March 17, 2018

Don’t Quit Your Day Job

Most of you know by now that when it comes to investing I have an infrequently used approach, namely I get excited when markets correct, rattling on about opportunity and misdirected interference, but when they go up is when I become singularly annoyed. Not just because optimism diminishes with each record day, but because when markets rally for a long time, such as the last nine years, a pesky phenomenon occurs, namely, everybody starts to think they can do it. We’re at that time now, is it time to sell?

Investing result over the last 100 years is still driven by its primary fuel, luck. Keeping clients happy and distant has been a strategy nurtured by the industrial age and borrowed from many industries. However, what’s changed in recent years, in my opinion, has been a subtle transition from ambitious yet conflicted stock brokers to using discretionary institutional methodologies of investing, the kind used to manage corporate and municipal defined benefit assets. In short, science is finally taking over art in the race of discipline over decisiveness. And when I speak of science I’m not only talking about algorithmic voodoo and its army of fans empowered by the belief in its promise to unlock the secrets of investing. I’m talking about the science of behavior, of organization and of the math based systemization of monitoring of aggregate assets to grow in good times and protect in bad times. So what does all this mean for the armchair investor?

Algorithm is the buzzword of this century (not bitcoin) but does anyone really understand it? In fact most people seem content to having phones, watches and laptops concerned in only what they do and rarely for how they do it. In the book "Homo Deus: A Brief History of Tomorrow" by Yuval Noah Harari, the author devotes a few chapters to his characterization of the inner workings of the brain representing a better example of a working algorithmic model. We see something, our brain takes the object and runs it through our well stocked, albeit somewhat disorganized, legacy of facts and images and, aha! We have the answer to what we see. Add to that our dispositional influences and, maybe.  It’s always been said that emotion is a disproportionate factor in the volatility of the stock markets. Recently, common behavioral traps (buy high, sell low) have found a home in behavioral science.  

Within nature math has been applied to ideas, bringing them together with platforms to quantitatively measure their impact. However it doesn’t always work. In years past much of quantitative analysis had been used adversely not because the substantive aspects of the formulas don’t ’work but because in financial services outcome is too often seen as more important than the sanctity of the determinant, often just another small act of sequential omissionThese days quantitative analysis is simply the way to alter the outcome of calculated, including some algorithmic, results allowing for variables created from typical dispositional influences, for example, judgmental bias, the number one hindrance to successful investing.

Technical analysis is essentially math based and designed to recognize (not predict) trend and momentum. In the end a technical indicator such as Relative Strength can tell you when a currency, commodity, equity or nearly everything in nature is a good investment however that's not the same as suggesting it worth paying attention to. This invited a scientific mind to find the lowest common denominator to best managing a portfolio of assets. Funny thing is the solutions were, as many scientists long agreed, easier than they were expected to be. The first premise in approaching to apply the new science to investing was accepting some parts of the concept of the efficient frontier. Namely that the global markets are reflective of all the information available. Therefore research can uncover much of said information, but no amount of research can give one a tool to consistently outperform the markets. Welcome, probability and its measurable fuel, risk. In my opinion risk is among the best ways to control and protect an asset. Simply put, if one fears that the market will go down they can buy (slow down) an ETF such as SPY (S&P 500). No one knows when the markets will correct, but probability can be applied better to when the markets will recover after they correct. At that time we can speed up if we sell SPY and buy AMZN (Amazon). The ability to systematically allocate and monitor accounts in this way introduces a level of control that armchair speculation will never need, nor accomplish.

March 9, 2018

Vol Is Here To Stay

“You will never fully convince someone that he is wrong, only reality can do that.” 
                                                                                                                                               -N. Taleb

The mystifying behavior of the capital markets is nothing new, at least over the span of my own involvement. However the current scenario generates all the more concern because how quickly information is passed via the internet. And if that’s not enough, much of that information is neither edited nor confirmed but nonetheless is embraced by media and subjected to literal analysis. So what happened to cause the volatility last month that seems to have evaporated this month? Nothing, but this is what happened that was ample evidence to lay blame.

Last month gave the broad indexes their first meaningful correction in exactly 2 years. While no specific piece of legislation, nor economic surprise caused the volatility the outcome was met with surprising order. The gap down of nearly 10% brought the broad indexes to flat on the year only giving up the gains which in my opinion are too often, too dependent on earnings results. 10% is a respectable correction by any standard, but it is not the same at 1000 points on the Dow Jones, blown out of proportion by pundits while representing barely 2% of the index. Nonetheless their goal was met and volatility spiked and within the unruly market active sellers were met with equally eager buyers and although some sense of stability was in the outcome the internet was primed for the next piece of earth shattering news. Should the market be volatile on this subject? Sure.

China Trade
By the end of last week the new poster child was the administration placing tariffs on steel and aluminum imports. I was somewhat surprised that so few pundits recalled that protectionism is nothing new to the US and has been even more frequently sourced by Europe and a handful of Asia Pacific economies. The difference here is that this administration likes to advertise its decisions with a sense of enthusiasm that many (including myself) don’t share. That aside, since the end of the last World War the US has been a leader in providing access to its rapidly expanding post war economy. In fact much globalization can be traced to the contributions the US has made sharing its economy to help nurture growing economies abroad. China was one of them and by the time they were provided access into the World Trade Organization the tag “Emerging” meant little in the grand scope. But that hasn’t stopped them from initiating protectionist motives of their own. Challenging the intellectual property rights of tech companies, coopting manufacture industry products and hindering the ability of foreign companies eager to set up in China 20 years ago to expand without compromise. All, in my opinion, begs for a new trade arrangement and maybe, although not the best strategy, this recent move by the administration might trigger some action. Should the market be volatile on this subject? Sure.

This week Job growth outpaced expectations by rising over 300k in the month of February, usually a seasonally less robust month. More recently Consumer Sentiment and Manufacturing data was released and both were near their highest since 2004. This is consistent with recent activity that still has the economy on track for a growth rate at or near 3% for the near term. This is supported by chatter from various central bankers and other voting members of the Federal Reserve who suggested that as data continues to show strength so too will the Fed continue to respond (i.e. higher rates). Should the market be volatile on this subject? Sure.

The Message
Volatility is not by itself a reason to buy the market. Often the unruliness can make the environment feel worse than it actually is. But likewise the opening for buying assets at lower prices than they were 3 months ago is compelling, so for now the volatility is a battle between a market that is craving to be understood and an investing public that is craving to spend some cash. The former acting in accordance to the latter?  Why not, markets are generally grounded in fact, investors are more compartmentalized. Should the market be volatile on this subject? Definitely.

February 16, 2018

See It and Know

I know many have heard my comparisons, namely get in the car (invest) step on the gas (take more risk) slow down (take less risk). The process is incumbent upon the same influences as a drive on a highway, such as plenty of sunshine giving way to bad weather. But the key to this approach is twofold, don’t get out of the car and don’t let your mood let you think you see bad weather on the horizon. See it and know, as history has frequently reminded us most storms are usually far enough away to predict, and signals whether or not to actively slow down.  

So now that the markets have rebounded from last week’s volatile swings in addition to the nearly 10% correction of all of the broad indexes can we expect an orderly dialog from the industry experts. Not really, and that’s mostly because the difference between those who actually mange money and those who simply talk about it is perspective. Rather than drool when markets rally, as what goes up must come down, patience is a better tool. But human nature is unfortunately wired to pursue the opposite. Take for example the inclination to chase after a rally out of fear for missing it. The challenge is made harder from correction as we’ve just experienced because knowing when to become cynical about a recovery in stocks could come later as easily as sooner. In my opinion, there are reasons to consider it could come later.

Consider the economy. As mentioned recently the presence of inflation is a call to caution, but caution is a constructive tool in keeping enough investors on the sidelines to tip market supply and demand to favor demand. There is also the tax season that for now until at least April 15 will bring a substantial amount of earmarked cash into the market. Consider the Fed open to any continued evidence of economic heat is unlikely to refrain from raising rates at their next meeting, and an interest rate hike could moderate some concerns regarding inflation.

Also consider the current tone of broad markets. As volatility has remained more indecisive than unruly many of the technical indicators that read momentum and trend distribution made a compelling argument for buying on the recent dip. Those indicators are still friendly and the markets are clear in telling us not to chase them. Additionally it’s important that the sudden increase in volatility and interest rates suggest adaptable strategies for moving ahead, in particular looking at investments that are less sensitive to volatility and some to benefit from specifically stronger sector growth.

As a final note, in the middle of market rallies I’m often asked if it’s a good time to invest. My common answer is that it’s really more a good time to already be invested. I still think so now, but keep in mind, the balance between comfort and expectation is always present but was highlighted during the recent declines. In short, there is never a bad time to consider getting comfortable. 

February 9, 2018

It’s the Market

As the markets move forward the customary refrain of doubt seems to continue to prevail from the point of view of the pundit narrative. Although not without precedent it nonetheless is more about spin than solution. Because of this much of the effort that goes into the management of client money is sometimes lost in the growing value of portfolios when matched by the dwindling confidence in where the value of that growth is coming from. The most frequent conclusion, it’s the market.

It’s only when the broad indexes move sharply lower as they have over the past week that pundits and experts alike appear to come to their senses and accept it is the market and not an accident. Modern economic theory has often suggested that academic intelligence outweighs the importance of discipline and organization in managing assets, or anything else for that matter, I’ve just as often disagreed. The outcome of a portfolios activity is more the sum of its parts than a self-appointed savant’s individual choice of hot stock. The reason is simple.  With the challenges that face the developed global economies, interactive interest rates and rising inflation, political struggles and everything else, including the kitchen sink, nothing is left out of the value of the global markets. One should never take it for granted that just because the markets have gone up doesn’t mean the next move isn’t down. And when the market is down the discipline of an active trader or manager is increased, or should be, with the level of volatility and opportunity. In short the value of management is embedded in the relative value of investing, not with the assumption that when the market rallies all stocks go up, but with discipline of knowing that value, and the risk associated with it, is increased.

Needless to say the outcome of the now well advertised drop in the broad indexes, the Dow -9.1%, the S&P 500 -8.8% and the Nasdaq -8.4% respectively, compares adequately to similar corrections in years past. The challenge has been in the abrupt behavior of the markets suggesting, speculative investment from digital trading of volatility measures or exchange systems. Although there has been no flash crash of the past since a 1,000 point declines in the Dow Jones Index have averaged 4%, not good, but also not the end of the world. In fact the moves in the markets tied in neatly to a jump in interest rates that remained intact when the Fed decided not to increases rates at this week meeting. Likewise the continued rise in manufacturing and earnings point to recent continuation of increases in inflation. Not to mention the recent inflationary decline in the dollar. These point to reasons for this week’s volatility and declines, the difference between grey areas of reason and the opening for real answers.

For the time being the volatility will keep traders and investors on their toes. The potential for opportunities always increases with drop in market valuation. However it’s always important to view value, not in something that is simply cheaper than it was a month ago, but because owning it has a purpose in the asset allocation of the accounts. Namely. For example the need for more defensive levels of risk (i.e. slowing the car down on the highway). This can be accomplished with cash or low volatility, higher income investments, both comforts a variety of concerns in different ways. Comfort being the primary goal in managing expectations, and holding in values until the storm passes and we can speed the car up a little.

So in the end, as the markets move forward and the efforts to explain it become ever more tiresome it’s important to note that the collective wisdom of the financial services industry is a moving target kept in line only through the performance results when the market is up or down. Today’s big swings as a percentage of the whole are more meaningful than the size of the move. This is because against an historical line, the percentage customarily has been the proper point of reference and performance measure.

January 30, 2018

It’s All Relative

Many have used the above title to explain nearly everything, and cite examples. However I’ve found that more often than not the positions that people need to rationalize for comfort often come at the expense of the facts. The facts I’m talking about are simple ones, such as what goes up must come down. But as the market responded today to massive disruptive actions by Amazon, JP Morgan and Berkshire Hathaway announcing they were entering the healthcare industry some outlets are suggesting that’s why the market went down today. You can probably already guess, I don’t agree, here’s why.

Interest Rates
Recent move in interest rates have seen a rise in the yield of 10 year Treasury Notes to over 2.7%. This is not a level seen since 2014 and can be directly attributed to both the recent action of the Federal Reserve Board and the growing concern of inflation. Needless to say the stock markets can withstand changes in interest rates as long as they don’t happen too quickly. And while there is also over $200 billion dollars in Treasury Debt to be auctioned in the next thirty days that too could be have an effect on current interest rates. In all there is economically much to look at and it’s up to the Fed to make a decision on further rate hikes. That distracts the markets attention, and that can feed a correction.

The Dollar
Recent concerns that the dollar is sinking are often discussed as a negative, and I don’t know why. A lower dollar is inflationary and having studied the behavior of the dollar’s correlation to the domestic trade balance, the impact to the economy is negligible at best. As a service industry the US doesn’t need a weak dollar to grow, even with the current interest in manufacturing. Our economy is based on consumption, not trade, and that isn’t going to change soon (if at all). Likewise as long as the Fed is poised to raise interest rates, that has the effect of pushing the dollar up, which is naturally disinflationary. But right now the currency is feeding inflation fears here, and even abroad, and that can feed a correction.

The Market
As you know investment value can come in two packages, those representing the fundamental value of a company and those the technical value of a stock. The former is an elusive valuation and the latter occurs when the broad markets decline as they’ve done this week.  Coming out of strong year the broad markets found their way higher as earnings results and creeping acceptance of the benefits of the recent tax plan (for companies at least). But since the beginning of last year the recent charge amounting to an aggregate increase of over 30%  rendered the expectations of any corrections either too ambitious or too complacent, but not impossible. And best, not necessarily a bad thing either.


What occurred following the announcement of the mega merger designed to defy the existing rule of the health care industry is, in my opinion, welcome news, but hardly original news. As recently as last year when CVS Pharmacy (CVS) bought Health insurer Aetna (AET) the game was on. The shift of medical consumers toward urgent care centers and other resources for flu shots and prescriptions has sent a clear message to the medical industry that price does matter. Couple that with today’s release of consumer sentiment data that was the highest  since before the financial crisis and I’m not just being optimistic, I see value in the market after today’s decline and the newest disruption that has arrived to deliver it.