics.  And yet, the discipline of quantitative statistics and algorithmic equations are themselves interlinked with physics and all other sciences, if truth be told.  Thus, "what goes up must come down"  is at the core of the lexicon of physics, financial markets, sports, life, and a whole panoply of other common sense endeavors.

What many find almost surreal about the current bull market is the number of times it keeps making new highs without significant capitulation.  Who knows, maybe the laws of all sciences no longer apply?  How many times in your investment lifetime have you heard the phrases "it's different this time"  or "it's a New Paradigm"?  While this author doesn't disparage those who subscribe to the notion that it is  different this time, I am stressed, nevertheless, by the pervasiveness of such belief.

Strategy

The thesis which governs my interpretations is predicated upon the ability to quantify factors that define the movement of financial phenomena, like stocks, bonds, interest rates, earnings acceleration patterns, consumer confidence, sector rotation, global trade, etc.  Those data if understood properly can leverage the probabilities of capital gains in our favor, and allows the user to intercede in, or avoid altogether, any catastrophic "right side of the parabola" disasters.  Sometimes price compressions take generations to occur.  Other times, they may occur in a 24 hour span. I'm sure you've seen examples of both.  They are a fact of life.  History has shown us so, and so too do the laws of mathematics.  It is the ability to stave off the unforeseen consequences of a failure to plan that makes my profession so interesting and so valuable to clients.

The bright lights and fancy bells of 24 hour business news coverage feed a vicious narrative of unrelenting success that too many unsuspicious investors buy into, thus creating a parallel landscape of impractical expectations.

I ask you to reflect back to the humbling and disastrous portfolio experiences of the dot.com crash and this past Great Recession/credit crisis as examples of something to which your euphoria blinded you, and the panic they created in boardrooms and kitchens worldwide.

Investing requires strategy, methodology, diligence, and patience.  One cannot ignore the existence of obstacles, just be nimble enough to navigate them when they arise.  Whether passive or active with your portfolio you must be aware of history and certain flash points that inevitably occur and which might have significant corrosive effects upon asset valuations.

Markets

Despite any misgivings I have about the linear nature of the market's recent phase, we have nevertheless been a full participant in the investment landscape within the limits of our client's stated risk tolerances and their longer term expectations for performance.  When moving from zero probabilities....as in the post recession doldrums....to nearly full stochastic integers of present valuations, one must always be prepared for negative catalysts.

One of those catalysts is the growing global divide between the wealthy and the impoverished.  If economic growth is to be engendered worldwide and domestically we have to find a way to breathe new life into the less affluent and their access to healthcare, education, transit and infrastructure, homeland security, banking and commerce, and institutions of faith.  The big X-factor is that a preponderance of the concentration of money in today's world accrue to a very small percentage of the populace even as more around them degrade financially.  The clock is ticking for those at both ends of the economic paradigm.

Yes, the Great Recession is in the rearview mirror.  But even as the economy has raced back from its depths, it has taken on disparate meaning for different parts of the market.  Will recent US tax legislation, for example, really unleash greater prosperity, or might it exacerbate an economic chasm that has already alienated a significant segment of the population?  Can the short term good-will created by a legislative accomplishment be sustained into legitimate long term investment and bounty?

Soaring stock markets only fuel so much of the recovery...and only for those fortunate few, as mentioned above, who have the resources to be playing in that arena.  Who's paying attention to and voicing solutions about areas of social need such as eradicating hunger and poverty; clean water access; cures for medical pandemics; computer and bioscience research and development; geriatric care; crime prevention; affordable education?  

In the end, a misplaced social trend which exclusively covets capital gains and corporate profits could wind up squeezing dry the goose that lays the golden eggs.  Excessive social inequality erodes public cohesion, consumer confidence, and ultimately growth itself.

The more we are surrounded by exogenous noise, the less attention we are willing to pay to anyone else.  Failure to focus upon others is not, by itself, a cause of financial crisis, but it is reasonable to assert that apathy has the ability slowly to unwind progress that has already been made.  Accounts have shown us that periods of financial instability or inequality always follow epochs in times past where excessive asset growth, corporate greed, wage imbalances, and euphoric passion have been disproportionate to underlying principles of fairness and distribution of opportunity.

Low interest rates, for example, are creating a climate in which prices of stocks have been driven up simply because of a scarcity of alternative choices, thereby fostering a riskier playing field while accommodating investor's hunt for absolute return on assets.  Global central banks, including the US Federal Reserve, have left themselves painted into a corner with no choice but to adjust interest rates higher while they ballyhoo the data indicating higher consumption, price pressure, and lower unemployment.  Curiously, our analytics observes very little evidence of rampant inflation or price pressures that might typically define an excessively out-of-control economy.  We do see, however, that anecdotal cost-push pressures are slowly eating away at household take home pay and exacerbating the anxieties that the “average citizen” feels in trying to succeed in the global economy.

Our asset allocation for the coming quarter will be much more selective based upon our interpretation of  the facts.  Because of pervasive bullishness about financial market's performance, our goal now is to identify those financial instruments that are quick to respond to a volatile US dollar; rising interest rates; slower earnings acceleration patterns; secular changes in energy, healthcare, housing, productivity; and a world in flux because of regional disputes and terrorism.  Indeed, the range of probable performers is a smaller list.  The task, obviously, is to winnow out plausible winners from those securities that we deem untouchable.  Therefore, we begin the year as we ended it: taking profits when available, selectively adding short-term time deposits to lessen portfolio volatility risk, and rebalancing into emerging markets and opportunities whose downside risk is diminished by early stage, left -side-of-the-parabola cyclical nexus.

Conclusion

The seeds of change require a long gestation.  There is still abundant opportunity to participate in the flow forward of stocks and other financial instruments.  Irrespective of the Fed, global central banks, the US Congress or other social domains, there is always a bias to improve one's lot in life....financially, educationally, spiritually.  It is how we perceive  financial trends, however, that makes those struggles more identifiable.  "Fairer trade", "increasing GDP"," declining unemployment"  are abstract concepts to anyone working paycheck to paycheck, burdened by illness, poor education, hunger, thirst, or lack of hope.

Our portfolio strategies for the next quarter will reflect a broader secular redirection and rebalancing away from consumer-driven (consumption) sectors towards tangible assets, pricing power, production and manufacturing sectors, and inflation oriented developments.  This month, we also introduce our Agriculture and Food investment strategies to couple with our earlier initiatives in Global Water, Alternative Energy, and Health and Life Sciences.  We believe these concept investments resonate well with our operational mandate of risk protection and strategic asset allocation.  A solid base of earnings acceleration and dividend investments will do more potentially to offset risk posed by excessively high valuations across the current continuum than speculative one-off investments or misplaced hyperbole.

 

 

 

Suggested balanced account asset allocation, Q1, 2018

Equity:                60%

Fixed Income:  24%

Cash:                  16%