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. 

January 12, 2018

Fairy Tales and Facts

“The ancients knew very well that the only way to understand events was to cause them” 
                             Anonymous Quote                                                                                               

I’ve generally favored expository reading materials in my life and ignoring Fiction often at the expense of missing the value of a story. But over time I’ve come to two important conclusions in my life. First, as the internet has grown and so much information is disseminated without any defined measure of accuracy I’ve come to accept, reluctantly, the value of a story as a premier tool of persuasion. Which leads me to the second, I no longer state that I don’t read fiction, because it’s all fiction. 

I bring this up because as an investor I prefer an event over a good story. This is because in much of the financial services industry stories come in different packages. For those who sell product I find a good story to often be “The world is coming to end” therefore you should buy this Annuity. But I’ve also often encountered the use of a story to better transmit a stock investment to a client. Now, not being a natural salesman, except for selling myself, I can see value in helping clients understand the value of an investment rather than simply assume that understanding. But at what point does a story tell more about the aesthetic of a company and less about the potential events in store for its future. For example, do I care if the earnings of a company disappoint the pundits? No, because the only disappointment comes from the earnings missing what “the street” analysts forecasted. So if earnings are bad should I be upset with the company or the analyst? To me, the former has more to prove than just earnings (story), it has to prove momentum, its survival (event).

I prefer to pay close attention to words, written on the websites and spoken in public statement. I’d rather invest in a company because I think that they might sell an underperforming division, be preparing for a merger, taking a division company public. I like to watch for hidden assumptions that may be valid. Not the implicit assumptions regarding companies reported results that only coordinate in their own proper setting. Historical growth, attractive industry outlook, experienced and transparent management all catch my attention and I look to back up what I find with technical analysis of global currencies, commodities and interest rates. All trackable in real time.

This is because the portfolios I mange aim for low turnover and the requisite patience. The list of equity activities such as the aforementioned mergers, acquisitions and spin-offs, also includes restructurings, buyouts, and my favorite of all price appreciation. And the best part is that covers as much reason to initiate a buy as to be a trigger for a voluntary sale. Even fixed income activity such as changes in credit status, in defeasance guidelines, in interest rate policy, and in interest rate assumptions, can be a trigger for a voluntary sale

As the markets continue to climb higher seemingly in the absence of any particular story, and there are external events that are open ended for increased volatility. Interest rates are rising to levels not seen in over a year, jobs and inflations haven’t decisively moved so far this year, but job growth is up anyway and steady inflation isn’t declining inflation. A lot to watch, a lot to digest and more than enough to keep us prepared when a correction occurs, not just the threat of one.

December 29, 2017

2017 Different and the Same

Another song for another year with hopes it was expected   
And true to form I hit a snag in countless nuances detected   
Because when it came to the markets, disparate voices failed to join  
Supporting news with reporting views that were like two sides of a coin   

But ah ha! I thought, two sides of a coin is both different and the same
So here are my memories of 2017 the year everyone played that game 
The year began for the clearly confused  
Connected on all sides by the anxiously amused   
With the only choice to feed the passive aggression   
Between the world of silence and one of expression  

And all in the company of a bevy of pundits   
Some intelligent, some elegant, but overwhelming in abundance      
And whether to deliberately collide or recklessly avoid
They aimed to divide with dismay and poise
Which is why I think the markets spiraled up this year   
Because advanced Capitalism doesn’t really care   
After all, its risk that presumes the noticeable from the absent
Competing with the gut that curries randomness as a practical tangent   

And with proof to explain it conspicuously absent   
Some chose to dismiss it while others amassed it
And while expectation and exclamation are entertaining feats
Uncertainty still prevailed between the prevailing and unique   

Industry prevailed in remaining weirdly normal   
The body politic uniquely projected the sloppily formal
Kicking an economy suffering too long from malaise
Watching it rise up unexpectedly in an unplanned escape 

First came strong job growth, a continued trend with a twist  
Affecting sectors of the economy for which previous policy was remiss
But it didn’t stop there, GDP was just getting started   
Productivity arrived as deficiency departed   

It even empowered consumers and sellers alike 
Choosing internet bounties over department store fights
Further helped by the power our weak currency can bring
Turning imports into exports in a much welcome swing 

And reversing seven years of declining inflation   
Its sudden appearance was met with bold hesitation   
Calling out to a Fed too frequently open ended   
The time to raise rates had to be seriously defended   
Now near the finish line we find ourselves at record highs 
All that remained for the complicit and the wise 
Was the ultimate internet gift both animated and trite 
An obsession called bitcoin hacked into our lives 

So, here we are at the end of the year   
With as much to rejoice in as for some to fear   
But even that description fails to address   
That there’s much in this world that can still impress   
And maybe that’s a bit optimistic to some   
Life’s an adventure to conquer, not to succumb   
And pithy oxy-poems, like this one can come and go   
But wishing for a brighter future will never get old