Paying
a premium
The markets retreated somewhat last
week from the internet mob-induced volatility of the week prior, although it
bears noting that the specter of it having been done once now festers in the
background. The volatility continues,
but hopefully a keener vision prevails.
Our inclination is to play rallies, not dips. The sheer volume of speculation driven by
internet chatter must be looked at as an aberration, not as a validation of
some underlying fundamentals. In fact, fundamentals are infrequently driving valuation,
for all intents and purposes.
Although our discipline, quantitative
analysis, is mostly regarded as a “reactive” science, one in which statistics
are evaluated from past trajectories, these data can also identify price and
time progressions which are expressed numerically as future probabilities. Prudent use of these stochastic integers
helps us to look forward, for example as they relate to economic/political
trends in infrastructure, energy, manufacturing and technology.
There is strong profit potential in
each of these sectors, across a wide spectrum of geographies, in the next 12
months.
The offshoot of the maddening chat
room speculation is that the markets lose sight of the forest for the trees,
creating price bubbles that erupt, and disrupt, the orderly flow of trend
cycles. It is fair to say that when
these roadmaps disappear, the chaos left behind is shattering norms.
Headlines and hyperbole are not
strategies, they are non-scientific emotional crutches. Most of the rallies borne of speculation are
really fears of being left behind,
not a conviction about what lies ahead.
Search,
don't surrender
Last week we wrote about how a lack
of alternatives in fixed income is fueling stock speculation. While this might be problematic it is not a
death knell for investors. At worst, it
is an inconvenience for not having another “parking place” for your money. Low interest rates are elongating the cycles
in stocks while dramatically skewing the denominator in our calculations. As a result, the numbers sometimes provide a
false hope about the continuation of up cycles.
To conclude, we see the
perpetuation of daily new highs in stocks as an unfortunate consequence of low
bond yields.
If, however, the global economy does
rebound this year in a post-pandemic world, there is a likelihood that interest
rates will tiptoe slightly higher. What
impact might that have upon the already bloated stock markets? There are innumerable issues with which to
deal, including the dreadful unemployment numbers that came out last week...and
the several months prior...healthcare delivery inefficiencies; social justice
and criminal reform; hunger; poverty; and homelessness. Despite all measures taken monetary, the real solutions are fiscal, political, and moral in nature.
Our biggest concern going forward is how and where earnings acceleration
locates and how to take advantage of these shifting secular patterns in our
client portfolio allocations.
It looks as if the market will be
punctuated by one-off earnings successes and targeted sector rotation rather
than an across-the-board acceleration in all categories for the next few
months. Avoiding any exogenous and
unexpected risks should be our primary focus.
Crises and recovery have always been
a foundation of investing. For nearly
four decades we have navigated these traumas by creating silo-specific
portfolios including Health and Life Sciences, Alternative
Energy, High Yield, Socially Responsible, and our two most recent
offerings in Global Water and Global
Food and Agriculture. By focusing upon specific needs, these
portfolios also complement our endeavors in wealth building for institutions
and the ultra-wealthy. New initiatives
are forthcoming in areas of social and secular change such as Technology
and Infrastructure utilizing our proprietary (ArlingtonEconometrics)
database, always preserving our focus upon the possibilities and the future.
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