"MODERATELY CONSTRUCTIVE"...
WHAT THE HECK DOES THAT MEAN?!

  As I often tell my industry colleagues, watching some of CNBC's programming is a must if you are a portfolio manager or financial advisor.  That's not because the content is compelling (perhaps it is if you are a trader, though if people are broadcasting their best trading ideas simultaneously to millions of other traders, there goes your "edge" I suppose).  The reason to at least keep tabs on what is being said in the TV financial media is because many of your clients watch, and some watch avidly.  Thus, part of the role of any portfolio manager or financial advisor is to be prepared to separate for your investors and clients what is truly valuable information versus that which is noise pollution on the public airwaves.  With that as a starting point, consider this brief discussion I heard one morning last week.
 
  A guest told the interviewer that "we think the stock market has 10-15% more upside...we are moderately constructive there." What the heck does "moderately constructive" mean?!   I have heard the last part of that phrase used by many market watchers, and it seems that it's more a way to avoid committing to an answer than providing useful information.  Of course, the preponderance of questions such as "Where is the market headed?" can often be more about entertaining than informing anyway, since market results sometimes prove that forecasting is a crapshoot anyway.  Importantly, evaluating the current tradeoff between market risk and reward is not a crapshoot, as it allows one to consider what can happen if you are wrong and hopefully guard against it.  THAT is what we do not see enough of in the financial press, in my opinion.
 
  This CNBC guest and the other guest appearing simultaneously were both bullish on the broad stock market in the near-term (which is usually a bearish sign, especially as the headline "Nasdaq up for 12th straight day" was flashing across the screen as they were talking).  The second guest did go on to say that the entry point for stocks on a two year basis looks "reasonable."  Pardon us for being underwhelmed, but that word does not convey the kind of conviction investors can hang their hats on. 
 
  However, the two year outlook is an interesting one to think about.  If you were confident that stock prices would be higher, maybe much higher two years from now (which is our opinion), how much would you care about what happens along the way?  THAT is today's investor's definition of risk, unless you think we really are in an economic depression. 
 
  Unfortunately, the risk of bumps along the way is too much for many investors and financial advisors to take.  That's too bad, since there is a real possibility that they will look back in anger at how they handled the aftermath of 2008.  We are handling it as follows: bullish over the next 2-3 years as the inevitability of the business cycle (yes, it still exists) swings toward hope, optimism and then action by consumers, lenders and investors.  In the meantime, we believe there is clearly risk of another frightening fall in stock prices. 
 
  What could be the trigger?  Here are some possibilities:
 
  1.      The next round of adjustable rate mortgage resets coming up
  2.      The cool-down that often accompanies the end of earnings season
  3.      Progress in DC on healthcare (remember that markets like gridlock, so if the Congress actually gets something done, it means change and the dreaded uncertainty for investors)
  4.      Lack of progress in DC (lots of stimulus money out the door, but insufficient near-term results)
  5.      The psychologically bad part of the year historically (September is the worst month on average, October isn't much better, and November has often been a bottoming month).  See 2008 for the latest in a long line of historical evidence here.  However, keep in mind that those market "events" are, we think, often the best setups for long-term investors. 
  6.      The market is overstretched technically.  While the charts offer much reason for hope as well as caution, chances are that the "overbought" condition may work itself off, bringing prices down temporarily as a result.
 
  We have noted in our recent investment committee meetings that in the mid-1990s, the market could go from technically overvalued to undervalued over the course of several weeks or months, but stock prices did not fall much.  Remember when we experienced years without as much as a 10% decline in the Dow and S&P?  In a bear market, that same pendulum swing from overvalued to undervalued often drags prices down by much greater amounts, as we have seen.  The bottom line: which form this "pendulum swing" takes is not yet certain, so our response is to be invested, but hedged, and ready to pounce on long-term opportunities and/or market dislocations that, in our opinion, present tactical moves with excellent risk-reward tradeoffs.   
 
  So, to pull this all together, we'd recommend that financial advisors take a good look in the mirror and decide who they are to their clients.  They do not need you to be the performance-chaser, since they can do that without you.  Your clients need you to commit to a process of balancing risk and reward.  That does not mean perfectionism, and it does not mean that something that isn't working won't work very well soon.  Remember my comment earlier about the two-year outlook with bumps along the way?  Every investor has a different tolerance for those bumps and THAT is what must be adjusted at the client level...but only after you have bought into an overall philosophy and investment process backed by consistent behavior from the manager.  That's what we look for when analyzing mutual funds for inclusion in our portfolio strategies.

  Finally, that CNBC show I watched included an in-studio interview with Sallie Krawcheck, who has a distinguished record as a wealth management industry executive.  She stated several times that investors are going through a sort of Post-Traumatic Stress Syndrome, and that explains why cash levels among retail investors are so high.  We hope this issue of GreenThought$ provides some food for thought on how you can be the psychological and emotional boost these folks need to get back to pursuing their dreams.
 
  The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.
 

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