Showing posts with label MARKETS. Show all posts
Showing posts with label MARKETS. Show all posts

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.

Circumstance
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.

Outcome
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.


Opinion
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.

Corrections

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 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.

October 2, 2015

An Efficient Edge

Over the years the differing opinions of stock portfolio management and predictive models overflowed to the world of academia owing its credibility to the massive endowments that were faced with the same issues as the average investor, namely, how to make money. But as the markets have recently shown their first price rebellion in four years memories are stimulated about the days when gross uncertainty made capital preservation a winning strategy. Today, I believe we are seeing a similar correction in today’s volatile markets. 

For many years individuals from prestigious academic institutions and other backgrounds have tried their collective hands at the management of assets. Most did so to no avail, as the markets proved too random to consistently outperform. So what did these individuals do? They gave up. Or rather they keenly decided that if all the available education and pedigree didn’t prepare them for success in asset management then what hope was there for the average investor. Hence the introduction of indexed mutual funds.

What this created was an investing environment that could be tracked on a basis that forgoes fundamental analysis and instead relies on the premise that all information that is available to influence market behavior (i.e. volatility) is available to everybody, making its efficiently distributed. This meant that if the stock market index went up a portfolio could be hedged with a bond index that could be counted on going down. Sounds simple enough, and the fancy name given to this characterization was The Efficient Frontier.

Flash forward and today those index funds are the mainstay of the ETF business. That means in short all of the characteristics of a mutual fund with the tradability of an individual stock. The product has been a gift to the speculating community, looking at a horizon no longer than an 8 hour trading day. But it hasn’t been that easy in the years since the aforementioned frontier strategies stumbled in the financial crisis and a new set of short term models based on thousands of pieces of data compiled over fundamental, technical and now behavioral analysis projecting more activity in the markets, including a near quadrupling of option volume since the introduction of ETF’s, and a clearing system, given the fancy name High Frequency Trading, can capitalize even without a spec of leverage.  And it can all happen in seconds, as we’ve all felt in the last few weeks.


In short, the chronic hyperbole, the computers, the chaotic global economies, all at the beckon of technology has served to move us further and further away from the discipline that indexing was meant to create for us. However, in its place it has heightened the need for true active asset management as the efficient means to offset the surrounding axis of volatility. It also doesn’t hurt to have a real person to talk to.

August 25, 2015

Interesting Times

Okay, a bit of an understatement, but the truth nonetheless. The day started with a precipitous fall in the Dow Jones Industrial Average of over 6.5%, followed by a bounce in part instigated by a comment from an unnamed media personality that received an insiders email from Tim Cook, the post Jobs leader of Apple Inc., and finished a day that looked to recover only to close at a loss of over 3.5%. He’s how I saw it.

Apple (AAPL)
Apple Inc. has come down nearly 30% from its recent high, and because if its massive presence in all three of the broad indexes (Dow, S&P500 and NASDAQ) the influence of its drop cannot be underestimated. More curious however was the letter containing a few comments regarding the new iPhone sales in China. Most notable measured the thirst of iPhone interest by the Chinese consumer as measured in rates of activation as well as the purchase. The news relieved investors enough to take Apple stock briefly into the green.

China
Not to repeat myself, but the news about Apple underscores an important fact of recessions, that being most people might pullback on going out to dinner, or seeing that new movie in the theater, but very few will stop buying toothpaste, baby shampoo and other personal and household products that in my opinion these days includes ones cellphone in general and iPhone specifically. This is true for any consumer driven economy.

Technology
Before the advent of digital investing, the short name for algorithmic speculation, of the broad markets, it was the open cry futures markets that served wide felt disruption to Wall Street. Needless to say the split second influence of these many systems all contributed today to a collision of orders and trade executions made more urgent on a Monday morning. The ability of the market to recover with equal speed lends some evidence to that idea. This could be a factor of the new economy, or the system needs to spend less time on JP Morgan and focus more attention on a new breed of ad hoc financial speculator.

No one can know if the market direction is near the end. It’s been four years since the last, therefore there is an especially strong demand for patience. Many have heard me comment that markets go crazy simultaneously but come to their senses one at a time. It is my opinion that we are experiencing correction, not a systemic event, and that the aforementioned comment will play out…again.

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 31, 2015

Analyze This

Since the chimes of the recent Chinese and Greek events another somewhat frustrating period came into focus that revolves around companies and the public release of their earnings and expectations. Now at face value this would seem a reasonably enjoyable event assuming of course the investments I’ve made have appreciated as expected or declined with their value still intact, whereby I might hold such an investment for a better day. Or maybe not.

Unfortunately as we finish the past 2 weeks with the US stock indexes negative across the board I have found myself frustrated. Now it’s important to note that frustration on my part while infrequent is not necessarily uncharacteristic of the job. If your Financial Advisor claims to have never felt their pulse rise on the occasion of especially volatile financial markets, they’re not being completely honest. The risk I take for clients is the same risk I take for myself and although for most situations such are global, economic or political in nature that rarely even distract me from lunch (and other important things in life) much of the past 2 weeks has been about the aforementioned earnings. And that is where the markets are not reacting to actual claims on the part of corporations (and so they shouldn’t) but rather how those claims stack up against the expectations of analysts.

Wall Street analysts, we’ve all heard of them, I’m even one myself. And over the years as corporate scandals such as Enron and WorldCom soured the public’s faith in finance, new legislation ushered in what analysts called Full Disclosure. Essentially Full Disclosure meant that publically traded companies had to enable the free exchange of all material facts pertaining to their ongoing business operations.*  So flash forward to today’s markets and with the information highway moving at light speed that free dissemination should be more accurate. Maybe, and when information is brought to the attention of the investing public it is especially odd how good news can take a stock down and bad news can cause it to rally. Hence my occasional frustration.

So while I will probably become as jaded to the above mentioned abstraction as I have to many others       I have also noted in previous comments that to navigate this my style of managing assets is not simply about what I invest in individually, but what the investments look like  in total. Knowing that I need most of my expectations that follow economic and political interpretations, often punctuated by a global crisis or two, to perform at the expense of those ideas I get wrong. That’s why you often hear me talk about risk as my measure of how deeply invested we are and why using ETF’s for example is as much to capture broad interpretations as it is to monetize risk. Simple really, and while I’ve often been told that my strategy lacks style, I’m content with that since I’ve never been one to focus too much on appearances.

As always, thanks for the feedback. I expect volatility to continue through the summer so if there are any questions please don’t hesitate to contact me. Have a good weekend.

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.

June 29, 2015

One View on Greece

The view on Greece as I observe is that the resources of information are split between those that relish a lose/lose narrative and those that are unsure, resulting in unclear messages. My view is that Greece is an anomaly, not a catastrophe, the former providing an excuse for a much needed correction. That said, consider the pieces of this unsavory pie.

Debt – Greece has a lot of debt. Inability to pay off debt is a problem but so is the demand by creditors, both international and national, for more austere measures such as cutbacks in government pension’s outlays and changes in certain social/employment conditions. The latter common even to the US as we debate the merits of changing the retirement age or competing tax philosophies. As of this comment the Greek government has balked at the demands and creditors are holding their ground, a condition that could result in Greece exiting the European Union. In the meantime other countries have suggested temporary aids, including China and Russia. All these are at the center of uncertainty gripping the region and the global stock markets.

Currency – As a member of the EU a default by Greece would have a negative effect on the EU currency and its relationship to Asia and the US. For the US a stronger dollar at a time when the economy is only modestly growing is, in my opinion, a challenge to our markets although no bigger than the problems facing Europe. But because the global economies, particularly in the west, are economically intertwined sympathetic declines in stock markets cannot be discounted.

External Influences – The now familiar expansion of aggressions in the Middle East, the launch of the Asian Infrastructure Investment Bank, a trade and commerce entity to compete with world banks and outstanding trade agreements. At home Federal Reserve Bank sending mixed signals as to when interest rates will officially rise. Each of these items still have a different effect on global growth, in particular the allocation of resources, but mostly their uncertainty fuels volatility.


So, my focus on Greece is the potential of a default on its debt and the subsequent result of that outcome (i.e. exit the Euro Community).  However, opportunity is often found in the wreckage of economic excess, but even without the name calling, nationalistic posturing and endless political opportunism I remain cautious while on the lookout for it. And whatever the outcome the global economy will find a way to absorb the problems that arise, none of which, in my opinion, are as severe as those faced in the recent global financial crisis. 

June 12, 2015

Let It Be

We are not experiencing a bear market. There, I said it, and while it is my opinion it has not been arrived at in simplicity. Rather only with the understanding that the future economy is only as complicated as the clues that are provided to us, with the most obvious, jobs growth, consumer behavior and inflation, most statistical data is suggesting positive growth expectations are not unrealistic to forecast. Not necessarily strong growth either, but maybe on average, more of the same. So what are my reasons for being constructive? Here goes:

My Employment Reason – Combines 3 pieces that I feel have to be viewed together. Using last month’s Unemployment statistics we found out that job growth was around 280k new jobs, a very good amount by most historical measure. The number was augmented by adjustments to previous month’s numbers resulting in higher growth for them as well. As good as the number was the Civilian Unemployment rate for May was 5.5%, which was at face value a good low number. But the nagging truth about participation in the workforce, which could be higher or lower thereby rendering the data incomplete, cannot be ignored. Lately the participation rate has hovered at a consistent rate (approximately 63%) that while not the best is the equivalent of no news on the matter, and I hope we all can agree that sometimes no news is good news.

My Consumer Reason – When watching the consumer, individual statistics really tell the story. But I prefer to also look at an average, an eight month average to be exact, to find evidence of momentum. Consumer Sentiment as measured by the University of Michigan came in at 93.6 versus an 8 month average of 85.3. Retail Sales data last came in at 1.2% higher than the previous month and versus an 8 month average of .4%. While these numbers can change as quickly as the tastes of the general consumer, they suggest the potential for momentum, and with any upcoming signs of wage growth, that’s good enough for me right now.

My Productivity, Inflation and General Economic Reasons – Are based on Producer and Consumer inflation, which means, how much costs rise when making stuff versus selling stuff. Here we’ve seen, contrary to expectations virtually no inflation growth over 2%, which would be needed to get the Treasury‘s attention. This is good, except for the fact that the world economy is still dragging and even with some glimmer of energy, inflation is not likely to rise very much in the near future. That said, Productivity trends, as measured by Manufacturing statistics and Industrial Production statistics have also been dragging domestically, and that takes some of glow off of my forecast.


So where does that leave us? With consumers armed with cash coming from more employment and better wages, action has to take place, at which time the productivity machine should start its engines. And while asking for inflation might be too premature, my forecast is only modestly optimistic, the overall influence on stock prices should be equally modest and positive. That could be the recipe for some uncertainty and the volatility that feeds on it, which is what the markets are experiencing right now. So I choose to let it be, it’s not unexpected and it’s also not a bear market.*

May 15, 2015

What, Me Worry?

These days we are presented with a classic snapshot of the chaos that nurtures volatility, that unruly market behavior that undermines logic and defies any rational explanation for a trend. The culprits are numerous and while the efforts may be in earnest it cannot be ignored that those who speak for us are often so confident as to drive me to pine for some good old fashioned doubt. 

Consider the FED, and their newfound passion for passion once again perfectly orchestrated traditional and social media only to confuse the markets by showering investors with ambiguous language suggesting stock valuations being too high or the possibility (kinda, sorta) that rates might rise sooner rather than later. Certainly this is important, as the rise in interest rates is generally accompanied by a rise in the dollar and neither is very good for the stock market, which has not had a reasonable correction in a few years. But as caution prevails so too will stocks follow the path of least resistance, which for now is up. Take one for the doubters.

As I’ve often noted in my commentaries the interest rate markets normally don’t need the FED to send rates higher, which is exactly what has been happening for the past three weeks. The first pitch was made by a group of well, albeit, self-advertised activist investors lamenting the unsustainable conditions of European interest rates, especially German bonds. This precipitated a sympathetic rise in US bond rates that was so strong as to effect a slowdown in mortgage applications as well as throwing caution to the wind in the minds of some bullish stock investors. And stocks which in a valiant attempt to shrug off the recent rise in interest rates with some unruly volatility early in the week, managed to find their footing as commodities and a weaker dollar gave hope to the armchair economists looking for clues to future of the economy. Doubters to the rescue.

For now I believe much hinges on employment, my benchmark for the strength of the economy. As far as the recent unemployment data suggest I found the number to be a mixed blessing. While the headlines focused on the good payroll growth, the more relevant details were the downward revision from last month’s poor showing that includes the loss of nearly 50,000 workers related to the recent declines in the oil and gas industry. And the participation rate continues to decline to levels not seen in decades. Coupled with recent declines in consumer confidence and spending and it is possible to be confident that a margin of healthy doubt about the markets is in order.


Sooner or later the markets are going to reflect a real economy in need of higher rates. At that time the markets will correct as they’ve not done so in a very long time. Therefore the question is not if, but when. In the meantime there is still value to be found in the broad markets, and room for a little bit of doubt, just for good measure.

March 13, 2015

Ease and Devalue

At the starting gate of the industrial revolution giants of capitalism were making farming machines powered by steam engines that could do the work of 100 people or stylish cars affordable enough for the newly named middle class consumer, and let’s not forget the telegraph, telephone, sewing machines, light bulbs, airplanes, cameras, radios and the list goes on. Each of these inventions  credited to an American went on to become products run by companies named after their inventors such as Bell, Singer, Goodyear, Eastman and Westinghouse among a few. Within 50 years the world’s aforementioned consumer bought up those products and in the course of financial expansion the stock market became an important tool for curious investors and speculators of more and lesser means to get involved.

So what’s my point? The stock market and the familiar Dow Jones and S&P Averages became the benchmarks for investors eager for information that gave them insight into the fortunes of the underlying companies. This was especially important as the growth in the industrial countries brought focus onto their local economies, their interest rates, and most of all, their currencies. The currencies became especially important because as American companies competed with Europe they realized the power of a lower local currency when buying their parts, paying their workers and generating larger profits. Simply put, the rallying cry of politicians became “ease and devalue” referring to the need to keep interest rates low and currency cheap. In fact it’s probably obvious to you in that is exactly the strategy that helped lift us out of financial crisis. But not anymore.

As the competition for information grew within the financial services industry investors leaped on every positive prediction to defend an investment. Problem was, and still is, when the analysts at those financial services companies expected companies to perform well and they didn’t, the mad rush to sell was usually met with chaos. Not that this was a bad thing however, an industry built on transactions welcomed selling with the same zeal as they did buying. And recently, as the US dollar has been rising in value versus the European Euro analysts are rushing to downgrade companies whose outlook depends on a weaker dollar and the result being sharp declines in the stock’s value and lots of transactions for the financial services industry.

This week the sharp price declines in semiconductor company Intel (INTL) and software company Microsoft (MSFT) stocks underscore how pointless it is to follow this type of analyst interpretation. First of all companies have struggled with fluctuations in currency value for over a century and many have failed in their strategies. However over the last fifty years multinational firms, which today include the likes of everyone from Boeing (BA) to Apple (AAPL) and Google (GOOGL) the strategy has been adjusted with companies in the US merging with companies in countries with higher currencies thereby using each domicile as a benefit to margin (helped by a weaker currency), free cash (helped by meeting the needs of foreign consumers) and flexibility (managing strategy geographically). These strategies, while not every politicians cup of tea, I believe more than ever serves to invalidate the importance of currency going forward for one primary reason, and that is technology.

All of the business models that use technology to drive product ecosystems are driving growth in sectors beyond traditional industrial exporters such as Health Care, Finance and even Energy, as companies not only expand their corporate bases abroad, but other countries including our own have  looked to build out their traditional export businesses domestically. Likewise we are representative of countries such as China, and India, who combined have grown their respective middle class consumers to an army over a billion strong.  And with investors able to find these companies throughout the world to hedge against the forces of currency fluctuation portfolio performance can remain stable even as overall volatility of the world’s markets is high.


And in the meantime enjoy the benefit of cheaper foreign products in this country as a change of pace and to further stimulate the consumer it’s worth noting that a stronger currency, buys more stuff when the currency is cheaper elsewhere, like Europe. And as an investor give up on trying to make sense of market advice, and rate the value of consistent strategy, that’s what I do.

August 6, 2014

When Changes Make Sense

Ever find that one of your favorite apps from your Android or iPhone suddenly begins to act erratically immediately after you've accepted one of the many upgrades asked of you. You know the ones that court your favor with statements like “bug fixes” (makes mistakes sound cute) or other improvements which generally either don’t mean anything to you personally, or are simply requesting in opaque language their need to have control of your contacts list and your camera. Trouble is one only has to look at the current rating to affirm ones suspicions, and I use the rule that any app under a 4 rating is an app in trouble, there is such a thing as making one change too many.

Why bring this up? Especially when there is so much turmoil in the world and the stock and bond markets are reflecting the uncertain realities of investing in them? I invest with a strategy that seeks to recognize two factors that are out of my control, namely when stocks go up and when they go down. Without the benefit of that natural volatility I would never know how my strategies would have behaved through the years. Just as I believe there too many geeks writing too many lines of code to disrupt, rather than improve our phone apps, so too are many of the loudest members of my industry always focusing the interpretation for their stories rather than the other way around, by noting the facts.


The markets have a bit unruly lately and I admit that our news services would be boring if they used the same methodologies I use to find a silver lining in that distress, or maybe it would be a nice change of pace. But the reason I manage to a range of risk targeted asset allocations, aimed to deliver a competitive return in exchange for balanced volatility is because I believe that Federal Reserves unfinished business, the current political gridlock, or the disturbing Mideast and Ukraine distractions will more than likely find some resolution before merging into a new set of issues. In the meantime I won’t ignore the distractions but look to learn more how they affect interest rates, or the value of our currency or where there signs of weakness and strength in the economy are and decide if it fits into my current strategies, namely for growth, or if changes are necessary. Otherwise I prefer not to fix it, if it isn't broken.

June 14, 2014

Startup Memories

Over the course of my investing on behalf of others I've gained the knowledge that events that affect the broad markets are always going to be present, and getting excited over a crisis is subject to disappointment, unless one is armed with the experience, that upon being solved a crisis will immediately be replaced with another. But I have to admit that it gets harder to accomplish in a world where information travels at light speed at best and does so whether it's true or false at worst.

Current issues such as the growing tension in Iraq, the ongoing complexity of the political climate and their impact in the price of oil and stocks is reminiscent of the kind of economy slowing distractions that led up to the financial crises, albeit we're far from the $149 highs of that period. But when other events occur such as the occasional merger between behemoth tech firms and unknown startups the news is less read because I believe technology news is generally focused on how something works, not useful to a population that appears more interested in what something does. Which leads me into the point which is information carries much in the way of fodder that only seems to let the big stories out which make for more emotional impact and whose solution is less clear. But what about the information we don't see or hear? That's the information we should interested in.

In technology, a sector of the economy I pay much attention to, there are new startups coming every day. Venture capital companies (VC's) of the type that brought us Google (GOOG) and Yahoo (YHOO) with names such as Sequoia Capital and smaller, but amply funded ones such as Kickstarter, come to the market annually with a range of ideas, raising  money for well researched pre-funded companies at all levels. Much of that money is their own but with the decades old demand from institutional, corporate and state pension funds the amount of outside capital is nearly endless. Investors in these "private equity" vehicles find themselves holding what might be the names of tomorrowsuch as Uber, the transportation service company connecting people with rides via an app (lication) on their mobile phone. Less controversial is Spotify, a music streaming service competing with the likes of Amazon (AMZN) and Pandora (P), the upcoming IPO of GoPro, a maker of affordable high definition personal cameras or SpaceX, a space exploration company founded by Elon Musk, famous, for his other company Tesla, an originator of luxury electric cars. Even companies hailed as expensive failures such as Etoys and Webvan, an internet toy store and a web based grocery pickup and delivery service respectively, were followed by numerous online retailers of toys and the very visible trucks belonging to Fresh Direct and support the notion that some of the companies and products were just launched before their time. Remember the Newton?

I'm never at a loss for words to describe the ways that I avoid the distractions of daily life to maintaining objectivity when I invest. Most of them I simply look to swap with the distractions of potential new ideas for investment that with a sound network, the right tools and an open mind can be found over every crisis filled horizon. The best part is its fun and anyone can do it.

May 24, 2014

How much is that 狗 in the Window

Most of you have heard me say that employment is the catalyst for economic growth.  It provides revenue to the government in the form of taxes.  Corporations benefit from improved public consumption of goods and services, which also increases output.  It also benefits individuals by giving them the confidence to consume all those goods and services. However, unemployment can hinder the economic landscape.  Everything from crime rates to divorce rates display changes in employment. Both the individuals who have a stable employment situation as well as those who have a less stable employment situation affect the most important driver of our economy in the last 100 years: consumption.

The near tidal wave of coverage that is afforded to the worldwide race to bring the next technological disruptor has revealed many interesting possibilities for consumers. But the challenge that fact presents to companies often overlooks the casual belief that the US consumer is the ultimate prize. But are they? After being in business since 2000 and traded on the US stock exchanges since 2005 Mr. Yangon Li, the 45 year old founder and head of Baidu Inc. (BIDU) the Chinese search firm that competes with Google was asked what his plans were for competing for the attention of the US consumer. His response was that there were no plans other than continuing the expansion underway in China. Given that the Chinese population is over four times the size of the US, with India not far behind, his response makes a lot of sense to me. And with this week's IPO (Initial Public Offering) of the company JD.com (JD) an internet based e-commerce business with a profile similar to Amazon (AMZN) and the Chinese shopping search giant Alibaba, whose IPO is expected in the summer, both have articulated the same strategies.

So many of the companies we own are generating revenues that are dispersed to the benefit of countries that have strong economies and while our markets reflect that growth in aggregate performance the focus is instead on where are the profits from sales are going. Yes a lot has been in the news profiling the attempted purchase of AstraZeneca (AZN) by Pfizer (PFE) as a means of ducking their tax obligations on overseas revenues, but you don't have to follow the money very far to see the consumer centric firms holding their own mountains of cash abroad. Apple (APPL), Google (GOOG), Microsoft (MSFT) and even Starbuck (SBUX) are all are generating revenue with the same global philosophy in mind, namely it's not the US consumer that is the prize of the 21st century, but the foreign consumer.

Now I'm not going to get dirty messing in the mud fight over how to get that money repatriated, my point is that while the US has the benefit of being a stable and industrious country, we have to try harder in the future as I believe whether we like it or not the baton has been passed to where the domestic growth is clearer in the once emerging, now rapidly developing countries around the world. The good news is the world has never been easier to invest in and that's what I aim to do.

April 26, 2014

The Art of Fine Mining

Like it or not (I do) ours is a mercantile system. We build things, we market things and we sell things. That pretty much sums up the efforts of every member of the S&P 500. But when the popularity of some corporate platforms smothers any otherwise negative blemish there are still those members who can perform the holy trinity of capitalism only by going the extra mile to convince the user of the imperative need for a given product. The success of this practice goes under many different monikers and has been endlessly debated over by journalists and academics, and is contingent on a simple assumption, that “a sucker is born every day” and legitimized by another assumption, namely "buyer beware"
There are a number of industrial countries in the world who look after their financial agencies with an air of cynicism but with something far less disdainful than here in the United States. At the root of the problem is the assumption that either through regulatory zeal, a hand holding soulful arrangement of Kumbaya, or both, we can become the only transaction led economic system in the world that is perfect. When living in the UK, some years ago, I first heard the casual description of capitalism as "vulgar". That would be a stretch for me; I'd rather look at it as imperfect.

For example the markets witnessed this week the newest saga in the ongoing challenges to the industrial complex by what the press like to call activist investors. That would be a few select hedge fund managers who for their extravagantly large carbon footprint needed a friendly label to exercise their life's passion and "green" wasn't gonna do it. One such investor, Bill Ackman, gained recent notoriety on the heels of a multibillion dollar attack on the company Herbalife (HLF) that bills itself as a nutrition company, pitching weight management, healthy meals and snacks and doing so since 1980. Does it work? There is a lot to question but it's worth noting that there is a long history of American manufacturers coming up with products that fulfill the primary ambition of the American consumer, which is namely to buy things that they think they want, that they might not necessarily need, and all too often they can't afford, except on credit. While Mr. Ackman might really believe that the company was deceiving its customers, he is an investor first and he made sure he was prepared for his claims to sway the action of sellers. Contradictions are becoming more apparent in the information age and while it gives investors enough time and access to decide the merits of a market claim, it doesn't completely protect them from the less obvious and legal flaws in capitalism that are under appreciated by regulators in favor of more politically advantageous posturing, such as high profile "fine mining" of corporate coffers.

The efforts that initiated the products that contributed to the recent crisis in the financial system illustrates how capitalism invites competition, and the skills that have been most profitable have been ingenuity, perceptiveness and greed, which have historically been used within existing rules in every industry including healthcare and technology. And finding the narrowest of crimes to face a non criminal endeavor isn't new; some of the most famous criminals in history have been brought down for crimes ranging from tax evasion to mail fraud but more like Bernie Madoff brought themselves down when the markets lifted the curtain and revealed their crimes.

What I believe is needed is not an endless stream of regulatory directives too eagerly gamed, but rather our regulatory agencies filled with more competitive players who think like competitive payers.  Leveling breathtaking fines might make some people happy but regulating capitalism at its own game will bring out something more important over the long haul…confidence.

April 7, 2014

Artificial Intelligence

 Although from the title you may be thinking already that this is another descriptive directed at our gleefully disruptive culture, you'd be half correct. With todays follow through of the week that just ended with all of the familiar stock indexes having moved decisively lower, the inclination of the customary observers is to blame something. And with the help of our passionate reporters at the various financial news services there never a shortage of judgments that spring forth, the more bombastic the better, unfortunately at the risk of being less accurate, or even relevant.

Last week hyperbole reached new levels with the release of a book, which I'd rather not plug here, about High Frequency Trading, or HFT. First of all, in my experience the markets are not rigged. Not all of them anyway, but for the purpose of understanding both the aims of investment opportunism and the implications of illegal acts such as front running* the differences shouldn't be lost on anybody who has ever questioned the industry participation of financial engineers, those geek like brainiacs that the press love to call "outstanding in their fields", a description I agree with for less obvious reasons. And while the din of abstract accusations dominated the headlines I believe that today's problems are similar to those which took hold during recent displays of Wall Street greed. Namely that technology could mine both the behavior if not the outright activities of daily market makers, or that such technology is adaptable, and scalable, to any industry interested in maximizing the financial market model. I'm often frustrated when technology is used for mischief, such as the snooping of contacts on your phone while decrying the activities of the NSA, or my favorite that each ambition is not for money but to make the world is a better place. I always see that answer along with many of the solutions as nothing but an effort to reintroduce the elusive claims of artificial intelligence as the key to remove judgmental bias from daily life. Yea right

Never mind that there were many companies that have come to market in the past year without those pesky necessities we portfolio managers look for, such as profits or a practical business plan. Rather the idea that the exquisite promises of perfection that we artificially imagine of our tech is obscuring the problems the lofty biotech companies might have with stock prices soaring ahead of completion of a given study. Likewise faith in energy legislation has given a boost to oil and gas companies while the real catalysts await government action. Or the typical defensiveness that often proceeds the period when companies release their earnings, removed from overly optimistic street expectations. Or dare I say maybe even profit taking to pay a tax bill or a simple, and long overdue, correction.

In short, it's hard to define the reason for a market to decline. Even last week's employment statistics revealed consistent job growth, increased civilian participation in the economy and a stable (as in not rising) unemployment rate. Patience is required for the time being, as a market correction is rarely described as a correction, especially when it can be described in language that carries more emotional punch.