Losing a step.

Since 1981, and the origins of the last great secular disinflation trend, both bonds and stocks have benefited from the tailwind that “cheaper money” had to offer.  Equities and bonds together have experienced significant capital gains expansion as a result.

Contrast that with the secular inflection points at which we presently stand.

Today, bond and stock inventors sit at the edge of a new paradigm, indeed, where inexpensive money has yielded about as much as possible from corporate balance sheet expansion, while lower interest rates no longer offer high yield or capital gains probabilities to fixed income investors.

In such an environment conventional wisdom calls for us to ladder maturities, sit tight with short-term deposits, and wait for rates to rebound upwards.  The thinking is that over time yields will supplement any disadvantage to owning stocks in an alternative-less environment.

Caution.

The difficulty today, however, is that stocks are at a significant inflection point where the likelihood of perpetual sustainable upside gains is limited.  Thus we find ourselves on the horns of a dilemma:  in order to safeguard capital it is necessary to do less, not more, and to be reticent to chase secular trends when the markets look more and more like a trading basket.

Since most of us are taught to be long-term buy-and-hold investors, the strategy of trading for opportunity is anathema to our psyche.  Undoing that philosophy is a tedious and time consuming exercise.

Every market cycle consists of several parabolic periods.  Markets don’t move straight up or straight down.  Instead they contain upside and downside inflection points, periods of high or low probability capital gains, which my methodology is able to identify.  These rhythms have become less regular, and more staccato, particularly as psychology, cash, and expectations expire from exhaustion.

The current market upcycle (July 2010-present) is becoming old and mature.  Similarly, the best time to have locked in bond capital gains has passed.  What remains is a landscape of one-off transaction opportunities, represented by some secular demographics, some depressed securities, and some news-driven events.

While I have always considered bonds to be a necessary component to building balance and risk-aversion in my client’s portfolios, the universe of yield-related fixed income products is diminishing, and, of those that do exist, less attractive than years prior.

Key drivers.

What we need to focus on are classic secular trends (e.g. healthcare, infrastructure, energy, agriculture) and try to isolate capital gains potential within the framework of diminishing current market earnings and momentum, as well as a doubtful investor constituency who finds little of what Wall Street says palatable.

Within that context I am comfortable saying that opportunity exists in all spectra of equity investing, but that the approach needs to be tighter and less connected to long term buy-and-hold strategies.

As big as the damage done to our economy by leverage and excess speculation, no one would suggest that presumptive cycles of recovery aren’t in the offing.  The issue, as always, is timing.  It is wrong to couple market performance with economic performance, as the correlation is sometimes by inference only.  But we do have a remarkable pent-up resilience which I believe can be manifest in demographic and secular rebound as other standards of behavior are addressed in the near-term.

 

                                                                                                                

The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.

 

(c) du Pasquier Asset Management

www.dupasco.com