Market Commentary for the week of December 5, 2022

Feeling guilty, yet?

A little over a week ago, most Americans were getting up from their Thanksgiving dinner table, surrounded by friends and family, perfectly sated by a terrific meal.  In this instance, gorging ourselves on turkey, ham, vegetables, and dessert was an example of “giving thanks” for our bounty.  In another context, however, let’s ask if you, at any moment during the feast, thought of those less fortunate who had little or no food at all?

Food is a topic fraught with emotional levels that cannot be summarized in one paragraph or analysis.  Food is a necessity of life, acknowledged to be a human “right” by most.  Not having a car, for example, might be an inconvenience;  not having enough food to eat can be fatal.  Nearly one third of the world’s population experiences hunger or food shortages at some point, according to United Nations studies.  To classify food as one might any other commodity is a cruel offense that is unacceptable.

But how does one reconcile the difference between one person’s excesses and another’s suffering?  Too often we fall victim to a lack of introspection, direction, and compassion from our leaders.  Forging a solidarity with those less fortunate is simply a matter of empathy, not something about which you should feel ashamed or in some way put upon.  Yes, your pleasures are your right, too.  After all, how does your meal really take something away from  someone else?  And why should you care?

Curiously, the pandemic exacerbated this conundrum by nearly closing the entire hospitality/food industry.  What once was an extravagance (dining out) became as rare for the well-off as for those who wouldn’t/couldn’t consider it anyway.  In both instances the super-rich and the indigent became communally marginalized by scarcity.

Finding the link

The burden of solving poverty and starvation doesn’t fall on just one person.  Hunger is a systemic global issue.  It is also a moral issue, one which requires willpower of the many to overcome obstacles imposed upon a few.  It is not a sin for you to enjoy your caviar every once in a while.  But what do we owe to others who are bereft of such luxuries?

ArlingtonEconometrics, my proprietary research model and database, has spent decades in search of investment possibilities related to these subjects.  As recently as 2017, we constructed a Global Food and Agriculture model portfolio, consisting of over 50 publicly traded entities, whose efforts to explain issues related to farming, production, delivery, and sale of agricultural products were vital to their businesses.  The “bench” is quite deep, as more companies come online looking at macrobiotics, hydroponics, ecology (climate), and geography.  Our watch list consists of corporations with accelerating earnings and expanding profit margins.  As the markets recoil with uncertainty we have to adjust our risk tolerances commensurate to market activity and data.  Thus, we are always seeking to complement our portfolios with “silo-specific” opportunities that also do good for society as a whole.

The global food and hunger dilemma’s significance is incontrovertible.  Beating the broad market averages is a fine goal, but we prefer to make money for our clients by finding earnings potential in sustainable themes.  Above all, relevance and resilience  creates demand for shares, technologies, and industries when markets turn uncertain or disjointed, as they are now.

Foregoing a night out of dining may mean you save a few dollars…and perhaps a bloated belly and a hangover!!  But working towards a world in which everyone shares the same “right” to eat still allows for your indulgences without denying the privilege from anyone else.  It may sound burdensome….or perhaps trite…..but wrestling with socially responsible generational change (whether in the financial markets or the societal landscape) is not a 9 to 5 job but, rather, a full time exercise.  I think we’re up for the task.

Market Commentary for the week of November 14, 2022

(Warning: today’s commentary will not appeal to investment “cowboys”, speculators, yahoos, or those otherwise predisposed to unrealistic capital gains expectations)

Embrace the lag

The nature of change, positive or negative, is that it evolves over time, sometimes hidden in plain sight, or more so at the impulse of vast emotional, fiscal, or social stimuli.  We know what the issues are today: hunger, poverty, security, and sustainability.  The question is whether we as a society have the resources and willpower to do something to solve them.  As investors, the lynchpin is always how much time and patience are we willing to offer before a financial reward is contemplated.

Therein lies the essence of the problem for Wall Street and for Main Street.  More frequently than I have seen in the past, the financial community has become fixated by and dependent upon the big score, the immediate payoff.  And why not?  Public companies are obligated to their stakeholders to deliver a profit.  Clients are unwilling to wait for professionals to customize portfolios and risk assessments, preferring the internet for direct access to ideas and rumors.  But obstacles to social progress emerge when those short term expectations supplant the urgency to get things done that cannot be solved in 3 minutes, 3 weeks, 3 months.

Consider your own matriculation through life.  Did you…could you…master geometry on the first day of class?  Could you complete a marketing assignment on your first day of a new job?  Can you “learn” to play golf in one day?  Fly a plane?  Repair a car?  These things take time.  And unless you expect to be incompetent at everything you undertake, you know going in that anything worth doing requires a commitment and an effort.

Thus, an investor must also have the willingness to stick it out, to bide one’s time, and to manifest the guile to differentiate the bright spots of a larger purpose of problem-solving that only a real investor, not a gambler, can embody.

During periods of social evolution it is necessary to align with transition  and adaptation  to any new normal.  In so many ways, the recent Covid pandemic wreaked havoc upon our social and professional lives.  Kudos to us all for the effort it required to come out on the other side. But now we are faced with questions about our humanity and our connections with one another.  No one is asking you to sit back with a wait and see approach, but we also cannot avoid the matters of rebuilding daily structure and its impact upon our communities for the future.

Solving these misfortunes is a journey over time.  We must think about a new energy economy, innovative agribusiness, advanced pharmaceuticals, and rebuilding crumbling infrastructure.  There will be setbacks and punctuation marks…it’s all part of the cycle of life.

Amid ongoing global uncertainty the grip of negativity is  certain.  Are we in a recession?  Is inflation permanent?  Consider that the world’s economy was dormant for nearly two years; that the pent-up petition for all things necessary and discretionary became so great as to put a chokehold on global supply lines; that the “price” of things had been stunted during an economic hiatus then unleashed as demand outpaced supply.  Yet, still, we are emerging from the crisis in robust fashion absent a well-defined political agenda…it is survival time.

After two very challenging years we should be under no allusion that the answers are immediate.  However, we should not misrepresent the challenge by waving our arms, abandoning the processes of success and tolerance, or failing to recognize the enormous investment potential that any downcycle always offers on the reverse-side.   Against the backdrop of last week’s news about inflation and GDP, we feel quite euphoric about extending our investment horizon towards thematic, sustainable, and socially responsible alternatives.     

Market Commentary for the week of October 31, 2022

A matter of perspective

Unless your investing career started back in the 1970’s, your level of concern and confusion about economic data must be alarming right now.  However, as has been the case in other instances, we’ve been here before when rising prices and weaker economic growth produced “stagflation” and recession fears.  During such periods, sectors rebalanced and reprioritized to reflect market changes.  Defensive assets, such as commodities, perform well in those times.

When both stocks and  bonds are in decline rational theories of market performance become useless, heightening the specter of hopelessness.  Against this backdrop of uncertain macro direction investors must look at the long-term as the answer to their uneasiness.  Thematic and secular (generational) themes always win in the long run.  Unfortunately, we have witnessed a recent spate of immediacy and impatience by too many investors in their quest to recover from their pandemic “melancholy”. 

They tend to see things as either/or.  Technologies that rearrange generational schools of thought are hard to find, but worth the wait and prize.  Industries that engage in replenishing our social consciousness are not usually thought of as the typical “big score” that traders look for.  But every generation must come to accept that change is inevitable and part of understanding a “new normal”.  To that extent, asset management is sometimes described to me as “boring” or “unstimulating” when, in fact, it is precisely the way intergenerational wealth is transferred responsibly.  And if done properly it can be a force for good governance and social care.

In fact, the synergy potential between socially responsible  and profitability  is unmistakable if one has patience.  Dollar cost averaging, doubling down, and failing to diversify are the antithesis of fiduciary care.

My job is to respect risk.  My appetite for losses is small, my convictions are large.  Our job is to execute our discipline in the face of changing realities to create portfolios that reflect your expectations for return and volatility mitigation.  There are times to be on offense, and times to play defense.  Right now we are definitely in a defensive posture, without guarantees that any strategy is right for these times.  However, our 40-plus year track record of outperformance demonstrates that we have played in this game long enough to know the differences.

Keeping losses manageable is essential to wealth creation and preservation.  It takes a 100% return to overcome a 50% decline.  So when one’s monthly statement shows a “loss” it should be noted that our defensiveness means our thresholds are tighter and our relative position is stronger.  Make no mistake, everyone experiences agita during down markets.  The knack is to manage the magnitude and duration of the pain to one’s tolerances.  Ours is a business of risk mitigation as much as it is generating extraordinary rewards.

Wealth can “hurt”, too

At present we see only a handful of fundamentally strong sectors that are fighting market downtrends.  However, even for those few, their quantitative relative strength integers (RSI) do not put them in an optimal buying range.  Trying to pick “bottoms” is an exercise in futility.  Instead, we require an appropriate time/price relationship to create an optimal inflection.  Hoping  is not a quality investment discipline.

As the seasons change, election series unfold, and global monetary policies take effect we find ourselves in a vortex of health (Covid), politics, and economics which impose vicious cost to our psyches.  To survive these exogenous noises we focus instead on the opportunities and unsolved problems that the capital markets historically have always helped us to discover…...clean air, clean water, food, shelter, security. 

This remarkably intricate mosaic which comprises the financial markets always works best when there is a shared sense of purpose and expected outcomes rather than a singularly ignorant “what’s in it for me” bias.  The experiment we call “Capitalism” is about unifying opportunity for reward for the betterment of all participants.

Market Commentary for the week of October 17, 2022

Dealer’s Choice

Anyone who invests knows, or should know, that up precedes down  and down precedes up.  Volatility is a part of the game and must be embraced.  Quantitative scientists measure the magnitude and duration of cycle phases from which are derived predictions about the future course of events.  Bemoaning the condition of the financial markets or the economy is uninspiring rhetoric because whichever cycle we’re in is merely precedent for whichever one follows.

That’s not to say that human nature must be ignored simply by wishing it isn’t there.  Losing is real, as is winning, and nobody likes to lose.  But it is mostly a matter of choice, and facts, about how one choses to assess the current state of affairs and adapts to it.  In financial matters that job falls to money managers to allocate funds according to risk tolerances, time horizon, and expectations about the future.

The current debate revolves around whether or not we are in a recession; whether the financial markets are entering a bear phase; and whether or not we perceive opportunity or disaster is in the offing.  Above and beyond essential evaluation of the objective data, there are those for whom those answers derive from a personality predisposition.  If a black cloud follows you always then things look bleak.  Overly optimistic investors tend to see the bright side.  As a client fiduciary (a term one hears on television a lot lately) I am always aware of the pitfalls embodied in the data, but optimistic about finding solutions to my client’s objectives.  That is what asset allocation is all about.  As carpenters say, “measure twice, cut once”.

Undaunted

As quarterly earnings season got underway last week it appeared from the diverse sample size that we are not in a particularly precarious position, rather a relentless one.  The pace  of economic acceleration was abating from that which occurred immediately following the worst pandemic in a century.  The market jitters and gyrations in recent weeks were sourced by uncertainty concerning rate of decline in earnings, not the earnings themselves.

Recall that we were all encouraged to spend our way out of our despair by bankers and politicians who kept interest rates artificially low and who passed legislation extending benefits and offering cash incentives.  Today, the tide has turned….at least for the bankers who are progressively increasing interest rates as a means to stem unyielding spending and to quell inflation anxieties.  If, indeed, the past is prologue, then we know that when this phase is over we will reach an inflection point from which the next growth cycle will emanate.

Our current baseline assumptions are that modest increases in employment, marginal slowdown in demand, post-Covid supply chain shortages, and higher interest rates will narrow profit margins (earnings) in the near term, making stocks significantly less attractive for risk reluctant investors.  Similarly, we see opportunity in short term bonds as a means of enhancing portfolio total return.  We want our portfolios to be “balanced”, but as risk averse as possible.  Expected slowdowns in the economy will probably be perceived as negatives to overall confidence readings…a cycle of pessimism that feeds upon itself.  Right now, micro is more important than macro for most investors.

We are holding a healthy level of cash in our portfolios as a buffer against daily volatility.  While portfolio valuation declines are never acceptable they must be tolerated until the end of this upheaval is completed.  However, there are, and will continue to be, opportunities for capital gains in socially responsible investments (SRI) such as agriculture, healthcare, alternative energy, infrastructure, and transportation.

The pandemic was a once in a lifetime (negative) phenomenon.  Its traces will be felt for generations.  But if this is indeed our “down”, then there is hope that the next “up” will be even more handsomely rewarding.

Market Commentary for the week of October 1, 2022

 Frayed at the edges

The abrasive dichotomy that defines the marketplace is causing havoc with investor expectations.  On the one hand, everything is retreating backwards while on the other everything is going up, including the blood pressure of market participants who wonder just how the split between high inflation versus lowering valuations eventually will resolve.  To be sure, there is always something in which to invest.  But there appears to be more of a manic divestiture away from  financial assets than a stampede towards them.  Chaos can kill a good market rally.

Markets

To the astute Wall Street observer things don’t look so bad.  There had been two years of post-pandemic recovery…both in healthcare and portfolio valuation...which looks even better when measured against the damage the virus inflicted at inception.  But the virus was an aberration that wreaked historically uneven consequences upon the population.  Nevertheless, as we surged out of the carnage the Federal Reserve and other global central bankers felt the need to tamp down our enthusiasm by raising interest rates to quell spending.  In this case, the Fed won, the markets lost.  Higher interest rates soaked up investor’s short term cash as Treasury Bills and CD’s made a huge comeback by providing temporary relief from limited returns in savings accounts.  And then, boom…stock prices plummeted along with enthusiasm for taking risk.  It might be the case that cheaper equity prices will entice speculators back into the market this quarter, or next, but stock luster looks just a bit duller than during the boom last year.  So, are we going up or going down?  There is no one size fits all answer….

Some might argue that low interest rates, low inflation, and easy money create a stable environment for economic success.  Still, others  instruct that low interest rates and profligate spending allows corporations to borrow money simply to buy back their own shares rather than to invest in infrastructure and the future; that the individual investor is running up greater (unaffordable) debt; that savings rates are kept artificially low; that unemployment figures don’t accurately reflect the gap in demographics of today’s world: the well-educated upper class versus the undereducated lower strata with extremely poor chances of competing in today’s marketplace.  In short, there are no scarcities of fiscal capital gains to be had on Wall Street, while at the same time an equal measure of political and capital moral depreciation on Main Street is running rampant and eroding the buying power and political leverage of the average citizen.  As of now, even as monetary measures are being implemented, household indebtedness represents a significant percentage of household expenses.  No wonder our social priorities are out of whack.  For many, these developments portend a no-win scenario.  Rising rates have created a cost too high for discretionary….or for many, necessary….purchasing while falling stock prices put a psychological strain on investor’s confidence.  There needs to be a fundamental and technical reboot for the markets to stabilize. 

Meanwhile, economic and military conflagration in Ukraine create similar global uncertainty.  European nations are caught in the middle of a social and political dilemma of absorbing the costs of a war they didn’t want while migrating multitudes of refugees must be cared for out of a pool of diminishing resources.  Does one really believe that European politicians want to get in the middle of the Russia/Ukraine conflict…or internal strife in France, or Italy, Greece or anywhere else?  “European (economic) Union” is a lofty goal but fraught with pitfalls when individual interests are at stake.

We might add that gunfire and political conflict is not limited to central Europe.  The emerging economies of Latin America, Asia, and Africa are in flux owing to regional conflicts, a currency unable to find equilibrium or traction, and hostile gang-based violence resulting in death, population migration, and insufficient natural and capital resources required to sustain economic prosperity.  Given the infrastructure, political, and cultural obstacles facing those regions we are not yet ready fully to commit client capital to the emerging markets at this time.  Many of the developing economies of the world have empty larders in part because of politics or climate.  The painstaking process of building social institutions that work for all of their citizens is something that must be addressed.

As with most anything in the capital markets, the issue often boils down to profitability and/or matters of social conscience.  Farmers know how to splice genes and ward off crop infestation.  Health care workers understand immunization and preventative care.  Businesses are adroit when it comes to managing the bottom line.  More so, however, the solutions to these and other issues is having the will to lessen the plight of the poor by replenishing supply chains, building infrastructure, and caring for basic human needs (food, water, shelter, security) of their citizens.

Climate change is a defining factor in shifting the rhetoric and action of political leaders.  In a warming world, increased famine and population dislocation have become, unfortunately, a new normal.  Rising temperatures actually raise the rate of crop growth, but the demand for potable water and fertile land is also increasing as the population soars.  Science postulates that as temperatures rise the net output per square foot of farm acreage will drop because of insufficient water capabilities.  In dry areas of the globe, with fresh water for irrigation becoming more scarce or being siphoned off to nourish other crops, staple farming must either learn to adapt or perish.  Curiously, wet parts of the world are over saturated; drought-ridden countries are suffering even more.

Strategy

Wall Street must embrace the concept of using innovation in science to “do good” as well as creating profits for stakeholders.  It is possible to do both....to enlarge the size of your portfolio while doing so responsibly and consistent with values-based earnings.  A company that feeds the poor using better science, or which creates clean energy, can also have rising share prices.  Good stewardship of our planet, fair compliance and governance, and profitability from innovation and strong demand are themes that don’t have exorbitant “costs” except commitment and empathy.  We would argue that not  to do these things dramatically limits one’s exposure to capital gains and cutting edge science.

We will be reducing our exposure to stocks this quarter.  However, we are mightily satisfied about allocation decisions made many months ago to reduce risk while, more recently, deploying cash reserves into short term higher-yielding bonds which generate an income “reward” for staying patient during the Fed’s machinations and the market’s uncertainties. A slowing economy is not conducive to increased earnings or rising P/E levels.  There might be additional volatility in the financial markets ahead.  The S&P, which is experiencing a 20% correction from last year’s “recovery high” is still teetering from the effects of interest rate hikes, earnings patterns dissipating, business disruptions, and sector shifts.  We project a fourth quarter base-building around the 3900 level which, unfortunately, remains a staging area for the near term.  Understand, we are not suggesting another capitulation below that level but neither are we confident it might not happen if exogenous circumstances arise.  In other words, there is very little on the horizon to create exuberance and excitement.  Low unemployment, inflation reduction, modest GDP growth are not enough to ignite the next cyclical wave to the upside….merely sufficient to protect against a collapse of epic proportions.

Markets and the economy have arrived at a pivot point: growth is decelerating as actions taken by global central banks to rein in inflation gain traction.  An overweighting in commodities and commodities-related assets provides protection from geopolitical and economic risks.  Defensive allocations have most always outperformed traditional benchmarks during fractious times.  Food insecurity due to scarcities and price increases leave agriculture industries poised for extraordinary gains derived from new demands and technological efficiencies that produce higher crop yields.  Similarly, the energy complex must find ways to adapt to changing needs, environmental concerns, and resource shortages.  Please note that my 40-plus years of work in building silo-specific portfolios in water, energy, agriculture, and health sciences has been ahead of its time and highly profitable in its returns.  More is expected in the months ahead.

Conclusion

We have not yet seen any indication that current market turbulence is abating.  However, we are not seeing evidence of a recession or a bear market.  There may, in fact, be a vibrant recovery in the needs-based businesses we discussed in this tome and, more broadly, a promising rejuvenation in the cycle of returns in the broader averages by next year.  Our investment advice for the final quarter of 2022 is simple: be invested, but be cautious.  Identify market momentum indices.  Notice the benefit in short term time deposits as rates continue to rise and weigh your risk tolerances for fixed income versus stock trading.  Invest for the long term in demographic trends we have discussed this year, and prior: healthcare, biosciences, alternative energy, agriculture, water, technology, and infrastructure.  Above all, lessen some of the impatience that is innate from a “must have it now” culture.

Understanding cyclicality requires an appreciation of how time  plays a role in all criteria of evaluation.  Time is the denominator to all calculus for return.  Seeking instant gratification, over a week, a month, or a quarter, is not money management….it is gambling.  We know that everyone wants the elusive magic bullet.  If you don’t know it by now…..

 

Suggested balanced account asset allocation, Q4, 2022

Equity:                45%  

Fixed Income:    40%

Cash:                  15%    

 

 

 

 

 

Market Commentary for the week of September 6, 2022

 Thanks, Jerry

Interest rate reality slammed the financial markets (and personal pocketbooks) with full force in the past few weeks prompting one to ask whether the coveted “rally” that carried investors through the Summer was an aberration or, perhaps even worse, just a placeholder before the next drop off?

In either case the message is clear that the cost of fighting excessive demand and profligate spending with higher interest rates is serious business.

Unfortunately, the stock markets took the latter view and inflicted selling pressure not seen in several months.  We believe there is likely to be more volatility in the weeks following as earnings and jobs data for the quarter are released.  The early-year momentum has, at least temporarily, been abated while global central banks remain apace to quell inflation.

Given that there now appears a lull, if not downward, bias in stocks we remain satisfied with our portfolio preparations “on the way up” for the inevitable capitulations that the financial markets are experiencing: using cash to purchase short-term time deposits to supplement our account’s yield potential, and readying for any pivots that might support buying equities on dips.  Liquidity is, and has been, our key to navigating the post-Covid economy.

As long as pent-up demand keeps moving goods and services…the after effect of a two year economic hibernation …markets will remain active and volatile, despite a waning level of consumer confidence.  To be sure, the past 5 months have seen us go from speculative fervor to awkward sell-offs.  Most notably, there is a marked exaggeration in the gaps (and experiences) between the wealthy and the poor, particularly in managing food and energy expenses. 

Our lower risk approach to investing should more consistently assuage the precipitous up and down cycles and hopefully outperform benchmarks without excessive volatility.  Adherence to a strict discipline of earnings, secular asset allocation, and patience  has always proven to be our signature.  Nevertheless, a potent confluence of high inflation, rising interest rates, post-pandemic economics, and a lethal conflict in Ukraine has hindered portfolio performance and dampened expectations about the near-term for many of us.

Moreover, as negative attitudes proliferate one must accept that trends take time to develop and to reverse course.  Right now, fear is accelerating the decline in stocks as much as, if not more than, any changes in fundamentals.  These are indeed unique times as we emerge from a pandemic but all of us have seen crises before and come out stronger as a result.  Reversals do not surprise us as much as the mania surrounding them does.  In fact, we see secular investment opportunity in tangible assets (commodities), energy, ecology, and utilities while the drumbeat of inflation data imposes temporary pain on other sectors losing earnings power.

Challenge the risk

The markets will require much more than immediate monetary intervention.  Political leadership (fiscal stimulus) must address structural economic inequities which exacerbate poverty, climate change, national security, crime, healthcare, education, hunger, and infrastructure in order to complement efforts by the Federal Reserve.  It is unfortunate that election season looms large in the debate about when/if things get done but we have optimism that the latter part of the year will be better.

The next few weeks cannot accurately be “predicted” but if history is any guide it is likely that negative influences will persist for the near term.  Remember, though, that it is during periods of excessive vulnerability that bases are built and entry opportunity reappears.  Prudent strategic thinking demands that we lower the harmful rhetoric and search for answers while we have the time.

(Post script: generational monsoons in Pakistan and flooding in Mississippi remind us to be grateful for the “privilege” of turning on the tap and       having clean water to drink).

Market Commentary for the week of August 8, 2022

 The sum of the parts

When reviewing last week’s market data we found some compelling indications.  For example, when digging deeper into quarterly earnings reports we sardonically noted that there are no measures quantifying the social impact of the numbers…just numbers and integers themselves.  In the business world the very existence of the “underbelly” of society is anathema to what makes a successful business model because those citizens don’t purchase or use any of the products or services offered by those companies.  In other words, if you’re not buying our cars, our furniture, our financial services then why should we pay any attention to you?  The poor, the ignorant, the “others” don’t really matter, do they?

The shield of invincibility was ripped off, however, during and now after the Covid crisis.  With businesses stripped to the bare bones as consumers retreated there was a forced reckoning in which the hierarchy of needs became much clearer.  Regardless of the industry, from pillow manufacturers to aerospace engines, business’ attitudes about their end users, and the empathy required to service them, changed dramatically.

The new way of adapting to these realities makes a holistic approach more necessary, as well as potentially more profitable.  The world is interconnected whether we choose to call it “globalization” or not.  New industries and technologies, and the way in which services/products are conceived, generated, delivered, or used, means that the old way of quantifying supply and demand must be modified to fit a metamorphosis of dynamics.  Transitions of this kind are generational and multi-thematic, but the opportunity to understand how one’s company relates to the ethos of their environment has the potential to accrue dramatically to the bottom line.

Thus, this resounding evolution is forcing analysts and boardrooms to accept a new ritual of what constitutes essential resources and how they are deployed.  In the areas of water and food, for example, the intersection between simply making a product and how it is used, distributed, and purchased means that demand  drives the equation, location  drives the balance, and social decency  drives profitability.

Would you say you are “greedy” if you need, and have access to, a glass of water? 

Despite food and water (as well as clean air to breathe) considered necessities of life, the unequal distribution of those commodities fashions that question into a social and political conundrum.  As such, we are bound to the solutions by federal agencies, social institutions, and governmental policy which makes answering the “greed” issue a matter of right versus wrong.  Our view is that the question begins with knowing what we are willing or prepared to do to fulfill our obligation to others regarding life’s basic needs.  That would be where profitability meets reality.

Is it someone’s “fault” that by dint of their place of birth they must be deprived of necessities or dignity?  And what are you going to do about it?

Resume play

While the market seems to have gained some traction in the last several weeks we must caution that not every pause in downward momentum constitutes a new bull uptrend.  There are still too few companies that have demonstrated resilience against inflation pressures or a hesitancy on the part of consumers to spend robustly and indiscriminately.  Downwards earnings cycles typically experience several waves of unpredictability before finding an equilibrium over time.  We would not be surprised if the disappointments continue, placing more pressure upon stock prices in the next few months.  In the meantime, we have sufficient cash reserves on hand (a strategy we have previously described as deliberate) in the event of any one-off opportunity arising.

Macroeconomic pressures (such as the war in Ukraine, inflation, supply chain bottlenecks) are currently elongating the recovery cycle.  But they are also magnifying the human toll of challenges encompassing access to basic human needs like security, food, and water.  Our work over the decades in creating silo-specific portfolios, particularly in these areas, has proven profitable for portfolios as well as the right thing to do in addressing social responsibilities.  

Market Commentary for the week of July 18, 2022

 Divergence

“Two roads diverged in a snowy woods……”

As the economy ponders in which direction the vectors will move next it is incumbent upon us to remember that any period of uncertainty is always a volatile time in the markets.  Of course, the specifics of the variables are much less important than the overall trend itself, which means that one’s macro view of events is more highly significant than trying to micromanage individual inflection points.  “Two roads diverged”…  is more than just a poetic metaphor….it is a warning that needs to be heeded.

Many parts of the global financial landscape are dealing with instability and social crises.  Corporations are caught in the foment, both internal and external, wreaking damaging effect upon their labor force and hiring practices, costs, inventory development, and delivery systems.  Those that can absorb these variables will emerge robust and competitive. Unfortunately, we are also seeing the demise of businesses that are outdated or incompetent and which have difficulty adapting to the commercial disruptions caused by war, Covid, inflation, and supply chain issues.  The nature of competition is that you cannot “protect” the vulnerable and still maintain integrity in the system.

Not in dispute, however, is that the financial system is having difficulty adapting to many factors not of its own making.  Central banks’ efforts to reign in inflation and reduce the money supply is an artificial impingement upon the natural order of things.  Any effort to combat runaway pricing pressures by raising interest rates only prolongs the cycle of discontent.  Rising prices, although onerous, cause the consumer to reduce his purchasing, leaving rising inventories, and resulting sometime later in a reduction of prices.  Such cycles, if interfered with by central authorities, cause greater dislocation than if left to be resolved by the free market.

No matter the industry, there are disruptions occurring to the bottom line in a post-Covid world.  Job number one is always to stay  in business.  So no matter the cause we are seeing more companies trying to be nimble and unfortunately focusing upon the here and now in lieu of strategic planning for the future.

However, we would suggest that there is too much  aggression and emphasis upon managing the short term.  How much fat can be trimmed before irreparable harm is caused to one’s brand, one’s internal organizational structure, or one’s community?  Globally integrated entrepreneurship has gotten so “micro” that the most important thing considered in most boardrooms today is quarter-to-quarter viability and how to appease Wall Street analysts.  True capitalism is being impeded by that kind of thinking.  The withdrawal of the consumer has put business on the defensive.  The reduction in discretionary spending and the lack of confidence in the future has shifted the business culture from expansion and reform  to perish or becoming extinct……and, of course, no one in the boardroom is seeking the latter option.  The loss of a true predatory climate has softened and diluted today’s capitalism to a “bail out” quotient that makes irrelevant a company’s product or mission statement.  Indeed, it is social consciousness, not social justice, that produces a fair market.  Individual users and producers have a much better understanding of the demand/need curve than do central bank engineers who take all the spontaneity out of the economic cycle.  As the upcoming “earnings season” unfolds we expect to see more carnage and more accounting calisthenics to weather the storm.

This is so prevalent as a socioeconomic phenomenon that even with fiscal and monetary support behind them businesses and households would rather withdraw from the contest than try to get in and possibly fail.  Untold billions are not  being spent (where once they were) because of fear about politics, war, migration, ecology, inflation, and such.  City boulevards might be teeming now with people in the wake of the Covid pandemic but there is still an underlying concern about endemic  issues such as hunger, poverty, crime, homelessness, and lack of empathy.

We have recently been using the fortuitous rate increases to dabble in short term time deposits, thereby establishing “baseline” floors to our portfolio returns while reducing volatility associated with concentrated equity positions.  There are no indications that the market has established equilibrium at its bottom quite yet, so we welcome the chance to deploy cash reserves into yield enhancing opportunities for the time being.

Market Commentary for the week of July 1, 2022

$2.60

The emerging shape of a fractured global order is signaling a vigorously unpredictable period ahead for the financial markets.  One’s capacity to withstand brinksmanship over national disputes, international conflict, and standard kitchen table threats will be severely tested in a post-Covid recovery.  Indeed, the aftermath of the recent pandemic, worldwide, is not yet fully understood…economically, politically, or socially.

Thus, taking a macro view…although much harder to do…might put into context some of the fear and anxiety that currently grips the markets.  Depending on how you choose to read the signals, one could conclude that the world is either teetering on the edge of a moral and economic crisis, or that the elements of any optimism for the future also encompass the predictable push/pull of emotions which characterize any secular outlook.  Our view is that the latter is more persuasive; the sky is definitely not  falling.

Markets

A pragmatist looks at the world and tries to make sense of the myriad kaleidoscopic images all around him.  He realizes that he personally doesn’t cause  the various arguments for or against trends, but he sees the logic in them nonetheless.  He recognizes that a multiplicity of factors can be accelerants to recent developments.  That pragmatist, too, would be in a state of shock over the many components that are aggressively in flux right now.  It would take a mapmaker and a soothsayer to make sense of today’s drama.

It is unrealistic to believe that there is a center of origin for all the world’s influence, whether it be one nation, one continent, one leader.  Therefore, we must first eliminate the pretense that all of the globe’s issues originate with one purpose: to stifle the resiliency and success of mankind.  No doubt, we are in a world in turmoil, both political and financial.  History has taken us there before.  But what makes today unique…at least in our lifetime...is a breakdown in tolerance and empathy.  Today, one’s birthplace and ethnicity is an implied Scarlet letter.

It should come as no surprise, then, that economic and market stability is also being affected by those same intolerances.  Labor markets are highly stressed, capital is tight, and strategic goal-setting is more highly influenced by fear, jingoism, and geography than by need.  The stable Western alliances are flourishing while the emerging markets are left to figure it out for themselves, making their fortune and future much less clear.  Industry in those regions cannot even think about 5 year plans because of political and financial instability.  Weather, too, is a factor that has adversely affected farming, construction, and population migration.  Given these developments, fewer corporations are willing to lay down a bet on 19^th and 20^th century -style rules.  And so the poverty and neglect long imbedded in those archaic populations dooms the whole process into oblivion.  The consequence of being poor feeds into a never ending spiral.

However, we must accept that no industry or person is disconnected from the plight of everyone else.  While it is sometimes said that all matters are “local”, it is the attention we pay to the less fortunate, less well established, that could shift the paradigm from dispassion and egotism  to profitable in a heartbeat.  Attitude and empathy should be a line-item on every balance sheet.

“Lean and mean”  has become a corporate euphemism for “we can’t afford to lose market share to the other guy”.   It is an archaic depiction of a me-too era in which competition and profitability meant destruction of all forces standing in your way.  Today, that kind of thinking only evokes an intransient chorus from the well-off who don’t give a darn about anything but their own bank account.   “Not my problem”  is a phrase that can only be uttered by those who already have what they need.  Consider that the “other” guy or woman once started out with the same potential as everyone else.

More and more, the market is fixated upon the near term costs inflicted upon the economy by shortages in product, price spikes, the supply chain, and profitability in the next two quarters.  The dilemma for policy-makers is whether to step on the brakes aggressively or to “tap” on them sporadically.  Post-Covid induced inflation is an aberration from historical norms and might require a new calculus.  For certain, there will be short term downturns in earnings, output, and expectations but there is no doubt that market forces will sort them all out.

A demarcation of sorts was crossed at the end of last quarter when market selling and pessimism became “reactionary” to the Federal Reserve’s pronouncements regarding their intentions to raise rates beyond the 75 basis points already enacted.  In effect, what had been “known” previously became a catalyst for those determined to exit the stock market to run for the exits.  Sometimes it is easy to make money in the markets, other times it is difficult.  The key is knowing how to discern the difference and having the discipline...mental and methodological….to withstand the obstacles.

Strategy

The war in Ukraine, along with China’s health-related (Covid) shutdowns, has exacerbated global supply chain issues.  As noted above, those effects are being felt harshly in the emerging markets, where natural resources are less plentiful and self-sustaining industries are harder to find.  One of the unintended consequences of Russia’s war has been to strengthen political and financial alliances amongst nearby and neighboring countries which now enables them to share in the responsibility of distributing food, oil (energy), and other necessary product.

We see multiple sectors that are experiencing heavy selling pressure despite the fact that they are irrationally linked to stagflation and economic recession.  For example, the food and agriculture industries are poised for extraordinary profit growth in the half-decade ahead, particularly after the inflation and interest rate data is digested by analysts.  A few weeks ago these shares were dropping precipitously along with the rest of the stock market despite the fact that guidance forecasts were strong and these industries fill a pressing global need to feed the hungry.  That is an encouraging sign because other businesses in the socially responsible realm such as energy, healthcare, biotech, and ecology are similarly poised to “fight the tape” and move higher in spite of the pressure current events impose upon their progress.  While there most certainly will be market drift in the upcoming weeks our expectation is that prices will stabilize before the end of the year in these sectors.

We also welcome the efforts by central banks to raise interest rates (tighten the money spigot).  Higher yields will finally inspire an alternative investment scenario in which clients might have the choice to lock in a return from the fixed income markets while also having the option  to speculate in the equity markets.  If the ultimate objective of our policymakers is to overpower price inflation and excessive spending, the unintended consequence of tighter money could be to secure baseline capital appreciation and portfolio income for investors not pleased that the stock market had been the only game in town for the previous decade.  We believe that consumers want to see that type of restriction on superfluous discretionary exorbitance, and let the market cycles play out in an orderly effort.  In fact, it is the absence  of oversight and structure which has created the current inflation/stagflation predicament.  For the first time in years, “order in the court” might impose a consistent macro framework for the financial markets.  

Conclusion

The best way to muddle through challenging economic times is to maintain a strict budget, to focus upon the wider macro aperture, and to hold on to competitive asset allocation guidelines.  Risk and reward are obviously unique to each individual but an approach that considers those tolerances is inherently more successful than jumping from method to method in an effort to outmaneuver potential volatility.  There really is no intrinsic strategy that works for everyone except the one that produces results consistent with your own expectations.  Sometimes, being on the sidelines is not the best choice for the long term success of building one’s net worth.

This upcoming quarter, especially, presents unique challenges.  Two years ago, a flourishing global economy shut down because of Covid.  One year ago, product demand began to increase as the world slowly emerged from its pandemic cocoon.  Today, there are fewer goods and services available to fill the pent-up need, thus inflation is widespread.  Remember, no one was driving a car, flying in an airplane, or eating out in restaurants during the lockdown.  As a result, employers laid off employees or closed up shop entirely.  Now there is a “shortage” of gasoline, repair workers, certain services, and airline pilots. (In reality, those shortages are more related to delivery and supply chain bottlenecks than a dearth of product).  You demand “cheaper gasoline”, but what you really mean is to have a sufficient supply to meet your needs so that you don’t have to pay more for the article of trade.  In so many instances…from healthcare workers, to truck drivers, to dock workers, etc...the situation is onerous and pervasive and not likely soon to end.

Our portfolio resolutions are to remain significantly diversified amongst asset classes so that our minimal stock exposure (roughly 20%) neither precipitates a magnitude of portfolio decline nor proves excessively bold; our fixed income capacity reflects current opportunities to upgrade yield; and our cash reserves provide a bulwark of support that both limits our downside and remains nimble enough to deploy at the appropriate inflection.     

Suggested balanced account asset allocation, Q3, 2022

Equity:                 21%

Fixed Income:     41%

Cash:                   38%

      

 

 

 

 

Market Commentary for the week of June 20, 2022

Dow…your slip is showing

Is there a cost to be paid for the market dropping so precipitously since its highs earlier this year, or might one objectively look at the real cyclical opportunity that has emerged from amongst a churn of negative news?  The answer, in many cases, depends upon one’s individual circumstance, time horizon, and risk profile.  But this we know: as certain equity prices decline the chance to purchase a “higher probability of return” becomes enhanced.  In many instances, price-to-earnings ratios (P/E) for many competitive and profitable companies have diminished to levels not seen since the last “bear” market over a decade ago.

To be sure, current objective statistics such as price, earnings forecasts, and relative strength integers (RSI) are not a commentary directly about the overall economy nor people’s attitudes about it.  Rather they are specific numerals attached to various formulae which are a snapshot of the current condition and phase of any particular data point.  Methodologically, we know that buying a security at the initiation of an uptrend is always more profitable than buying well after the trend has begun or, worse still, at its apex.  Too many investors make the mistake of chasing stories or jumping on the bandwagon long after the real securities’ value has appreciated.

Our clients and readers should take note that our average percentage portfolio allocation to equities has decreased  during the last few years as valuations expanded linearly and capital gains probabilities narrowed.

That doesn’t mean that we are immune from declining prices in certain asset classes when/if they occur.  It means that your likelihood of experiencing those declines in a catastrophic manner is significantly mitigated by prudent diversification and active management strategies.

All of last week’s volatility makes for compelling conversation.  When to re-engage with the stock market, or whether to sell wholly, is a function of timing, disposable assets and risk tolerance, and experience honed over time.  Our view is that the current market capitulation is ongoing and we are loathe to deploy cash reserves into risk securities at this juncture until we see evidence of quantitative probabilities improving.  In the meantime we are comfortable with our restrictive asset allocations that we highlighted in our last Quarterly Commentary (April, 2022).

Old is new

By means of comparison, our allocations were significantly more aggressive 5 years ago.  At that time it was fair to say that the economic recovery was gaining momentum, interest rates were low, capital investment and hiring was expanding, and private equity was the engine “behind the scenes” rejuvenating technology, infrastructure, medicine, alternative energy, and ecology.  Today’s landscape is fraught with inflation, higher interest rates, stagnating GDP, a jobs recession, and a dramatically different outlook altogether.  The Federal Reserve and, hopefully, our policy makers are indicating that a more aggressive stance on combating inflation will be near-term “job one”.

Finally, we would be remiss not to note the effect that Covid has had upon the global supply chain and commodity price increases.  While not “critical”, in the pejorative sense, they do represent an aberration from anything we have seen in our lifetime 

However, we believe that the fundamental underpinnings of the financial markets and the global economy are sufficiently strong enough to withstand a temporary redirection…despite the discomfort imposed on the population...from historic norms many of which will have to be recalibrated when all this volatility recedes.  Interest rates are “nominally low” even as policy makers indicate higher rates in the future; demand for goods and services is waning because of fear and uncertainty despite being exceedingly strong earlier; and a post-pandemic world has become somewhat enlightened by a new persuasion that economics and prosperity transcend more than just a balance sheet or a 24 hour news cycle.

Frustration over trying to find the bottom is understandable.  But we’ve all been here before, and our enthusiasm about waiting out the process is a good place from which to start.

 

Market Commentary for the week of June 6, 2022

 Just a matter of time

With all the components that make up the “financial markets” it is easy to get distracted from the core objective of investing: preserving assets and increasing net worth.  One’s sense of optimism or pessimism is deep-rooted, but how you execute that belief is the expression of courage, hard work, and educated guesses.  Above all, one must not lose awareness that the market is not the same thing as the economy.  Any perceived correlation is mostly accidental, sometimes arbitrary, and definitely in the eyes (and expectations) of the beholder.

That having been said, there are indicators that can often be used as guideposts.  For example, one would assume that a rising economy should be a pre-indication of a rising stock market, correct?  Well, it is certainly getting harder to discern between what is good news and what is bad news, what is up and what is down.

 Consider that in my last missive I discussed both the moral and specific cost of agriculture (food) around the world.  When you go to the grocery today I am sure that you notice the shortages on the shelves and the higher price tag for such staples as bread (grains), eggs, and dairy.  These prices are rising because demand is high but supply is low; shortages in fertilizer and cost increases for shipping and harvesting are eating into the profits of farmers; gasoline needed to transport the goods, labor costs, and production expenses are going up; drought and other climate issues are becoming more severe; and, lastly, the disproportionate “cost” to the poor and indigent is widening so much so that hunger, migration, and starvation are pervasive and persistent.

All this while the global economy is rising and recovering from a massive body blow, Covid19!  It is unimaginable what the price of foodstuffs might be in a global recession…

As energy prices rise there is an effect upon when/if you purchase a new vehicle, how much you pay for petroleum based plastics, and how expensive distribution will be.  In today’s marketplace it is becoming too costly to produce oil and gas, so many of the major suppliers have put extraction and exploration on hold.  Recall, too, that the Covid pandemic metaphorically…if not actually...shut down the world for two years.  No vacations, no theatre, no extraneous household purchases.  Throw in the Ukraine war, and global sanctions on Russian oil, and you have the fundamental elements for a moral consensus that leads to an economic crisis.

As supplies and supply chains bottleneck…from China, Taiwan, and Russia...there are fewer products being chased by more people, the classic definition of inflation.  Thus, when central banks around the globe begin to “tighten” money (raise interest rates) to quell pricing pressures the stock markets react with a knee jerk response to sell.  “The sky is falling, get out of the way.”   Further, when media spin tries to rationalize the panic, cognitive dissonance sets in.  Those whose predilection is for pessimism sell, those who are optimistic take a wait and see approach.  This is where discipline, methodology, and patience reward the educated investor.  Stepping back from the headlines and emotion matters if you want a consistently good outcome for your portfolio.  Disavowing fear and panic is the role of a good money manager.  In no way do we wish to ignore the dramatically devastating effects of inflation and portfolio devaluations as a result of market tumult upon household and corporate bottom lines.  Rather, as analysts and scientists we feel duty-bound to acknowledge that cycles do exist, and that the munificence of the last decade was inevitably going to recede…as all cycles do.  Thus, the task of sector and asset rebalancing becomes all the more important and a part of the job of navigating through a fluid process.

The markets and the economy might appear to be congruent at this juncture, but real life tells us just the opposite.  One cannot “time” the market, nor should one go from being aggressive to conservative, then back again.  That is foolish, in markets, investing, life…and golf, I might add!!  Patience is a virtue.  In fact, our accounts have sequestered sufficient liquidity on the sidelines prior to and during the capitulation that I would be looking to buy at the right juncture, not sell.  Liquidity (cash) is not a default investment decision…it is an active  one.  Asset allocation is not just a euphemism for diversification.  It is a quantitative representation of the amount of risk in the market relative to a client’s stated objectives and tolerances.  Pragmatically speaking, it is a meticulous interpretation of upside potential, and our optimism that headlines do not rule the landscape, facts do.  Right now, all signs point to capital gains potential during the next phase of the markets in areas such as healthcare, biotech, infrastructure, alternative energy, ecology, and agriculture.