Market Commentary for the week of July 30, 2018

It's all about perspective

With the summer rally in full swing, I'm hearing from clients about a duality in their mindset.  On the one hand, they are grateful for my navigation prowess and hopeful about a continuation of the market's good fortune.  On the other, they are terrified about their station in life (age, health, etc.); geopolitics; cross currents of unpredictable exogenous events; raising cash and "sitting the rest of the market out".

This classic imbalance between wants  and needs  is real, and must be respected.

What they, and I, see is a market held hostage to daily tweets, global confrontation, and government policies outside the span of their control, and which are oftentimes unrelated to the strict rules of science and economics.  But it is not economic science that governs our everyday lives....it is, instead, filling the gas tank, paying the mortgage, getting our children a quality education.  All these things are more ethereal, less quantifiable, but significantly more important than price-to-earnings ratios.

However, because of the steady pace upwards of the financial markets it may be several months hence that we look back and conclude when or what precipitated the end of the current bull cycle.  "What it is"  and "what it feels like"  might be two different phenomena right now, but it definitely feels to me as if the tail is wagging the dog!!

Shield from harm

One of the most effective uses of my proprietary quantitative tools is to try and isolate patterns of economic trends which, in the aggregate, create probabilities of trend appreciation/depreciation.  The question, then, is not which "shiny investment model" we need to invest in, but rather where the preponderance of the evidence might create the right blend (for each client) of positive outcomes.  Quite simply, rather than trying to find a new good stock and bond picker, you need to keep the focus upon secular macro trends and try to be correct about the balance of risks  associated with the portfolio.

The problem with this bull market (if you will indulge me your agreement that there is a problem) is that so few industries and so few individuals are directly benefitting from its largesse.  Yes, some if not most profits this cycle are rising.  Some are rising because of better corporate governance.  But some others are manufacturing profitability through layoffs or stagnating wage growth.  In truth, if a corporation can give Wall Street the impression that they are controlling costs, they may be accorded more favorable ratings than they deserve.  Remember, demand should be the primary driver of revenues, and to this observer demand is the least influential  factor in our current earnings cycle.

The most noble form of profitability is to have the moral fortitude to produce something beneficial to the global community at large, in addition to maintaining your obligation of return for your shareholders.

One reason for that moral vacuum is that we on Wall Street and you in the community don't demand loudly enough for that kind of fealty.

At this point in the economic cycle it appears that the next shoe to drop will be when our psychological frustrations begin to play a stronger role in our investment decision-making than does the simple expansion of "good news" and economic fundamentals.

Market Commentary for the week of July 23, 2018

More than idle conversation

It is always emotionally rewarding to synchronize one's personal values with their investment portfolio's structure.  Generating competitive returns need not be divorced from "doing good" at the same time.

As many of my readers know, morals-based (altruistic) and socially responsible investing has frequently been an accompanying objective to my quantitative orientation regarding the financial markets.  During a nearly four-decades long practice, I have created proprietary stochastic integers and statistical analysis to craft various target-specific strategies such as Health and Life Sciences, Alternative Energy, Fixed Income and current offerings in Global Water Concepts  and Global Agriculture Solutions.   The filter of socially conscious investing aligns clients to portions of their portfolio with specific areas of interest and concern.

But far from relinquishing the opportunity for capital gains, these segregated silos have performed at an extraordinary pace during the past generation.  Target oriented portfolios help the investor to define his goals while also contributing to the welfare of the planet.  The niches are too numerous to calibrate and widening in scope each decade.

Evolutionary shifts in demand for skill sets and natural resources are durable, and impactful upon research and development (R&D), capital expenditures, and profitability for a wide array of industries and geographies.

These trends are also affecting global investment cycles that emanate from a changing demographics of demand and need.  The most significant of these shifts is population displacement due to politics, weather, or economics.

Beyond their application to the financial markets, population trends also influence overall consumer confidence in private sector business, as well as government.  As pressures mount to find new sources of natural resources, so too does the fear of poor health, malnutrition, housing shortages, and physical security.  Despite Wall Street's opportunism about product creation from these distresses, the outside world watches with dismay as human convoys become statistics for heartbreak and misfortune.

The financial markets look at supply and demand/excess and shortage in the context of a profit-sum game, while the rest of the world sees human dislocation as a trauma beyond comprehension.

Do whatever you must

A significant portion of my stochastic data is lined up at present for a secular/generational opportunity to seek out solutions to these issues through socially responsible investing.  Additionally, we believe the prospect to create portfolio alpha in these sectors is rounding into its maximum phase.  Commodities like food, oil, metals, arable farmland, water, wood, etc. are inextricably linked to the human condition, as well as defining how their use helps to shape our perceptions about the role of good corporate and governmental stewardship of our ideals.  Rising interest rates, along with price inflation in soy, corn, wheat, coffee, poultry, dairy, and fruits could propel a new era of demand-driven economic growth for the next decade and beyond.

Compounding the potential shortages in raw materials and foodstuffs is a drop-off in available inventories in places that need them most .  Harvests around the globe are actually at record levels, but consumption rates vary widely by geography.  We need better storage, delivery, and production efficiencies to ensure that product is getting to those whose lives depend upon it.  These are the kind of questions patrons should be asking when looking for "shiny new opportunity hype".

Today, with the attention span of a nanosecond, investors possibly might finally be getting the message that secular, long-term shifts are occurring and, potentially, be the place for a few of their investment assets.

Market Commentary for the week of July 16, 2018

Analysis/paralysis

Many of the gyrations, both up and down, in the financial markets are driven both by data  and emotion.   To varying degrees, most of what you see in the daily price movements of the stock averages are responses to people's perception about what they see and hear, as well as good old-fashioned laws of supply and demand affecting rising or falling securities' prices.  Last week's vigor focused around the possibility of energy and commodity price inflation, global tariffs and trade wars, earnings dissipation, and wage disparities...as well as massive price fluctuation in particular stocks and global bourses.

We all use data to optimize our performance expectations.  As a measure against mythical or actual benchmarks, data is the most efficient way to provide comparisons to various peer groups and to set in motion a process of measuring future targets.

The internet has only widened our hunger for creating, activating, and implementing information through its immediate access to statistics of all kinds.  The general public might admit that data makes them feel more intelligent!

However, despite the proliferation of services and providers created during the internet era, one of the first drawbacks to assessing the value of that access is whether all that "noise" actually performs for us and makes us feel  as if it is helping the cause.  In other words, does data make us wealthier (or feel wealthier) or does it sometimes, or mostly, clog the wheels of forward momentum?

Think about it.  You have at your disposal a multiplicity of things that either make your life easier or more complicated, successful or less so.

We certainly are better off when the information at our finger tips gives us the answers and results we seek.  But if you have ever experienced "information overload", or been inundated with information that had very little to do with your desired outcome, then not only does the solution come less quickly, but possibly not at all.

 It is very possible that our tools are outpacing our ability to leverage them.

Good decisions

I would argue that being data rich but results poor  is a commonplace occurrence in financial modeling today, and that product originators sometimes use the luster of "new and improved" to fool purchasers into making choices that don't need to be made.

That view is influenced by the fact that the culture of the financial markets is oriented around sales, profit margins (theirs, not yours), and building infrastructure....not always upon placing a premium upon your asset preservation and capital gains.  Data capacity has given Wall Street an ability to take their eyes off of your prize: making and preserving wealth.

Of course, there are particular instances one might cite to refute my thesis, and we can respectfully agree to disagree. In many cases your perspective might positively have been influenced by a successful transaction you undertook.  Heck, I can offer substantive evidence in favor of "data" myself, as my entire four-decades long career has been predicated upon  a proprietary construction (ArlingtonEconometrics) of quantitative statistics, algorithms, stochastic integers, and ranking systems which made forecasting more efficient long before it became popular in today's financial vernacular.   (Note: read the first paragraph in the footnote/disclaimer under every week's commentary relating the objectives of my research).

The larger issue, though, is that not everyone is well served by the cacophony of noise that information pollution proffers. Think instead about those who, unfortunately, have gotten snookered by their own greed and that of the institution that played them.  As I wrote a few weeks ago, both clients and their representatives sometimes get seduced by the latest, the shiniest, and the most dynamic of product offerings on their menu, sometimes to the exclusion of asset allocation, time-tested fundamentals, and a healthy dose of patience and long-term perspective.

At its core, successful information gathering should be a vertically integrated, upward spiral that makes for positive performance.

At its worst, it becomes a vortex of profound proportions from which portfolio imbalance, indecision, and lack of success is more probable.   

Market Commentary for the week of July 2, 2018

False juxtapositions

In the conduct of global affairs the world is dividing between an "us versus them"  mindset which is changing the dynamic of trade, profitability, culture, and moral suasion.  Being generous, this "inadvertent" fraying of the world's economic tapestry is distressing.

The most significant rules and alliances of the past century have been disrupted because ego and tribal/territorial values are becoming more important than commercial equilibrium.

Not only is the rhetoric disrupting jobs and commerce, but competitiveness and industrial research are becoming casualties.  The world is shifting from cooperation to friction.  In general, economic patterns set in motion over 70 years ago in a post-World War climate are falling like dominos, creating uncertainty, market volatility, and psychological distress.  Memories of cooperation and conciliation are fading fast.

Any logical observer might assume that the great Bull Run of the past decade is on shakier ground now than at any time during its ascent.  A world with closed borders (morally, economically, politically) is an impoverished tapestry and one which is seemingly throwing away every advantage it might have enjoyed.

It should be noted that as new laws and more restrictive codes are adopted the sacrifices must be picked up elsewhere in society.  Entirely bypassing the environment, immigration, trade, and health benefits implies that other legislative initiatives might have to fill in the gaps for those in need.  What is less certain is how a new reckoning must be constructed in order to avoid hostility and pain within the citizenry.  Once policies are put in place...or in this case neutered...the wheels are in motion toward a host of potentially negative outcomes.

Unfortunately, economic and market consequences are the least  understood at this juncture.  Tons of information abounds, but outcomes are truly vague, at best.  The experts themselves are misleading because very few of them can accurately measure the impact of tariffs and punitive taxes upon a vast percentage of the world's economy.  We do know, however, that the influence of these new imbalances is akin to shutting off the spigot when trying to water your garden.

To be fair, we do not really know if or how the entirety of trade and revenues will be affected by these policy wars.  Certainly it is possible that their influence will be small, that protectionism is "good" for those countries trying to maintain some semblance of unanimity and shared purpose.  We will know soon enough.

Perhaps a more realistic characterization of current economic events is that an inflection has been reached...for stocks, bonds, monetary policy, fiscal policy, investor expectations, portfolio performance, moral leadership, and international cooperation.  That, in itself, is a mouthful.

Markets

The markets are rampant with speculation about Fed and central bank policy, global inflation, market forecasts, and the next direction of financial bourses.  Those who transact with a 24 hour timeline are becoming concerned about sudden shifts in portfolio valuations brought about by the ever-changing tone coming out of Washington DC and other global capitals.  However, those same denizens are obviously overlooking a basic tenet of the investment process: that volatility and uncertainty are ceaselessly inextricably linked to the exercise.   Not to mention that such a tiny aperture of perception fails to comprehend the true difference between investing for the long-term versus betting on the uncertainty of a roulette wheel.  The calculus is quite different for each whereby the former should calm the mind while the latter actually produces greater anxiety.  

Grass roots protectionism is bringing a decidedly discouraging tone to politics and economics.  Slowly but surely there is a subtle shift occurring that will stifle budget and spending considerations.

Witness how sluggish demand for housing and other tangible assets is holding those sectors hostage; rising interest rates are acting as additional tax burdens to consumers; tariffs and punitive taxes are inhibiting the free flow of goods; oil cartels sense an economic opportunity to withhold product and raise prices; manufacturers are suddenly handcuffed by a lack of raw materials.

The combination of the changing political dynamic worldwide along with last quarter's inordinate market volatility will have a spillover effect upon financial markets this coming quarter.  Restrictive trade policy will change the global currency equilibrium that has existed for the past half-decade.  Profitability will probably be impacted, as will future plans for reinvestment, inventory expansion, and debt service payments.  As goods become more scarce and more expensive the reciprocity of callous knee-jerk protectionism might accelerate into a dangerous self-fulfilling spiral.

As I noted in earlier commentaries, the most appropriate investment policy during this period of profound changes....both social and fiscal....is to concentrate upon defensive allocation strategies focusing mainly upon earnings-type equities like utilities, non-cyclicals, and basic materials; short term time deposits; and cash with the expectation over time that that these verbal and economic conflicts will eventually be solved by calmer heads and that a resumption of civility and good will might occur.

Conclusion

The proliferation of destructive power.....verbal and weaponized....permits a small number of malcontents to expose fundamental divisions between people and nations.  It is difficult to extinguish the flames of hatred and fear.  But the biggest absurdity would be to limit any attempt to remediate the situation.  Even within the most strident of nations, people still aspire to a world in which faith in each other is stronger than political pressures applied upon them.

Participation is stronger than withdrawal.  Entrepreneurship is stronger than walking away and sulking.  The greatest pathway to future reward...economically and spiritually.... is engagement and a keener sense of tolerance for one another.

Before we are expected to accede to the needs of our political leaders, perhaps they should reciprocate to the needs of those they serve.

 

 

Suggested balanced account asset allocation, Q3, 2018

Equity:                  37%

Fixed Income:   38%

Cash:                    25%