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.