Showing posts with label EXTERNAL EVENTS. Show all posts
Showing posts with label EXTERNAL EVENTS. Show all posts

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 1, 2017

Another Update, Yawn (Not!)

This is no time to snooze. This week was one for record books for the massive amount of incomplete news, the mixed outcome of some important economic stats and the unruly price action of the broad indexes, up one day, down the next. For the most part, its business as usual, but with the markets at such lofty levels for the year, I see the goal should be to remain cautious and ignore the more impulsive investor behavior in favor of a protective strategy. Here’s why.

The Markets
With the equity markets continuing their impressive year, getting the most recent lift from the optimistic expectations stemming from current tax legislation, the facts are still elusive. I have as much to like and dislike from what I’ve read and my overall take away is that the potential of the markets to rise on the circumstance and sell on the outcome has rarely been stronger. That said other investment environments and external events are serving as strong distractions, including, OPEC cutting oil prices, bitcoin rising to record levels on the back of an announced launch of a tradable futures contract by Dec 18th, and what turned out to be a very good earning season especially for the retail industry, always a good sign for the markets and the economy.

The Economy
Between the recent estimate upgrade of the 3rd Quarter GDP from 3.0% to 3.3% and the release of the highest consumer confidence level in 17 years the economic news has been mostly good. I say mostly, because among the contributors to recent volatility in the markets has been a decline in the Chicago PMI manufacturing index, albeit from larger than normal recent rise it is still worth paying attention to. Mainly because as most of the positive news focuses on indicators that suggest continued downward pressure on the unemployment rate and potential higher inflation, inflation could become a problem at some point too.

The Fed
In the meantime it’s hard to imagine the fed won’t increase interest rates at their next meeting on Dec 12 and 13th. With good economic data that comes from consumer’s activity the outlook for inflation still seems the primary incentive as well as Europe is showing similar signs of pressures. However, rather than talk much about the reporting board the outlook for the expiration of the current chairpersons term is leading the concern as to whether the incoming replacement will raise rates too aggressively. No reason I can see for that happening but the news adds to the current market volatility.

The Government
Which bring us to the nerve center for market volatility. While much of the media activity swirls around the current administration the financial markets have managed to focus on the economy and corporate activity instead. Good thing, since there is much that will eventually come out of the current political dilemmas that will get a fair spin that an investor can act on.


There you have it, a rising market, lots of volatility and very few answers to much external activity. Generally I choose to shift to more large cap and dividend friendly investments to be better prepared for any unexpected surprises. I still think the year will end on a high note, so I’m more looking into the first quarter of next year.

August 23, 2015

Bad Company

This has been a challenging week for the stock markets around the world and as yet another media frenzy challenges the collective patience of investors and observers alike it’s the latter that is usually hard at work discrediting individual companies such as this week’s shaming of Amazon (AMZN) for having a corporate culture that is too aggressive. Never mind that calling upon disgruntled employees to generate an article smells like an agenda, Amazon has well over 150 thousand employees worldwide and certainly among them there are those for whom the job isn’t a fit as well as those for whom it is. I can understand, while disagreeing with the argument, that work place behavior within an environment that sells for profit might appear unsavory to some. But in my experience many tedious jobs, for which my own has been cited, are not often not seen that way by those who are engaged in what I call a “labor of love”.  

So while the global markets are in turmoil I think there is more to be gained by following events such as:

China continues to seek ways to address the slowing of its economy. There is no suggestion yet of a recession, but the continuing decline in oil prices does suggest some credibility in economic predictions that mostly lean to a slowdown with a growth rate higher than the  western democracies but significantly lower than the average over the last 10 yrs. Some signs of stabilizing will have to be realized before the markets can truly calm down. In the meantime I have lightened up on emerging market exposure in accounts.

The Federal Reserve Board continues to show ambivalence among its members. Interest rates are going to rise, but in the meantime the Federal Reserve is sending mixed signals that aren’t helpful in the pursuit of market clarity. Since it’s been nearly 8yrs of no Fed activity many on the sidelines are predicting a rate hike in September. It can be said that the stock markets were ill positioned for such a move, therefore this week’s decline makes more sense, even if still uncertain.

Oil prices are obviously poised to outpace the normal bounds of necessity. And while I’ve spent much time writing about the potential benefits of lower energy prices, the current speculation of prices into the 20’s is bothersome. Maybe it’s because of the continued potential for manipulation on the Futures market or maybe it’s more for its contradiction to historical changes in the price of oil. I’ve watched those prices closely as an indicator of both global growth and inflation for 30 years during which the culprits to volatility were easy to trace. Recession made oil prices decline and wars, or threats thereof, made the price rise. The Middle East which has been a strong voice in the OPEC consortium has historically favored keeping prices low, in western logic to keep the consumer hooked. Only signs of stronger global growth will stop the current trend.

War posturing is currently in the news regarding the rising tone of rhetoric passing between North and South Korea. More than Ukraine or self-inflicted challenges facing Greece, I think this development is worth paying attention to, not because war is inevitable but because it could bring the type of distraction the current global market rout is hindering.

Much will be discussed over the weekend about what the market did and little about why. Picking on corporate America at the expense of following genuine news is consistent with the emotive style of our news services and in my opinion is getting tiresome. The markets are correcting and there are increasing signs that risk is showing some value. As of today all three major indexes are negative for the year. So far it is both brisk, since people jump to sell but procrastinate to buy, and widely felt in all sectors. I’ve ben raising cash and will look for opportunities to allocate it.

August 13, 2015

Chinese Food for Thought

China is not a democracy. I say that to draw attention to the potential loss of credibility when the government controls the release of information. That said, this week the currency devaluation (i.e. selling the Yuan in the open market) that is being credited to the Chinese government is being disseminated by the media as, you guessed it, a crisis, and therefore the reason the stock market is declining. Well, given my recent comments regarding the much needed relief of a market correction underway, I don’t agree, and the following is why.

China is not alone in acting in the best interests of its economy at the expense of its trading partners. In particular the need to underprice America, has been a crucial strategy in the goal to expand Chinese consumers with purchasing power. That goal took Chinese “urban” households from 4% in 2000 to 68% in 2012.* Basically the Chinese government could maintain what appeared to be a stable and free floating currency while “pegging” it to the US dollar that had been falling since the financial crisis. The outcome of the strategy was the US struggled along the last five years while the Chinese economy grew handsomely, until now.

Smaller economies generally benefit the most from pegging their currency to the US dollar. However the downside to this activity is the country gives up control of its monetary policy. This is part of the problem that faced Greece in its recent crisis. And as China has moved away from manufacturing and transitioned to a service based economy it has felt the cold winds of declining productivity and inflation. Engaging in this US style (think quantitative easing) endeavor makes sense when deciding what China hopes to gain by devaluing its currency. Not to assure what little is left of export but to stimulate inflation, a much need measure of economic growth. It’s for this reason that the press in its simplistic fashion points to recession in China and the ensuing rattle of the markets follow. The importance of grappling with this logic is as stated above, as long as the government controls information there is a lack of credibility that I believe hinders an accurate scenario let alone an accurate projection.


But if one looks at the US, an economy that’s still nearly twice the size of China as measured by GDP, the lack of inflation has kept the Federal Reserve on the wall even as other areas of the economy have shown improvement. The outcome, has been modest growth that has kept the consumer busy with distractions such as rising Healthcare costs and sluggish wage growth. In my opinion China is more likely to follow the same course, bumpier but also easier because of the added consumer slack and capital resources in its arsenal to fight recession. And if the currency issue continues to be blown out of proportion consider that there is little evidence that domestic consumers feel the impact on imports from currency fluctuation. The resulting drops in interest rates and the US dollar are not yet ready to be dismissed as sympathetic movements, although I believe they are. And as far what little the US exports to China and its trading partners I honestly don’t think the Chinese consumer is going to let a little thing like a cheaper Yuan get in the way of owning a newer iPhone than their neighbor. Some things never change.

July 8, 2015

Sleight of Hand

At the risk of being too abstract this environment reminds of the sleight of hand maneuvers that one might experience close-up to a magician or perhaps a street card game table. One that underscores what I believe is a primary reason for the confusion fueled volatility being experienced in global equities. Namely, while the events in Greece play out the press, in its zeal to occasionally elevate a story above reasonable merit, draws attention away from the proverbial elephant in the room, and that would be China.

Not to suggest the Greek situation isn’t dire, but in my previous opinion, more dire for the citizens than for rest of the world. And not that China is the only bump in the road however, while all this has been playing out Chinese equities, for example as measured by the iShares China Large-Cap ETF (FXI) have declined by over 20% since April 23rd.  And while it’s important to remember that, similar to our markets, the need for a correction is even greater for the Chinese who have enjoyed equity appreciation on the back of vigorous growth over the last ten years. In short, unlike the Greek situation, the correction in China also comes with sizable current account surpluses with many western countries, including the US. Those surpluses will allow the Chinese government to defend the financial institutions and provide support for its widespread industrial resources. But to concur with the risk of being too optimistic, the surpluses also represent the complex inter-connectedness of the Chinese economy with its industrial partners creating a reasonable amount of fear on the global investing stage, and that includes us.

So in the recent correction in the US equity markets, and the race to find the cause to attribute it to, my message remains the same. Not to simply rely on the importance of patience, weakness in the Chinese stock market is important but it too will give way to the next exploitable crisis. Today the New York Stock Exchange halted trading of all stocks due to a technical problem. Important to consider that the NYSE is not the sole exchange for the stock market and therefore its problems are widely contained.

In the next few days the Federal Reserve Bank might speak about rates, the Chinese might increase its current programs to stabilize their markets, a solution might occur between Greece and the EU, and the effect of all these events on investing such as oil declining due to a strong dollar, interest rates declining in spite of a Fed that wants them to go up, might reverse. When it comes to the digital universe and the ability to see the entire world in a glimpse unique to our times it’s worth noting the obvious flaws in having too much access to information. In my opinion, having experienced many corrections in the past, including the recent watershed event, this is a correction, not a systemic crisis.

As is customary during past declines (and there have been a few) there will be some activity in most accounts to take advantage of both desirable risk opportunities and for taxable clients to harvest some gains at the same time. Please don’t hesitate to call me if you have questions or concerns, I’m available for everyone at any time.