January 18, 2019

The Humor in Investing


“If financial reporting makes you laugh, you’re halfway to enlightenment”

This may come as a surprise, but given how common rationalization is used for choosing investments these days much of it is rarely based on verifiable fact and often inconsistent with past explanations. From my perspective this is because of the nature of the business is that every day the markets move there must be a reason. And while a sensible rationalization, such as trade with China or friendly Fed speak seem to be the triggers of the day, the immediate impact of a given external trigger is often the basis for defending the style of analysis, where more evidence would suggest that the long term impact of any one external event has as much available to refute the sensible outcome as it does defend it.

I bring this up because so much effort is brought to bare on the public to educate rather than inform. And much of that education is based on rationalization of the present justified by cherry picking circumstances of the past. I see that as misleading and playing into notions of time honored styles of buy and hold, maximizing yield and compounding without recognizing that times can change and none has been more disruptive of the norm than the entre of the digital age.

Thematic Analysis
Thematic analysis has been around for a very long time and mainly refers to the type of analysis that focuses on qualitative circumstances rather than quantitative ones. As discussed last week, quantitative analysis isn’t what is used to be. In the past this was applied to investing in comical ways, colors that were dominant, musical trends and hemline length were all targeted to suggest changes in consumer confidence. But was it really that funny? Given the scale of information that comes to us today and the global magnitude of cultural fashion, for example a closer look at the world is warranted, but from what perspective.

Causality
My point is when deciding what to invest in I make known from the start that there is no way to determine the future which immediately invalidates most economic forecasters and analysts. Trends ranging from music to movies to the food diets that seek the attention of the buying public are all part of what track social mood. And as Robert Prechter*, the author and authority on the Elliot Wave Theory (broad market analysis) has written about how stocks don’t predict the future as is widely assumed, but rather stocks follow the social mood which the economy simply takes longer to follow. Cause and effect, think about Nike or more recently Gillette who have stirred controversy using cultural memes to drive their advertisements in hope of reaching millennials. Maybe they’re right, only their stocks will tell.

So when looking at the world at everything from gold to the US dollar what matters to me is if the market is going to go down because so many pundits are bullish on gold, perhaps rather than simply looking at forecasts of the economy maybe instead on why Russia has been secretly accumulating the precious metal (from CNBC). Or Saudi Arabia is manipulating oil by cutting supply, thereby feeding the idea that strong oil translates to a strong economy. In the end there is not much to get any more from basic technical analysis, the new trend is social mood and trend analysis, that tells us more of what we need to know, and does so before the economy. Easier said than done, but with digital assistance and an open mind, we’ll see where it takes us.

January 4, 2019

Breadth of Volatility


This may sound odd, but a very reliable technical observation that has presented itself to me over the many years I’ve been watching numbers flashing on a screen concerns what I refer to as the breadth of volatility. This refers to the space that occurs when markets spike up and spike down. And because as the measure of that breadth increasingly widens, so too do the investment opportunities. This is as opposed to the speculative opportunities that have been major players in the downtrend for the last few months. The nice thing about interest in the markets after a large fall is that the more stock that’s bought the wider the breadth, until either the bulls or the bears give up. Right now the bears are still in charge, and as usual bears always get better media coverage since portending the end of the world is good for the click business. But we’ll see how long that lasts.

The Market
The New Year has continued the trend of market unruliness (volatility) with more to substantiate it than previously observed. For example, this week Apple (AAPL) provided early guidance of their current state of revenue growth, which as everyone knows now was less than publically assumed. I have to uncharacteristically agree with a very well know pundit that I would like all companies to do what AAPL did for the simple reason that the company provided  analysts with the choice to use content over conjecture in estimating future earnings results. Other events also included the purchase of Celgene (CELG) by pharmaceutical giant Bristol Meyers (BMY). While I see this as an uneventful merger between a company with disappearing patents and a thin pipeline of replacements and a company with money to burn, that did just that, only time will tell if it works. There is the potential for a lot of talk in DC regarding healthcare, and while I favor the sector as a good defensive space, pharmaceuticals are too easy to fall prey to political attacks.

The Economy
Elsewhere in the domestic markets the defensive sectors such as Consumer Staples and Healthcare have been performing relatively well compared to the broad market. But so too have the Consumer related sectors that are a direct result of what has been a moderation in the manufacturing industries (trade) and housing industries (interest rates) while at the same time, as released today, a strong increase in job growth and increase in the unemployment rate mostly due to the increase in the overall participation rate, generally itself a good indication of rising income levels. Rising income means rising consumer activity, a big portion of GDP. On the corporate level AAPL isn’t alone as a recent decline in CEO confidence* has continued into the New Year. This is an interesting dilemma for the Fed since they are prepared to remain on watch before announcing further rate hikes. It is a further indication, in my opinion, why the markets will eventually find a place to resume its historically positive growth pattern.

The Future
It’s hard to ignore the pattern of pessimism that seems to be a popular source of entertainment. Understandably so perhaps, but the markets are rarely respondent to pessimism when real economic results present themselves. For now signs of strength in the US are still widely offset by moderation, similar to that taking place in Europe and the uncertainty of what the economy holds in terms of economic viability in China. For now my strongest indicator is the wide swings in the indexes and the goal is to complete any new buys, with equal sales and maintain a defensive posture that will increasingly rely on keeping cash at comfortable levels ready for investments that reflect a growing economy. It’s just a matter of time.

December 17, 2018

Another Day, Another Update


Today was another down day in the stock market and each successive decline is a bit frustrating. Changes to less risk exposure and more income focus has allowed accounts to perform better than the market. Trouble is, portfolios performing better than the market when both are going down is a frustrating consolation. For now, none of the broad indexes are more than 4% down for the year and while that’s not good news, the constructive aspect of the profile is that nothing in the economy, nothing regarding the Fed, and no news on the trade front to exploit in the media, is certain. So what’s up?

The Economies
Much of the economic growth in the US over the past few years can be directly attributed to the rise in employment. For now that remains strong, and those who know me know that any positive growth is, positive growth. Industrial production has remained firm, Retail Sales data has continued an upward trend and manufacturing indexes have been steadily above a level signaling expansion. On the inflation front, Personal Income (my favorite) is, according to the Government Bureau of Economic Analysis, over 4% higher than last year. It all sounds good with one exception, vocal caution from corporate CEO’s that could increase in the New Year when earnings are released.
     Another challenge is the growing worker discord in Europe that is directing attention away from economic issues, and even Brexit. China is facing headwinds from rising real estate concerns, trade issues that directly affect their manufacturing base and a growing middle class that significantly increased debt. The point is, without meaningful global growth, the US economy is going to remain in a cyclical down turn, in my opinion, into the New Year.

The Fed
The Fed will raise rates one more time this year and at that point it seems clear from their statement that their wait and see approach is warranted going forward. It seems fair given the caution that is coming from the corporate sectors. And overall inflation has quickly slowed down as sections of the economy have shown some moderation. In my opinion this is a good environment for the domestic economy to moderate and for the time being I’m going to continue to invest in higher income, less cyclical sectors, and when the economy picks up again, which my analysis now suggests could occur in the spring of next year, I’ll look for value in the beaten up cyclical sectors.


Tech, Banking Healthcare and Politics
I figured it would be impossible not to mention the more familiar mess that is filling the air. Namely, stories of every shape and the credibility of much of it very elusive to say the least. What is clear is the change on government. More focus and impact on Healthcare, maybe a revisit of attacks on banks and much brewing on the rising concerns of the tech industries unchecked independence. These are real issues that can gain traction along with legislation to fix other problems many of which probably will never reach the WH desk.

Once again, in my opinion the US economy is moderating, but not threatened with a near term recession. The global economy needs to show some greater focus on managing interest rates and stimulus packages, especially China. For now the accounts are defensively positioned until there are signs to “step on the gas”. We’re participating in the market and the volatility and decline continue to feel a lot worse than they’ve been, but they’ve been declines nonetheless. And I promise to keep everyone posted.

August 24, 2018

Update - What Now


“Overconfidence is fed by the illusory certainty of hindsight”   - Daniel Kahneman

As we enter into the month of September and the transformation from lazy summer, it’s the back to school and vocational enthusiasms that seem to show up everywhere. Unfortunately it all tends to be temporary and by the time October rolls around the draw of the holiday season collides with the increasingly colder days of fall. And this fall tends to be an interesting one, for a number of reasons, as I’m sure you are aware.

The Markets
Whenever October rolls around the talk of historical collapses in market valuation increase in volume because October is the month when the market declines seem to take place. However in keeping with the above quote I prefer to see the preparative behaver of the pundits, widely dispersed in the internet age as a better indication of what won’t occur. Namely, markets don’t go down because we think they will, and are more than likely to go up when we think they won’t. My current opinion is that the broad markets will likely continue to churn, not charge, higher until the end of the 3rd Quarter, which ends on September 30th. Between now and then it’s what will begin to enter the narrative, separate from the above behavioral wedge, which begins with what I call the Brexit Effect.

The Brexit Effect
In the past few years much has been made of rapidly changing political and economic dialogues gripping academia and politics. Beginning with Brexit, the vote in favor of the UK leaving the EU and following the 2016 US election and the numerus similar conditions around the world there is much to suggest that no country has a lock on the craziness. Luckily though the markets do seem to be content to ignore the dissonance which should be remembered is not the same being oblivious. This is important because each of the aforementioned cultural shocks that I prefer to call Black Swans* was proceeded by an increase in volatility as measured by the VIX Volatility Index**, and used to justify impending doom. But just as the 2016 presidential election experienced its own battle with increased volatility the follow up in each case was a return to the direction leading up to the distraction. I bring this up, because after the end of the 3rd Quarter, from October 1st until Election Day on November 6th I would not be surprised if volatility returned to the capital markets as a tidy backdrop of what is sure to be visceral coverage in the media.


The Fed
It is my opinion that the impending meeting by the Federal Reserve Board toward the end of September is another activity that is worth mentioning particularly in that it might very well be it’s last of the year. With recent consumer confidence steady and inflationary trends subsiding a bit, in domestic areas of strength such as manufacturing and housing in particular, one can point to increasing debt costs, and the influence of recent trade issues. And since those industries gained the most from the recent tax legislation convincing signs of deceleration has been a slowdown in CAPEX expenditures (what companies spend on themselves).  In my opinion I have to consider these as potential influences on the continuing goal of the Fed to raise rates one more time before year end. That said, it doesn’t mean the economy will follow suit, only that the Fed will lean to desiring more time before continuing on their current path.

Strategy
Markets and politics are not the same thing, they don’t even rhyme. And as the fall season progresses, with all that comes with it, the goal for accounts will be to adjust positions to reflect the upcoming start of the New Year. With my opinion leaning toward the global markets ending the year constructively, the rest of the year is probably going to be reflective of the outcome of the election. And while I’m confident that it won’t likely have much impact on the economy I’m uncertain on the impact of the distraction and potential for a stop to any meaningful legislation. But for right now the need for discipline and patience are the tools of choice, to remain active, but respectful of the volatile times ahead.

August 10, 2018

The Art of Fear Mongering


Human history has long endeavored to introduce civility into daily life. Everything from the threat of divine intervention to the post age of reason introduction of what has in many cultures been introduced as manners, the need to use fear to keep society from breaking laws and violating social norms has never been more tested than in today’s world of cascading fear mongering. I bring this up because I can’t help being both frustrated and amused at the constant view that any sign of trouble in the world of finance is discreetly signaling the end of the markets as we know them. Well, I’ll admit that scenario is compelling, but the disseminating power of the internet also leaves me a bit skeptical. Here are some of the stories that have generated the most questions.


Tesla
This week Tesla (TSLA) saw its stock rally and decline in multiples of 5 % moves. First the stock was lower as a result of the recent battle waged by founder and visionary Elon Musk against the annoying practice of the financial industries self-appointed overseers disguised as analysts. Once having traded down there was some relief at the recent release of quarterly earnings. And while each move higher in the stock was usually met with aggressive short trading activity the battle was on as to who would win. Then, as everyone in the world now knows, Musk tweeted that he had secured financing to take the company private, and the stock sharply rallied. Also included in his running commentary was the proposal to create a "special purpose fund” that would enable “anyone to stay with Tesla." So there you have it, the potential of a buyout roughly 20% from today’s price or Musk spoke without genuine facts. I’ll go with the former and consider the unique outcomes being floated are a good reason to risk some of the profit to discover more. I’ll also say to folks who think they should buy the stock, I say you should already own it. And if you already own it and are considering to sell it, I’ll say if it becomes a distraction, then yes, there’s always good opportunities in the stock market.

Apple
Apple is a perfect example of a long running good opportunity. This week it was widely reported that the company had become the first one to reach a trillion dollars in market cap. With the help of Warren Buffet and a number of other large investors the company has gotten to that point pretty smoothly. I especially liked Buffet’s descriptive remark that Apple is the biggest company in the world whose every product fits on your dining room table. Well, so not to put any damper on the party, but I think reaching a trillion dollars is not that big of a deal. First off Apple products are comparatively expensive while costs from production to loyalty point to an outcome is far disproportionate in both market share of the actual ownership and market share of the operating system (ios). What does this mean? I like to use the word slack. Slack in the clear picture of the company’s strategy and slack in the potential of new product all translates into a favorable risk reward, and if Tesla is distracting you can always move to Apple.

Trade
I’ve been asked a few times whether I’m ready to backpedal on my original comments on the trade battle being waged with China by the current administration. First of all it’s not simply a battle of industry, it remains mostly a battle of rhetoric. And there is reason to conclude that as the verbal conflict heats up the actual results of tariffs loses steam. This is because there is wide agreement that China has been engaging in unfair trade practices since its more humble  beginning with the biggest pass coming from the US and Europe. Now, the idea that the country is still referred to as “emerging” is absurd and the weight of its massive economy has diminished the leverage the west believed it had. So I’ve recommend ignoring the fear mongering and keeping China exposure, directly and indirectly, in the portfolios to managed levels. This is a worthwhile strategy given in my opinion that with so many billions of dollars at stake there is little justification not to come to an agreement.

Turkey
Like the shot heard around the world (who was that again?) suddenly Turkey is going to be the trigger that takes the global markets down. Most of this points to the gigantic changes that the country has gone through over the last decade, but at closer inspection much of my research suggests only relative impact on its own economic health, not particularly world economic health. But that story seems to come from the impact of its slumping currency on the euro, and since Turkey is a member of the EU, where there’s smoke there’s fire. Now, it is widely known that when a country with a self-perpetuating economy finds itself in economic trouble there is a direct impact on the banking systems that have outstanding loans with the country’s businesses and its citizens. Business deals can generally continue, but financial agreements are generally the first to be ignored in favor of those activities that bring in new capital. Couple that with the impact on Turkey’s commodity industry of which it is a big exporter faced with recent tariffs imposed by the the US. So while the scenario doesn’t look so good, Turkey has a history of a strong central bank, active business community and generally sound trading practices. And even over the years as the government has fallen into conspiratorial panic over its perceived enemies, this is the reason fear mongering has taken over. I return to the importance of not conflating political or media generated economic problems when there is currently definite slack in the EU countries, especially when compared to the US. In this regard another cheap opportunity to remain invested in Europe with some emerging exposure, for now is favorable risk.

US Market
The US markets have reached new highs more than few times this year and while there is much economically to point to there is plenty of reason from a technical perspective  to expect some sort of correction. Whether this is beginning to happen now I’m not convinced of that, but with interest rates spending more time at the year’s highs and the Federal Reserve ready to raise them again at the next meeting in September a correction before entering into the fourth quarter would be a welcome sign of market efficiency. Even so, in the recent months the portfolios have seen increase in income and moves to a modestly more defensive position. Modest because I am counting on opportunities presenting themselves well before the fourth quarter and because in the meantime I’m not convinced that tech won’t continue to lead the way and for this reason keep a fair amount of risk in the market, presenting opportunities almost everywhere else.