Market Commentary for the week of January 22, 2019

Lipstick

In my recently published Quarterly Commentary (January 1, 2019) I opened a dialogue with you about trying to focus upon intrinsic need investing, sometimes referred to as socially responsible investing.   The focus in that missive was on water crises, but any number of endeavors might qualify for examination, such as agriculture, ecology, energy, education, healthcare, etc.

I also noted that many financial firms have tried to capitalize upon these concepts by introducing product offerings such as mutual funds, unit investment trusts, or private equity pools.  However, as I also pointed out, most have failed to deliver solutions to the problems or performance for their clients because their methodologies are, in my words, "incomplete or dilapidated".

If one is truly interested in combining relevant answers with portfolio performance the focus must be sustainable and unique.  One shouldn't be impressed just because a socially responsible moniker is affixed to an investment offering.  While the effort might be laudable, the value quickly dissipates when you realize that the originators are simply overlaying yesterday's analytical method upon a contemporary phenomenon.

Investing in tomorrow's issues (renewable energy, agribusiness, e.g.) may possess noteworthy "catch phrases", but requires ethical, consistent, and progressive quantitative statistics to produce results.  Achieving an enduring portfolio in these realms with strong long-term returns must be more than simply screening an established benchmark or index and adding the phrase "green" or "socially responsible".

Socially responsible investing (SRI) as currently practiced still succumbs to the old dictum that the portfolio usually follows an "old" benchmark in order to be considered mainstream and low risk  (as if volatility and risk were the same thing).  But such plodding deployment relies upon legacy businesses and commonplace solutions, as well as technologies only known at present, which have very little to do with investments that answer for reforms in the future.  The winners of yesterday's idea competition aren't generating the answers we need, or else we would already have eradicated the social misfortunes looking to be ameliorated.

Going further

I prefer to play in a proprietary realm of quantitative statistics in which magnitude and amplitude qualifiers make it easier to locate the probability of longer term performance from a select silo.

The old method of starting with an existing benchmark and being told to "put lipstick on this pig" doesn't make it a "greener" or more palatable circumstance.  My work, instead, spans the continuum of geography, capitalization, sectors, and corporate definitions to aggregate portfolios by risk  and probability.  Old indices are insufficient relative to the needs, questions to be asked, and opportunities for the future.

The most significant element to SRI is having the proper context within which one can advance the calculus of investment performance and precise results for the long-term. 

For example, today's "green funds" might do a good job of helping you identify industry leaders.  But one needs to go beyond that....to create rankings within all  industries whereby routines might be developed from which cross-pollination can produce integrated possibilities not yet anticipated.

The mind and the imagination are the fertile soil from which durable sciences grow out of creative application.  

Market Commentary for the week of January 14, 2019

What would the "experts" do...?

During this period of extraordinary and extreme volatility in the financial (investment) markets, investors frequently seek out, or are bombastically inundated by, the opinions of market gurus who offer prognostications and opinions about what to do next.  The media feverishly feeds the frenzy by calling upon every source, every "expert", to fill up valuable air-time or newspaper columns.  Why are people drawn in sometimes mindlessly to the chatter?

Look, I am not lamenting the medium or griping about the coverage.  Full disclosure: I, too, am an oft-quoted media presence for over 30 years.  I enjoy imparting perspective about my science and the markets to the public.  Well before the advent of the internet and 24 hour news cycles there were a lot fewer of us "talking heads" to go around!  The attention paid to our points of view is intoxicating as well, I hope, as illuminating to those who listen.

But the bigger problem, as I see it, is that it would take several lifetimes to read, listen to, and digest all the possible permutations and judgments that could be assembled about the financial realm....or any topic, for that matter.....and most likely the consensus would fall far short of satisfying the requirements for a successful outcome.  The Hall of Fame of outstanding financial counselors is a small room, indeed.

The problem isn't that seeking advice is a bad thing.  No, the problem is that too many advice-givers are too immersed in the horserace on a daily basis to know, or to care about, the uniqueness of each client's goals and objectives.  Being consumed on a day-to-day basis in the circus that is Wall Street tends to blind its participants from the well-rounded extracurricular world that exists beyond their sphere of expertise.

Without impugning myself or other of my colleagues, the historical annualized track record of the S&P...or those who claim to outperform it on a consistent basis....is tepid, at best.

Remember, markets are cyclical, success comes and goes, ebbs and flows.  And so too does the efficacy of "skilled advice".  How many prognosticators correctly predicted the dot.com bubble, or the last Great Recession (2008)?  And yet every hour of television produces another authority telling you more and more about sometimes useless information, and what to do about it.

And still we listen assiduously.

Who knows you?

Behaviorists know that humans are wired to make predictions about the future.  It is what separates us from other species...the ability to "know" or plan for the future outcome of actions we take today.  It is the foundation of what it means to be human.

We also crave certitude.  Lack of certainty is perceived as a threat or a sign of chaos.  No one likes to be anxious about the future, even though our obsession with professional market advice in the media may, in fact, make some of us extremely anxious!  However, we need the reward for doing something, anything.   Thus, we listen anyway.

One's tolerances for these immersions/aversions differ widely.  That is why clients prepare a Risk Profile Questionnaire before opening an investment account or hiring a money manager.  "Know your client"  is the foundational tenet of my profession.

Opinions  and advice  fill a need for all of us.  They hopefully allay our fears and quell the uncertainty.  Their soothing chemical effect upon our brain is irrefutable.  But our overreliance upon the "ubiquitous opinion of others" should also have boundaries.  Being comfortable with being uncomfortable is also a trait I see in the most successful professionals, and something more of us must try to ingrain.

Stop thinking about highlights  and out-of-this-world deals, and start refocusing on what really matters to your "values quotient" and your life in a more visceral way.  Thus, it might be helpful to think about how you use media and information technology and what purpose you want it to serve for you.

The alternative is eagerly to be led around by the next  guest on the 4:15 Market Wrap program...... 

Market Commentary for the week of January 7, 2019

False boundaries

Without doubt, delineations on a calendar such as days, weeks, months, etc. are highly useful.  They help us to know when birthdays, anniversaries, doctor's appointments, and school classes occur.  They are not so useful, however, in providing realistic demarcations in the stock market, particularly when investors benchmark portfolio performance against "the end of the year", or other quarterly standards.  Why?  Because financial markets simply don't operate upon the Gregorian calendar, or any other artificial imposition of time manufactured by man.  As much as we would like "quarterly earnings reports" to be representative of the "true" quarterly performance of publicly traded companies they are, after all, the overlay of a presumed time period during which something we expect to measure must be measured.

In other words, financial rhythms are beholden to no such barriers other than those which occur on their own time, in their own way.

As a result, I believe investors can do a better job of mitigating risks....and generating higher returns....if they pay greater attention to the longer-term business cycle and to those companies that focus on innovation, research and development (R&D), and any other factor that lends itself to strategic long term planning as opposed to the hype of get-rich-quick pitches or quarterly, calendar-driven mandates.

In fact, these are times for aggressive  portfolio management, but not in the way you might imply that phrase's meaning.  Rather, the most important decisions are how to balance your objectives over the next two to five years and how to process the answers into optimistic silos...versus those laggards and losers....and to purchase those selections at prices "wonderfully depressed" from ten months ago.  Today, although many are calling for the end of the bull market, is simply a chance to reboot your portfolio into a cautiously optimistic basket of opportunities once thought lost.  Without losing one's perspective about age, risk, time duration, etc. the market is offering you a second chance to make money.

We spent the better part of last year raising cash as the markets went straight up.  It was a difficult decision to make.  But rather than being seduced by the siren call of "inevitable" stock price appreciation, we now find ourselves with sufficient liquidity to take advantage of those longer-term trends that we still find enticing.   Based upon the current economic data, I believe the backdrop for bearishness in the market is highly overplayed, slightly romanticized, and not yet necessary.

Getting real

Do I worry that stock prices might fall again in the immediate future?  Of course I do.  I always worry on behalf of my clients that something unforeseen...or known, perhaps...might derail short term portfolio valuations.  That's my job.  But not every cyclical (short-term) reversal is a crash.  Rather, we know from our science that cycles will, and must, occur in order to create relief from just such excesses that took place during the past year.  I'm glad we positioned ourselves as we did and "glad" that the pullback offers us the chance to recalibrate our statistics.

The effect of the pullback has been significant and troubling.  However, an astute investor plans for cyclicality and converts bad breaks into better chances.  The added value of a good money manager is to stabilize the rough spots by employing a steady methodology that pays off in the long-term.  Looking for a stock picker and quick staccato gains....or losses?  Look elsewhere.

The tyranny of using calendar benchmarks to judge portfolio accomplishment is that you must constantly assess performance versus process.  The comparison is not always accurate because the person who can afford to take the most risk likely has the best chance of short term gain....but usually to the exclusion of a solid 5 to 10 year framework, during which process almost always beats "the jackrabbit".

In fact, looking at a portfolio's current assembly, I can always get an indication of a client's pro-risk/anti-risk intentions.

Let the hyperbole, emotion, and mania die out a little.  Usually the biggest portfolio mistakes are made when you're emotional.  And, given the magnitude and speed of the last market crunch, you are probably emotional right now.  Now is not the time to declare that you are "jumping back in with both feet to value hunt"  nor, worse still, that you are "out of the game altogether".

Market Commentary for the week of January 1, 2019

....not a drop to drink

 

 

 

 

The truth about water shortage isn't that we either have it or we don't.  It's not an either/or proposition.  In fact, it is much more complex than that.

 

One of the greatest challenges the globe faces today is both the scarcity of and access to one of its most valuable commodities.  Finding the humane response to water deficiency requires enormously diverse and innovative thinking.

 

Deliberative educational and social-governing institutions deliver startling news as we enter into the third decade of this millennium: half the world's population will be living in areas of water scarcity or water-stressed conditions during the next 10 years.  If you think you are immune from these data, think again.  Western states of the US; regions of Africa and South America; vast expanses in Asia all face severe water shortages at present.

 

Water stress  simply means that either the demand for water exceeds its availability or poor water quality restricts its use.  Where stress occurs, the deterioration of the human condition follows.  It is not simply a matter of population growth, but factors, natural and man-made, that take a toll on precious natural resources.

 

However, the world's population is expanding at a pace too immense to keep pace with available water supplies.  As the rate of population growth increases, there are more instances of human migration roaming into areas where water supply is more abundant.  The fact is, we are using and abusing H2O at a pace greater than any time in mankind's history.

 

Climate cycle changes are also altering rainfall patterns, the amount of rain, and intensity of precipitation.  In some areas, the issue is not lack of rainfall. it might be too much  which damages infrastructure or quality of life.

 

Shortages might be influenced by man-made habits: pollution, waste, imperfect distribution.  But, above all, it is how we think about water which most influences the quality of and access to this precious resource.  Throughout the developed and developing nations, finding a unifying strategy that addresses the needs of people to have pure water must become a transcendent issue for our times.

 

Markets

 

It is not well understood where first to attack the problem.  Wall Street, for example, typically jumps from one "hot idea" to another.  Volatility in this sector is often linked to seasonality or news cycles in advance of, or just after, major weather or human calamities.  It just seems as if the Street's fanaticism about idea generation  and profit constrictions  leaves no room for wide-ranging long-term solution making.

 

Tapping the actual problem, and investing successfully in it, is another thing altogether.  ArlingtonEconometrics, my proprietary database, has spent over a decade compiling water stock issues from a myriad of geographies, capitalizations, and social spectrums culminating with my Water Stock Concept  allocation that has lucratively advanced the proposition of building capital gains while doing good for the globe's inhabitants.  So far, so good.  Many publicly traded "water funds" have not been able to deliver consistent performance because their processes are incomplete or dilapidated.  Water is not just a commodity, but a public trust and must not be managed for a select few or a specific profit motive, but as a human right for everyone.

 

It makes no difference whether you are a mature company or a start-up, investors are looking for expert time and money management and comprehensive, no-holds-barred positive outcomes for the future.  In addition, it is useful to create a longer-term, sleep-at-night approach to investing in this sector to avoid the kind of emotional convulsions that typically govern speculative or trading mindsets.

 

The problem is so diverse because estimates and regional diversity vary so dramatically.  As noted above, the issue in some areas is not lack of availability but, rather, lack of proper distribution, whereas elsewhere the challenges are reversed.  There is no such thing as an all-inclusive one-size-fits-all solution to investing in or solving the impending water crisis.  The reality is that the answers must encompass a variety of topics, including desalinization, testing , pumping, irrigation and agriculture, siphoning and purification, engineering, and infrastructure, to name a few.  If one aggregates all these goods and services, one approaches hundreds of billions of dollars in potential investment windfall.

 

Perhaps the technology for one region doesn't fit into another?  That's all part of recognizing that this is a burgeoning topic with more than one resolution.  While the overall theme may be broad, the goal is to be target-specific and methodologically consistent in one's approach to allocating resources, public and private, to this endeavor.  The allure of being "vogue", being affiliated with "hot button topics", must be tempered by common sense, patience, earnings-based returns on investment, and a solid moral compass.

 

The challenge for human beings to address these social issues is both a political and economic test.  There obviously is an awareness in the media that crises abound, but is there a will to do something about it?  Everything we conceive regarding an impending water crisis must be supported by a consistent philosophy.  It is a defining moment.  At this point in history there must be a declarative humanitarian tenet that no one should be hungry or thirsty.  Which industries, charities, agencies, institutions will step up to help first?

 

Think of it another way......what do you currently pay for a gallon of gasoline (fuel)?  Multiply that number by tenfold to consider the consequences of not  having potable water....

 

Conclusion

 

If you were called upon to challenge yourself to identify the greatest potential crisis to the planet, would you have selected something related to water?  Would it shame you to think that as long as the issue doesn't directly affect your  spigot that the likely answer might have been "probably not"?

 

There is a wonderfully powerful confluence within the financial markets right now, one in which a multiplicity of opportunities in socially responsible investments offer the savvy investor a chance to multiply his wealth while providing the framework for a new network of problem-solving for several decades to come.  Consider how the tapestry of healthcare, infrastructure, food and water, ecology, animal conservancy, and renewable energy is woven by our conscience and sense of self.  The bottom line is that no matter how the issue directly affects you, there are motivating financial, political, and moral challenges that are bigger than just one individual.

 

Paying attention to a predicament is the first step in addressing it.  I am pleased that we can appreciate the comforts we already have while also bringing forward a conversation that evokes fear, compassion, and ingenuity on a macro scale. 

 

No one disputes that you can't legislate morality or social consciousness.  Nor can you absolutely  incentivize capital expenditures through fiscal or monetary policy to address the pressing needs of our day.  Most likely, these will be results that derive from human nature and basic laws of survival of the species/(planet).   Unless these disasters actually wash up on your doorstep, it seems very few pay attention.  Let us hope that it never comes to such a breaking point.

 

Look around you.  Do you know the most effective way to coalesce the plight of others with your desire to create capital gains and portfolio aggrandizement?  Spend 24 hours "walking in someone else's shoes".....someone less fortunate, someone impoverished, hungry, or in failing health.  Investing in those things that improve our societal landscape might not be the "trader's way" to make money.  But it does represent the forward thinker's approach to building wealth.

 

 

 

 

 

Suggested balanced account asset allocation, Q1, 2019

Equity:                48%

Fixed Income:  40%

Cash:                  12%